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CASS 7.4 Segregation of client money

Depositing client money

CASS 7.4.-1R

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

CASS 7.4.1R

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]

CASS 7.4.2G

An account with a central bank, a CRD credit institution 5 or a bank authorised in a third country in which client money is placed is a client bank account.

5

Qualifying money market funds

CASS 7.4.3G

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CASS 7.4.3AR

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

CASS 7.4.4G

A firm that places client money in a qualifying money market fund should ensure that it has the permissions required to invest in and hold units in that fund and must comply with the rules that are relevant for those activities.6

CASS 7.4.5R

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

CASS 7.4.6G

If a firm that intends to place client money in a qualifying money market fund is subject to the requirement to disclose information before providing services,4 it should, in compliance with that obligation, notify the client that:

  1. (1)

    money held for that client will be held in a qualifying money market fund; and

  2. (2)

    as a result, the money will not be held in accordance with the client money rules; and66

    6
  3. (3)

    if it is the case, that the units will be held as the client's safe custody assets in accordance with the custody rules.66

A firm's selection of a credit institution, bank or money market fund

CASS 7.4.7R

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

CASS 7.4.8R

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

CASS 7.4.9G

In discharging its obligations when selecting, appointing and reviewing the appointment of a credit institution, a bank or a qualifying money market fund, a firm should also consider, together with any other relevant matters:

  1. (1)

    the need for diversification of risks;

  2. (2)

    the capital of the credit institution or bank;

  3. (3)

    the amount of client money placed, as a proportion of the credit institution or bank's capital and deposits, and, in the case of a qualifying money market fund, compared to any limit the fund may place on the volume of redemptions in any period;

  4. (4)

    the credit rating of the credit institution or bank; and

  5. (5)

    to the extent that the information is available, the level of risk in the investment and loan activities undertaken by the credit institution or bank and affiliated companies.

CASS 7.4.9AR

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.

CASS 7.4.9BR

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.

CASS 7.4.9CG

3The rules in SUP 16.14 provide that a firm must report to the FCA in relation to the identity of the entities with which it deposits client money and the amounts of client money deposited with them. The FCA will use that information to monitor compliance with the diversification rule in CASS 7.4.9A R.

CASS 7.4.10R

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.

Client bank accounts

CASS 7.4.11R

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]

CASS 7.4.11AR
  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.

CASS 7.4.11BG

6CASS 7.4.11A R (2)(b) and CASS 7.4.11A R (3) do not prevent a firm from depositing client money on terms under which a withdrawal may be made before the expiry of a fixed term or a notice period (whatever the duration), including where such withdrawal would incur a penalty charge to the firm.6

CASS 7.4.11CG

6CASS 7.4.11A R does not prevent a firm from depositing client money in overnight money market deposits which are clearly identified as being client money (for example, in the client bank account acknowledgement letter 6 ).6

6
CASS 7.4.11DG

6Firms are reminded of their obligations under CASS 7.8 (Acknowledgment letters6) for client bank accounts. Firms should also ensure that client bank accounts meet the requirements in the relevant Glossary definitions, including regarding the titles given to the accounts.6

6
CASS 7.4.12G

A firm may open one or more client bank accounts in the form of a general client bank account, a designated client bank account or a designated client fund account (see CASS 7A.2.1 G (Failure of the authorised firm: primary pooling event))6.4 The requirements of CASS 7.4.11A R (2) and CASS 7.4.11A R (3) apply for each type of client bank account.66

CASS 7.4.13G

A designated client fund account may be used for a client only where that client has consented to the use of that account and all other designated client fund accounts which may be pooled with it. For example, a client who consents to the use of bank A and bank B should have his money held in a different designated client fund account at bank B from a client who has consented to the use of banks B and C.

Approaches for the segregation of client money6

CASS 7.4.14G

The two6 approaches that a firm can adopt in discharging its obligations under this section6 are: 6

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  1. (1)

    the 'normal approach'; or

  2. (2)

    the 'alternative approach'.

CASS 7.4.15R

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CASS 7.4.16G

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CASS 7.4.17G

Under the normal approach, a firm that receives client money should either:

  1. (1)

    pay it promptly, and in any event no later than the next business day after receipt, into a client bank account; 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).

The alternative approach to client money segregation

CASS 7.4.17AG
  1. (1)

    6In certain circumstances, use of the normal approach for a particular business line of a firm could lead to significant operational risks to client money protection. These may include a business line under which clients' transactions are complex, numerous, closely related to the firm's proprietary business and/or involve a number of currencies and time zones. In such circumstances, subject to meeting the relevant criteria and fulfilling the relevant notification and audit requirements, a firm may use the alternative approach to segregating client money for that business line.

  2. (2)

    Under the alternative approach, client money is received into and paid out of a firm's own bank account. A firm that adopts the alternative approach to segregating client money should, if it is following the standard method of client money reconciliation (see CASS 7 Annex 1 G paragraph 2), carry out an internal client money reconciliation on each business day ('T0') and calculate how much money it either needs to withdraw from, or place in from its own bank account or its client bank account as a result of any discrepancy arising between its client money requirement and its client money resource as at the close of business on the previous business day ('T-1').

  3. (3)

    The alternative approach mandatory prudent segregation required under CASS 7.4.18B R is designed to address the risks that:

    1. (a)

      client money in a firm's own bank account may not be available to be pooled for distribution to clients on the occurrence of a primary pooling event; and

    2. (b)

      at the time of a primary pooling event the firm may not have segregated in its client bank account a sufficient amount of client money to meet its client money requirement.

CASS 7.4.17BR

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).

CASS 7.4.17CR

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.

CASS 7.4.17DR

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.

CASS 7.4.17ER
  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.

CASS 7.4.17FR
  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).

CASS 7.4.17GR

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.

CASS 7.4.17HG

6A firm is reminded that, under SUP 3.4.2 R, it must take reasonable steps to ensure that its auditor has the required skill, resources and experience to perform its function.

CASS 7.4.18G

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CASS 7.4.18AR

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).

CASS 7.4.18AAR

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.

CASS 7.4.18ABG

6It is anticipated that CASS 7.4.18AA R may be used by firms which maintain client bank accounts in a number of different time zones and making adjustments to the balances of those client bank accounts is dependent on meeting cut off times for money transfers in those time zones.

CASS 7.4.18BR
  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.

CASS 7.4.19G

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Alternative approach mandatory prudent segregation record

CASS 7.4.19AR

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).

CASS 7.4.19BR

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.

CASS 7.4.19CR

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.

CASS 7.4.19DG

6Nothing in CASS 7.4.17A G to CASS 7.4.19C R prevents a firm from also making use of the prudent segregation rule in CASS 7.4.21 R.

CASS 7.4.20G

Pursuant to the client money segregation requirements, a firm should ensure that any money other than client money deposited in a client bank account is promptly paid out of that account unless it is a minimum sum required to open the account, or to keep it open.

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CASS 7.4.21R

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.

Automated transfers

CASS 7.4.22G

Pursuant to the client money segregation requirements, a firm operating the normal approach that receives client money in the form of an automated transfer should take reasonable steps to ensure that:

2
  1. (1)

    the money is received directly into a client bank account; and

  2. (2)

    if money is received directly into the firm's own account, the money is transferred into a client bank account promptly, and in any event, no later than the next business day after receipt.

Mixed remittance

CASS 7.4.23G

Pursuant to the client money segregation requirements, a firm operating the normal approach that receives a mixed remittance (that is part client money and part other money) should:

2
  1. (1)

    pay the full sum into a client bank account promptly, and in any event, no later than the next business day after receipt; and

  2. (2)

    pay the money that is not client money out of the client bank account promptly, and in any event, no later than one business day of the day on which the firm would normally expect the remittance to be cleared.

Appointed representatives, tied agents, field representatives and other agents1

CASS 7.4.24G
  1. (1)

    Pursuant to the client money segregation requirements, a firm operating the normal approach should establish and maintain procedures to ensure that client money received by its appointed representatives, tied agents,1 field representatives or other agents is:

    2
    1. (a)

      paid into a client bank account of the firm promptly, and in any event, no later than the next business day after receipt; or

    2. (b)

      forwarded to the firm, or in the case of a field representative forwarded to a specified business address of the firm, so as to ensure that the money arrives at the specified business address promptly, and in any event, no later than the close of the third business day.

  2. (2)

    For the purposes of 1(b), client money received on business day one should be forwarded to the firm or specified business address of the firm promptly, and in any event, no later than the next business day after receipt (business day two) in order for it to reach that firm or specified business address by the close of the third business day. Procedures requiring the client money in the form of a cheque to be sent to the firm or the specified business address of the firm by first class post promptly, and in any event, no later than the next business day after receipt, would be in line with 1(b).

CASS 7.4.25G

The firm should ensure that its appointed representatives, tied agents, field representatives or other agents keep1 client money separately identifiable from any other money (including that of the firm) until the client money is paid into a client bank account or sent to the firm.

CASS 7.4.26G

A firm that operates a number of small branches, but holds or accounts for all client money centrally, may treat those small branches in the same way as appointed representatives and tied agents.1

Client entitlements

CASS 7.4.27G

Pursuant to the client money segregation requirements, a firm operating the normal approach that receives outside the United Kingdom a client entitlement on behalf of a client should pay any part of it which is client money:

2
  1. (1)

    to, or in accordance with, the instructions of the client concerned; or

  2. (2)

    into a client bank account promptly, and in any event, no later than five business days after the firm is notified of its receipt.

CASS 7.4.28G

Pursuant to the client money segregation requirements, a firm operating the normal approach should allocate a client entitlement that is client money to the individual client promptly and, in any case, no later than ten business days after notification of receipt.

2

Money due to a client from a firm

CASS 7.4.29G

Pursuant to the client money segregation requirements, a firm operating the normal approach that is liable to pay money to a client should promptly, and in any event no later than one business day after the money is due and payable, pay the money:

2
  1. (1)

    to, or to the order of, the client; or

  2. (2)

    into a client bank account.

Segregation in different currency

CASS 7.4.30R

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.

CASS 7.4.31G

The rule on segregation of client money in a different currency (CASS 7.4.30 R) does not apply where the client has instructed the firm to convert the money into and hold it in a different currency.

Commodity Futures Trading Commission Part 30 exemption order

CASS 7.4.32G

[deleted]6

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CASS 7.4.33G

[deleted]6

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CASS 7.4.34R

[deleted]6

6
CASS 7.4.35R

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CASS 7.4.36G

6CASS 12 contains provisions which are relevant to a firm conducting business pursuant to the Part 30 exemption order.