In short
CASS 7 sets the FCA's client money rules for investment firms. Client money is held on trust in client bank accounts, and none may be held in an account until the bank countersigns an acknowledgement letter. Each business day it compares what it owes clients with what it holds at the previous day's close, paying in any shortfall by close of business. Bank reconciliations are required at least monthly.
Key takeaways
- CASS 7 applies to firms that receive or hold money for clients in connection with MiFID business, designated investment business and certain ISA business (CASS 7.10.1R).
- Under the normal approach client money is paid directly into a client bank account (CASS 7.13.6R); the alternative approach needs documented reasons, three months' FCA notice and an auditor's report.
- A firm must not hold client money in a client bank account until it has received a duly countersigned acknowledgement letter from the bank (CASS 7.18.2R).
- An internal reconciliation is required each business day, as at the previous day's close, with any shortfall paid in or excess withdrawn by close of business that day (CASS 7.15.15R and 7.15.29R).
- An external reconciliation is required as regularly as necessary, with no more than one month between reconciliations (CASS 7.15.22R).
- If a firm fails, its client money is pooled and distributed to clients in proportion to their entitlements under CASS 7A.
What CASS 7 covers
CASS 7 is the chapter of the FCA's Client Assets Sourcebook that governs client money: cash an investment firm receives or holds for clients. Under CASS 7.10.1R it applies to money held in connection with MiFID business, designated investment business, and stocks and shares, innovative finance and lifetime ISA business. It covers stockbrokers, platforms, wealth managers, contracts for difference providers and similar firms. Its purpose is that, if the firm fails, client money is held separately, identified by client and returned quickly. For a plain-English definition, see our guide to what client money is, linked below.
Some money is outside the rules. Deposits held by a bank in its capacity as a bank are not client money (CASS 7.10.16R). Money a non-retail client transfers outright to the firm under a title transfer collateral arrangement, or TTCA, is not client money, but a firm must not enter into a TTCA over a retail client's money (CASS 7.11.1R). Money in a delivery versus payment transaction can be exempt for a short period if it settles within the limits in CASS 7.11.14R. For custody of securities, see CASS 6.
The normal approach and the alternative approach
CASS 7 gives 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, all client money must be paid directly into a client bank account, an account held in the firm's name as trustee for clients. Under the alternative approach in CASS 7.13.54G, client money is received into and paid out of the firm's own bank account, and the firm moves the correct amount to or from its client bank account each day after its internal reconciliation.
The alternative approach is only for business lines where the normal approach would create significant operational risks, such as complex or numerous transactions across several currencies and time zones. Before adopting it, a firm must document its reasons (CASS 7.13.55R), notify the FCA in writing at least three months ahead (CASS 7.13.57R), send the FCA an independent auditor's reasonable assurance report (CASS 7.13.58R) and hold a mandatory prudent segregation amount. Our guide to the CASS 7 alternative approach covers each condition and the daily mechanics.
Client bank accounts and acknowledgement letters
CASS 7.13.3R requires client money to be placed promptly with a central bank, an eligible bank or a qualifying money market fund. Cash and cheques received must be paid into a client bank account no later than the business day after receipt (CASS 7.13.32R). Deposits with banks in the firm's own group must not exceed 20 per cent of all client money held at any time, unless the firm has assessed that limit as disproportionate and notified the FCA (CASS 7.13.20R, 7.13.21AR and 7.13.21CR).
For each client bank account, the firm must complete and sign an acknowledgement letter, a standard letter in which the bank confirms the money is held for clients and cannot be used to settle the firm's own debts, and send it to the bank to countersign (CASS 7.18.2R(1)). The letter must follow the template in CASS 7 Annex 2. Unlike the insurance rules in CASS 5, CASS 7.18.2R(2) does not allow a grace period: a firm must not hold or receive client money in the account until it has received the duly countersigned letter.
Notice deposits, the 95-day limit and prudent segregation
As a starting point, client money in a client bank account must be withdrawable within one business day of a request (CASS 7.13.13R(2)(b)). CASS 7.13.13R(3A) allows a firm to place money in an account that cannot be withdrawn for up to 30 days, or for 31 to 95 days if it meets the conditions in CASS 7.13.14AR: a written policy, a written explanation to clients and ongoing management of the risk. These accounts, often called unbreakable deposits, cannot be used for money in a sub-pool, and CASS medium and large firms must report the amounts in the 31 to 60 and 61 to 95 day bands separately in the CMAR (SUP 16.14.7R).
Separately, CASS 7.13.41R allows a firm to 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. This is called prudent segregation. It requires a written policy approved by the governing body (CASS 7.13.43R) and an up-to-date record of the amounts (CASS 7.13.42R), and the money remains client money if the firm fails.
| Withdrawal period | Permitted? | Conditions |
|---|---|---|
| Within one business day | Yes | The default under CASS 7.13.13R(2)(b) |
| Up to 30 days | Yes | Not for money in a sub-pool |
| 31 to 95 days | Yes | Written policy, client explanation and risk management under CASS 7.13.14AR; reported separately in the CMAR |
| More than 95 days | No | Outside CASS 7.13.13R(3A) |
The internal client money reconciliation
CASS 7.15.15R requires an internal client money reconciliation each business day, based on the firm's records as at the close of business on the previous business day. It compares the client money requirement, what the firm should be holding for clients, with the client money resource, the balance on its client bank accounts. Under the normal approach the check is whether the resource at the previous day's close equalled the requirement at that time (CASS 7.15.16R(1)). The reconciliation uses the firm's own ledger values, not bank statements (CASS 7.15.13R), and the date, actions and outcome of each one must be recorded (CASS 7.15.7R).
The requirement must be calculated by one of the standard methods in CASS 7.16 (CASS 7.15.15R(2)). The individual client balance method adds up what the firm owes each client across all accounts and products, excluding negative balances (CASS 7.16.16R). The net negative add-back method works from the balance recorded for each client bank account and adds back any negative client balances, so one client's debt does not reduce what is held for others (CASS 7.16.17R). The second method may only be used by CASS 7 asset management firms and loan-based crowdfunding firms that do not carry out margined transactions (CASS 7.16.11R). A firm wanting any other method must notify the FCA and send it an auditor's report first (CASS 7.15.18R).
The external reconciliation and the deadlines
The external client money reconciliation compares the firm's records of each client bank account, by currency, with the bank's statement or confirmation (CASS 7.15.20R and 7.15.27R). CASS 7.15.22R requires it as regularly as necessary, with no more than one month between reconciliations, and as soon as reasonably practicable after the date it relates to. The firm must set the frequency by considering the volume, value and risk of its transactions (CASS 7.15.23R), and a firm that transacts daily should usually reconcile each business day (CASS 7.15.25G). Unless it reconciles daily, it must review the frequency at least annually (CASS 7.15.26R).
Any discrepancy must be investigated and resolved without undue delay, unless it arises solely from timing differences between the bank's and the firm's accounting systems (CASS 7.15.31R). While it is unresolved, the firm must assume the record showing the greater need for client money is correct and pay in its own money (CASS 7.15.32R).
| Requirement | Rule | Timing |
|---|---|---|
| Internal reconciliation | CASS 7.15.15R | Each business day, as at the previous day's close |
| Pay in a shortfall or withdraw an excess | CASS 7.15.29R | By close of business on the day the reconciliation is performed |
| External reconciliation | CASS 7.15.22R | No more than one month apart, and as soon as reasonably practicable after the reference date |
| Resolve external differences | CASS 7.15.31R | Without undue delay, unless solely a timing difference |
| Unresolved external difference | CASS 7.15.32R | Assume the greater need is right and pay in own money |
| Frequency review | CASS 7.15.26R | At least annually, unless reconciling daily |
Worked example: an internal reconciliation difference
An investment platform runs its internal client money reconciliation on Tuesday morning, as at close of business on Monday. The individual client balance method gives a requirement of £214,880,350.00. The client bank account balances at close on Monday total £214,861,350.00, an apparent shortfall of £19,000.00. CASS 7.15.29R requires the firm to determine the reason and, if a shortfall is real, pay it in by close of business on Tuesday.
The investigation finds that a client withdrawal of £19,000.00 was paid from a client bank account on Monday afternoon, but the client's ledger balance was not reduced until Tuesday because of a batch timing error. The requirement was overstated by £19,000.00 and no client money is missing. The firm records the cause, corrects the batch schedule and logs the event in its breach register. Had the investigation found a real shortfall, the firm would have had to pay it in from its own money before close of business on Tuesday.
| Line | Amount (GBP) |
|---|---|
| Client money requirement (individual client balance method) | 214,880,350.00 |
| Client money resource (client bank accounts at close) | 214,861,350.00 |
| Apparent shortfall | (19,000.00) |
| Client withdrawal paid but not yet posted to the ledger | 19,000.00 |
| Difference after correcting the requirement | 0.00 |
When the FCA must be told
CASS 7.15.33R requires a firm to inform the FCA in writing without delay if its client money records are materially out of date, inaccurate or invalid; if it will be unable to, or materially fails to, pay in a shortfall or withdraw an excess; if it will be unable to, or materially fails to, resolve an external reconciliation discrepancy; if it will be unable to, or materially fails to, perform internal or external reconciliations; or if it learns that in the preceding 12 months the amount segregated differed materially from what was required.
Every breach, notifiable or not, should be logged, because the auditor must list every rule breached in its annual client assets report. Our guide to CASS breach reporting explains how to notify and what a breach register should hold.
If the firm fails: pooling and distribution under CASS 7A
CASS 7A sets out what happens to client money if a firm fails. A primary pooling event occurs on the failure of the firm, on the vesting of its assets in a trustee, when the firm is required to stop holding client money, or when it tells the FCA it cannot correctly identify and allocate all valid claims in its records (CASS 7A.2.2R). When that happens, client money in the general pool is treated as a single notional pool for the clients entitled to it.
The firm, or its insolvency practitioner, must then distribute that pool as soon as reasonably practicable so that each client receives a sum in proportion to their client money entitlement (CASS 7A.2.4R). If the pool is short, every client shares the loss in proportion, which is why the daily reconciliation and prompt funding of shortfalls matter: they are what keeps the pool whole on the day it is needed.
Classification, reporting and audit
Firms are classified under CASS 1A as CASS large, medium or small by the highest amounts of client money and custody assets they held in the previous calendar year. A firm with more than £1 billion of client money is CASS large; one with £1 million to £1 billion is CASS medium; one with less than £1 million is CASS small, unless its custody assets put it in a higher category. Every firm must give a director or senior manager responsibility for CASS oversight, as our guide to CASS operational oversight explains, and CASS medium and large firms file the monthly CMAR.
Each year the firm's auditor sends the FCA a client assets report on whether its systems were adequate and whether it complied, described in our guide to the CASS audit. A firm whose daily reconciliations, acknowledgement letters and breach register are kept current has far less to prepare for either.
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 CASS 7?
The FCA's client money rules for investment firms that receive or hold money on behalf of clients.
How often must an internal client money reconciliation be performed?
Each business day, based on the firm's records as at the close of the previous business day (CASS 7.15.15R).
How often must an external client money reconciliation be performed?
As regularly as necessary, with no more than one month between reconciliations (CASS 7.15.22R). Firms that transact daily should usually reconcile daily.
When must a CASS 7 shortfall be paid in?
By close of business on the day the internal reconciliation is performed (CASS 7.15.29R).
What is the difference between the normal approach and the alternative approach?
Under the normal approach client money goes directly into a client bank account. Under the alternative approach it passes through the firm's own account and is segregated by a daily transfer, subject to extra conditions.
Can a firm hold client money before the acknowledgement letter is returned?
No. CASS 7.18.2R(2) prohibits holding or receiving client money in a client bank account until the duly countersigned acknowledgement letter has been received.
What happens to client money if an investment firm fails?
A primary pooling event occurs and client money is pooled and distributed so that each client receives a sum in proportion to their entitlement (CASS 7A.2.4R).
References
- FCA Handbook, CASS 7.10 Application and purpose
- 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, CASS 7.18 Acknowledgement letters
- FCA Handbook, CASS 7A.2 Primary pooling events
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.