GIGI 2.5 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. (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. (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.

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 from your firm's accounting records 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.

For the accruals-based method, and from your firm's accounting record, the client money resource must also include:

1. (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. (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).

The client money resource should be calculated and then compared to 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. (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 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 R makes clear you can get to the client money requirement by determining from your firm's accounting records the sum of:

1. (1)

   all insurance creditors shown in your 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 (a prudent estimate must be used if you cannot produce an exact figure at the date of 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.

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.