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CASS RP Bites on Small Alternative Investment Fund Managers

Life for “small AIFMs” [1] will change in a big way on 1 April 2015 and, despite the date, it’s no joke…

In Policy Statement 13/5, the FCA made certain amendments to its client assets (CASS) rules in order to ensure that they remained consistent with the Alternative Investment Fund Management Directive (AIFMD) and to clarify how CASS 6 (Custody rules) would apply to Alternative Investment Fund (AIF) depositaries and Alternative Investment Fund Managers (AIFMs).  In the course of implementing the AIFMD, an amendment was also made to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) such that a firm with permission to carry on the regulated activity of ‘managing an AIF’ would not be deemed to be carrying on ‘safeguarding and administering investments’ in respect of any custodial activities carried on in connection with or for the purposes of managing an AIF[2].  This position was further supported by guidance in CASS 6 which states that the ‘custody rules do not apply to a firm that is managing an AIF…in relation to activities which are carried on by that firm in connection with or for the purposes of, managing the AIF…’[3].

As an unintended consequence of this combination of amendments, a number of “small AIFMs” – which would not be required to appoint a depositary to hold AIF assets[4] – fell outside of the scope of CASS 6, even though they could be carrying on activities which would otherwise constitute safeguarding and administering investments.  As such, assets managed by these “small AIFMs” are not protected by CASS 6.

In order to rectify this situation, On 12 December 2014, the FCA published Handbook Notice 17 which, through the Client Assets Sourcebook (Amendment No 7) Instrument 2014, amends CASS 6 such that any “small AIFM” is required to apply CASS 6 when, in connection with or for the purposes of managing an AIFM, it carries out activities that would have otherwise amounted to ‘safeguarding and administering investments’.

The sting in the tail is that, not only will “small AIFMs” be subject to CASS 6, but they:

  • may also be required to complete a Client Money and Assets Return (CMAR)[5]; and
  • will be brought in scope for the purposes of CASS 10, meaning that they will be required to produce and maintain a CASS Resolution Pack.

CASS 10 requires each firm which is subject to CASS 6 or CASS 7 to collate certain information regarding its handling of client money and safe custody assets that would be of use to an insolvency practitioner in the event of the firm’s failure.  The purpose of the rules is to facilitate the return of client money and safe custody assets more quickly than is currently the case and so avoid a re-run of the problems faced during the collapse of Lehman brothers.

The challenges associated with CASS Resolution Packs are legend.  In practice, CASS 10 imposes a significant ongoing maintenance burden on firms due to the dynamic nature of some of the documentation forming part of the pack and the requirements that:

  • the contents of a CASS Resolution Pack are reviewed on an “ongoing basis” to ensure accuracy;
  • all documentation forming part of a CASS Resolution Pack must be capable of being retrieved within 48 hours;
  • a subset of documentation must be capable of being retrieved immediately; and
  • material inaccuracies in the content of any new documentation required to be produced as a result of the CASS Resolution Pack rules must be corrected within 5 business days of the inaccuracy arising.

Unfortunately for some, the days when the FCA turned a blind eye to the state of a firm’s CASS Resolution Pack are now long gone.  The Resolution Pack is now often the first thing a firm is asked to produce during the course of an FCA visit – not surprising given that they are easy to check and operate as a ‘smoking gun’ for those with generally low levels of CASS compliance.  As a result of the increased regulatory focus in this area, those firms which have been producing a CASS Resolution Pack since October 2012 are now slowly beginning to steer away from their original tactical and manual approach to CASS Resolution Packs (often built on Word or Excel) towards more strategic, technology-led solutions.  In doing so, they are beginning to unlock the power of the data contained within a CASS Resolution Pack as a risk management tool, capable of identifying weaknesses within existing CASS processes.

The FCA sees CASS compliance as no laughing matter – something to which JP Morgan, SEI, Blackrock and Barclays can all attest.  Fortunately, the CASS Resolution Pack rules are reasonably self-contained, meaning that compliance by the 1 April 2015 deadline is relatively straightforward to achieve – but only for those with a clear idea of the regulatory requirement as well as the commitment and resources to begin implementing the necessary changes in the very near future.


[1] Broadly, an AIFM with Part 4A permission to carry on the regulated activity of ‘managing an AIF’ and whose total AIF assets under management do not exceed (a) EUR 500 million in relation to unleveraged AIFs which have no redemption rights exercisable during a period of 5 years following the date of initial investment in each AIF, or (b) EUR 100 million in other cases, including any assets acquired through the use of leverage (see SI 2013 No 1773, Article 9)

[2] See Article 72AA(2)

[3] CASS 6.1.16BAG

[4] To which CASS 6 would apply

[5] If subject to the provisions of SUP 16.14

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