FCA criticises auditor for CASS report failings

In a first of its kind, the Financial Conduct Authority has censured an auditor for failing to report breaches of the FCA’s client asset rules. As well as providing lessons for CASS auditors, the FCA’s action is a reminder to firms about the potential hazards of the CASS regime.

Step into the breaches

The FCA found that the auditor failed to identify and report 25 CASS breaches by two regulated firms. Those breaches included:

• Co-mingling of client money with firm money
• Absent acknowledgment letters
• Insufficient documentation covering how the firm kept systems adequate to enable it to comply with CASS
• Lack of CASS incident breach logs
• Insufficient records of the grounds for being satisfied that a third party was appropriate for holding client money
• “Dummy” counterparties accounts being used in live investment management systems

By not reporting these breaches the auditor failed to meet the FCA’s standards for CASS audits.

Who audits the auditors?

The FCA can fine auditors or disqualify them from auditing regulated firms. In this case it chose only to issue a public censure because, although the auditor’s failings were serious, the underlying CASS breaches would not have resulted in significant harm to consumers.

Lessons to learn

For auditors, the FCA’s action is a shot across the bows. They should assure themselves that their audit teams have sufficient experience in this complex area of regulation, that they are at the very least picking up the most clear-cut compliance issues and that any identified breaches are included in their final audit reports.

For regulated firms, the underlying breaches are a reminder of the importance of evidencing CASS compliance. The FCA has previously said that there is no excuse for firms failing to safeguard client assets and ensure their processes comply with the FCA’s rules. Firms may also find that their upcoming CASS audits become more meticulous as auditors seek to learn the lessons of the FCA’s action.

Read our briefing note ‘Auditors in the spotlight as the FCA takes action’ for further detail.