Practical guidance series, Theme 1, Part 1 of 6

This opens a six-part walk-through of where firms most often generate findings in a CASS audit, working through the control environment in a logical build. It starts here, with the client money calculation (CMC) itself, because every other control in the series depends on this figure being right in the first place.

Which method a firm is permitted to use

Before looking at what goes wrong, it helps to be clear on what’s actually allowed, because firms using the wrong method for their business is itself a recurring finding.

There are two standard methods of internal client money reconciliation. The Individual Client Balance Method calculates the requirement client by client, and is available to any firm. It requires two separate records, one client by client and one bank account by bank account, kept apart and then reconciled against each other, not derived from a single record analysed two different ways.

The Net Negative Add-Back Method calculates the requirement bank account by bank account instead, starting from the firm’s own internal cashbook or ledger figure. It is not available to every firm: it can only be used as a standard method by a CASS 7 Asset Management Firm or a CASS 7 Loan-based Crowdfunding Firm, as those terms are defined in the FCA Glossary, and only where the firm does not undertake any margined transactions for or on behalf of its clients.

A firm must apply the same standard method consistently across the whole of a single legal entity. Using two different standard methods within one entity, even if each is applied correctly in isolation, is treated as operating a non-standard method. A non-standard method is available to any firm, but only after the firm documents why it believes the method will meet its obligations to clients, notifies the FCA of its intention to use it, and obtains an independent auditor’s written report on whether it will achieve that outcome. Any material change to a non-standard method requires those steps to be repeated. It’s generally only appropriate where a standard method genuinely doesn’t fit, for example where a firm runs two different business models that would otherwise need two different standard methods, and it comes with materially higher audit cost and regulatory scrutiny.

What it looks like in practice

CMC findings tend to take one of four shapes.

The first is a methodology error in the broad sense: a firm applies a method it isn’t entitled to use, for example a firm outside the Net Negative Add-Back Method’s permitted scope using it anyway, or a firm mixing two standard methods across the same legal entity without ever going through the documented non-standard process.

The second, and increasingly common, is missing content. The rules don’t just prescribe a method, they prescribe what the calculation must contain. Firms using the Individual Client Balance Method sometimes leave out items from the CASS 7.16.22(2) table without documenting why, or skip the further adjustments CASS 7.16.25 requires firms to consider, such as unallocated and unidentified money, shortfalls in assets, cash and cheques received but not yet deposited, unpresented cheques, non-margined transaction balances, and money held for or received from an affiliate. Others omit the firm’s record of client money held with third parties, which CASS 7.16.27(2) requires to be built into the calculation, or fail to calculate the margined transaction requirement separately where CASS 7.16.32 applies.

The third is a timing gap. The calculation isn’t run daily despite daily client activity, or it’s run using figures that aren’t genuinely as at close of business on the previous business day.

The fourth is misclassification of unallocated or unidentified money. A bulk receipt sits unallocated well past the point it should have been assigned to specific clients. Separately, a payment the firm can’t identify as client or firm money isn’t properly segregated and investigated while that question gets resolved.

Why it tends to happen

Most of this traces back to manual, spreadsheet-based calculation processes with no documented methodology behind them. A calculation template is often inherited from a previous system, a prior adviser, or a sister entity with a different business model, and nobody revisits whether it’s actually the right method for the firm’s own permissions, or whether every applicable content item from CASS 7.16.25 has been mapped into it.

Journals are often used to process entries into the books and records rather than updating them as transactions occur, which creates drift between what the records show and what’s actually true. And without a defined deadline or escalation process for unallocated and unidentified items, they simply accumulate rather than getting chased down.

A lack of second-review checks compounds all of this. If nobody checks the calculation before it’s relied on, including checking it still matches the firm’s permitted method and contains every item relevant to its business, the same errors recur undetected, audit after audit.

Steps firms can take

Confirm which method the firm is actually entitled to use, based on its FCA permissions and business model, and apply one standard method consistently across the legal entity. If a non-standard method is genuinely needed, document the rationale, notify the FCA, and obtain the required independent auditor’s report before relying on it.

Map every applicable item from CASS 7.16.22(2) and CASS 7.16.25 against the firm’s own business, with a documented explanation of which items apply, which don’t, and why, rather than a calculation that simply omits anything inconvenient. Include the third-party client money record required by CASS 7.16.27(2) and a separate margined transaction calculation where CASS 7.16.32 applies.

Run the calculation daily without exception, using records as they stood at close of business on the previous business day, never real-time or stale figures.

Allocate bulk receipts within 10 business days, in line with CASS 7.13.36(1), with an agreed point at which unallocated funds are returned if they can’t be allocated, and investigate unidentified money within a reasonable timeframe before deciding whether to allocate it or repay it.

Keep a correction log that records, for every calculation error, what happened, why, what was done to fix it, and what’s being done to stop it recurring.

Build in a second-review check before the calculation is relied on, particularly where spreadsheets are involved, including cell validation and protected formulas to stop figures being overwritten or corrupted.

Part 2 picks up from here: even a correctly calculated client money requirement doesn’t help if it isn’t properly reconciled, which is where the next cluster of CASS audit findings tends to sit.