SIFA 9.16 Custody and client money

You will find the rules at CASS 2.1 for custody and CASS 4 for client money. Safeguarding and administering client assets is a separate regulated activity and permission must be obtained to carry it out. Many small firms are not allowed to hold client money and custody assets, and hence the Guide does not include a discussion of these rules.

Some firms can get an exemption from the custody rules by following CASS 2.1.9 R (3). The rule states that when a firm temporarily holds a designated investment belonging to a client (other than in bearer form) it is exempt from the custody rules if it takes certain steps as set out in the rule. You should not rely on this rule as a matter of course, and should only retain a designated investment for as long as is strictly necessary.

There is no equivalent exemption for client money. An example of where a firm may need to act to avoid holding client money is where a customer sends a cheque intended for the purchase of a product made payable to the firm rather than the product provider. In this case you should not cash the cheque if you want to avoid holding client money - instead you should return it to the client with a request for an amended cheque.

A further potential client money issue is that of rebated commission. If a firm makes it clear in its agreement with the client that any commission remains the firm's until actually paid into the account of the client, then the client money rules should not apply. Firms operating fee agreements where commission is rebated to the client, either directly or by holding excess amounts against future fees, will continue to be able to construct their fee agreements in such a way that the client money rules are not engaged.

You will find the rules on mandates at CASS 4.5. The rules apply to those firms that control rather than hold clients' assets, or are able to create liabilities in the name of the client (CASS 4.5.4 G).