1This chapter (the client money rules) applies to 2 a firm that receives money from or holds money for, or on behalf of, a client in the course of, or in connection with3:

1. (1)

   [deleted]3

   3
   1. (a)

      [deleted]3

      3
   2. (b)

      [deleted]3

      3
2. (2)

   [deleted]3

   3
3. (3)

   its MiFID business; and/or3

4. (4)

   its designated investment business, that is not MiFID business in respect of any investment agreement entered into, or to be entered into, with or for a client;3

unless otherwise specified in this section.

1. (1)

   A firm that receives or holds money to which this chapter applies in relation to: 3

   3
   1. (a)

      its MiFID business; or3

   2. (b)

      its MiFID business and its designated investment business which is not MiFID business; 3

   and holds money in respect of which CASS 5 applies, may elect to comply with the provisions of this chapter in respect of all such money and if it does so, this chapter applies as if all such money were money that the firm receives and holds in the course of, or in connection with, its MiFID business.

2. (1A)

   [deleted]3

   3
3. (1B)

   A firm that receives or holds money to which this chapter applies solely in relation to its designated investment business which is not MiFID business and receives or holds money in respect of which the insurance client money chapter applies, may elect to comply with the provisions of this chapter in respect of all such money and if it does so, this chapter applies as if all such money were money that the firm receives and holds in the course of or in connection with its designated investment business.3

4. (2)

   A firm must make and retain a written record of any election it makes under this rule, including the date from which the election is to be effective. The firm must make the record on the date it makes the election and must keep it for a period of five years after ceasing to use it.

3 CASS 7.1.7C G to CASS 7.1.7I G do not apply to a firm in relation to money held in connection with its MiFID business to which this chapter applies or in relation to money for which the firm has made an election under CASS 7.1.3 R (1).

3Subject to CASS 7.1.7F R, money is not client money when a firm (other than a sole trader) holds that money on behalf of, or receives it from, a professional client, other than in the course of insurance mediation activity, and the firm has obtained written acknowledgement from the professional client that:

1. (1)

   money will not be subject to the protections conferred by the client money rules;

2. (2)

   as a consequence, this money will not be segregated from the money of the firm in accordance with the client money rules and will be used by the firm in the course of its own business; and

3. (3)

   the professional client will rank only as a general creditor of the firm.

3 Money is not client money if a firm, in respect of designated investment business which is not an investment service or activity, an ancillary service, a listed activity or insurance mediation activity:

1. (1)

   holds it on behalf of or receives it from a professional client who is not an authorised person; and

2. (2)

   has sent a separate written notice to the professional client stating the matters set out in CASS 7.1.7DR (1) to CASS 7.1.7DR (3).

3When a firm transfers client money to another person, the firm must not enter into an agreement under CASS 7.1.7D R or CASS 7.1.7F R with that other person in relation to that client money or represent to that other person that the money is not client money.

The client money rules do not apply to a CRDcredit institution6 in relation to deposits within the meaning of the CRD6 held by that institution.

[Note: article 13(8) of MiFID and article 18(1) of the MiFID implementing Directive]

1. (1)

   3This rule applies to a firm which is an approved bank but not a CRDcredit institution.6

   6
2. (2)

   3The client money rules do not apply to money held by the approved bank if it is undertaking business which is not MiFID business but only when the money is held in an account with itself, in which case the firm must notify the client in writing that:

   1. (a)

      money held for that client in an account with the approved bank will be held by the firm as banker and not as trustee (or in Scotland as agent); and

   2. (b)

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

3A firm that holds money on behalf of, or receives money from, an affiliated company in respect of designated investment business which is not MiFID business must not treat the money as client money unless:

1. (1)

   the firm has been notified by the affiliated company that the money belongs to a client of the affiliated company; or

2. (2)

   the affiliated company is a client dealt with at arm's length; or

3. (3)

   the affiliated company is a manager of an occupational pension scheme or is an overseas company; and

   1. (a)

      the money is given to the firm in order to carry on designated investment business for or on behalf of the clients of the affiliated company; and

   2. (b)

      the firm has been notified by the affiliated company that the money is to be treated as client money.

The client money rules do not apply with respect to coins held on behalf of a client if the firm and the client have agreed that the money (or money of that type) is to be held by the firm for the intrinsic value of the metal which constitutes the coin.

1. (1)

   An authorised professional firm regulated by the Law Society (of England and Wales), the Law Society of Scotland or the Law Society of Northern Ireland that, with respect to its regulated activities, is subject to 5the following rules of its designated professional body, must comply with those rules and,5 where relevant paragraph (3), and3 if it does so, it will be deemed to comply with the client money rules.

   5353
2. (2)

   The relevant rules are:

   1. (a)

      if the firm is regulated by the Law Society (of England and Wales):

      1. (i)

         the Solicitors' Accounts Rules 1998; or

      2. (ii)

         where applicable, the Solicitors Overseas Practice Rules 1990;

   2. (b)

      if the firm is regulated by the Law Society of Scotland, the Solicitors' (Scotland) Accounts, Accounts Certificate, Professional Practice and Guarantee Fund Rules 2001; and

   3. (c)

      if the firm is regulated by the Law Society of Northern Ireland, the Solicitors' Accounts Regulations 1998.

3. (3)

   If the firm in (1) is a MiFID investment firm that receives or holds money for, or on behalf of a client in the course of, or in connection with its MiFID business, it must also comply with the MiFID client money (minimum implementing) rules in relation to that business.3

3This chapter does not apply to the permitted activities of a long-term insurer or a friendly society, unless it is a MiFID investment firm that receives money from or holds money for or on behalf of a client in the course of, or in connection with, its MiFID business.

3This chapter does not apply to client money held by a firm which:

1. (1)

   receives or holds client money in relation to contracts of insurance; but which

2. (2)

   in relation to such client money elects to act in accordance with the insurance client money chapter.

3A firm should make and retain a written record of any election which it makes under CASS 7.1.15B R .

3A trustee firm which holds money in relation to its designated investment business which is not MiFID business to which this chapter applies, must hold any such client money separate from its own money at all times.

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

      33
   3. (c)

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

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

      33
   2. (b)

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

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.

1 Money 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.

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.

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.

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

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 with4CASS 7.2.9 R (Money due and payable to the firm); or

   44
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

   44
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 R6; or

8. (8)

   6it is transferred by the firm to a clearing member in connection with a regulated clearing arrangement and the clearing member remits payment to another firm or to another clearing member in accordance with CASS 7.2.15CR (1); or

9. (9)

   6it is transferred by the firm to a clearing member in connection with a regulated clearing arrangement and the clearing member remits payment directly to the indirect clients of the firm in accordance with CASS 7.2.15CR (2).

4 Client money which the firmplaces at an authorised central counterparty 6in connection with a regulated clearing arrangement 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.

4 Client money which the firmplaces at an authorised central counterparty6in connection with a regulated clearing arrangement 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.

6 Client money received or held by the firm and transferred to a clearing member who facilitates indirect clearing through a regulated clearing arrangement ceases to be client money for that firm and, if applicable, the clearing member, if the clearing member:

1. (1)

   remits payment to another firm or to another clearing member in accordance with default management procedures adopted by the clearing member which comply with the requirements of article 4(4) of the EMIR L2 Regulation; or

2. (2)

   remits payment to the indirect clients of the firm in accordance with default management procedures adopted by the clearing member which comply with the requirements of articles 4(4) and 4(5) of the EMIR L2 Regulation.

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.

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.

A firm must, when holding client money, make adequate arrangements to safeguard the client's rights and prevent the use of client money for its own account.

[Note: article 13(8) of MiFID]

A firm must introduce adequate organisational arrangements to minimise the risk of the loss or diminution of client money, or of rights in connection with client money, as a result of misuse of client money, fraud, poor administration, inadequate record-keeping or negligence.

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

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 CRDcredit 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]

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]

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]

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; and

2. (2)

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

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

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 CRDcredit institution ,5 a bank authorised in a third country, a qualifying money market fund, or the entity operating or managing a qualifying money market fund; and

   5
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]

A firm that does not adopt the normal approach must first send a written confirmation to the FCA from the firm's auditor that the firm has in place systems and controls which are adequate to enable it to operate another approach effectively.

If it is prudent to do so to ensure that client money is protected, a firm may pay into a client bank accountmoney 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.

1A firm must not reduce the amount of, or cancel a letter of credit issued under, an LME bond arrangement where this will cause the firm to be in breach of its Part 30 exemption order.

1A firm must notify the FCA immediately it arranges the issue of an individual letter of credit under an LME bond arrangement.

A firm may allow another person, such as an exchange, a clearing house or an intermediate broker, to hold or control client money, but only if:

1. (1)

   the firm transfers the client money:

   1. (a)

      for the purpose of a transaction for a client through or with that person; or

   2. (b)

      to meet a client's obligation to provide collateral for a transaction (for example, an initial margin requirement for a contingent liability investment); and

2. (2)

   in the case of a retail client, that client has been notified that the client money may be transferred to the other person.

A firm must keep such records and accounts as are necessary to enable it, at any time and without delay, to distinguish client money held for one client from client money held for any other client, and from its own money.

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

A firm must maintain its records and accounts in a way that ensures their accuracy, and in particular their correspondence to the client money held for clients.

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

A firm must ensure that records made under CASS 7.6.1 R and CASS 7.6.2 R are retained for a period of five years after they were made.

1. (1)

   A firm must make records, sufficient to show and explain the method of internal reconciliation of client money balances under CASS 7.6.2 R used, and if different from the standard method of internal client money reconciliation, to show and explain that:

   1. (a)

      the method of internal reconciliation of client money balances used affords an equivalent degree of protection to the firm'sclients to that afforded by the standard method of internal client money reconciliation; and

   2. (b)

      in the event of a primary pooling event or a secondary pooling event, the method used is adequate to enable the firm to comply with the client money distribution rules.

      1
2. (2)

   A firm must make these records on the date it starts using a method of internal reconciliation of client money balances and must keep it for a period of five years after ceasing to use it.

   2

A firm that does not use the standard method of internal client money reconciliation must first send a written confirmation to the FCA from the firm's auditor that the firm has in place systems and controls which are adequate to enable it to use another method effectively.

A firm must conduct, on a regular basis, reconciliations between its internal accounts and records and those of any third parties by whom client money is held.

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

Any approved collateral held in accordance with the client money rules must be included within this reconciliation.

When any discrepancy arises as a result of a firm's internal reconciliations, the firm must identify the reason for the discrepancy and ensure that:

1. (1)

   any shortfall is paid into a client bank account by the close of business on the day that the reconciliation is performed; or

2. (2)

   any excess is withdrawn within the same time period (but see CASS 7.4.20 G and CASS 7.4.21 R).

When any discrepancy arises as a result of the reconciliation between a firm's internal records and those of third parties that hold client money, the firm must identify the reason for the discrepancy and correct it as soon as possible, unless the discrepancy arises solely as a result of timing differences between the accounting systems of the party providing the statement or confirmation and that of the firm.

While a firm is unable to resolve a difference arising from a reconciliation between a firm's internal records and those of third parties that hold client money, and one record or a set of records examined by the firm during its reconciliation indicates that there is a need to have a greater amount of client money or approved collateral than is in fact the case, the firm must assume, until the matter is finally resolved, that the record or set of records is accurate and pay its own money into a relevant account.

A firm must inform the FCA in writing without delay:

1. (1)

   if it has not complied with, or is unable, in any material respect, to comply with the requirements in CASS 7.6.1 R, CASS 7.6.2 R or CASS 7.6.9 R;

2. (2)

   if having carried out a reconciliation it has not complied with, or is unable, in any material respect, to comply with CASS 7.6.13 R to CASS 7.6.15 R.

A firm receives and holds client money as trustee (or in Scotland as agent) on the following terms:

1. (1)

   for the purposes of and on the terms of the client money rules and the client money distribution rules;

   1
2. (2)

   subject to (42), for the clients (other than clients which are insurance undertakings when acting as such with respect of client money received in the course of insurance mediation activity and that was opted in to this chapter) for whom that money is held, according to their respective interests in it;

3. (3)

   after all valid claims in (2) have been met, for clients which are insurance undertakings with respect of client money received in the course of insurance mediation activity according to their respective interests in it;

4. (4)

   on failure of the firm, for the payment of the costs properly attributable to the distribution of the client money in accordance with (2); and

5. (5)

   after all valid claims and costs under (2) to (4) have been met, for the firm itself.

1A trustee firm which is subject to the client money rules by virtue of CASS 7.1.1 R (4)CASS 7.1.1A R (2):

1. (1)

   must receive and hold client money in accordance with the relevant instrument of trust;

2. (2)

   subject to that, receives and holds client money on trust on the terms (or in Scotland on the agency terms) specified in CASS 7.7.2 R.

1. (1)

   When a firm opens a client bank account, the firm must give or have given written notice to the bank requesting the bank to acknowledge to it in writing that:

   1. (a)

      all money standing to the credit of the account is held by the firm as trustee (or if relevant, as agent) and that the bank is not entitled to combine the account with any other account or to exercise any right of set-off or counterclaim against money in that account in respect of any sum owed to it on any other account of the firm; and

   2. (b)

      the title of the account sufficiently distinguishes that account from any account containing money that belongs to the firm, and is in the form requested by the firm.

2. (2)

   In the case of a client bank account in the United Kingdom, if the bank does not provide the required acknowledgement within 20 business days after the firm dispatched the notice, the firm must withdraw all money standing to the credit of the account and deposit it in a client bank account with another bank as soon as possible.

1. (1)

   A firm which undertakes any contingent liability investment for clients through an exchange, clearing house, intermediate broker or OTC counterparty must, before the client transaction account is opened with the exchange, clearing house, intermediate broker or OTC counterparty:

   1. (a)

      notify the person with whom the account is to be opened that the firm is under an obligation to keep client money separate from the firm's own money, placing client money in a client bank account;

   2. (b)

      instruct the person with whom the account is to be opened that any money paid to it in respect of that transaction is to be credited to the firm'sclient transaction account; and

   3. (c)

      require the person with whom the account is to be opened to acknowledge in writing that the firm'sclient transaction account is not to be combined with any other account, nor is any right of set-off to be exercised by that person against money credited to the client transaction account in respect of any sum owed to that person on any other account.

2. (2)

   If the exchange, clearing house, 1intermediate broker or OTC counterparty does not provide the required acknowledgement within 20 business days of the dispatch of the notice and instruction, the firm must cease using the client transaction account with that exchange,3clearing house, intermediate broker or OTC2 counterparty and arrange as soon as possible for the transfer or liquidation of any open positions and the repayment of any money.

   2