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CASS 7.2 Definition of client money

CASS 7.2.1R

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CASS 7.2.2R

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Title transfer collateral arrangements

CASS 7.2.3R
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  1. (1)

    Where a client transfers full ownership of money to a firm for the purpose of securing or otherwise covering present or future, actual or contingent or prospective obligations, such money should no longer be regarded as client money.

    [Note: recital 27 to MiFID]2

  2. (2)

    2Excepted from (1) is a transfer of the full ownership of money:

    1. (a)

      belonging to a retail client;

    2. (b)

      whose purpose is to secure or otherwise cover that client's present or future, actual, contingent or prospective obligations under a contract for differences or 3a rolling spot forex contract that is a future, and in either case where that contract is3 entered into with a firm acting as market maker; and

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    3. (c)

      which is made to that firm or to any other person arranging on its behalf.

CASS 7.2.3AR
  1. (1)

    2Subject to (2), where a firm makes arrangements for the purpose of securing or otherwise covering present or future, actual, contingent or prospective obligations of a retail client those arrangements must not provide for the taking of a transfer of full ownership of any of that client's money.

  2. (2)

    The application of (1) is confined to the taking of a transfer of full ownership:

    1. (a)

      whose purpose is to secure or otherwise cover that retail client's obligations under a contract for differences or 3a rolling spot forex contract that is a future, and in either case where that contract is3 entered into with a firm acting as market maker; and

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    2. (b)

      which is made to that firm or to any other person arranging on its behalf.

CASS 7.2.4G

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.

CASS 7.2.5G

Where a firm has received full title or full ownership to money under a collateral arrangement, the fact that it has also granted4 a security interest to its client to secure4 its 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, where a firm has received client money under a4 security interest and the security interest4 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 client bank account 4 to the firm.

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CASS 7.2.6G

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.

CASS 7.2.7G

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.

Money in connection with a "delivery versus payment" transaction

CASS 7.2.8R

Money need not be treated as client money in respect of a delivery versus payment transaction through a commercial settlement system if it is intended that either:

  1. (1)

    in respect of a client's purchase, money from a client will be due to the firm within one business day upon the fulfilment of a delivery obligation; or

  2. (2)

    in respect of a client's sale, money is due to the client within one business day following the client's fulfilment of a delivery obligation;

unless the delivery or payment by the firm does not occur by the close of business on the third business day following the date of payment or delivery of the investments by the client.

CASS 7.2.8AG

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.

CASS 7.2.8BR

1Money need not be treated as client money in respect of a delivery versus payment transaction, for the purpose of settling a transaction in relation to units in a regulated collective investment scheme, if:

  1. (1)

    the authorised fund manager receives it from a client in relation to the authorised fund manager's obligation to issue units, in an AUT or ACS,5 or to arrange for the issue of units in an ICVC, in accordance with COLL, unless the price of those units has not been determined by the close of business on the next business day:

    1. (a)

      following the date of the receipt of the money from the client; or

    2. (b)

      if the money was received by an appointed representative of the authorised fund manager, in accordance with CASS 7.4.24 G, following the date of receipt at the specified business address of the authorised fund manager; or

  2. (2)

    the money is held in the course of redeeming units where the proceeds of that redemption are paid to a client within the time specified in COLL; when an authorised fund manager draws a cheque or other payable order within these time frames the provisions of CASS 7.2.17 R and CASS 7.2.9 R (2) will not apply.

Money due and payable to the firm

CASS 7.2.9R
  1. (1)

    Money is not client money when it becomes properly due and payable to the firm for its own account.

  2. (2)

    For these purposes, if a firm makes a payment to, or on the instructions of, a client, from an account other than a client bank account, until that payment has cleared, no equivalent sum from a client bank account for reimbursement will become due and payable to the firm.

CASS 7.2.10G

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.

CASS 7.2.10AG

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.

CASS 7.2.11G

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.

Commission rebate

CASS 7.2.12G

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.

CASS 7.2.13G

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)).

Interest

CASS 7.2.14R

Unless a firm notifies a retail client in writing whether or not interest is to be paid on client money and, if so, on what terms and at what frequency, it must pay that client all interest earned on that client money. Any interest due to a client will be client money.

Discharge of fiduciary duty

CASS 7.2.15R

Money ceases to be client money (having regard to CASS 7.2.17 R where applicable) if4:

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  1. (1)

    it is paid4 to the client, or a duly authorised representative of the client; or

  2. (2)

    it is paid4 to a third party on the instruction of the client, unless it is transferred to a third party in the course of effecting a transaction, in accordance with CASS 7.5.2 R (Transfer of client money to a third party); or

  3. (3)

    it is paid4 into a bank account of the client (not being an account which is also in the name of the firm); or

  4. (4)

    it is due and payable to the firm in accordance with4 CASS 7.2.9 R (Money due and payable to the firm); or

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  5. (5)

    it is paid to the firm as4 an excess in the client bank account (see CASS 7.6.13 R (2) (Reconciliation discrepancies)); or4

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  6. (6)

    4it is paid by an authorised central counterparty to a clearing member other than the firm in connection with a porting arrangement in accordance with CASS 7.2.15A R; or

  7. (7)

    4it is paid by an authorised central counterparty directly to the client in accordance with CASS 7.2.15B R

CASS 7.2.15AR

4 Client money received or held by the firmand placed in a client transaction account that is an individual client account or an omnibus client account at an authorised central counterparty ceases to be client money for that firm if, as part of the default management process of that authorised central counterparty in respect of a default by the firm, it is ported by the authorised central counterparty in accordance with article 48 of EMIR.

CASS 7.2.15BR

4 Client money received or held by the firmand placed in a client transaction account that is an individual client account or an omnibus client account at an authorised central counterparty ceases to be client money if, as part of the default management process of that authorised central counterparty in respect of a default by the firm, it is paid directly to the client by the authorised central counterparty in accordance with the procedure described in article 48(7) of EMIR.

CASS 7.2.16G

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.

CASS 7.2.17R

When a firm draws a cheque or other payable order to discharge its fiduciary duty to the client, it must continue to treat the sum concerned as client money until the cheque or order is presented and paid by the bank.

Allocated but unclaimed client money

CASS 7.2.18G

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.

CASS 7.2.19R

A firm may cease to treat as client money any unclaimed client money balance if it can demonstrate that it has taken reasonable steps to trace the client concerned and to return the balance.

CASS 7.2.20E
  1. (1)

    Taking reasonable steps should include:

    1. (a)

      entering into a written agreement, in which the client consents to the firm releasing, after the period of time specified in (b), any client money balances, for or on behalf of that client, from client bank accounts;

    2. (b)

      determining that there has been no movement on the client's balance for a period of at least six years (notwithstanding any payments or receipts of charges, interest or similar items);

    3. (c)

      writing to the client at the last known address informing the client of the firm's intention of no longer treating that balance as client money, giving the client 28 days to make a claim;

    4. (d)

      making and retaining records of all balances released from client bank accounts; and

    5. (e)

      undertaking to make good any valid claim against any released balances.

  2. (2)

    Compliance with (1) may be relied on as tending to establish compliance with CASS 7.2.19 R.

  3. (3)

    Contravention of (1) may be relied on as tending to establish contravention of CASS 7.2.19 R.

CASS 7.2.21G

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.