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GIGI 2.5 The client money calculation

What is the client money calculation?

GIGI 2.5.1G

CASS 5.5.62 G explains that the purpose of the client money calculationis to verify that the amount of client money segregated into the client bank account(s) (and the value of any segregated designated investments held under the non-statutory trust in accordance with CASS 5.5.14 R) together with the value of client money held by third parties, is sufficient to meet the firm's obligations to its clients.

GIGI 2.5.2G

In performing the client money calculation the firm must use its own internal records to determine the client money resource and the client money requirement and then compare them. Having done so:

  1. (1)

    if the client money requirement is greater than the client money resource the firm you must top up the resource - i.e. pay money into the client bank account; and

  2. (2)

    if the client money requirement is less than the client money resource the firm must normally withdraw the excess from the client bank account.

GIGI 2.5.3G

The calculation (client money requirement and client money resource) is to be undertaken as often as is necessary to ensure the accuracy of the firm's records and at least at intervals of not more than 25 business days. Any top ups to/withdrawals from the firm's client money bank account(s) need to be made by close of business on the day on which the calculations are performed.

GIGI 2.5.4G

In order that an accurate balance of client money held at third parties can be included in the client money calculation, firms will need to await notification that client money they pass to third party firms - most commonly premiums - has subsequently reached the insurance company or en route to the insurance company was received by a firm authorised to hold that insurance company's money as its agent. Unless a firm receivesconfirmation that the transaction is complete through receipt of the money by the insurance company or one of its agents, they must assume that the relevant money is still with the third party firm to whom they passed it and an account of that money in the client money calculation.

How do you calculate the client money resource?

GIGI 2.5.5G

There are two methods permitted for the client money calculation, a cash-based method and an accruals method.

  1. (1)

    For the cash-based method, the client money resource should be calculated as the total of:

    1. (a)

      the balances of the firm's client bank accounts, as at close of business on the previous business day; plus

    2. (b)

      the value of client money held at third parties; plus

    3. (c)

      designated investments to the extent they are permitted to be held under the terms of the non-statutory trust.

Any designated investments must be valued on a prudent and consistent basis.Any designated investments must be valued on a prudent and consistent basis.

  1. (2)

    For the accruals based method, the client money resource must also include:

    1. (a)

      to the extent that client money is held in the statutory trust, insurance debtors (which in this case cannot include pre-funded items); and

    2. (b)

      to the extent that client money is held in line with the non-statutory trust, insurance debtors (which in this case may include pre-funded items whether in respect of credit advances of premiums, claims or premium refunds).

The client money resource should be calculated and then compared to the client money requirement.

How do you calculate the client money requirement?

GIGI 2.5.7G

For the cash-based method the client money requirement can be found by calculating the individual client money balance for each client and then adding these together for a total client money requirement figure. CASS 5.5.66R makes clear that the individual client-balance for each client may not include any uncleared client funds. CASS 5.5.67R explains that the balance should be calculated as:

  1. (1)

    the amount paid by a client to the firm (to include all premiums); plus

  2. (2)

    the amount due to the client (to include all claims and premium refunds); plus

  3. (3)

    the amount of any interest or investment returns due to the client; less

  4. (4)

    the amount paid to insurance companies (or third party firms) for the benefit of the client (to include all premiums) or due to itself (i.e. commissions that are due but have not yet been removed from the client account); less

  5. (5)

    the amount paid by the firm to the client (to include all claims and premium refunds).

How do you calculate the client money requirement?

GIGI 2.5.8G

For the accruals based method, CASS 5.5.68 makes clear that the client money requirement can be found by determining the sum of:

  1. (1)

    the sum of all insurance creditors shown in the firm's business ledgers as amounts due to insurance companies, third party intermediaries and clients; plus

  2. (2)

    unearned commission or brokerage being the amount of commission shown as accrued but not yet earned and payable.

Examples of the client money calculation

GIGI 2.5.9G

Example 1 - client pays £100 premium to a firm on day one, £10 of which will be earned by it as commission. The insurer's terms of business do not specify when the commission element of the premium will become due to the firm.

Examples of the client money calculation

GIGI 2.5.10G

In these circumstances, it may be assumed the commission will become immediately due (see paragraph 2.4.7 for explanation). Paragraph 2.4.6 explains that the receipt of the premium must be treated as a mixed remittance (i.e. £90 client money and £10 the firm's own money earned as commission). CASS 5.5.16R(2) requires that money that is not client money (i.e. the commission in this case) is paid out of the client bank account as soon as reasonably practical and in any event no later than 25 business days after the payment cleared the client bank account. So the firm settles £90 with the insurance company on day two and transfers £10 commission to its office account on the same day. It carries out the client money calculation on day 25.

GIGI 2.5.11G

Example 1 on a cash basis (for formula see paragraph 2.5.7):

Day

Client money resource

Client money requirement found by CASS 5.5.67R: ((1) + (2) + (3)) - ((4) + (5))

Client bank a/c balance

Office a/c balance

1*

£100

((£100) +(0) + (0)) - ((10) + (0)) = £90

£100 inc £10 commission due

0

25

£0

((£100) +(0) + (0)) - ((£100) + (0)) = 0

£0

£10 transferred on day two

GIGI 2.5.12G

Example 1 on an accruals basis (for formula see paragraph 2.5.8):

Day

Client money resource

Client money requirement found by CASS 5.5.68R: insurance creditors + unearned brokerage

Client bank a/c balance

Office a/c balance

1*

£100

£90 + £0 = £90 **

£100 inc £10 commission due

£0

25

£0

£0 + £0 = £0 **

£0

£10 transferred on day two

* The client money resource is £100 and the client money requirement is £90, resulting in a surplus of £10 representing the commission due to the firm. This surplus is not client money and should be removed from the client account (see paragraph 2.4.6 above).

** As the commission is due immediately, it cannot be included in the client money requirement calculated on an accruals basis as unearned brokerage. Therefore, the unearned brokerage figure is 0.

GIGI 2.5.13G

Example two - the insurer's terms of business state that commission will become due 25 business days after receipt of the premium from the customer. The firm settles £90 with the insurance company on day 25. It then calculates the client money requirement on day 25 and identifies a £10 surplus (i.e. £10 earned by it as commission). Paragraph 2.4.8 explains that the £10 surplus must be withdrawn from the client bank account and transferred to the firm's office account in line with CASS 5.5.63(2)(b).

* The client money resource is £100 and the client money requirement is £90, resulting in a surplus of £10 representing the commission due to the firm. This surplus is not client money and should be removed from the client bank account (see paragraph 2.4.5 above).

** As the commission is due to the firm immediately, it cannot be included in the client money requirement on an accruals basis as unearned brokerage. Therefore, the unearned brokerage figure is £0.

GIGI 2.5.14G

Example 2 on a cash basis (for formula see paragraph 2.5.7):

Day

Client money resource

Client money requirement found by CASS 5.5.67R: ((1) + (2) + (3)) - ((4) + (5))

Client bank a/c balance

Office a/c balance

1*

£100

((£100) + (0) + (0)) - ((0) + (0)) = £100

£100 inc £10

£0

- 12 -

commission not due

25**

£10

((£100) +(0) + (0)) - ((£100) + (0)) = £0

£10 to transfer to office account by cob

£0

* As the commission is not due to the firm it is client money and is therefore included in the client money requirement (i.e. £10 commission is not deducted as in example 1 above).** The commission becomes due on day 25. At this point it is no longer client money and can not be included in the client money requirement. It is therefore deducted from the client money requirement, as is the premium which has been paid to the insurer. As such, the client money requirement is £0 whilst the client money resource shows a £10 surplus, representing the commission due to the firm, which must be removed by close of business (see paragraph 2.4.8).

GIGI 2.5.15G

Example 2 on an accruals basis (for formula see paragraph 2.5.8):

* As the commission is not due to the firm, it is client money and is therefore included in the client money requirement as unearned brokerage.

** The commission becomes due on day 25. At this point it is no longer client money and cannot be included in the client money requirement as unearned brokerage which should now show £0. The insurance creditors figure is also £0 as the premium has been paid to the insurer. The client account therefore shows a £10 surplus, representing the commission due to the firm, which must be removed by close of business (see paragraph 2.4.8).

Verification of banking records

GIGI 2.5.16G

Having performed the client money calculation, a firm must also carry out a verification of its banking records. It must compare the balance on its internal client records with the balance on that account as set out on the statement issued by the bank(s) with which the client bank account is held.