6.5 Prudential Standards, CASS and the SMCR

Prudential standards, the Client Assets Sourcebook (CASS), and the Senior Managers and Certification Regime (SMCR) form the operational core of how authorised firms are kept safe and well-governed. Prudential rules protect firms against failure; CASS protects client money when firms fail; and the SMCR ensures named individuals are accountable for both.

Prudential Standards for FCA-Regulated Firms

The FCA's prudential rules apply to firms that are not PRA-regulated (the PRA sets prudential rules for major banks, building societies and insurers). For FCA-regulated firms, the relevant sourcebooks depend on the firm's type and size.

Capital Adequacy

Capital adequacy means holding enough own funds to absorb losses without becoming insolvent. The amount required depends on the firm's activities and risks:

• Mortgage and insurance intermediaries (MIPRU) — fixed minimum £5,000 plus a variable element based on expenditure
• Investment firms (IFPRU/MIFIDPRU) — risk-sensitive K-factors (e.g. assets under management, daily trading flow, orders handled) computed under UK-IFR
• Deposit-takers — minimum own funds under UK CRR, supervised by the PRA

Liquidity

Liquidity means holding sufficient liquid assets (cash, high-quality government bonds) to meet obligations as they fall due. The PRA supervises bank liquidity under the UK Liquidity Coverage Ratio; FCA-regulated investment firms under UK-IFPRU have a basic liquidity requirement proportionate to their activities.

Reporting

Firms must submit FIN-A (annual) and FIN-C (semi-annual) returns to the FCA, plus more frequent returns for some categories. The GABRIEL system (now the RegData platform) is the FCA's electronic reporting gateway. Failure to submit is itself a breach and a leading indicator of supervisory concern.

CASS: The Client Assets Sourcebook

The Client Assets Sourcebook (CASS) protects client money and safe custody assets when an authorised firm fails. The rules require firms to segregate client assets from the firm's own assets so that, on insolvency, client assets are returned to clients rather than entering the general pool available to the firm's creditors.

Key CASS Chapters

How CASS Works

A CASS firm must:

• Identify client money and assets at all times
• Segregate them from the firm's own money in a client bank account with an approved bank
• Reconcile regularly (typically daily for client money; at least every 25 business days for custody assets)
• Record the title to client assets in a way that is identifiable
• Submit CMAR (Client Money and Asset Return) monthly to the FCA
• Maintain a CASS Resolution Pack that allows an insolvency practitioner to wind down the firm in 7 days

CASS 5 vs CASS 7

The distinction matters for examination purposes. CASS 5 applies to small investment firms that hold client money and operate a non-designated client bank account; CASS 7 applies to most other investment firms that hold client money, including through designated client bank accounts. In practice most investment advisers are CASS 7 firms. Mortgage advisers generally do not hold client money and may not be subject to CASS at all.

The Senior Managers and Certification Regime (SMCR)

The SMCR replaced the Approved Persons Regime for FCA solo-regulated firms from 9 December 2019. Its purpose is to make senior individuals personally accountable for the parts of the business they run, and to ensure that all staff are subject to enforceable Conduct Rules.

Three Components of the SMCR

Senior Manager Liability

Each SMF must have a Statement of Responsibilities (SoR) describing the areas they are accountable for, mapped to the firm's Management Responsibilities Map. Prescribed Responsibilities ensure that at least one SMF is named as accountable for each key area, including:

• Compliance with the FCA's rules and regulatory obligations
• The firm's Consumer Duty outcomes
• CASS compliance (PR(z))
• Whistleblowing and complaints handling

A senior manager who fails to take reasonable steps to prevent a breach within their area can be fined or prohibited personally, without the firm itself being fined first.

Conduct Rules (COCON)

The Individual Conduct Rules apply to all staff under the SMCR:

1. Act with integrity
2. Act with due skill, care and diligence
3. Be open and co-operative with the FCA, the PRA and other regulators
4. Pay due regard to the interests of customers and treat them fairly
5. Observe proper standards of market conduct

The Senior Manager Conduct Rules add:

1. Take reasonable steps to ensure that the business complies with relevant requirements
2. Take reasonable steps to ensure that any delegation of responsibilities is effective
3. Take reasonable steps to ensure that the firm is organised so it can be controlled effectively

Phase 1 Reforms 2026

The FCA and PRA published PS26/6 on 22 April 2026, with Phase 1 SMCR reforms effective from 24 April 2026, further changes from 10 July 2026, and non-financial misconduct alignment from 1 September 2026. Key changes: criminal records check validity extended from 3 to 6 months; the 12-week rule modified so SMF candidates may act while their application is being determined; digital certification permitted; Directory updates within 20 business days for most changes.

Fitness and Propriety

Firms must assess the fitness and propriety of SMFs and certified staff on appointment and at least annually. The test (in FIT and SYSC 5) considers honesty, integrity, competence, capability, and financial soundness. Regulatory references must be obtained from previous employers for the previous 6 years before appointment.

Key Takeaways

• FCA prudential rules are in GENPRU, IFPRU, MIFIDPRU, MIPRU (small firms) and BIPRU (legacy banks)
• CASS protects client money and custody assets through segregation, reconciliation, CMAR and a CASS Resolution Pack
• CASS 5 covers small investment firms; CASS 7 is the main client money chapter; CASS 6 covers custody
• The SMCR has three components: Senior Managers Regime (FCA-approved), Certification Regime (firm-certified), and Conduct Rules
• Each SMF must have a Statement of Responsibilities; senior managers are personally accountable for their areas