FCA CP24/20: Diversifying Balances to Mitigate Risk and Enhance Compliance

The Regulatory Landscape Is Shifting—Are You Ready?

The FCA's publication of CP24/20 marks more than just another regulatory update—it represents a fundamental shift in how the regulator expects firms to protect customer funds. With the FCA's unwavering commitment to minimizing consumer harm when firms face insolvency or safeguarding shortfalls, the new relevant funds regime introduces a critical requirement: firms must now actively consider diversification of safeguarding balances.

This isn't just regulatory box-ticking. It's about building resilience into your business model while ensuring customers can recover their funds quickly when it matters most.

Understanding the Diversification Imperative

Why Diversification Matters More Than Ever

Diversification serves two critical purposes that go to the heart of consumer protection:

Risk Mitigation: By spreading safeguarding balances across multiple institutions, firms dramatically reduce concentration risk. No longer are all customer funds vulnerable to a single point of failure.

Recovery Speed: When the worst happens, diversified balances enable faster fund returns to customers—often the difference between orderly resolution and prolonged uncertainty.

The Regulatory Framework: What You Need to Know

Under the new regime, safeguarding institutes must embrace continual diversification assessment as outlined in CASS 15.9.1.R (2) and CASS 15.9.6 G. This mirrors familiar requirements from CASS 7, but with enhanced emphasis on ongoing evaluation rather than point-in-time assessments.

Key considerations include:

• Group Structure Limitations: Carefully managing exposure to institutions within the same corporate group

• Market Condition Sensitivity: Adapting diversification models as market dynamics evolve

• Due Diligence Integration: Ensuring diversification decisions are embedded within your broader third-party risk assessment framework

How Grath Addresses This Challenge: Our GRC platform transforms regulatory change management from reactive scrambling to proactive strategy. Firms can demonstrate comprehensive due diligence evaluation, including diversification considerations, through integrated control and attestation functionality. Our audit manager module produces periodic due diligence assessment reports that provide auditors with clear evidence trails—turning compliance documentation from burden to competitive advantage.

The Operational Reality: Beyond Regulatory Compliance

The Complexity Challenge

Implementing diversification isn't simply about opening new bank accounts. It's about fundamentally rethinking your operational architecture while maintaining regulatory compliance throughout the transition.

Consider the operational implications:

Technology Infrastructure: Your core systems must accommodate multiple banking relationships, complex routing logic, and enhanced reconciliation requirements.

Ledger Architecture: Chart of accounts structures may require significant redesign to properly segregate and track diversified balances.

Reconciliation Complexity: Multiple banking relationships exponentially increase reconciliation touchpoints and exception management requirements.

Governance Oversight: Board-level visibility into diversification strategies becomes critical for demonstrating ongoing suitability assessments.

The Change Management Imperative

Any modification to safeguarding structures represents a significant change under CASS requirements—a designation that brings heightened scrutiny and documentation expectations. Your approach to designing, implementing, and embedding these changes will be examined forensically by CASS auditors.

Auditors will expect comprehensive evidence addressing:

• Change Rationale: Clear documentation of why diversification changes were necessary

• Implementation Methodology: Step-by-step evidence of how changes were executed

• Compliance Assurance: Demonstration that all changes maintained regulatory compliance throughout the process

• Ongoing Monitoring: Evidence of post-implementation oversight and effectiveness assessment

Technology as Your Strategic Enabler

Why Generic Solutions Fall Short

Traditional banking and reconciliation systems weren't designed for the nuanced requirements of diversified safeguarding models. They struggle with:

• Complex multi-entity reconciliation requirements

• Dynamic ledger structures that evolve with business needs

• Audit trail preservation during structural changes

• Real-time visibility across diversified banking relationships

The Grath Advantage: Built for Your Reality

Our Reconciliation solutions don't just accommodate change—they anticipate it. Designed specifically for firms managing diversified safeguarding models, our platform provides:

Flexible Architecture: Straightforward configuration of ledger structures that can evolve as your diversification strategy matures, without system rebuilds or lengthy implementation cycles.

Audit-Ready Documentation: Every configuration change, reconciliation adjustment, and structural modification is automatically documented with full audit trails—giving auditors the transparency they demand.

Controlled Evolution: Changes are implemented through controlled processes that maintain data integrity and compliance throughout transition periods.

Operational Efficiency: Reduced manual intervention in complex multi-bank reconciliation processes, freeing your team to focus on strategic oversight rather than operational firefighting.

Strategic Considerations for Implementation

Building Your Diversification Framework

Successful diversification requires more than regulatory compliance—it demands strategic thinking about:

Operational Resilience: How will diversified structures enhance your ability to serve customers during stress scenarios?

Cost-Benefit Analysis: Balancing diversification benefits against increased operational complexity and costs.

Scalability Planning: Ensuring your diversification model can accommodate business growth without requiring fundamental restructuring.

Technology Integration: Confirming your systems can support enhanced complexity without compromising operational efficiency.

Preparing for Audit Success

CASS auditors increasingly focus on firms' ability to demonstrate intentional compliance—showing that regulatory adherence results from deliberate strategy rather than accidental alignment.

For diversification initiatives, this means:

• Clear Documentation: Comprehensive records of decision-making processes and rationale

• Process Evidence: Demonstration of controlled change management throughout implementation

• Ongoing Monitoring: Evidence of post-implementation effectiveness assessment and adjustment capabilities

• Technology Assurance: Proof that systems changes maintain data integrity and regulatory compliance

The Path Forward: Turning Compliance into Competitive Advantage

The FCA's diversification requirements represent more than regulatory obligation—they're an opportunity to build more resilient, customer-focused operations. Firms that embrace this challenge strategically, with the right technology foundation, won't just achieve compliance—they'll establish operational advantages that serve them long after the regulatory requirement becomes routine.

The question isn't whether you'll need to implement diversification strategies. The question is whether you'll do so reactively, under regulatory pressure, or proactively, as part of a broader operational excellence initiative.

Ready to Transform Your Safeguarding Strategy?

Diversification requirements don't have to mean operational complexity. With the right platform, regulatory change becomes strategic opportunity.

Contact Grath today to discover how our purpose-built reconciliation and GRC solutions can streamline your diversification implementation while strengthening your overall compliance posture. Let's turn regulatory requirement into competitive advantage.