CASS 7.2 Definition of client money

A title transfer financial collateral arrangement under the Financial Collateral Directive is an example of a type of transfer of money to cover obligations where that money will not be regarded as client money.

Where a firm has received full title or full ownership to money under a collateral arrangement, the fact that it has also takena security interest overits obligation to repay that money to the client would not result in the money being client money. This can be compared to a situation in which a firm takes a charge or other security interest over money held in a client bank account, where that money would still be client money as there would be no absolute transfer of title to the firm. However, if that security interest includes a "right to use arrangement", under which the client agrees to transfer all of its rights to money in that account to the firm upon the exercise of the right to use, the money may cease to be client money, but only once the right to use is exercised and the money is transferred out of the accountto the firm.

Firms are reminded of the client's best interest rule, which requires a firm to act honestly, fairly and professionally in accordance with the best interests of its clients when structuring its business particularly in respect of the effect of that structure on firms' obligations under the client money rules.

Pursuant to the client's best interests rule, a firm should ensure that where a retail client transfers full ownership of money to a firm:

1. (1)

   the client is notified that full ownership of the money has been transferred to the firm and, as such, the client no longer has a proprietary claim over this money and the firm can deal with it on its own right;

2. (2)

   the transfer is for the purposes of securing or covering the client's obligations;

3. (3)

   an equivalent transfer is made back to the client if the provision of collateral by the client is no longer necessary; and

4. (4)

   there is a reasonable link between the timing and the amount of the collateral transfer and the obligation that the client owes, or is likely to owe, to the firm.

1The exclusion from the client money rules for delivery versus payment transactions under CASS 7.2.8 R is an example of an exclusion from the client money rules which is permissible by virtue of recital 26 of MiFID.

Money held as client money becomes due and payable to the firm or for the firm's own account, for example, because the firm acted as principal in the contract or the firm, acting as agent, has itself paid for securities in advance of receiving the purchase money from its client. The circumstances in which it is due and payable will depend on the contractual arrangement between the firm and the client.

2Firms are reminded that, notwithstanding that money may be due and payable to them, they have a continuing obligation to segregate client money in accordance with the client money rules. In particular, in accordance with CASS 7.6.2 R, firms must ensure the accuracy of their records and accounts and are reminded of the requirement to carry out internal reconciliations of client money balances, either in accordance with the standard method of internal client money reconciliation or a different method which meets the requirements of CASS 7.6.7 R and CASS 7.6.8 R.

When a client's obligation or liability, that is secured by that client's asset, crystallises, and the firm realises the asset in accordance with an agreement entered into between the client and the firm, the part of the proceeds of the asset to cover such liability that is due and payable to the firm is not client money. However, any proceeds of sale in excess of the amount owed by the client to the firm should be paid over to the client immediately or be held in accordance with the client money rules.

When a firm has entered into an arrangement under which commission is rebated to a client, those rebates need not be treated as client money until they become due and payable to the client in accordance with the terms of the contractual arrangements between the parties.

When commission rebate becomes due and payable to the client, the firm should:

1. (1)

   treat it as client money; or

2. (2)

   pay it out in accordance with the rule regarding the discharge of a firm's fiduciary duty to the client (see CASS 7.2.15 R);

unless the firm and the client have entered into an arrangement under which the client has agreed to transfer full ownership of this money to the firm as collateral against payment of future professional fees (see CASS 7.2.3 R (Title transfer collateral arrangements)).

When a firm wishes to transfer client money balances to a third party in the course of transferring its business to another firm, it should do so in a way which it discharges its fiduciary duty to the client under this section.

The purpose ofthe rule on allocated but unclaimed client money is to allow a firm, in the normal course of its business, to cease to treat as client money any balances,allocated to an individual client, when those balances remain unclaimed.

When a firm gives an undertaking to make good any valid claim against released balances, it should make arrangements authorised by the firm's relevant controllers that are legally enforceable by any person with a valid claim to such money.