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As regulatory professionals and for those with specific CASS expertise know all too well, persuading banks to open accounts to hold client money is no mean feat. Even with the extension of unbreakable term deposits from 30 to 95 business days in 2018, such accounts continue to be a challenge for banks to administer, with the tension between the bank’s own capital and liquidity coverage ratios (whereby banks are required to hold highly liquid assets), is tightly controlled to enable the withdrawal and return of client funds promptly.

Lower risk vs. beneficial interest rates

In theory, we could conclude that diversification reduces client detriment, lowering the risk for consumers by spreading client money balances across a number of organisations, providing further protection from banking defaults, adverse findings from due diligence activities, or charges etc. However, in practice, does this work? Lower balances do not usually attract beneficial interest rates and we also know that adding providers increases the due diligence and need for ongoing monitoring – so does it really provide enough of a risk mitigation to fully and actively diversify?

Banks have more stability and confidence from consumers since adjusting well in the post-default environment, with capital measures continuing to strengthen and drive resilience and good behaviours across the industry. So, is it really necessary to deploy diversification, and if so, at what level does that become a viable strategy – do interest rates have a driving force on this strategy and in a rising interest rate economy, should we look to diversify or stay with larger balances to pass on benefits to customers?

The shape of things before 2020

Throughout the pandemic, there was evidence to suggest that investors may have moved away from various investment products due to the volatility in financial markets, opting instead for what they perceived safer cash-based savings products (notwithstanding the impact over time of inflation and capital erosion). 

One consequence of this was a marked increase in client money being held by financial institutes with permissions to hold and control such funds. This uptick in balances held was so significant that the FCA felt compelled to issue a ‘Dear CEO’ letter on the August 12th, 2020 asking firms to consider whether they needed to hold client money balances which were unlikely to be reinvested, or whether it would be in the clients’ better interests to place these balances directly with their own current or savings account providers.

Notwithstanding the increased market pressure on firms to reduce concentration risk that accompanied these ever-increasing balances, exerted by the effects of the pandemic, the opening of new client money bank accounts at reputable and appropriate financial institutes was often burdensome for firms, as they themselves wrestled with pandemic-induced impairment of operational functions and reduced workforce.

Fast forward to 2022

The rules under CASS 7.13 haven’t changed, but the environment in which firms operate certainly have. 

Interest rates have increased progressively from 0.1% in November 2021 to 3% as of November 2022. 

We are advised by our clients that client money bank accounts in the post-pandemic era may still hold significant balances. This means that with interest rates no longer so low this has become an area for focus. 

CASS does not mandate firms to pay retail clients any interest earned on client money, subject to written notification. Interest, unless specified clearly to a customer, must be passed on in full under CASS; so, firms must either clearly define what they pass on (or withhold) or pass through all interest received in full. 

Until recently, in the period of prolonged low rates, some firms have held client money balances in non-interest-bearing accounts without the potential for customer best interest conflicts. However, in order to remain CASS compliant and with rising interest rates, and to ensure good customer outcomes, not passing on interest may become increasingly harder to justify. 

Firms may therefore be looking to actively reconsider interest rate treatment, strategy, and pass-through, potentially reinvigorating active diversification, against the backdrop of ever-increasing FCA expectations to ensure firms act to deliver good outcomes, especially with the recent consumer duty principles in mind.

Grath is seeing firms start to fully revisit and explore how actively diversified client money can support better outcomes for its clients.

Finding the middle ground

Adding extra banking partners and diversification increases the reconciliations and oversight that firms need to deliver and therefore can layer more operational activity and costs, which can lead to higher customer costs and charges. If such costs are then passed through, this may not be in the customers’ best interests, but if firms fully embrace diversification, it could drive more competition and therefore, a tangible benefit for the customer. So perhaps there’s a middle ground – at Grath we feel there’s a case for automation and simplification with tools to support diversification processing, reconciliation to external banking partners and third parties, and diversification ratio monitoring and reconciliations, supported by dynamic governance monitoring of providers with frequent oversight routines and assurance reporting in place. We’re ready to help firms embed governance, risk and controls, and specialised diversification reconciliations and monitoring across their operating model to rationalise the functional impacts associated.

Focus on the positives

Regardless of your viewpoint on deploying diversification, what’s clear is that in a rising interest rate environment, there should be some positives to streamline your operating model and oversight while gaining external benefits to pass on to customers. Diversification can be an effective strategy to gain the most protection from concentration and perhaps access to a more competitive market, and with such automation, doesn’t have to be a significant operational overhead or cost to firms.

The areas where we see impacts and firms cite that diversification can still be challenging fall largely within governance and oversight. This involves increased, but crucial due diligence at the onset of a new banking partner and throughout the life of that relationship and with the complexity of introducing a new client bank account and diversification management to pre-existing CASS processes, specialised reconciliation, and diversification percentage level oversight and all of this aligned to and in synch with robust management of the firms active liquidity and treasury functions. Using Grath can help in all of these areas to add capabilities to your teams, reconciling, monitoring, and controlling to provide enhanced capabilities and depth, operational agility, and resilience.

Navigate uncertain times with Grath

Our industry-leading software solutions can support your governance, reporting, and diversification requirements in a number of ways:

  • Governance, risk and control environment

Link directly your firm’s risk and control framework to clearly demonstrate how you undertake compliance to your obligations, risks, and controls. Manage 1st line actions to undertake diversification activities and evidence the operation before dovetailing into the 2nd and 3rd line oversight and present on purpose-built management reporting and dashboards in real-time.

  • Reconciliation, reporting of diversified balances, interest rates, and controls

Diversification adds to operational complexity, often layering additional reconciliations and considering strict client money holding thresholds (particularly if the firm holds its client money across a group structure). Grath can simplify and automate your regulatory reconciliations, complete with threshold trigger alerts and tasks to automate diversification processing to drive actions and attestations.

  • Management Information

Demonstrate instantly your firm’s diversification footprint, thresholds and levels, and reconciliation completeness and accuracy. You can also report on how your performance and activities support good customer outcomes and deliver according to your firm’s policy and standards.

  • Conduct and govern your due diligence

An increase in banks holding client money will naturally generate enhanced initial and ongoing due diligence activities; Grath can automate your annual and periodic assessments of third parties and oversight requirements.

  • Map your regulatory footprint and impacts by entity or group structure

Simplify your operational complexity, introduce alignment to your firm’s diversification and consumer duty fair value, pricing, and oversight across purpose-built regulatory solutions designed to elevate your maturity and capabilities across the spectrum.

Interested in learning more?

If you’d like to know how Grath’s technology can help manage diversification, improve your regulatory compliance and bolster your risk management process, then we’d love to talk.

Get in touch with us at

Discover the future of CASS and Safeguarding reconciliations
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