Key takeaways
- Client money is money an FCA-regulated investment firm receives or holds for a client in connection with its business, which it must protect under CASS 7.
- Client money is held on a statutory trust, so it does not belong to the firm and is protected if the firm fails.
- Payment and e-money firms protect customer funds under different rules, called safeguarding, now set out in CASS 15.
- Both regimes depend on daily reconciliation of what is owed to clients against what is held for them.
What client money is
In the UK, client money is money that an investment firm, such as a stockbroker, wealth manager, investment platform or contracts for difference provider, receives or holds for, or on behalf of, a client in the course of its business. Cash a client deposits to buy shares, the proceeds of a sale awaiting payment to the client, and dividends received for the client are all typical examples.
Not every sum a firm holds is client money. Money that is due and payable to the firm, such as fees it has earned, is the firm's own once it is due. Money held under a title transfer arrangement with a professional client may also fall outside the rules. Firms must identify, product by product, when client money arises and when it stops being client money, and record that analysis.
The FCA's client money rules, in CASS 7, require firms to keep that money separate from their own, record it by client, reconcile it daily and protect it if the firm fails. The rules exist because clients trusting a firm with cash should not become unsecured creditors if the firm goes into administration.
The statutory trust
Client money is held on a statutory trust. That means it is held by the firm as trustee for its clients, not as part of the firm's own assets. If the firm fails, client money is returned to clients through a distribution process, separate from the claims of the firm's other creditors.
Payment and e-money firms work differently. Their customer funds are protected by safeguarding under the Electronic Money Regulations, the Payment Services Regulations and CASS 15, which does not currently use a statutory trust. The FCA proposed a trust model for payments as part of its longer-term reforms, but it is not in force. Our guide to the safeguarding statutory trust explains where that stands.
| Client money (investment firms) | Safeguarding (payment and e-money firms) | |
|---|---|---|
| Rules | CASS 7 | EMRs, PSRs and CASS 15 |
| Legal protection | Statutory trust | Segregation or insurance or guarantee; no statutory trust currently |
| Internal reconciliation | Each business day | Each reconciliation day |
| External reconciliation | At least monthly | Each reconciliation day |
| Regular return | CMAR, monthly, CASS medium and large firms only | Monthly safeguarding return |
How protection works in practice
The protection works only if the firm's records are accurate. On failure, the administrator relies on the firm's books to identify each client's entitlement and the money held in client bank accounts. If records are incomplete or the reconciliation has not been done, the distribution is delayed and clients may receive less than they are owed. The daily internal client money reconciliation, and the at least monthly external reconciliation with banks, are what make the trust effective in practice.
That is why the FCA treats reconciliation failures seriously even when no money is missing. A firm that cannot show its daily position cannot show that clients are protected, and the FCA has fined firms for client money failures where clients ultimately lost nothing.
Firms also keep a CASS resolution pack under CASS 10A, so an administrator can find every client bank account, agreement and record quickly. See our guide to the resolution pack.
How Safeheld supports it
Safeheld runs client money and safeguarding reconciliations daily, applies the right rules to each pool of money, and keeps the records auditors and administrators rely on. See what CASS is, what safeguarding is and CASS 6 and CASS 7 software.
Frequently asked questions
What is client money?
Money an FCA-regulated investment firm receives or holds for a client in connection with its business, protected under CASS 7.
Is client money held on trust?
Yes. Client money is held on a statutory trust for clients.
Is safeguarding the same as client money?
No. Safeguarding applies to payment and e-money firms under different rules, now in CASS 15, and does not currently use a statutory trust.
How often must client money be reconciled?
Internally each business day and externally at least monthly.
References
- FCA Handbook, CASS 7.15 Records, accounts and reconciliations
- FCA Handbook, CASS 15.8 Records, accounts and reconciliations
- FCA, PS25/12: Changes to the safeguarding regime for payments and e-money firms
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.