In short
A non-statutory trust under CASS 5.4 is a client money trust an insurance broker creates by its own executed deed. Its deed can let the firm give credit to clients and insurers from client money. In return the firm needs auditor-confirmed systems, a designated manager, informed client consent and, for retail business, capital of at least £50,000.
Key takeaways
- The statutory trust in CASS 5.3.2R arises automatically, while a non-statutory trust needs a properly executed trust deed under CASS 5.4.6R; a firm may use both for different business.
- A non-statutory trust deed can allow the firm to make advances or give credit to clients and insurers from client money, but never to itself, so commission cannot be drawn before the client has paid the premium.
- CASS 5.4.4R sets five conditions: adequate systems and controls, written auditor confirmation kept current, a designated manager, capital resources of at least £50,000 for retail business, and client terms that obtain informed consent.
- Only under the accruals calculation method can a non-statutory trust count pre-funded insurance debtors and approved bank letters of credit in its client money resource, and then only to the extent needed to cover a shortfall.
- The £30,000 audit exemption in SUP 3.1.2R applies only to firms holding client money on a statutory trust, so every firm operating a non-statutory trust needs an annual client money audit.
Two ways to hold client money on trust
A trust is a legal arrangement in which one person, the trustee, holds money for the benefit of others, the beneficiaries. Under CASS 5 an insurance broker holds client money as trustee for its clients (as agent in Scotland). The legal title sits with the firm, but the money belongs in substance to the clients, so it is kept apart from the firm's own creditors if the firm fails.
CASS 5 offers two versions. The statutory trust in CASS 5.3.2R is created by the rules themselves. A firm that does nothing else holds client money on this trust, with no document needed. The non-statutory trust in CASS 5.4 is created by the firm through its own trust deed. CASS 5.4.2R makes it voluntary and allows a firm to use it for some business and the statutory trust for the rest, and CASS 5.4.3R takes that business outside CASS 5.3 to the extent the firm uses CASS 5.4.
Both trusts distribute money in the same order if the firm fails: first to clients other than insurers, then to insurers who are clients, then to the costs of distribution, and only then to the firm. The difference is what the firm may do with the money while it is running. For the wider framework, see the CASS 5 client money rules.
Statutory and non-statutory trust compared
The statutory trust is strict. CASS 5.3.3G explains that the segregation rules supporting it prevent a firm using client money to give credit, for example by paying a premium to an insurer before the client has paid. CASS 5.5.11R requires the total client money held for each client to be positive, and no payment may be made for a client until cleared funds have been received. A firm that wants to give credit must do so from its own money.
The non-statutory trust relaxes those limits in exchange for stronger controls. The table sets out every point of difference that affects day-to-day operations and the calculation.
| Point | Statutory trust (CASS 5.3) | Non-statutory trust (CASS 5.4) |
|---|---|---|
| How it is created | Automatically by CASS 5.3.2R | Properly executed trust deed (CASS 5.4.6R) |
| Credit to clients from client money | Not permitted (CASS 5.3.3G) | Permitted where the deed allows (CASS 5.4.8R(1)) |
| Credit to insurers from client money | Not permitted | Permitted where the deed allows (CASS 5.4.8R(1)) |
| Credit to the firm itself | Not permitted | Not permitted (CASS 5.4.1G(2)) |
| Positive balance for each client | Required (CASS 5.5.11R) | Not required |
| Capital resources | MIPRU only | At least £50,000 at all times for retail business (CASS 5.4.4R(4)) |
| Auditor's written confirmation of systems | Not required | Required and kept current (CASS 5.4.4R(2)) |
| Designated investments instead of cash | Not permitted | Permitted on conditions (CASS 5.5.14R) |
| Insurance debtors in the resource (accruals method) | Only debtors that are not pre-funded (CASS 5.5.65R(2)) | All debtors, including pre-funded, to the extent needed to cover a shortfall (CASS 5.5.65R(3)(a)) |
| Bank letter of credit or guarantee in the resource | Not counted | Counted, within limits (CASS 5.5.65R(3)(b)) |
| £30,000 audit exemption | Available (SUP 3.1.2R, Note 4) | Not available |
The five conditions in CASS 5.4.4R
A firm may only hold client money on a non-statutory trust if it meets all five conditions in CASS 5.4.4R, and it must keep meeting them. Missing any one of them means the firm is not entitled to operate the trust.
The conditions are linked. The systems in condition (1) must be able to monitor credit risk, which is the risk that a client or insurer the firm has given credit to does not repay. The auditor's confirmation in condition (2) is about those systems. The designated manager in condition (3) owns them day to day. The capital in condition (4) absorbs losses if credit goes bad. And the client terms in condition (5) make sure clients know their money is being used this way.
| Condition | What it requires | Rule |
|---|---|---|
| Systems and controls | Adequate to monitor and manage client money transactions and the credit risk from the trust, covering both trusts if the firm uses both | CASS 5.4.4R(1) |
| Auditor confirmation | Written confirmation from the firm's auditor that those systems and controls are adequate, obtained and kept current | CASS 5.4.4R(2) |
| Designated manager | A named manager responsible for overseeing day-to-day compliance with the systems and with CASS 5.4 | CASS 5.4.4R(3) |
| Capital | Capital resources of not less than £50,000 at all times, calculated under MIPRU 4.4.1R, if the trust handles client money for retail customers | CASS 5.4.4R(4) |
| Client consent | Terms of business that adequately explain the trust and obtain each client's informed consent; for insurers, an agreement meeting CASS 5.1.5AR | CASS 5.4.4R(5) |
The £50,000 capital condition
The capital condition applies only where the non-statutory trust handles client money for retail customers. Where it applies, the firm must have and at all times maintain capital resources of not less than £50,000, calculated under MIPRU 4.4.1R. The words 'at all times' matter: a firm that dips below £50,000 for a single day while operating the trust for retail customers is in breach.
The £50,000 sits alongside the general capital requirement for insurance intermediaries. Under MIPRU 4.2.11R, a firm carrying on only insurance distribution or home finance mediation that holds client money must hold capital resources of at least the higher of £10,000 and 5% of its annual income from those activities. CASS 5.4.5G confirms that capital held for MIPRU 4.2.11R can count, wholly or partly, towards the £50,000. In practice the two tests are compared and the firm must meet the higher figure.
| Annual income from insurance distribution (GBP) | MIPRU 4.2.11R: higher of £10,000 and 5% (GBP) | CASS 5.4.4R(4) for retail business (GBP) | Minimum to hold (GBP) |
|---|---|---|---|
| 400,000 | 20,000 | 50,000 | 50,000 |
| 1,000,000 | 50,000 | 50,000 | 50,000 |
| 2,400,000 | 120,000 | 50,000 | 120,000 |
The auditor's confirmation
CASS 5.4.4R(2) requires the firm to obtain, and keep current, written confirmation from its auditor that it has systems and controls adequate to monitor and manage its client money transactions and the credit risk from the trust. This confirmation is a separate document from the annual client assets report that the auditor produces under SUP 3.10. Firms sometimes assume the annual report covers it. It does not.
The rule does not set a fixed renewal interval. What it requires is that the confirmation stays current, which means it must still describe the systems the firm actually runs. A confirmation given when the trust was first set up, before any credit had been given, says little about how the controls work in practice. Firms should refresh it whenever their systems, credit policy or business mix change materially, and many align it with the annual audit so the auditor confirms the controls it has just tested. Our guide to the CASS 5 client money audit explains how the two fit together.
What the trust deed must say
CASS 5.4.6R requires a firm operating under CASS 5.4 to hold client money as trustee under a properly executed deed or equivalent document. A deed that has been drafted but not executed correctly does not create the trust, and the money then defaults to the statutory trust with its stricter limits.
CASS 5.4.7R sets the compulsory contents and CASS 5.4.8R the optional powers. The power to give credit is not automatic: the deed must include it. If the firm wants to segregate designated investments instead of cash, CASS 5.5.14R(2)(c) also requires the deed to say that those investments are held on the trust.
| Clause | Compulsory or optional | Rule |
|---|---|---|
| Money is held for the purposes of CASS 5.4, the applicable parts of CASS 5.5 and the distribution rules | Compulsory | CASS 5.4.7R(1) |
| First for clients other than insurers, according to their interests | Compulsory | CASS 5.4.7R(2) |
| Then for insurers who are clients, after the first group's valid claims | Compulsory | CASS 5.4.7R(3) |
| On the firm's failure, for the costs of distribution | Compulsory | CASS 5.4.7R(4) |
| Finally for the firm | Compulsory | CASS 5.4.7R(5) |
| Power to make advances or give credit to clients or insurers, with resulting debts held on the same trust | Optional | CASS 5.4.8R(1) |
| Benefit of an approved bank's letter of credit or guarantee covering a shortfall, held on the same trust | Optional | CASS 5.4.8R(2) |
| Designated investments held on the trust | Required if investments are segregated | CASS 5.5.14R(2)(c) |
Worked example: the same broker under each trust
A commercial lines broker uses the accruals method. At close of business on the calculation date its business ledgers show a client money requirement of £5,200,000.00 and client bank account balances of £4,930,000.00. It is owed £320,000.00 by clients and insurers. Of that, £140,000.00 is pre-funded: £95,000.00 of premiums it paid to insurers before clients paid, and £45,000.00 of claims it paid to clients before insurers settled. The remaining £180,000.00 is ordinary money due from clients for premiums that have not yet been paid to insurers.
Under a statutory trust, only debtors that are not pre-funded count (CASS 5.5.65R(2)), so the resource is £5,110,000.00 and there is a £90,000.00 shortfall to pay in by close of business that day. The pre-funding itself was also a use of client money to give credit, which the statutory trust does not allow. Under a non-statutory trust whose deed permits credit, all debtors can count, but only to the extent needed to cover the shortfall (CASS 5.5.65R(3)(a)). The firm counts £270,000.00 of its £320,000.00 debtors and there is no shortfall.
Two cautions apply. Debtors must be valued on a prudent and consistent basis, so a debt from a client who is unlikely to pay should not be counted at face value. And this treatment applies only under the accruals method. A firm using the client balance method cannot count insurance debtors at all, because CASS 5.5.65R(2) and (3) apply only when comparing against the accruals requirement in CASS 5.5.68R.
| Line | Statutory trust (GBP) | Non-statutory trust (GBP) |
|---|---|---|
| Client money requirement (CASS 5.5.68R) | 5,200,000.00 | 5,200,000.00 |
| Client bank account balances | 4,930,000.00 | 4,930,000.00 |
| Debtors not pre-funded | 180,000.00 | Counted within the line below |
| All debtors, including pre-funded, to the extent needed | Not permitted | 270,000.00 |
| Client money resource | 5,110,000.00 | 5,200,000.00 |
| Shortfall to fund by close of business | 90,000.00 | 0.00 |
How to choose between them
The choice turns on whether the business needs to give credit. A personal lines broker that collects premiums before cover starts and pays claims only after insurers settle gains little from a non-statutory trust and takes on extra cost: the deed, the auditor's confirmation, the designated manager and, for retail clients, £50,000 of capital. It also loses access to the £30,000 audit exemption that a small statutory trust firm can use.
A commercial or wholesale broker that routinely pays premiums to insurers on agreed dates before clients settle, or pays urgent claims before insurers settle, usually needs a non-statutory trust to avoid funding every advance from its own money. Before switching, the firm should have the deed executed, the auditor's confirmation in hand, client terms updated to obtain informed consent and its capital checked, because the trust is only valid once all five conditions are met.
Common mistakes
The failures that most often break a non-statutory trust are administrative: a deed never properly executed, an auditor's confirmation that no longer describes the systems in use, a designated manager who has left, capital that dips below £50,000 between reporting dates, and client terms that do not explain the trust. Commission drawn before the client has paid is a further common breach, because the trust never allows credit to the firm.
Each of these can be checked on a schedule. Hold a trust file with the executed deed, the current confirmation and the manager's appointment. Monitor capital against both tests, not only at year end. Review credit given to clients and insurers as part of every calculation, using the approach in our guide to insurance premium segregation and reconciliation, and keep agency money separate as explained in our guide to risk transfer agreements.
Safeheld reconciles client money every day for regulated firms, works every difference to its cause and keeps the record auditors ask for, and is extending that work to CASS 5. If your firm holds client money under CASS 5, talk to us about CASS 5.
Frequently asked questions
What is a non-statutory trust in CASS 5?
A client money trust an insurance broker creates by its own executed trust deed under CASS 5.4. It can allow the firm to give credit to clients and insurers from client money, subject to five conditions in CASS 5.4.4R.
What is the difference between a statutory and non-statutory trust?
The statutory trust arises automatically and does not allow client money to be used for credit. The non-statutory trust needs a deed and can allow credit to clients and insurers, but requires auditor-confirmed systems, a designated manager, client consent and, for retail business, £50,000 of capital.
Does a non-statutory trust need £50,000 capital?
Yes, if the trust handles client money for retail customers. CASS 5.4.4R(4) requires capital resources of at least £50,000 at all times, calculated under MIPRU 4.4.1R.
Can a broker take commission early under a non-statutory trust?
No. CASS 5.4.1G(2) says the trust never allows credit to the firm, so commission cannot be withdrawn before the client has paid the premium.
Does a non-statutory trust need a client money audit?
Yes. The £30,000 exemption in SUP 3.1.2R applies only to client money held on a statutory trust, so a firm operating a non-statutory trust always needs an annual client assets report.
How often must the NST auditor confirmation be renewed?
CASS 5.4.4R(2) requires it to be kept current rather than renewed on a fixed date. It should be refreshed whenever the firm's systems or credit arrangements change materially, and many firms refresh it each year with the audit.
References
- FCA Handbook, CASS 5.3 Statutory trust
- FCA Handbook, CASS 5.4 Non-statutory trust
- FCA Handbook, CASS 5.5 Segregation of client money
- FCA Handbook, MIPRU 4.2 Capital resources requirements
- FCA Handbook, SUP 3.1 Applicable sections
- FCA, RMA-C: Client money and assets FAQs
About Safeheld
Safeheld reconciles client money every day, resolves every difference and prepares every regulatory return for sign-off, for regulated firms in the United States, the United Kingdom, the European Union, Canada, Australia, Singapore and Hong Kong. To discuss your operations, contact us at safeheld.com/contact.
This article is for general information and does not constitute legal or regulatory advice.