On Friday (24 July 2020) the FCA sent out a Dear CEO letter to wholesale brokers about use of title transfer collateral arrangements and the matched principal exemption. The FCA call to action is for all firms who receive the letter to get either the holder of either the CASS or Compliance Senior Manager responsibilities to attest to FCA that their firm has considered the issues raised by FCA in its letter and will be alerting their Board about those issues.
To make the best use of all of the time between now and the FCA deadline of Friday 14 August to consider carefully both what actions you are going to take and most importantly the form of words that you use in your email to the FCA. Attestations like this are not just another email, if you need a reminder about how important these documents are, then look at the 2015 Deutsche LIBOR fine when the firm submitted an attestation without having systems and controls in place to verify its content and the FCA concluded the attestation was false. No individual was held to account by FCA for that instance but it happened pre-SMCR.
With that health warning out the way, how do you use the next 3 weeks? Before you cancel everyone's staycation's, consider what you need to have done in order to reply to the FCA. They want to know you have reviewed their letter not have you done a root and branch review of all your CASS compliance, regulatory capital management and regulatory permissions. So you need have a plan in place for what you will do to investigate, and remediate where necessary. Make sure that you have commitment from all your key stakeholders internally to deliver on that plan, it cannot be something that is later dropped. You have to look at all three issues raised in the letter. Watch our ten minute talk on the issues raised and actions you need to take.
Second, the FCA wants you to confirm that you will be raising these issues to your Board. That is partly because the governance forum responsible for oversight of CASS is the firm's highest level committee and for most firms that means their Board. The requirement to tell your Board is also because the issues relate to regulatory capital management and permissions which are pretty fundamental issues about which your Board need to be apprised. So book in to the Board meeting and be sure you have a slot on their agenda before you draft your email response to the FCA. Replying to the FCA without that certainty could put you in a very difficult position in future if for any reason you don't tell your Board. If you are struggling to get on the Board agenda make it an agenda item to highlight the FCA's letter and to discuss the plan that you have drafted, and so alert the Board to the potential risks that your plan is seeking to mitigate.
Thirdly, consider who the email is coming from. FCA wants a Senior Manager function holder on the hook for this and they give two options: the CASS senior manager or the head of compliance. FCA is all about business ownership of regulatory issues, so in my opinion you need to have someone from the first line of defence sign the letter and having a second line function sign the letter is just that, secondary. If you have both functions then get both to sign the letter. If you have only one or neither Senior Manager function holder then you should consider asking your Senior Manager with responsibility for the business that is predominately taking and receiving collateral which could mean going right up to your CEO (SMF 1), or branch manager (SMF 21 or SMF 19).
Those three steps should put you in a position where you can respond to the FCA by 14 August 2020 with some degree of comfort that you have a plan in place to tackle their concerns.