The opt-in to the client money rules in2this chapter 2does not apply in respect of money that a firm holds outside of the scope of the insurance client money chapter.3

1. (2)

   relevant cash deposit ISA wrapper;

If a firm has opted to comply with this chapter, the insurance client money chapter will have no application to the activities to which the election applies.

A firm that is only subject to the insurance client money chapter may not opt to comply with this chapter.

3The 'opt out' provisions provide a firm with the option of allowing a professional client to choose whether their money is subject to the client money rules (unless the firm is conducting insurance mediation activity).

3For a firm whose business is not governed by the Insurance Mediation Directive, it is possible to 'opt out' on a one-way basis. However, in order to maintain a comparable regime to that applying to MiFID business, all 'MiFID type' business undertaken outside the scope of MiFID, should comply with the client money rules or be 'opted out' on a two-way basis.

3When a firm undertakes a range of business for a professional client and has separate agreements for each type of business undertaken, the firm may treat client money held on behalf of the client differently for different types of business; for example, a firm may, under CASS 7.1.7D R or CASS 7.1.7F R, elect to segregate client money in connection with securities transactions and not segregate (by complying with CASS 7.1.7D R or CASS 7.1.7F R) money in connection with contingent liability investments for the same client.

3 CASS 7.1.7H R prevents a firm, when passing client money to another person under CASS 7.5.2 R (transfer of client money to a third party), from making use of the 'opt out' provisions under CASS 7.1.7D R or CASS 7.1.7F R.

If a credit institution that holds money as a deposit with itself 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 in an account with the credit institution will be held by the firm as banker and not as trustee (or in Scotland as agent); and

2. (2)

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

Pursuant to Principle 10 (Clients' assets), a credit institution that holds money as a deposit with itself should be able to account to all of its clients for amounts held on their behalf at all times. A bank account opened with the firm that is in the name of the client would generally be sufficient. When money from clients deposited with the firm is held in a pooled account, this account should be clearly identified as an account for clients. The firm should also be able to demonstrate that an amount owed to a specific client that is held within the pool can be reconciled with a record showing that individual's client balance and is, therefore, identifiable at any time. Similarly, where that money is reflected only in a firm's bank account with other banks (nostro accounts), the firm should be able to reconcile amounts owed to that client within a reasonable period of time.

1. (1)

   it should be able to account to all of its clients sums held for them at all times; and

2. (2)

   that money should, pursuant to Principle 10, be allocated to the relevant client promptly. This should be done no later than ten business days after the firm has received the money.

A credit institution is reminded that the exemption for deposits is not an absolute exemption from the client money rules.

A firm that holds money on behalf of, or receives money from, an affiliated company in respect of MiFID business must treat the affiliated company as any other client of the firm for the purposes of this chapter.

1. (1)

   3A firm which receives and holds client money in respect of life assurance business in the course of its designated investment business that is not MiFID business may:

   1. (a)

      under CASS 7.1.3 R (1B) elect to comply with the client money chapter in respect of such client money and in doing so avoid the need to comply with the insurance client money chapter which would otherwise apply to the firm in respect of client money received in the course of its insurance mediation activity; or

   2. (b)

      under CASS 7.1.15B R, elect to comply with the insurance client money chapter in respect of such client money.

2. (2)

   These options are available to a firm irrespective of whether it also receives and holds client money in respect of other parts of its designated investment business. A firm may not however choose to comply with the insurance client money chapter in respect of client money which it receives and holds in the course of any part of its designated investment business which does not involve an insurance mediation activity.

1. (1)

   Principle 10 (Clients' assets) requires a firm to arrange adequate protection for clients' assets when the firm is responsible for them. An essential part of that protection is the proper accounting and treatment of client money. The client money rules provide requirements for firms that receive or hold client money, in whatever form.

2. (2)

   The client money rules also, where relevant,43 implement the provisions of MiFID which regulate the obligations of a firm when it holds client money in the course of its MiFID business.3

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 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 account4 to 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.

2 Firms 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.

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

Where a firm deposits client money with a qualifying money market fund, the units in that fund should be held in accordance with CASS 6.2

[Note: recital 23 to the MiFID implementing Directive]

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.

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 but in accordance with the custody rules.

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.

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

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).4

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.

Two approaches that a firm can adopt in discharging its obligations under the client money segregation requirements are:

1. (1)

   the 'normal approach'; or

2. (2)

   the 'alternative approach'.

The alternative approach would be appropriate for a firm that operates in a multi-product, multi-currency environment for which adopting the normal approach would be unduly burdensome and would not achieve the client protection objective. Under the alternative approach, client money is received into and paid out of a firm's own bank accounts; consequently the firm should have systems and controls that are capable of monitoring the client money flows so that the firm can comply with its obligations to perform reconciliations of records and accounts (see CASS 7.6.2 R). A firm that adopts the alternative approach will segregate client money into a client bank account on a daily basis, after having performed a reconciliation of records and accounts of the entitlement of each client for whom the firm holds client money with the records and accounts of the client money the firm holds in client bank accounts and client transaction accounts to determine what the client money requirement was at the close of the previous business day.

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).

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

1. (1)
   1. (a)

      pay any money to or on behalf of clients out of its own account; and

   2. (b)

      perform a reconciliation of records and accounts required under CASS 7.6.2 R (Records and accounts), and where relevant 2SYSC 4.1.1 R (General requirements)4 and SYSC 6.1.1 R (Compliance),4 adjust the balance held in its client bank accounts and then segregate the money in the client bank account until the calculation is re-performed on the next business day; 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).

A firm that adopts the alternative approach may:

1. (1)

   receive all client money into its own bank account;

2. (2)

   choose to operate the alternative approach for some types of business (for example, overseas equities transactions) and operate the normal approach for other types of business (for example, contingent liability investments) if the firm can demonstrate that its systems and controls are adequate (see CASS 7.4.15 R); and

3. (3)

   use an historic average to account for uncleared cheques (see paragraph 4 of CASS 7 Annex 1 G).

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.

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:

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.

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:

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.

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,1field 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).

The firm should ensure that its appointed representatives, tied agents, field representatives or other agents keep1client 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.

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

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:

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.

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.

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:

1. (1)

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

2. (2)

   into a client bank account.

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.

1United States (US) legislation restricts the ability of non-US firms to trade on behalf of US customers on non-US futures and options exchanges. The relevant US regulator (the CFTC) operates an exemption system for firms authorised by the FSA. The FSA sponsors the application from a firm for exemption from Part 30 of the General Regulations under the US Commodity Exchange Act in line with this system.

1A firm with a Part 30 exemption order undertakes to the CFTC that it will refuse to allow any US customer to opt not to have his money treated as client money if it is held or received in respect of transactions on non-US exchanges, unless that US customer is an "eligible contract participant" as defined in section 1a(12) of the Commodity Exchange Act, 7 U.S.C. In doing so, the firm is representing that if available to it, it will not make use of the opt-out arrangements in CASS 7.1.7B R to CASS 7.1.7F R in relation to that business.2

This section sets out the requirements a firm must comply with when it transfers client money to another person without discharging its fiduciary duty owed to that client. Such circumstances arise when, for example, a firm passes client money to a clearing house in the form of margin for the firm's obligations to the clearing house that are referable to transactions undertaken by the firm for the relevant clients. They may also arise when a firm passes client money to an intermediate broker for contingent liability investments in the form of initial or variation margin on behalf of a client. In these circumstances, the firm remains responsible for that client's equity balance held at the intermediate broker until the contract is terminated and all of that client's positions at that broker closed. If a firm wishes to discharge itself from its fiduciary duty, it should do so in accordance with the rule regarding the discharge of a firm's fiduciary duty to the client (CASS 7.2.15 R).

A firm should not hold excess client money in its client transaction accounts with intermediate brokers, settlement agents and OTC counterparties; it should be held in a client bank account.1 This guidance does not apply to client money provided by a firm to an authorised central counterparty in connection with a contingent liability investment undertaken for a client and recorded in a client transaction account that is an individual client account or an omnibus client account at that authorised central counterparty.

Pursuant to CASS 7.6.2 R (Records and accounts),2 and where relevant 1SYSC 4.1.1 R (General requirements)2and SYSC 6.1.1 R (Compliance),2 a firm should take reasonable steps to ensure that it2 is notified promptly of any receipt of client money in the form of a client entitlement.

A firm should ensure that it makes proper records, sufficient to show and explain the firm's transactions and commitments in respect of its client money.

1. (1)

   Carrying out internal reconciliations of records and accounts of the entitlement of each client for whom the firm holds client money with the records and accounts of the client money the firm holds in client bank accounts and client transaction accounts should be one of the steps a firm takes to satisfy its obligations under CASS 7.6.2 R, and where relevant1SYSC 4.1.1 R and SYSC 6.1.1 R.

   1
2. (2)

   A firm should perform such internal reconciliations:

   1. (a)

      as often as is necessary; and

   2. (b)

      as soon as reasonably practicable after the date to which the reconciliation relates;

   to ensure the accuracy of the firm's records and accounts.

3. (3)

   The standard method of internal client money reconciliation sets out a method of reconciliation of client money balances that the FSA believes should be one of the steps that a firm takes when carrying out internal reconciliations of client money.

1. (1)

   A firm should perform the required reconciliation of client money balances with external records:

   1. (a)

      as regularly as is necessary; and

   2. (b)

      as soon as reasonably practicable after the date to which the reconciliation relates;

   to ensure the accuracy of its internal accounts and records against those of third parties by whom client money is held.

2. (2)

   In determining whether the frequency is adequate, the firm should consider the risks which the business is exposed, such as the nature, volume and complexity of the business, and where and with whom the client money is held.

A method of reconciliation of client money balances with external records that the FSA believes is adequate is when a firm compares:

1. (1)

   the balance on each client bank account as recorded by the firm with the balance on that account as set out on the statement or other form of confirmation issued by the bank with which those accounts are held; and

2. (2)

   the balance, currency by currency, on each client transaction account as recorded by the firm, with the balance on that account as set out in the statement or other form of confirmation issued by the person with whom the account is held;

and identifies any discrepancies between them.

Firms are reminded that the auditor of the firm has to confirm in the report submitted to the FSA under SUP 3.10 (Duties of auditors: notification and report on client assets) that the firm has maintained systems adequate to enable it to comply with the client money rules.

Firms that do not adopt the normal approach are reminded that the firm's auditor must confirm to the FSA in writing that the firm has in place systems and controls which are adequate to enable it to operate the alternative approach effectively (see CASS 7.4.15 R).

Firms that do not use the standard method of internal client money reconciliation are reminded that the firm's auditor must confirm to the FSA in writing that the firm has in place systems and controls which are adequate to enable it to use another method effectively (see CASS 7.6.8 R).

Section 139(1) of the Act (Miscellaneous ancillary matters) provides that rules may make provision which result in client money being held by a firm on trust (England and Wales and Northern Ireland) or as agent (Scotland only). This section creates a fiduciary relationship between the firm and its client under which client money is in the legal ownership of the firm but remains in the beneficial ownership of the client. In the event of failure of the firm, costs relating to the distribution of client money may have to be borne by the trust.

1If a trustee firm holds client money in accordance with CASS 7.7.3 R (2), the firm should follow the provisions in CASS 7.1.15E R and CASS 7.1.15F R.