What’s behind the FRC’s Assurance Standard?

What’s behind the FRC’s Assurance Standard?

What are the main objectives behind the Financial Reporting Council’s (FCR’s) proposed Assurance Standard? Tom Dane, a partner at Nabarro LLP, explains the background to the standard, its aims and scope.

Original news

Opinions sought on FRC’s ‘Assurance Standard’ for auditors, LNB News 14/05/2015 105

The FRC is seeking views on its new Assurance Standard following the strengthening of the Financial Conduct Authority’s (FCA) client asset regime. The standard, ‘Providing Assurance on Client Assets to the Financial Conduct Authority’, was created to support auditors when reporting on regulated businesses’ compliance with the FCA’s Client Asset (CASS) rules. The consultation deadline is 31 July 2015.

What is the background to the FRC’s consultation?

The FRC Assurance Standard has been developed in a bid to support and challenge auditors when reporting on compliance, by regulated firms, with the FCA’s CASS rules designed to ensure the effective safekeeping of client assets.

Where a firm holds client assets, the FCA’s supervisory manual (SUP Rules) require a CASS auditor to provide an annual ‘reasonable assurance client asset report’. This is a report as to whether, among other things, the firm has adequate systems in place to safeguard their client assets. Where an investment business claims not to hold client assets, a ‘limited assurance report’ is required.

The background to the FRC’s consultation is the desire to ensure appropriate systems are in place to protect client assets held by FCA regulated firms.

It is estimated that more than 1,500 firms hold over £100bn in client assets and £11trn in other custody assets. Following the 2008 financial crisis, there were well publicised cases regarding the effective safe-keeping of client assets by, among others, Lehman Brothers, JP Morgan and MF Global. In response to these events, the then Financial Services Authority (FSA) considerably tightened its CASS Regime particularly the enforcement of the regime through the work of its CASS Unit which it formed in 2008. Since 2008, the FSA/FCA has fined a number of financial institutions such as Barclays Bank Plc and Aberdeen Asset Managers Ltd in connection with significant breaches of the CASS Rules.

The proposed new standard will be effective for reports to the FCA with respect to client’s assets covering periods commencing on or after 1 January 2016 (with early adoption permitted).

The window for providing comments on the draft standard closes on 31 July 2015.

What is the status of the proposed new Assurance Standard?

When implemented, the Assurance Standard will become the material referred to in the SUP Rule 3.10.5B G to which the FCA would expect CASS auditors to have regard for reports issued on or after 1 January 2016.

What is the scope of the standard?

The standard establishes requirements with respect to:

  • the process for forming, and the expression of, reasonable assurance opinions
  • the process for forming, and the expression of, limited assurance opinions
  • the provision of reasonable assurance to the FCA with respect to a firm’s proposed adoption of:

                - the alternative approach to client money segregation, and

                - the non-standard method of client money reconciliation

  • CASS auditor confirmations in respect of non-statutory client money trusts

What are its main objectives?

The key objectives of the CASS Assurance Standard are to:

  • improve the quality of CASS audits
  • adequately support and challenge CASS auditors when undertaking CASS engagements and, in particular, to define the nature and extent of the work effort required for both reasonable assurance and limited assurance CASS engagements without undermining the importance of the CASS auditor’s judgment
  • support the objectives of the FCA’s Client Asset regime regarding the effective safe-keeping of client assets and client monies and in particular to guard against systemic failure of the CASS regime
  • manage the expectations, when they engage a CASS auditor to provide assurance to the FCA on client assets that they handle or account for, of:

                  - the management of firms that hold client assets, and

                  - third party administrators

  • support the effective training of CASS auditors by both the accounting bodies and other training organisations
  • help to establish realistic expectations regarding the integrity of the UK Client Asset Regime with the beneficial owners of client assets
  • underpin the effectiveness of the FRC’s enforcement and disciplinary activities with respect to CASS assurance engagement

How will the standard assist the FCA in ensuring effective regulation of CASS requirements?

CASS auditor reports are an essential tool in the FCA’s effective regulation of CASS requirements. The Assurance Standard has been developed to support and challenge auditors when providing CASS reports. It is hoped the new standard will make the process more robust.

Melanie Mclaren, executive director of Codes and Standards at the FRC notes:

‘The effective safekeeping of client assets is an issue of significant public interest. Our proposed assurance standard will support auditors in providing high quality assurance over the control systems operated by regulated firms and will support auditor reporting to the FCA where regulated firms fail to fulfil their obligations.

‘The development of the standard for consultation has been supported by the FCA. I encourage audit practitioners, regulated firms, investors and other interested stakeholders to read the draft, and to provide us with their views.’

 

Interviewed by Alex Heshmaty

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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