Good morning, the JFSC have issued their findings on “Client Assets”, please see summary below.
WHAT IS THIS ALL ABOUT?
As communicated in November 2017, the JFSC set out in high level terms its planned thematic examination programme for the first half of 2018, to be undertaken by the JFSC’s Supervision Examination Unit (SEU).
The programme identified the theme of Client Assets, whereby the SEU would examine whether Registered Persons, who can hold Client Assets, have in place appropriate systems and controls to segregate, account for, use, manage or otherwise safeguard those assets in accordance with applicable Laws, Orders and Codes.
The themed examinations commenced in Quarter 2 and concluded in Quarter 3 of 2018.
This paper provides the key findings from that themed examination. Read more here at – http://www.jerseyfsc.org/media/2287/2018-11-27-themed-q2-3-2018-client-assets-key-findings.pdf
THE EXECUTIVE SUMMARY
Oversight of Client Assets was generally good with the majority of Boards or Management Committees being provided with relevant management information in a timely manner.
That being said, JFSC officers did identify limited instances whereby information was not being provided, or it was not always correct, or was lacking in sufficient detail.
JFSC officers noted several examples of good practice in relation to compliance monitoring when it came to testing of controls in relation to Client Assets; however, compliance monitoring once again was an area which required improvement across the majority of Registered Persons examined.
Compliance monitoring continues to be a repeat finding not only in this thematic examination, but in other recent thematic and entity risk examinations, and therefore will be a dedicated theme in the SEU led themed examination programme for 2019.
The JFSC would like to make some general observations as a result of this themed examination process, which is to remind all Registered Persons:
1. › to ensure that the requirements of the local regulatory framework are at the forefront of internal systems and controls (eg CMP)
2. › that discussions and decision-making by the Board or Management Committee is clearly documented with any subsequent actions allocated and tracked.
Areas covered in the report
1. Corporate Governance
2. Internal Systems and Controls
3. Sanctions Screening
5. Custodian Agreements
7. Mixing and Use of Customer Money
Although the findings are split between investment business and trust companies i recommend all parties read all findings and consider r their own policy and procedures
1. Internal Systems and Controls Areas for further improvement
a. 6.2.1 Paragraph 188.8.131.52 of the IB Code requires Registered Persons to operate within the requirements of the regulatory framework. JFSC officers noted in several instances that the IBs were over reliant on the FCA’s CASS rules.
i. Policies and procedures made little or no reference to
1. the Jersey regulatory framework and
2. the controls in place to evidence compliance with CASS had not been mapped to the requirements of the IB Order.
ii. In some instances, although a compare and contrast exercise had been completed, this had not been sufficient in identifying the differences between both regulatory frameworks, and in one instance the exercise had not been refreshed, despite extensive changes to the CASS rules.
b. 6.2.2 Paragraph 184.108.40.206 of the IB Code requires periodic reviews of internal control systems to be undertaken to ensure they work effectively.
i. JFSC officers identified instances in which the control framework in respect of Client Assets had not been reviewed for a number of years.
ii. A Registered Person is required to ensure they are compliant with the regulatory framework in line with paragraph 3.5.1 of the IB Code.
iii. JFSC officers noted examples of compliance monitoring tests which required strengthening to fully comply with the requirements of the IB Order.
iv. For example,
1. compliance testing checked adherence with Article 6(3) of the IB Order, however it did not go on fully to check compliance with Article 6(3)(a) to (d).
2. In another instance, testing of first line of defence controls was not conducted by the Registered Person.
v. Good practice identified
c. Corporate Governance Areas for further improvement
i. 6.2.8 JFSC officers noted examples of material issues relating to Client Assets not reaching the Board or Management Committee.
1. In one instance KPIs were rated as green, when this was clearly not the case in relation to aged reconciliations.
ii. 6.2.9 Decision-making at Board or Management Committee level in relation to identified Client Asset issues was not always documented in sufficient detail and, although those Registered Persons were able to articulate how situations were being actively managed during Phase Two of the examination process, this was not readily evident from the minutes reviewed at Phase One.
iii. 6.2.10 Despite the Terms of Reference for oversight committees referring to the review of reports from second or third line of defence functions, it was not always the case that these reports were provided to the relevant forums.
iv. Good practice identified
1. 6.2.11 One entity had developed a Materiality Policy which provided guidance on matters which should be escalated internally, including the reporting line, and to the regulator.
2. 6.2.12 The creation of a specific committee which reviewed all matters in relation to Client Assets.
3. 6.2.13 Standing agenda items which encouraged discussion in relation to Client Asset management.
d. Sanctions Screening
i. 6.2.14 Although not a requirement of the IB Order, JFSC officers noted certain instances where sanction screening did not necessarily identify the underlying client when there was a free receipt/delivery of a security.
1. This findings is a breach of Article 11(3)(e)(iii) of the MLO, section 6.2.2 of the Handbook and paragraph 220.127.116.11 of the IB Code.
2. Ensuring gaps of this nature are identified and addressed is of extreme importance.
ii. Registered Persons who provide such a service are encouraged to conduct an immediate review of any relevant procedures and controls in this regard.
i. 6.2.15 Article 6(3)(a) to (d) of the IB Order requires an undertaking from the bank at which client money is held.
1. This undertaking outlines how the bank must treat client money, for example in relation to the title of the account and in respect of interest earned.
2. In a number of instances, the undertakings did not meet the requirements of the IB Order.
3. The JFSC recommends that all Registered Persons review undertakings for compliance with the IB Order
f. Custodian Agreements
i. 6.2.16 Article 18 of the IB Order details the requirements to be contained within written agreements entered into between Registered Persons and approved custodians.
1. These include the need to hold documents of title in a way that makes it apparent they do not belong to the Registered Person and to issue statements to the Registered Person at least every six months.
2. Although custodian agreements were in place, they did not always wholly satisfy the requirements of the Order.
3. The JFSC recommends that all Registered Persons engaging the services of an approved custodian conduct a review of their current agreements. Insurance
ii. 6.2.17 Article 21 of the IB Order requires the Registered Person, and their own nominee, to maintain adequate insurance covering non-registered securities of clients.
1. JFSC officers noted one instance in which the consideration for the requirement for such insurance could not be evidenced.
Trust Company Business
1. Mixing and Use of Customer Money
a. 6.3.1 Articles 5 and 6 of the TCB Order detail the requirements to ensure that Customer Money is not mixed with other money; and further that it is not distributed unless it is properly payable.
i. JFSC officers observed an instance in which Customer Money was used for fees without an invoice being raised to support the transaction and, as a result, Customer Money was mixed with other money thus breaching both Articles of the TCB Order.
a. 6.3.2 Article 7(1)(c) of the TCB Order requires an undertaking from the bank at which Customer Money is held in a Customer Pooled Bank Account. In one instance an undertaking was not held in relation to Customer Pooled Bank Accounts.
b. 6.3.3 Article 7(2) of the TCB Order outlines how the bank will treat Customer Pooled Bank Accounts. In a second instance, an undertaking in letter form did not comply with the requirements of the TCB Order.
c. 6.3.4 The JFSC recommends that all Registered Persons review undertakings for full compliance with the TCB Order.
3. Internal Systems and Controls Areas for further improvement
a. 6.3.5 A Registered Person is required to ensure they are compliant with the regulatory framework in line with paragraph 3.5.1 of the TCB Code.
i. JFSC officers observed examples of compliance monitoring which did not fully test compliance with the requirements of the TCB Order.
4. Good practice identified
a. 6.3.6 Comprehensive policies and procedures in relation to customer pooled accounts