CASS 7.4 Segregation of client money

6Where a firm establishes one or more sub-pools, the provisions of CASS 7.4 (Segregation of client money) shall be read as applying separatelyto the firm's general pool and each sub-pool in line with CASS 7.19.3 R and CASS 7.19.12 R.6

A firm, on receiving any client money, must promptly place this money into one or more accounts opened with any of the following:

1. (1)

   a central bank;

2. (2)

   a CRD credit institution;5

   5
3. (3)

   a bank authorised in a third country;

4. (4)

   a qualifying money market fund.

[Note: article 18(1) of the MiFID implementing Directive]

6Where a firm deposits client money with a qualifying money market fund, the firm's holding of those units in that fund will be subject to any applicable requirements of the custody rules.

[Note: recital 23 to the MiFID implementing Directive]6

A firm must give a client the right to oppose the placement of his money in a qualifying money market fund.

[Note: article 18(3) of the MiFID implementing Directive]6

A firm that does not deposit client money with a central bank must exercise all due skill, care and diligence in the selection, appointment and periodic review of the credit institution, bank or qualifying money market fund where the money is deposited and the arrangements for the holding of this money.

[Note: article 18(3) of the MiFID implementing Directive]6

When a firm makes the selection, appointment and conducts the periodic review of a credit institution, a bank or a qualifying money market fund, it must take into account:

1. (1)

   the expertise and market reputation of the third party; and6

2. (2)

   any legal requirements or market practices related to the holding of client money that could adversely affect clients' rights.6

[Note: article 18(3) of the MiFID implementing Directive]6

3A firm must limit the funds that it deposits or holds with a relevant group entity or combination of such entities so that those funds do not at any point in time exceed 20 per cent of the balance on:

1. (1)

   all of its general client bank accounts considered in aggregate;

2. (2)

   each of its designated client bank accounts; and

3. (3)

   each of its designated client fund accounts.

3For the purpose of CASS 7.4.9A R an entity is a relevant group entity if it is:

1. (1)

   a CRD credit institution or6 a bank authorised in a third country; and6

   5566
2. (2)

   a member of the same group as that firm.

A firm must make a record of the grounds upon which it satisfies itself as to the appropriateness of its selection of a credit institution, a bank or a qualifying money market fund. The firm must make the record on the date it makes the selection and must keep it from the date of such selection until five years after the firm ceases to use the third party to hold client money.

A firm must take the necessary steps to ensure that client money deposited, in accordance with CASS 7.4.1 R, in a central bank, a credit institution, a bank authorised in a third country or a qualifying money market fund is held in an account or accounts identified separately from any accounts used to hold money belonging to the firm.

[Note: article 16(1)(e) of the MiFID implementing Directive]

1. (1)

   6An account which the firm uses to deposit client money under CASS 7.4.1 R (1) to CASS 7.4.1 R (3) must be a client bank account.6

2. (2)

   Each client bank account used by a firm must be held on terms under which:

   1. (a)

      the relevant bank's contractual counterparty is the firm that is subject to the requirement under CASS 7.4.1 R; and

   2. (b)

      unless the firm has agreed terms that comply with CASS 7.4.11A R (3), the firm is able to make withdrawals of client money promptly and, in any event, within one business day of a request for withdrawal.

   Transitional provision CASS TP 1.10AR applies to (2).

3. (3)

   Firms may use client bank accounts held on terms under which withdrawals are, without exception, prohibited until the expiry of a fixed term or a notice period of a maximum of 30 days.

4. (4)

   Paragraphs (2)(b) and (3) do not apply in respect of client money received by a firm in its capacity as a trustee firm.

6A firm that wishes to adopt the alternative approach for a particular business line must first establish, and document in writing, its reasons for concluding, that:

1. (1)

   adopting the normal approach would lead to greater operational risks to client money protection compared to the alternative approach;

2. (2)

   adopting the alternative approach (including complying with the requirements for alternative approach mandatory prudent segregation under CASS 7.4.18B R) would not result in undue operational risk to client money protection; and

3. (3)

   the firm has systems and controls that are adequate to enable it to operate the alternative approach effectively and in compliance with Principle 10 (Clients' assets).

6A firm must retain any documents created under CASS 7.4.17B R in relation to a particular business line for a period of at least five years after the date it ceases to use the alternative approach in connection with that business line.

6At least three months before adopting the alternative approach for a particular business line, a firm must:

1. (1)

   inform the FCA in writing that it intends to adopt the alternative approach for that particular business line; and

2. (2)

   if requested by the FCA, make any documents it created under CASS 7.4.17B R available to the FCA for inspection.

1. (1)

   6In addition to the requirement under CASS 7.4.17D R, before adopting the alternative approach, a firm must send a written report to the FCA prepared by an independent auditor of the firm in line with a reasonable assurance engagement, stating the matters set out in (2).

2. (2)

   The written report in (1) must state whether, in the auditor's opinion:

   1. (a)

      the firm's systems and controls are suitably designed to enable it to comply with CASS 7.4.18A R to CASS 7.4.18B R; and

   2. (b)

      the firm's calculation of its alternative approach mandatory prudent segregation amount under CASS 7.4.18B R is suitably designed to enable the firm to comply with CASS 7.4.18B R.

1. (1)

   6A firm that uses the alternative approach must review, at least on an annual basis and with no more than one year between each review, whether its reasons for adopting the alternative approach for a particular business line, as documented under CASS 7.4.17B R, continue to be valid.

2. (2)

   If, following the review in (1), a firm finds that its reasons for adopting the alternative approach are no longer valid for a particular business line, it must stop using the alternative approach for that business line as soon as reasonably practicable, and in any event within six months of the conclusion of its review in (1).

6A firm that uses the alternative approach must not materially change how it will calculate and maintain the alternative approach mandatory prudent segregation amount under CASS 7.4.18B R unless:

1. (1)

   an auditor of the firm has prepared a report that complies with the requirements in CASS 7.4.17E R (2)(b) in respect of the firm's proposed changes; and

2. (2)

   the firm provides a copy of the report prepared by the auditor under (a) to the FCA before implementing the change.

6A firm that uses the alternative approach for a particular business line must, on each business day ('T0'):

1. (1)

   receive any money from and pay any money to (or, in either case, on behalf of) clients into and out of its own bank accounts;

2. (2)

   perform the necessary reconciliations of records and accounts required under CASS 7.6 (Records, accounts and reconciliations);

3. (3)

   adjust the balances held in its client bank account (by effecting transfers between its own bank account and its client bank account) to address any difference arising between its client money requirement and its client money resource as at the close of business on the previous business day ('T-1'), so that the correct amount reflected in the reconciliations under (2) is segregated in its client bank account; and

4. (4)

   subject to CASS 7.4.18AA R below, keep segregated in its client bank account the balance held under (3) until it has performed a reconciliation on the following business day ('T+1') and as a result of that reconciliation is undertaking further adjustments under (3).

6During the period between the adjustment in CASS 7.4.18A R (3) and the completion of the next reconciliations in CASS 7.4.18A R (2), a firm that uses the alternative approach for a particular business line may:

1. (1)

   increase the balance held in its client bank account by making intra-day transfers (during T0) from its own bank account to its client bank account before the completion of the internal client money reconciliation under CASS 7.4.18A R (2) (that is expected sometime later on T0) only if:

   1. (a)

      the firm reasonably expects that the client money requirement for the previous business day (T-1) will increase above the client money resource currently (during T0) held in its client bank account; and

   2. (b)

      such reasonable expectations are based on the working calculation of the client money requirement relating to the previous business day (T-1) that the firm has already determined on that business day (during T0) (as part of the process of completing its internal client money reconciliation); or

2. (2)

   decrease the balance held in its client bank account by making intra-day transfers (during T0) from its client bank account to its own bank account before the completion of the internal client money reconciliation under CASS 7.4.18A R (2) (that is expected sometime later on T0) only if:

   1. (a)

      the firm reasonably expects that the client money requirement for the previous business day (T-1) will decrease below the client money resource currently held (during T0) in its client bank account; and

   2. (b)

      such reasonable expectations are based on the working calculation of the client money requirement relating to the previous business day (T-1) that the firm has already determined on that business day (during T0) (as part of the process of completing its internal client money reconciliation).

   However, in doing so, a firm must act prudently and should take appropriate steps to manage the risk of not having segregated an amount that appropriately reflects its actual client money requirement at any given time.

1. (1)

   6A firm that uses the alternative approach must, in addition to CASS 7.4.18A R, pay an amount (determined in accordance with this rule) of its own money into its client bank account and subsequently retain that money in its client bank account (alternative approach mandatory prudent segregation). The amount segregated by a firm in its client bank account under this rule is client money for the purposes of the client money rules and the client money distribution rules.

2. (2)

   The amount required to be segregated under this rule must be an amount that a firm reasonably determines would be sufficient, at the time it makes the determination, to protect client money against the risk that at any time in the following three months the following categories of client money may not have been fully segregated in its client bank account or may not be (or become) available for pooling under , were a primary pooling event to occur:

   1. (a)

      client money that is received and held by the firm in its own bank account during the period between:

      1. (i)

         the firm's adjustment of client bank account balances under CASS 7.4.18A R (3) on a particular business day; and

      2. (ii)

         the firm's subsequent adjustments under CASS 7.4.18A R (3) on the following business day; and

   2. (b)

      money received and held by the firm in its own bank account which the firm does not initially identify as part of its client money requirement, but which subsequently does become part of its client money requirement;

   with the effect that the firm's alternative approach mandatory prudent segregation under this rule will reduce, as far as possible, any shortfall that might have been produced as a result of (a) or (b) on the occurrence of a primary pooling event.

3. (3)
   1. (a)

      Subject to (c), in reaching its determination under (2) of the amount of money that would be sufficient to address the risks referred to in (2) for the forthcoming three months, a firm must take into account the following in respect of each business line for which it uses the alternative approach, and for at least the previous three months:

      1. (i)

         the firm's client money requirement over the course of that prior period (excluding any amount that was required to be segregated under this rule during that prior period for the purposes of alternative approach mandatory prudent segregation);

      2. (ii)

         the daily adjustment payments that the firm made into its client bank account under CASS 7.4.18A R (3); during that prior period; and

      3. (iii)

         the amount of money received by the firm in its own bank account which it did not initially identify as part of its client money requirement, but which subsequently, and during that prior period, became part of its client money requirement;

      as shown in its internal records.

   2. (b)

      In reaching its determination under (2) a firm must also take into account, but at all times having regard to the requirement under (2), any impact that particular events, the seasonal nature of each relevant business line, or any other aspect of those business lines may have on:

      1. (i)

         the firm's client money requirement during the forthcoming three months for which the amount of alternative approach mandatory prudent segregation required under this rule is being determined;

      2. (ii)

         the daily adjustment payments that the firm is likely to make into its client bank account under CASS 7.4.18A R (3) in that same period; and

      3. (iii)

         the amount of unidentified receipts of money that the firm is likely to receive into its own bank account and which will subsequently, in that same period, become part of its client money requirement.

   3. (c)

      If, at the time of its determination under (2), the firm has not been trading for three months in a business line for which it is using the alternative approach, then it must use the records that are available to it and must also factor in reasonable forecasts, as required under (b), to establish a three-month reference period.

4. (4)
   1. (a)

      A firm must, at regular intervals that are at least quarterly, repeat and complete the combined process of:

      1. (i)

         determining the amount that it is required to segregate for the purposes of alternative approach mandatory prudent segregation under (2) and (3);

      2. (ii)

         making necessary adjustments to its records to reflect any changes to its client money requirement; and

      3. (iii)

         paying any additional amounts of its own money into its client bank account to increase the firm's alternative approach mandatory prudent segregation or withdrawing any excess amounts from its client bank account to decrease the firm's alternative approach mandatory prudent segregation after it has adjusted its records under (ii).

   2. (b)

      The combined process of (a)(i) to (iii) must take no longer than 10 business days.

   3. (c)

      To the extent that a firm's compliance with (a)(i) and (ii) results in there being an excess in the firm's client bank account, the firm may cease to treat that money as client money.

5. (5)

   A firm must ensure that the individual responsible for CASS oversight under CASS 1A.3.1 R, CASS 1A.3.1A R or CASS 1A.3.1C R (as appropriate) reviews the adequacy of the amount of the firm's alternative approach mandatory prudent segregation maintained under this rule at least annually.

6A firm must create and keep up-to-date records so that any amount of money that is, pursuant to CASS 7.4.18B R:

1. (1)

   paid into a client bank account and retained as client money; or

2. (2)

   withdrawn from a client bank account;

can be easily ascertained (the alternative approach mandatory prudent segregation record).

6The alternative approach mandatory prudent segregation record under CASS 7.4.19A R must record:

1. (1)

   the date of the first determination under CASS 7.4.18B R (2) and each subsequent review undertaken under CASS 7.4.18B R (4), and the total amount that the firm determined was required to be segregated under CASS 7.4.18B R (2) as at that date;

2. (2)

   the date of any payment of the firm's own money into a client bank account, or withdrawal of any excess from a client bank account under CASS 7.4.18B R, and for each such occasion:

   1. (a)

      the amount of the payment or withdrawal;

   2. (b)

      the fact that the money was paid or withdrawn by the firm in accordance with CASS 7.4.18B R; and

   3. (c)

      as at that date, the total amount actually segregated by the firm under CASS 7.4.18B R.

6The alternative approach mandatory prudent segregation record must be retained for five years after the firm ceases to segregate any money in accordance with CASS 7.4.18B R.

If it is prudent to do so to ensure that client money is protected, a firm may pay into a client bank account money of its own, and that money will then become client money for the purposes of this chapter.

A firm may segregate client money in a different currency from that of receipt. If it does so, the firm must ensure that the amount held is adjusted each day to an amount at least equal to the original currency amount (or the currency in which the firm has its liability to its clients, if different), translated at the previous day's closing spot exchange rate.