GIGI 2.5 The client money calculation
What is the client money calculation?
CASS 5.5.62 G explains the purpose of the client money calculation. It is 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, you must use your firm's internal accounting records to determine the client money resource and the client money requirement - then compare them. Having done so:
- (1)
if the client money requirement is greater than the client money resource you must top up the resource - i.e. pay money into the client bank account; and
- (2)
if the client money requirement is less than the client money resource, you must normally withdraw the excess from the client bank account.
You must carry out this calculation (client money requirement and client money resource) as often as is necessary to ensure the accuracy of your firm's records. And you must do this at least at intervals of not more than 25 business days. You should make any top ups to/withdrawals from the firm's client money bank account(s) by close of business on the day the calculations are performed.
So 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 was received en route by a firm authorised to hold that insurance company's money as its agent. Your firm may receive confirmation from its third party counterparts that the transaction is complete through receipt of the money by the insurance company or one of its agents. But if you do not, you must assume that the relevant money is still with the third party firm you passed it to and you must include an account of that money in the client money calculation.
How do you calculate the client money resource?
There are two methods permitted for the client money calculation, a cash-based method and an accruals method.
- (1)
For the cash-based method, the client money resource should be calculated from your firm's accounting records as the total of:
Any designated investments must be valued on a prudent and consistent basis.
For the accruals-based method, and from your firm's accounting record, the client money resource must also include:
- (1)
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)
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).
How do you calculate the client money requirement?
For the cash-based method, you can work out the client money requirement by calculating from your firm's accounting records the individual client money balance for each client and then adding these together for a total client money requirement figure. CASS 5.5.67 R explains that the balance should be calculated as:
- (1)
the amount paid by a client to the firm (to include all premiums); plus
- (2)
the amount due to the client (to include all claims and premium refunds); plus
- (3)
the amount of any interest or investment returns due to the client; less
- (4)
the amount paid to insurance companies 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)
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 R makes clear you can get to the client money requirement by determining from your firm's accounting records the sum of:
- (1)
all insurance creditors shown in your firm's business ledgers as amounts due to insurance companies, third party intermediaries and clients; plus
- (2)
unearned commission or brokerage being the amount of commission shown as accrued but not yet earned and payable (a prudent estimate must be used if you cannot produce an exact figure at the date of calculation).
Examples of the client money calculation
Example 1 - client pays £100 premium to a firm on day one, £10 of which will be earned by it as commission. The firm's terms of business - which it maintains with the client and the insurance company the premium will become payable to - state that the commission will be due and payable to the firm immediately when the client has paid the premium.
In these circumstances, paragraph 2.4.5 explains that when your firm receives the premium, you must treat it as a mixed remittance (i.e. £90 client money and £10 the firm's own money earned as commission). CASS 5.5.16 R (2) requires that money that is not client money (i.e. the commission) 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.
Example 1 on a cash basis (for formula see paragraph 2.5.8):
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 |
Example 1 on an accruals basis (for formula see paragraph 2.5.9):
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 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.
Example two - The firm's terms of business - which it maintains with the client and the insurance company the premium will become payable to - state that commission will become due 25 business days after it receives 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). The £10 surplus must be withdrawn from the client bank account and transferred to the firm's office account in line with CASS 5.5.63R(2)(b).
Example 2 on a cash basis (for formula see paragraph 2.5.8):
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 commission |
£0 |
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 cannot 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 insurance company. As such, the client money requirement is £0 while the client money resource shows a £10 surplus, representing the commission due to the firm, which must be removed by close of business in line with CASS 5.5.63R(2)(b).
Example 2 on an accruals basis (for formula see paragraph 2.5.9):
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 + £10 = £100 |
£100 inc £10 commission |
£0 |
25** |
£10 |
£0 + £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 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 figures is also £0 as the premium has been paid to the insurance company. The client account therefore shows a £10 surplus, representing the commission due to the firm, which must be removed by close of business in line with CASS 5.5.63R(2)(b).
Reconciliation of client money
Having performed your firm's client money calculation, you must also reconcile your accounting record of client money with the balance set out on the statement issued by the bank(s) with which the client bank account is held. If this reveals a discrepancy, your firm must identify the reason for it and correct it as soon as possible - unless it has arisen solely because of a timing difference between your firm's accounting system and that of the bank's.