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Protecting client cash: Are platforms doing enough to safeguard assets?


The FCA has fired a “warning shot” at the platform market after it hit Aviva with an £8.2m fine over failures in client money oversight.

The fine, which is the first of its kind, signals further regulatory scrutiny is to follow for platforms outsourcing the administration of custody assets.

Experts suggest the case leaves advisers with more questions than answers when it comes to platform due diligence.

They have also challenged the lack of clarity around what specific controls platforms should have in place when dealing with their outsourcing firms.

‘Endemic’ issue

Last week the FCA fined Aviva Pension Trustees and Aviva Wrap UK for failures in its outsourcing arrangements for client assets on Aviva’s advised platform.

Aviva outsourced client money admin and reconciliations to Citi from January 2013 to September 2015, and to Genpact in August 2015.

The FCA says Aviva failed to put in place appropriate controls over the third-party administrators, leading to delayed detection of client money and compliance risks.

Between 10 February 2014 and 9 February 2015, client money was also not properly ring fenced internally, with under-segregation peaking during the period at £74.4m.

Aviva has said it is responsible for the failures and it has resolved the issues identified.

Despite the fine, the FCA has said the failures have not resulted in any loss of client money or custody assets.

The Lang Cat principal Mark Polson says: “What happened to Aviva is a warning shot for the industry. Nobody is laughing at Aviva for what happened because everybody struggles with Client Asset Sourcebook issues.

“Concerns about CASS are absolutely endemic in this sector and it doesn’t mean people are really doing things wrong, it means it is almost impossible to do things right.”

Platforum senior researcher Miranda Seath warns smaller platforms are at a higher risk if they are hit by a large fine.

“Nobody is laughing at Aviva for what happened because everybody struggles with client money issues”

She says: “Aviva’s £8.2m fine shows the buck stops with the platform, not the outsourced administration provider. The FCA has also hinted other platforms may be similarly vulnerable to fines.

“For platforms that are not part of larger groups, £8.2m is a big deal and would likely wipe out any profit. It would be wise for platforms to have a long, hard look at whether their own houses are in order.”

Altus Consulting director Kevin Okell says the FCA will now be looking at the rest of the sector.

He says: “The Aviva fine isn’t a fine for CASS failure; other platforms have been fined for that like Transact and SEI.

“It is interesting that someone is now getting fined for something before anything has gone wrong. It looks like the FCA is going upstream. If it has done that for Aviva, there’s no particular reason to single them out, so I imagine it must be looking at everybody. It is possible there might be others.”

Money Marketing has approached a number of platforms asking about the way they deal with client money protection and their relationships, if any, with their outsourcing partners.

Cofunds operations director Marc Bulstrode says the firm takes all its regulatory responsibilities “very seriously”. He says: “This includes having the necessary processes and controls in place to ensure the safekeeping of customers’ money and assets.”

Old Mutual Wealth, Aegon and Ascentric do not outsource management of CASS responsibilities.

Old Mutual Wealth UK operations director Phil Hine says the firm has “a robust control framework” to monitor and oversee the effective operation of CASS controls. He says: “Formal governance oversight forums are in place and risk committees receive regular reports, with full board oversight. External consultancy firms support our internal monitoring of CASS controls and review key aspects of our control processes to ensure we are operating to best practice.”

An Ascentric spokesman says: “Looking after our clients’ money safely is our number one priority. We therefore do not outsource the administration of any of our clients’ money to third parties and have no plans to do so in the future.

“A platform is primarily an administrative system and we believe custody and managing client money is core to any platform and should not be outsourced.”


Due diligence limits

Aviva’s fine has shed light on the challenge advisers face in carrying out due diligence on the safety of assets when selecting a platform.

Zurich head of UK retail business Alistair Wilson says: “Having the right controls in place is paramount for any platform and this shouldn’t be taking lightly. Cash reconciliation is absolutely focus number one for platforms so there are no issues. You’ve got to know what money is moving in and out on a day-by-day basis.”

Zurich declined to comment on whether it used third-party administrators.

Experts argue advisers will struggle to get information on regulatory issues as part of their due diligence, as platforms are usually hesitant to disclose this.

Threesixty managing director Phil Young says: “Most advisers are asking if platforms have any significant issues and all the responses are ‘no’ or they won’t disclose it, so how is an adviser realistically supposed to know?”

Young also questions whether a platform should provide regulatory information about its client money controls when under investigation. He says: “It is difficult for advisers to work out who is the third party providing these services, who is responsible for what and what could go wrong. What’s more, no platform will give information about ongoing regulatory issues at that point in time.

“As much as the FCA says ‘we don’t want to see box-ticking’, how can due diligence be anything other than box-ticking if no one is prepared to give up any honest information?”

Experts agree on the FCA’s lack of clarity over the types of controls needed in relation to outsourced providers.

Polson says for any provider there will need to be a team or sufficient resources to do the difficult job of audit and reconciliation.

He says: “A trick for a big provider like Aviva is putting a team together. There’s one place you shouldn’t save money and that is the team that looks at clients’ money.”

Okell says: “CASS rules are clear enough but I haven’t seen any specific rules on how you are supposed to oversee an outsourcer. There are big variations. Some organisations have teams of people and I imagine that counts as a reasonable level of control from the FCA’s view. But then I see other organisations which have maybe one or two people.”

He also argues the client money issue is not just about platforms with legacy books to manage.

He says: “The ‘Dear CEO’ letter on this came out ages ago highlighting the risks the FCA saw about outsourcing. Certainly outsourcing has become increasingly common in the platform sector.

“People have been predicting for a long time that the industry will consolidate and outsource but I don’t think older-style platforms are anymore susceptible to it. The FCA is particularly interested in who has outsourced CASS responsibility and what controls they have to make sure their responsibilities have been properly exercised, and that is not unusual or dependent on new or old platforms.”

Expert view

If Aviva is struggling, what about others?

The majority of platforms have had client money protection issues and had to invest quite a lot of time resolving them. This is clearly a complication and still seems to be prone to error.

A lot of insurers are outsourcing a good degree of the platform administration to someone else. Some also outsource some of the custody admin to other people.

A lot of the underlying operation and the mechanics of platforms take place outside the platform’s control – the fine against Aviva seems to reflect it was not taking the necessary care to keep an eye on that relationship.

It is possible Aviva would look to reclaim redress from the third-party administrators. Aviva is clearly saying it is at fault but you still do not know fundamentally what is going on.

If a large company like Aviva is struggling with this, you would wonder how the rest of the market has dealt with it. I know some of the smaller distributors have been dealing with client money issues and did not necessarily factor that into the overall costs of the platforms over the years.

As an adviser you only find out about these things in retrospect. Advisers may have been doing due diligence on Aviva a month ago while these investigations were in progress.

No platform is going to be prepared to disclose these sorts of things while they are being
reviewed. It makes a farce of the whole due diligence process.

Phil Young is managing director of Threesixty



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There are 2 comments at the moment, we would love to hear your opinion too.

  1. It seems a lot of commentators are setting firms up for a fall when this is not necessary. Some platforms outsource and appoint a custodian that is responsible for CASS e.g. Succession. Other platforms are responsible for CASS but outsource back office administration e.g. Zurich with FNZ or Aviva. The problem with CASS is that it is designed to ensure firms are ready in the event of an insolvency event to ensure clients can identify their money and assets and have them returned or transferred with the minimum of disruption with a balance of accuracy and speed of resolution. CASS is not difficult and should not be scary. Its about efficient record keeping, governance and controls. Aviva’s controls failed and most of the fines are a result of significant failures across the board. Most firms will have had issues but informing the regulator and getting on with a fix is the best approach and usually results in successful resolution.

  2. You cannot outsource CASS responsibility, as Aviva found to their cost. Platforms may outsource much of the administration, as FNZ does for many platform providers. However, apart being able to recover costs through contractual clauses and failures to deliver against service level agreements (SLAs) it should never be possible to recover a regulatory fine from an outsourcer, as it is the firm with the CASS responsibility (e.g. the custodian that owns the nominee company and holds client money) that is responsible for CASS to the FCA.

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