Unified reconciliation systems play an important role in protecting client money

By Jim McGivern, senior business consultant, AutoRek

Businesses in the financial services space have long been obliged to keep client assets safe.  Why then does a quick Google search reveal that the FSA has fined a wide range of financial institutions and auditors over £10m for failures to comply with client asset rules in the last year alone?

You might think that the fines were for breaches of the more complex aspects of regulations but you would be wrong.  Again and again the FSA has stated that the errors are being made in “the basics” of client asset protection and that regulated firms have failed to understand that client money must, at all times, be kept separate from a firm’s money so that it cannot be confused with funds available to meet the businesses’ own obligations.

Client money processing was further complicated in October last year when the FSA introduced new regulations governing Client Money and Asset Returns (CMAR).  According to the latest regulations, medium and large firms must report their client money and asset returns through the FSA’s online system, known as GABRIEL, on a monthly basis.

The plethora of regulations now governing how client money needs to be handled can often have serious operational impacts for stockbrokers, asset managers, insurance brokers and currency brokers, amongst others. In addition, the FSA’s client money inspectorate is receiving a 10-fold increase in headcount making it much more likely that regulated firms will receive a client money inspection.

So if you are a director or the CF10a officer of a financial institution to which the client asset regulations apply, it is crucial that you do not presume that your existing operational procedures are correct or that they remain sufficient.  Best practise in this area may have moved on since your procedures were last reviewed so  I would recommend taking the following 10 steps.

1. Determine whether your firm qualifies as a large, medium or small organisation once a year by checking the latest FSA guidelines in this area.
2. Make sure that you understand what CMAR is all about. Ever since October 2011, the new rules make it a legal requirement for firms holding client money or assets to submit a Client Money and Asset Return (CMAR) electronically, via GABRIEL.
3. Mark your calendar – large and medium firms now need to submit the CMAR within 15 business days from the end of the reporting period.
4. Make sure that you have all the information that you need for CMAR right now including easy access to any records relating to client bank accounts, details on any custodian arrangements and information about where and how custody assets are held.
5. Verify that any institutions holding client money are acceptable to the FSA.
6. Convert any foreign currencies into British Pounds since the reporting currency for CMAR is GBP (sterling). Make sure that the firms have processes in place to translate any client money and/or safe custody assets into sterling at the previous day’s closing spot exchange rate.
7. Communicate with third-party suppliers. Firms with existing outsourcing arrangements in respect of client money and custody assets activities must ensure that their third party/outsourced service providers will also be able to meet the CMAR reporting requirements.
8. Don’t worry about daily valuation. Instead simply determine the lowest and highest figures by reference to the data that has been recorded from internal reconciliations over the reporting period in question.
9. Leave no stone unturned when calculating balances for the purpose of CMAR. Firms need to ensure that they include any client money or safe custody assets that have been placed with a sub-custodian.
10. Make sure the pool is being reconciled daily. Most firms ensure that client money is kept in its own bank or stock account. However, several clients’ deposits or holdings are often held together in one single account or else settled and cleared through a single account, which presents some operational complexity. Accounts that hold many clients’ cash or assets are called ‘pooled’ or ‘omnibus’ accounts.  It is crucial that the individual client balances held within these accounts are calculated and where it is found that a clients balance is overdrawn or short, the firm must top up the pooled account with the company’s money to cover this overdrawn position.  Directors should ensure that this reconciliation and top up is being done at least once a day

Unifying the reconciliation process
In order to help achieve compliance with CMAR, businesses should also think about introducing technologies that can help to automate this process. Most organisations will benefit from solutions that provide advanced matching facilities, for example, in order to identify which clients’ are remitting funds accounts modern systems can match customer administration records to previous payments from the same source. This has the added advantage of allowing cash to be auto-allocated at a client level.

Scottish Friendly Assurance was able to achieve significant benefits from AutoRek’s automated client money solution, for example. The firm had already been making extensive use of AutoRek’s core functionality for grouping its outstanding transactions into business specific areas, but the addition of this new client money functionality helped Scottish Friendly to keep up with the industry’s ever-increasing compliance demands, since it was able to prepare a suite of detailed client money reports – twice daily – for each of the reconciliations that it was managing.

This client money functionality, combined with powerful auto-reconciliation tools, makes it much easier for firms like Scottish Friendly to report and audit their client money positions, a task which has traditionally been both labour intensive and time consuming for most organisations. In fact, the work that is needed to comply with client money regulations has often restricted firms’ ability to engage in defect resolution and other key tasks that could be deliver greater value to the business.

With the need for greater control and transparency more important than ever before, businesses within the financial services sector are likely to need help addressing the latest compliance challenges. However, by using technology to keep up to speed with reconciliation processes, organisations can clearly demonstrate their compliance with the FSA’s client money regulations while reducing the financial and operational burden of regulation at the same time.