CASS 5 - NST systems and controls confirmation letter

Operating a non-statutory trust (“NST”) client money environment introduces additional risk and complexity to a firm’s client money arrangements and there are additional regulatory requirements in place to address this risk and complexity as a result.

CASS 5.4 permits a firm which has adequate resources, systems and controls, to declare a trust on terms which expressly authorise it, in its capacity as trustee, to make advances of credit to the firm's clients.

Under this arrangement, the firm may, in its capacity as trustee, advance credit to clients, for example by funding premium settlements to insurers prior to receipt from clients or settling return premiums or claims before the insurer remits the related funds.

This approach provides operational flexibility, but it also introduces additional credit risk into the firm’s client money arrangements which must be monitored and managed closely.
Firms operating a non-statutory trust account must obtain an NST systems and controls confirmation from their CASS auditor to demonstrate that the systems and controls in place are adequate to meet CASS 5 requirements. The FCA also require confirmation that a letter has been obtained through the Retail Mediation Activities Return and actively monitor when a confirmation has not been obtained, which might indicate an inadequate control environment.

It is important to note that the FCA accepted the NST regime reluctantly on initial drafting of the CASS rules and NSTs are still perceived as risky by the regulator.

The requirements of CASS 5.4 should therefore be viewed as a core component of a firm's wider CASS governance framework, requiring systems and controls that are not only well designed but also fully embedded within its operations and supported by effective and ongoing oversight.