CASS 7: the increasing risk of manual reconciliation

By: Daniel Magol

The trend towards automating reconciliation processes has picked up notably in recent years. This has been driven by factors including regulatory changes, increases in transaction volume and financial markets complexity. In spite of this, many financial firms continue to rely on at least some manual reconciliation processes.

The United Kingdom’s FCA (Financial Conduct Authority) recently passed new rules for recordkeeping and custody of client money through its policy statement 14/9 (PS 14/9). The final phase of these rules, which went into effect in June of 2015, will affect a wide variety of financial firms handling funds in the UK. In the wake of these regulatory changes, firms that are still using manual reconciliation processes will find that moving to automated solutions will become necessary in order to maintain compliance.

The updated CASS 7 (Clients Assets Sourcebook v7) rules contain significant changes to the previous policy, especially in regards to reconciliation processes. PS 14/9 increases the required frequency of client funds reports and standardizes the format. It also limits the exceptions previously available to firms.

As a result, using manual reconciliation processes will open firms to a number of negative consequences, including:

  • The potential for errors in reconciling client funds due to the more complicated regulatory regime. This increases operational risk and can lead to potential fines and other enforcement action from the FCA, which has indicated that CASS policing will be a higher priority;
  • Increased personnel costs due to more intensive reconciliation reporting procedures;
  • Diminished operational flexibility due to increased transaction and product volume;
  • A higher probability of attracting regulatory scrutiny.

In a study by the Aite Group, 40% of tier-1 and tier-2 financial institutions cited “regulatory and compliance pressure” as having the most impact on reconciliation functions, while 21% identified “lack of automation”, which demonstrates the significant impact post-2008 that regulatory scrutiny has had on these firms.

To stay current and ensure compliance with the new CASS 7 regulations, financial firms dealing with client funds must now have the capacity to perform sophisticated recordkeeping and asset modeling procedures. Automated reconciliation solutions can help firms deal with the requirements by handling many relevant tasks, including:

  • Rapid reconciliation for mandated review procedures on a daily basis. Firms still using spreadsheets in the reconciliation process can find it takes hours or even days to properly reconcile data relating to client money. Software can perform these procedures almost instantly;
  • Providing audit trail capability by tagging individual transactions. Doing so makes it easier for firms to audit their reconciliation process, perform individual audits and reconstruct audits, if necessary;
  • Enabling automatic allocation and posting of client money receipts. When client money is received, an automated system can account for the funds immediately, which is an improvement over legacy procedures involving manual processing;
  • Daily reporting on client money balances. Includes monitoring, calculating and posting adjustments to client funds with a transparent audit trail.

The benefits that banking and investment management firms can realize from using automated reconciliation solutions are significant. They include:

  • Enhanced productivity by freeing up staff from the work needed to manually validate spreadsheets;
  • Improved client service using accurate measures of relevant client account data;
  • Enabling the monitoring of counterparties’ performance;
  • Reduction of operational risk arising from mistakes in the reconciliation process;
  • Improved compliance reporting capabilities.

The CASS 7 regulations are consistent with the worldwide trend towards establishing greater regulatory control over financial firms and processes which gained impetus following the financial crisis. This is evident by similar regulatory activity around the world such as the U.S. Dodd-Frank legislation, which affected the oversight and supervision of financial institutions, and the Dutch Financial Markets Amendment Act 2016, which mandated segregation of client funds from derivative positions.

These regulatory efforts have increased the need for financial firms handling client money to improve their ability to track and calculate all activity related to these funds. A robust automated reconciliation solution can provide firms with the ability to improve operational performance and successfully navigate the increasingly complicated regulatory environment they face when dealing with client funds.

For more information, please contact solution@sscinc.com.