1 This chapter (the client money distribution rules) applies to a firm that holds client money which is subject to the client money rules when a primary pooling event or a secondary pooling event occurs.
The client money distribution rules seek to facilitate the timely return of client money to a client in the event of the failure of a firm or third party at which the firm holds client money.
A firm can hold client money in a general client bank account, a designated client bank account or a designated client fund account.
A firm holds all client money in general client bank accounts for its clients as part of a common pool of money so those particular clients do not have a claim against a specific sum in a specific account; they only have a claim to the client money in general.
A firm holds client money in designated client bank accounts or designated client fund accounts for those clients that requested their client money be part of a specific pool of money, so those particular clients do have a claim against a specific sum in a specific account; they do not have a claim to the client money in general unless a primary pooling event occurs. A primary pooling event triggers a notional pooling of all the client money, in every type of client money account, and the obligation to distribute it.
If the firm becomes insolvent, and there is (for whatever reason) a shortfall in money held for a client compared with that client's entitlements, the available funds will be distributed in accordance with the client money distribution rules.
A primary pooling event occurs:
on the vesting of assets in a trustee in accordance with an 'assets requirement' imposed under section 48(1)(b)of the Act;
on the coming into force of a requirement for all client money held by the firm; or
when the firm notifies, or is in breach of its duty to notify, the FSA, in accordance with CASS 7.6.16 R (Notification requirements), that it is unable correctly to identify and allocate in its records all valid claims arising as a result of a secondary pooling event.
CASS 7A.2.2R (4) does not apply so long as:
If a primary pooling event occurs:
client money held in each client money account of the firm is treated as pooled; and
the firm must distribute that client money in accordance with CASS 7.7.2 R, so that each client receives a sum which is rateable to the client money entitlement calculated in accordance with CASS 7A.2.5 R.
When, in respect of a client, there is a positive individual client balance and a negative client equity balance, the credit must be offset against the debit reducing theindividual client balance for that client.
When, in respect of a client , there is a negative individual client balance and a positive client equity balance , the credit must be offset against the debit reducing the client equity balance for that client.
A client's main claim is for the return of client money held in a client bank account. A client may be able to claim for any shortfall against money held in a firm's own account. For that claim, the client will be an unsecured creditor of the firm.
Client money received by the firm after a primary pooling event must not be pooled with client money held in any client money account operated by the firm at the time of the primary pooling event. It must be placed in a client bank account that has been opened after that event and must be handled in accordance with the client money rules, and returned to the relevant client without delay, except to the extent that:
it is client money relating to a transaction that has not settled at the time of the primary pooling event; or
it is client money relating to a client, for whom the client money entitlement, calculated in accordance with CASS 7A.2.5 R, shows that money is due from the client to the firm at the time of the primary pooling event.
Client money received after the primary pooling event relating to an unsettled transaction should be used to settle that transaction. Examples of such transactions include:
an equity transaction with a trade date before the date of the primary pooling event and a settlement date after the date of the primary pooling event; or
a contingent liability investment that is 'open' at the time of the primary pooling event and is due to settle after the primary pooling event.
If a firm receives a mixed remittance after a primary pooling event, it must:
pay the full sum into the separate client bank account opened in accordance with CASS 7A.2.7 R; and
pay the money that is not client money out of that client bank account into a firm's own bank account within one business day of the day on which the firm would normally expect the remittance to be cleared.
Whenever possible the firm should seek to split a mixed remittance before the relevant accounts are credited.
If both a primary pooling event and a secondary pooling event occur, the provisions of this section relating to a primary pooling event apply.
A secondary pooling event occurs on the failure of a third party to which client money held by the firm has been transferred underCASS 7.4.1R (1) to CASS 7.4.1R (3) (Depositing client money) or CASS 7.5.2 R (Transfer of client money to a third party).
CASS 7A.3.6 R to CASS 7A.3.18 R do not apply if, on the failure of the third party, the firm repays to its clients or pays into a client bank account, at an unaffected bank, an amount equal to the amount of client money which would have been held if a shortfall had not occurred at that third party.
When client money is transferred to a third party, a firm continues to owe fiduciary duties to the client. Whether a firm is liable for a shortfall in client money caused by a third party failure will depend on whether it has complied with its duty of care as agent or trustee.
When a bank fails and the firm decides not to make good the shortfall in the amount of client money held at that bank, a secondary pooling event will occur in accordance with CASS 7A.3.6 R. The firm would be expected to reflect the shortfall that arises at the failed bank in its records of the entitlement of clients and of money held with third parties.
The client money distribution rules seek to ensure that clients who have previously specified that they are not willing to accept the risk of the bank that has failed, and who therefore requested that their client money be placed in a designated client bank account at a different bank, should not suffer the loss of the bank that has failed.
If a secondary pooling event occurs as a result of the failure of a bank where one or more general client bank accounts are held, then:
in relation to every general client bank account of the firm, the provisions of CASS 7A.3.8 R, CASS 7A.3.13 R and CASS 7A.3.14 R will apply;
in relation to every designated client bank account held by the firm with the failed bank, the provisions of CASS 7A.3.10 R, CASS 7A.3.13 R and CASS 7A.3.14 R will apply;
in relation to each designated client fund account held by the firm with the failed bank, the provisions of CASS 7A.3.11 R, CASS 7A.3.13 R and CASS 7A.3.14 R will apply;
any money held at a bank, other than the bank that has failed, in designated client bank accounts, is not pooled with any other client money; and
any money held in a designated client fund account, no part of which is held by the bank that has failed, is not pooled with any other client money.
If a secondary pooling event occurs as a result of the failure of a bank where one or more designated client bank accounts or designated client fund accounts are held, then:
in relation to every designated client bank account held by the firm with the failed bank , the provisions of CASS 7A.3.10 R, CASS 7A.3.13 R and CASS 7A.3.14 R will apply; and
in relation to each designated client fund account held by the firm with the failed bank , the provisions of CASS 7A.3.11 R, CASS 7A.3.13 R and CASS 7A.3.14 R will apply.
Money held in each general client bank account and client transaction account of the firm must be treated as pooled and:
any shortfall in client money held, or which should have been held, in general client bank accounts and client transaction accounts, that has arisen as a result of the failure of the bank, must be borne by all the clients whose client money is held in either a general client bank account or client transaction account of the firm, rateably in accordance with their entitlements;
a new client money entitlement must be calculated for each client by the firm, to reflect the requirements in (1), and the firm's records must be amended to reflect the reduced client money entitlement;
the firm must make and retain a record of each client's share of the client moneyshortfall at the failed bank until the client is repaid; and
the firm must use the new client money entitlements, calculated in accordance with (2), for the purposes of reconciliations pursuant to CASS 7.6.2 R (Records and accounts), and where relevant SYSC 4.1.1 R (General organisational requirements) and SYSC 6.1.1 R (Compliance).
The term "which should have been held" is a reference to the failed bank's failure to hold the client money at the time of the pooling event.
For each client with a designated client bank account held at the failed bank:
any shortfall in client money held, or which should have been held, in designated client bank accounts that has arisen as a result of the failure, must be borne by all the clients whose client money is held in a designated client bank account of the firm at the failed bank, rateably in accordance with their entitlements;
a new client money entitlement must be calculated for each of the relevant clients by the firm, and the firm's records must be amended to reflect the reduced client money entitlement;
the firm must make and retain a record of each client's share of the client moneyshortfall at the failed bank until the client is repaid; and
the firm must use the new client money entitlements, calculated in accordance with (2), for the purposes of reconciliations pursuant to CASS 7.6.2 R, and where relevant SYSC 4.1.1 R (General organisational requirements) and SYSC 6.1.1 R (Compliance).
Money held in each designated client fund account with the failedbank must be treated as pooled with any other designated client fund accountsof the firm which contain part of the same designated fund and:
any shortfall in client money held, or which should have been held, in designated client fund accounts that has arisen as a result of the failure, must be borne by each of the clients whose client money is held in that designated fund, rateably in accordance with their entitlements;
a new client money entitlement must be calculated for each client by the firm, in accordance with (1), and the firm's records must be amended to reflect the reduced client money entitlement;
the firm must make and retain a record of each client's share of the client moneyshortfall at the failed bank until the client is repaid; and
the firm must use the new client money entitlements, calculated in accordance with (2), for the purposes of reconciliations pursuant to CASS 7.6.2 R (Records and accounts), and where relevant SYSC 4.1.1 R (General organisational requirements) and SYSC 6.1.1 R (Compliance).
A client whose money was held, or which should have been held, in a designated client bank account with a bank that has failed is not entitled to claim in respect of that money against any other client bank account or client transaction account of the firm.
Client money received by the firm after the failure of a bank, that would otherwise have been paid into a client bank account at that bank :
must not be transferred to the failed bank unless specifically instructed by the client in order to settle an obligation of that client to the failed bank; and
must be, subject to (1), placed in a separate client bank account that has been opened after the secondary pooling event and either:
If a firm receives a mixed remittance after the secondary pooling event which consists of client money that would have been paid into a general client bank account, a designated client bank account or a designated client fund account maintained at the bank that has failed, it must:
pay the full sum into a client bank account other than one operated at the bank that has failed; and
pay the money that is not client money out of that client bank account within one business day of the day on which the firm would normally expect the remittance to be cleared.
Whenever possible the firm should seek to split a mixed remittance before the relevant accounts are credited.
If a secondary pooling event occurs as a result of the failure of an intermediate broker, settlement agent or OTC counterparty, then in relation to every general client bank account and client transaction account of the firm, the provisions of CASS 7A.3.17 R and CASS 7A.3.18 R will apply.
Money held in each general client bank account and client transaction account of the firm must be treated as pooled and:
any shortfall in client money held, or which should have been held, in general client bank accounts and client transaction accounts, that has arisen as a result of the failure, must be borne by all the clients whose client money is held in either a general client bank account or a client transaction account of the firm, rateably in accordance with their entitlements;
a new client money entitlement must be calculated for each client by the firm, to reflect the requirements of (1), and the firm's records must be amended to reflect the reduced client money entitlement;
the firm must make and retain a record of each client's share of the client moneyshortfall at the failedintermediate broker, settlement agent or OTC counterparty until the client is repaid; and
the firm must use the new client money entitlements, calculated in accordance with (2), for the purposes of reconciliations pursuant to CASS 7.6.2 R (Records and accounts), and where relevant SYSC 4.1.1 R (General organisational requirements) and SYSC 6.1.1 R (Compliance).
Client money received by the firm after the failure of an intermediate broker, settlement agent or OTC counterparty, that would otherwise have been paid into a client transaction account at that intermediate broker, settlement agent or OTC counterparty:
must not be transferred to the failed third party unless specifically instructed by the client in order to settle an obligation of that client to the failedintermediate broker, settlement agent or OTC counterparty; and
must be, subject to (1), placed in a separate client bank account that has been opened after the secondary pooling event and either:
On the failure of a third party with which money is held, a firm must notify the FSA:
as soon as it becomes aware of the failure of any bank, intermediate broker, settlement agent, OTC counterparty or other entity with which it has placed, or to which it has passed, client money; and
as soon as reasonably practical, whether it intends to make good any shortfall that has arisen or may arise and of the amounts involved.
