GIGI 2.5 The client money calculation

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.

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.

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.

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.

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.

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).

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.

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.

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.