In short
Under the CASS 7 alternative approach, client money is received into and paid out of the firm's own bank account and segregated by a daily transfer, instead of going straight into a client bank account under the normal approach. A firm may use it for a business line only with documented reasons, three months' notice to the FCA, an auditor's reasonable assurance report and a mandatory prudent segregation amount.
Key takeaways
- Under the normal approach, CASS 7.13.6R requires all client money to be paid directly into a client bank account.
- The alternative approach is for business lines where the normal approach would create significant operational risks, such as complex or numerous transactions across several currencies and time zones (CASS 7.13.54G).
- Before adopting it, a firm must document its reasons, notify the FCA in writing at least three months ahead and send the FCA an independent auditor's report prepared under a reasonable assurance engagement (CASS 7.13.55R, 7.13.57R and 7.13.58R).
- Each business day the firm reconciles as at the previous day's close and moves the difference, so that the client money resource at close of business equals the previous day's requirement (CASS 7.15.16R(2)).
- The firm must also hold an alternative approach mandatory prudent segregation amount as client money under CASS 7.13.65R.
- The firm must review its reasons at least annually and stop using the approach within six months if they no longer hold (CASS 7.13.59R).
The normal approach and the alternative approach
CASS 7 gives investment firms two ways to segregate client money, meaning keep it apart from the firm's own money. Under the normal approach in CASS 7.13.6R, a firm must ensure all client money it receives is paid directly into a client bank account: an account held in the firm's name as trustee for its clients. Clients and third parties are asked to pay straight into that account, and payments to clients are made from it.
Under the alternative approach described in CASS 7.13.54G, client money is received into and paid out of the firm's own bank account. The firm then works out each day how much should be in the client bank account and moves money to or from it. The money passing through the firm's own account is still client money, but CASS 7.13.54G warns it may not be available to be pooled and returned to clients if the firm failed, which is why the alternative approach carries extra conditions. Our guide to CASS 7 client money rules covers the rest of the regime.
| Normal approach | Alternative approach | |
|---|---|---|
| Where client money is received | Directly into a client bank account | Into the firm's own bank account |
| Where payments to clients come from | The client bank account | The firm's own bank account |
| How segregation is achieved | At the point of receipt | By a daily transfer based on the internal reconciliation |
| Conditions before use | None beyond the client money rules | Documented reasons, three months' FCA notice, auditor report |
| Extra client money held | Prudent segregation is optional | Mandatory prudent segregation amount required |
| Scope | The default for all business | Chosen business lines only |
When the alternative approach is allowed
CASS 7.13.54G explains that the normal approach can create significant operational risks for some business lines, for example where transactions are complex, numerous or closely related, or run across several currencies and time zones. In those cases the alternative approach may be used, subject to criteria, notification and audit requirements. It is chosen business line by business line, not for the firm as a whole.
Under CASS 7.13.55R the firm must document its reasons for concluding three things before adopting it: that the normal approach would create greater operational risks to client money protection than the alternative approach; that the alternative approach, including its mandatory prudent segregation, would not itself create undue operational risk; and that the firm has adequate systems and controls to run it and comply with Principle 10, the FCA principle that firms must protect clients' assets. Convenience or cost alone does not meet that test.
What a firm must do before adopting it
The steps run in a fixed order, and the FCA notice period means a firm needs to plan at least a quarter ahead. The documents from the first step must be kept for at least five years after the firm stops using the approach for that business line (CASS 7.13.56R), and the FCA can ask to inspect them at any time.
Because notice must be given at least three months before adoption, the auditor's work and the documented reasons are best prepared alongside the notification rather than after it. Each new business line needs its own reasons and notification, because the rules apply business line by business line.
| Step | Rule | Timing |
|---|---|---|
| Document the reasons for each business line | CASS 7.13.55R | Before adopting |
| Notify the FCA in writing of the intention to adopt | CASS 7.13.57R | At least three months before adopting |
| Send the FCA an independent auditor's report | CASS 7.13.58R | Before adopting |
| Keep the reasoning documents | CASS 7.13.56R | At least five years after ceasing to use the approach |
| Review the reasons | CASS 7.13.59R | At least annually, no more than one year apart |
The auditor's report
CASS 7.13.58R requires the firm, before adopting the approach, to send the FCA a written report from an independent auditor, prepared under a reasonable assurance engagement. That means the auditor gives a positive opinion rather than simply saying nothing has come to its attention. The report must state whether the firm's systems and controls are suitably designed to comply with CASS 7.13.62R to CASS 7.13.65R, and whether the firm's method of calculating its mandatory prudent segregation amount is suitably designed to comply with CASS 7.13.65R.
The auditor's involvement does not end there. CASS 7.13.60R prevents a firm from materially changing how it calculates and maintains its mandatory prudent segregation amount unless an auditor has prepared a report meeting the same standard. The annual CASS audit then tests whether the approach operated as designed during the year.
How it works day to day
CASS 7.13.54G describes the daily cycle. On each business day, called T0, the firm performs its internal client money reconciliation. It compares its client money requirement, what it owes clients, with its client money resource, what it holds in client bank accounts, both as at the close of the previous business day, called T-1. The difference is the amount it must move between its own bank account and the client bank account.
CASS 7.15.16R(2) sets the target: the client money resource at the close of business on the reconciliation day must equal the client money requirement at the close of the previous day. CASS 7.15.29R requires any shortfall to be paid in, and any excess withdrawn, by close of business on the day the reconciliation is performed. The standard reconciliation methods in CASS 7.16 apply under both approaches, and every client bank account still needs its countersigned acknowledgement letter.
Mandatory prudent segregation
A firm using the alternative approach must segregate an extra amount of its own money as client money: the alternative approach mandatory prudent segregation amount required by CASS 7.13.65R. CASS 7.13.54G gives two reasons. Client money sitting in the firm's own bank account may not be available to be pooled and returned to clients if the firm fails. And the firm may not have segregated enough in its client bank account to meet its requirement on the day it fails, because the next transfer had not yet been made.
The amount is calculated by the firm's own documented method, which the auditor's report must confirm is suitably designed. Under CASS 7.13.53A, money held in a client bank account for mandatory prudent segregation when a firm fails remains client money and is available to clients. This is different from the voluntary prudent segregation that any firm may choose, described in the next section.
Voluntary and mandatory prudent segregation compared
Any CASS 7 firm may, under CASS 7.13.41R, pay its own money into a client bank account where it is prudent to do so to prevent a shortfall if the firm fails, for example to cover the risk of a system failure or payments made on non-business days. That voluntary arrangement needs a written policy approved by the governing body (CASS 7.13.43R), an up-to-date record of the payments (CASS 7.13.42R), and, when the firm no longer considers the money needed, its withdrawal as an excess at the next reconciliation (CASS 7.13.49R).
Mandatory prudent segregation is not a choice. It is a condition of using the alternative approach, and its calculation is fixed by the method the auditor has reviewed.
| Voluntary prudent segregation | Alternative approach mandatory prudent segregation | |
|---|---|---|
| Rule | CASS 7.13.41R | CASS 7.13.65R |
| Who | Any CASS 7 firm that chooses it | Every firm using the alternative approach |
| Basis | Written policy approved by the governing body | Documented calculation method reviewed by an auditor |
| Changing it | Policy may be amended as risks change | No material change without a further auditor report (CASS 7.13.60R) |
| On failure | Money retained remains client money | Money held remains client money (CASS 7.13.53A) |
Worked example: two days under the alternative approach
A contracts for difference provider uses the alternative approach for its multi-currency trading business line. On Wednesday 14 October 2026 it performs its internal reconciliation as at close of business on Tuesday. Its client money requirement is £38,420,000.00 and its client bank accounts hold £37,960,000.00, so it transfers £460,000.00 from its own bank account to the client bank account before close of business on Wednesday.
On Thursday the reconciliation as at Wednesday's close shows a lower requirement of £37,900,000.00, because clients withdrew more than they deposited on Wednesday, all through the firm's own account. The client bank account holds £38,420,000.00, so the firm withdraws the £520,000.00 excess by close of business on Thursday. The firm also holds its mandatory prudent segregation amount, which this example leaves out for simplicity.
| Line | Wednesday (as at Tuesday close) | Thursday (as at Wednesday close) |
|---|---|---|
| Client money requirement | £38,420,000.00 | £37,900,000.00 |
| Client money resource in client bank accounts | £37,960,000.00 | £38,420,000.00 |
| Shortfall or excess | £460,000.00 shortfall | £520,000.00 excess |
| Transfer by close of business | £460,000.00 from own account to client account | £520,000.00 from client account to own account |
| Resource at close of business | £38,420,000.00 | £37,900,000.00 |
Annual review, reporting and stopping
CASS 7.13.59R requires the firm to review its documented reasons for each business line at least once a year, with no more than one year between reviews. If the reasons are no longer valid, the firm must stop using the alternative approach for that business line as soon as reasonably practicable, and in any event within six months of completing the review. A change in the business, such as simpler products or a single currency, can be enough to end the case.
CASS medium and large firms report their use of the approach in section 1 of the CMAR, which asks whether the alternative approach is used and whether the auditor assurances have been given to the FCA. A failure to make a daily transfer on time is a breach of CASS 7.15.29R and, if the firm cannot or materially fails to make it, a notifiable event, as our guide to CASS breach reporting explains. For what counts as client money in the first place, see what client money is.
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 7. If your firm holds client money under CASS 7, talk to us about CASS 7.
Frequently asked questions
What is the CASS 7 alternative approach?
A method of client money segregation in which client money is received into and paid out of the firm's own bank account, and the correct amount is moved to the client bank account each day after the internal reconciliation.
What is the difference between the normal approach and the alternative approach?
Under the normal approach, client money is paid directly into a client bank account (CASS 7.13.6R). Under the alternative approach it passes through the firm's own account and is segregated by a daily transfer.
How much notice must a firm give the FCA before using the alternative approach?
At least three months' written notice before adopting it for a business line, under CASS 7.13.57R.
Does the alternative approach need an auditor's report?
Yes. Before adopting it the firm must send the FCA an independent auditor's report prepared under a reasonable assurance engagement (CASS 7.13.58R).
What is alternative approach mandatory prudent segregation?
The requirement under CASS 7.13.65R for a firm using the alternative approach to segregate an extra amount of money as client money, calculated by its documented method.
How often must a firm review its use of the alternative approach?
At least once a year. If its reasons no longer hold, it must stop within six months of completing the review (CASS 7.13.59R).
References
- FCA Handbook, CASS 7.13 Segregation of client money
- FCA Handbook, CASS 7.15 Records, accounts and reconciliations
- FCA Handbook, CASS 7.16 The standard methods of internal client money reconciliation
- FCA Handbook Glossary, alternative approach mandatory prudent segregation
- FCA Handbook, SUP 16 Annex 29R Client Money and Asset Return form
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.