FCA client money rules
FCA client money rules

The following Financial Services practice note provides comprehensive and up to date legal information covering:

  • FCA client money rules
  • Impact of Brexit on CASS and the FCA’s powers and requirements
  • FCA temporary transitional powers and CASS
  • FCA temporary permissions regime and CASS
  • Background to the client money rules
  • Major changes to the client money rules brought about since 2014
  • Changes to speed up the return of client money on insolvency
  • The impact that MiFID II had on FCA client assets requirements
  • Definition of client money
  • Application of the client money rules and opt-outs
  • More...

BREXIT: 11pm (GMT) on 31 December 2020 (‘IP completion day’) marked the end of the Brexit transition/implementation period entered into following the UK’s withdrawal from the EU. Following IP completion day, key transitional arrangements come to an end and significant changes begin to take effect across the UK’s legal regime. This document contains guidance on subjects impacted by these changes. Before continuing your research, see: Brexit and financial services: materials on the post-Brexit UK/EU regulatory regime.

Impact of Brexit on CASS and the FCA’s powers and requirements

Following the FCA’s decision to leave the EU, the UK government ‘onshored’ and preserved most EU and EU-derived law as it stood immediately before the UK’s departure. ‘Onshoring’ is the process of amending legislation and regulatory requirements so that they work in a UK-only context, including EU legislation that form part of UK law by virtue of the European Union (Withdrawal) Act 2018 (EU(W)A 2018).

The EU(W)A 2018, as amended by the European Union (Withdrawal Agreement) Act 2020, makes provision for the ratification and implementation in domestic law of the Withdrawal Agreement between the UK and the EU. The Withdrawal Agreement sets out the arrangements for the UK’s withdrawal from the EU. It includes a transition period (or, to use the UK government’s phraseology, an ‘implementation period’) beginning on 31 January 2020 and ending on 31 December 2020 (IP completion day). During the implementation period,

the UK will be treated, for most purposes, as if it were still an EU Member State with access to EU markets on current terms and, importantly, maintaining current passporting and Treaty rights.

If the UK and the EU fail to reach an agreement on financial services by IP completion day, the passporting regime will fall away and EEA firms would be unable to operate in the UK without UK authorisation as they currently do under the EEA financial services passporting regime set out in section 31(1)(b) and (c) and Schedule 3 (EEA Passport Rights) and Schedule 4 (Treaty Rights) of the Financial Services and Markets Act 2000 (FSMA 2000) (or, in the case of payments and e-money firms, the passporting rights established under the second Payment Services Directive (EU) 2015/2366 (PSD2) and the second Electronic Money Directive 2009/110/EC (EMD2), which were transposed into UK law by the Payment Services Regulations 2017, SI 2017/752 (PSRs), and the Electronic Money Regulations 2011, SI 2011/99 (EMRs), respectively). 

FCA temporary transitional powers and CASS

As a result of the onshoring process, HM Treasury gave the Bank of England (BoE), the Prudential Regulation Authority (PRA) and the FCA temporary transitional powers (TTP) to delay or modify firms’ regulatory obligations where those obligations have changed as a result of onshoring financial services legislation or where they apply to firms for the first time. These powers are predominantly set out in the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019, SI 2019/632, Pt 7 (see also explanatory memorandum). The aim of the powers is to support firms adjusting to new regulatory requirements arising from Brexit as a result of no agreement having been reached in relation to financial services after the end of the implementation period on 30 December 2020 (IP completion day).

The FCA has published a webpage setting out the key requirements where the TTP does not apply, one of which concerns application of the FCA’s Client Assets Sourcebook (CASS). The FCA notes that CASS will be disapplied for EEA branches of UK firms. These firms must (i) segregate UK client money from EEA branch money; and (ii) ensure that EEA branch money will no longer be held under the CASS statutory trust. 

The FCA has decided not to apply the TTP to these changes to increase the certainty of the scope of consumer protection and avoid costly legal confusion on insolvency.

FCA temporary permissions regime and CASS

On 20 December 2017, HM Treasury announced that, if necessary, it would introduce a temporary permissions regime for inbound passporting EEA firms and funds and a temporary recognition regime (TRR) for non-UK CCPs and central securities depositories (CSDs) to ensure that they could continue to operate in the EU for a limited period after the UK’s exit from the EU. It also said it would legislate if necessary to establish a financial services contracts regime (FSCR) to ensure that financial contracts that were not covered by the TPR would continue to be met. On the same day, statements were issued by the FCA and the PRA/BoE setting out how they would approach the temporary regimes.

From IPR completion day, TPR firms that hold client money, receive or hold client assets in connection with investment business or insurance mediation have to comply set out in new Chapter 14 of CASS (CASS 14). For more information about the requirements of CASS 14 for TPR firms, see Practice Note: Brexit and financial services—the temporary permissions regime (TPR)—Client assets and the TPR.

At the same time that the government announced the introduction of the TPR, it also said it would legislate if necessary to ensure that financial contracts that were not covered by the TPR would continue to be met. The UK government therefore established the financial services contracts regime (FSCR) via the Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019, SI 2019/405 (the FSCR Regulations). This legislation will be relevant where EEA firms which passported into the UK to carry on a regulated activity failed to notify the FCA that they wished to enter the TPR or were unsuccessful in securing authorisation at the end of it, but still have regulated business in the UK to run off. 

The FSCR will provide two discrete mechanisms:

  1. supervised run-off (SRO)—for EEA firms with UK branches or top-up permissions in the UK which do not enter the TPR, and for EEA firms which entered the TPR but did not secure a UK authorisation at the end

  2. contractual run-off (CRO)—for EEA services firms with no UK branch

CASS 14 rules relating to safeguarding client money and custody assets will apply to SRO firms to the same extent as TPR firms.

For more information about the FSCR, see Practice Note: Brexit and financial services—the financial services contracts regime (FSCR).

Background to the client money rules

The rules governing how a firm must safeguard and handle client money held in relation to its investment business are found in chapter 7 of the Clients Assets sourcebook (CASS 7), which forms part of the Financial Conduct Authority’s (FCA) Handbook. These rules provide more detail on the FCA's overarching requirement in Principle for Business 10 that 'a firm must arrange adequate protection for clients' assets when it is responsible for them'.

This Practice Note describes what does and does not amount to client money, the requirements contained in CASS 7 to pay client money into particular accounts, the need for segregation of that money, and for due diligence in relation to the entities with whom it is placed. It does not cover the way in which client money will be distributed on the event of a firm's insolvency (or 'pooling event'). These issues, which are dealt with by the rules in CASS 7A, are covered in Practice Note: Client money distribution and transfer.

Major changes to the client money rules brought about since 2014

The collapse of Lehmans highlighted how essential it is that firms adequately record the client assets they hold and effectively segregate them in accordance with CASS. However, as the FCA pointed out in its Business Plan 2013/14, the FCA's supervisory work has shown that a number of firms have inadequate records and ineffective segregation of client assets, heightening the risk that any departures from the market could prove disorderly, causing harm to clients, creditors and counterparties and the market as a whole. The FCA therefore recognises the importance of increasing firms' compliance and awareness of the rules in the CASS and the FCA is also carrying out a wider review of the client money and custody assets regime (collectively, client assets), in particular the rules and guidance in CASS 6 and CASS 7.

For example, on 6 September 2012, the Financial Services authority (FSA) issued CP12/22 as a combined Consultation Paper (CP) and Discussion Paper (DP) that proposed a number of changes to the 'client assets') regime for firms that undertake investment business. In addition to some changes required by the European Markets Infrastructure Regulation (Regulation EU/648/2012) (EMIR), the FSA proposed changes that could lead to a radical shift in how firms protect client money. The FSA also sought comment on some wider issues in relation to its fundamental review of the client assets regime with the aim of producing better results in the insolvency of an investment firm. See FSA CP12/22: Client assets regime: EMIR, multiple pools and the wider review for more information.

In July 2013, the FCA followed up FSA CP12/22 published consultation paper CP13/5: Review of the client assets regime for investment business proposing changes to its clients asset rules and which were informed by the responses it received to the discussion paper contained in FSA CP12/22. The consultation paper covered a number of matters relating to the client money and custody assets rules in CASS 6, CASS 7 and CASS 7A. For more information about the changes relating to CASS 6 and CASS 7A, see Practice Notes: Custody rules and Client money distribution and transfer respectively.

The proposed changes to the client money rules described in FSA CP12/22 and FCA CP 13/5 covered the following:

  1. the application of the client money rules

  2. the banking exemption (ie the exemption in CASS which allows firms with permission to accept deposits (banks) to hold money which would otherwise be client money as a deposit)

  3. trustee firms

  4. restrictions on switching out of a title transfer collateral arrangement (TTCA)

  5. delivery versus payment exclusion—transactions through a commercial settlement system

  6. delivery versus payment exclusion—regulated collective investment schemes

  7. payment of interest

  8. money ceasing to be client money

  9. transfer of business

  10. allocated but unclaimed client money

  11. segregation of client money

  12. client bank accounts (general)

  13. unbreakable client money term deposits'

  14. immediate segregation

  15. qualifying Money Market Funds (MMFs)

  16. physical receipts and allocation of client money

  17. prudent over-segregation of client money

  18. the alternative approach to segregation

  19. client money held by third parties

  20. client money relating to custody assets held at custodians or sub-custodians

  21. client money reconciliations and record-keeping

  22. acknowledgement letters

  23. the commodity futures trading commission part 30 exemption order, and

  24. the introduction of rules to permit firms to create ‘sub-pools’ of client money that belong to a defined subset of client beneficiaries

FSA CP12/22 and FCA CP 13/5 were followed up by FCA policy statement PS14/9 Review of the client assets regime for investment business. The amendments contained in PS 14/9 particularly focussed on CASS 6 (custody assets) and CASS 7 (client money) involved the deletion and replacement of entire sections of CASS 6 and 7. This Practice Note concerns the requirements set out in CASS 6 and discusses the amendments brought in through PS14/9, which were implemented in a three-stage process. Minor amendments were brought in on 1 July 2014 and major amendments where made on 1 December 2014 and on 1 June 2015. Table 1 in chapter 2 of the policy statement sets out in greater detail the dates that the rules will apply.

Please note that from 1 June 2015, all the rules and guidance in CASS 7.1 to 7.8 in force at that date moved to CASS 7.10 to 7.18 and CASS 7.19 came into force on 1 July 2014 (see Client money sub-pools below).

Also, in June 2013, the FCA published consultation paper CP14/9: Client Money held in Individual Savings Accounts which proposed amendments to the client money rules in response to changes made by the The Individual Savings Account (Amendment) Regulations 2014 (SI 2014/654) which came into force on 1 July 2014 and which allows consumers to use stocks and shares ISAs for both cash saving and investment purposes without distinguishing between the two. The consultation paper was followed by FCA policy statement PS14/10 Client money held in Individual Savings Accounts which made rules applicable from 1 July 2014 and which require all money held within stocks and shares ISAs managed by investment firms to be held as client money.

In addition, in March 2015, the FCA published Quarterly Consultation No.8 which consulted on minor amendments to CASS 7 relating to the use of the normal approach to client money segregation for certain regulated clearing arrangements and the delivery vs payment rule for regulated collective investment schemes. The FCA stated in Handbook Notice 21 that such changes were made on 23 April 2015 and became live on 1 June 2015 in line with the PS 14/9 changes.

In January 2016, the FCA published consultation paper CP16/4: Loan-based crowdfunding platforms and segregation of client money which consulted on rules to simplify client money requirements for firms that operate electronic systems in relation to lending (P2P platforms) and hold money in relation to both regulated and unregulated peer-to-peer business. The FCA followed this consultation with policy statement PS16/8: FCA Handbook changes regarding the segregation of client money on loan-based crowdfunding platforms, the Innovative Finance ISA, and the regulated activity of advising on peer-to-peer agreements which introduced rules to permit P2P platforms to elect to hold all their clients’ monies, in relation to both peer-to-peer and business-to-business agreements, in line with CASS 7. Firms are required to inform the FCA and their clients if they wish to make such an election and if they wish to cancel such an election. The policy statement also introduced a consequential amendment so that CASS 7 applies to innovative finance individual savings accounts.

Changes to speed up the return of client money on insolvency

Following the failure of Lehmans, the Treasury also created a specific insolvency regime for investment firms holding client assets, the Special Administration Regime (SAR). For more information about the SAR and the legislation that underpins it, see Practice Note: Special Administration for financial institutions. The SAR works with the CASS rules to create the mechanism under which client assets are dealt with in a failed investment firm. The SAR sets out three special objectives for administrators to:

  1. return client assets to customers as soon as reasonably practicable

  2. ensure timely engagement with market infrastructure bodies and authorities (eg clearing houses and exchanges), and

  3. rescue the firm as a going concern or wind it up in the best interests of its creditors

HM Treasury commissioned Peter Bloxham to undertake an independent review of the SAR and the final Bloxham Review Report, which was published in January 2014, contained a number of recommendations relating to the SAR regulations, the CASS rules and the procedures administrators follow in the event of an investment firm failure. As a result, on 9 March 2016, the FCA published discussion paper DP16/2: CASS 7A & the Special Administration Regime Review which set out the FCA’s response to the recommendations in the Bloxham Review Report and sought industry views into how the client money distribution rules in the CASS will function alongside the SAR. DP16/2 was published on the same day as Treasury consultation paper on proposed changes to the Investment Bank Special Administration Regulations (SI 2011/245) (IBSA Regulations).

Following the publication by HM Treasury of the draft Investment Bank (Amendment of Definition) and Special Administration (Amendment) Regulations 2017 (which were made on 16 March 2017 as SI 2017/443), the FCA published consultation paper CP17/2: CASS 7A & the Special Administration Regime Review on 23 January 2017. The consultation sought feedback on a number CASS proposals which had been shaped in line with the Treasury’s amendments to the IBSA Regulations.

On 25 July 2017, the FCA published policy statement PS17/18: CASS 7A and the special administration regime review which provides feedback on the consultation and sets out the FCA’s final rules. As a result, the FCA has made significant changes to the transfer and distribution of client money requirements contained in CASS 7A. For more information, see Practice Note: Client money distribution and transfer.

PS17/18 therefore made a number of consequential rule changes to CASS 7 to reflect the changes made to CASS 7A, including amendments relating to:

  1. treatment of client money (see CASS 7.11.33A R, CASS 7.11.34 R, CASS 7.11.40A R, CASS 7.11.40B G, CASS 7.11.47A R, CASS 7.11.47B G)

  2. segregation of client money (CASS 7.13.38A—CASS 7.13.41 R, CASS 7.13.45 R, CASS 7.13.49A R, CASS 7.13.53A R, CASS 7.13.65 R, CASS 7.13.72A R, CASS 7.13.73 R)

  3. records, accounts and reconciliations (CASS 7.15.15 R, CASS 7.15.15A G, CASS 7.15.21A R, CASS 7.15.21B G, CASS 7.15.26A R — CASS 7.15.21C R, CASS 7.15.32 R—CASS 7.15.32B G)

  4. the standard methods of internal client money reconciliation (CASS 7.16.1 G, CASS 7.16.33 R)

  5. statutory trust (CASS 7.17.2)

The impact that MiFID II had on FCA client assets requirements

As a result of the implementation of the recast Markets in Financial Instruments Directive (Directive 2014/65/EU) (MiFID II) and the Markets in Financial Instruments Regulation (Regulation (EU) No 600/2014) (MiFIR) (together the MiFID II framework), the FCA introduced changes to CASS requirements in policy statement PS 17/14: Markets in Financial Instruments Directive II implementation – Policy Statement II in light of the’safeguarding of client assets’ requirements contained in the MiFID II framework. Firms holding financial instruments or funds belonging to clients must now provide information on the safeguarding of client financial instruments or funds to all clients and potential clients, not just retail clients. For an overview of the MiFID II framework safeguarding of client assets requirements, see Practice Note: MiFID II conduct of business and investor protection requirements — Information provided to clients.

For more information on the MiFID II framework, see:

  1. MiFID and MiFID II—overview

  2. MiFID II and MiFIR—toolkit

  3. MiFID I, MiFID II and MiFIR—essentials

  4. MiFIR level 1 roadmap

  5. MiFID II level 1 roadmap

  6. MIFID II and MiFIR Level 1 Glossary

  7. MiFID II and MiFIR level 2 measures

  8. MiFID II and MiFIR level 3 measures

  9. UK implementation of MiFID II and MiFIR

Definition of client money

In order to understand the FCA's client money rules, an understanding of the ownership of the various types of money held by the firm is necessary. The FCA glossary defines 'money' as any form of money, including cheques and other payable orders. However, coins kept for the intrinsic value of the metal are not included. The FCA glossary also defines client money as, subject to the client money rules, money of any currency:

  1. that a firm receives or holds for, or on behalf of, a client in the course of, or in connection with, its 'MiFID business' (as defined in the FCA Glossary), or

  2. which, in the course of carrying on 'designated investment business' (as defined in the FCA Glossary) that is not MiFID business, a firm holds, or

  3. that a firm receives or holds for, or on behalf of a client in the course of, or in connection with its stocks and shares ISA business, or

  4. that a firm receives or holds for, or on behalf of a client in the course of, or in connection with, its innovative finance ISA business, or

  5. which a firm treats as client money in accordance with the client money rules.

The CASS 7.11 rules (previously CASS 7.2) contain a variety of circumstances in which money will become, or will cease to remain, client money, including:

  1. Where a client transfers money over to the firm in order to settle an upcoming liability—for example, money to pay for investments for that client. These types of transfers are known as title transfer collateral arrangements (TTCAs) and the money will generally not be treated as client money. However, as a result of the implementation of MiFID II framework requirements, since 3 January 2018, firms are prohibited from entering into TTCAs with retail clients and must terminate existing ones (see CASS 7.11.1(3) R). Also, firms have to consider the appropriateness of TTCAs with non-retail clients, taking account of the factors set out in CASS 7.11.4A R. In addition, since 1 December 2014, firms must have in place a written agreement made on a durable medium in relation to TTCAs between the firm and any new client which complies with the conditions of CASS 7.11.3R. Firms had until 1 June 2015 to ensure compliant written agreements were in place for existing clients. Since 1 June 2015, CASS 7.1.9 to CASS 7.11.13 sets out the process firms must follow should a client request the termination of a TTCA (which could lead to the client receiving protections under CASS that did not apply under the TTCA). This process includes the firm ensuring both the client’s request and, based on feedback, the firm’s response are documented. The rules also confirm that the termination of a TTCA need not amount to a termination of the entire agreement between that client and the firm in which the TTCA may have been established. Also, nothing in the final rules requires a firm to agree to terminate a TTCA if the client so requests. On agreeing to a request for protection the firm will also be obliged to notify the client of its agreement and to state when the protection would come into effect.

  2. Where there is a 'delivery versus payment' (DvP) transaction—for example, where a firm has a three-day window to make payment to a client, or to deliver to a client his investment after receipt of payment, in which case the client money rules will not apply. This is a common sense rule that prevents business from becoming overly bureaucratic, when a firm holds client money for a short period in connection with a purchase or sale. The rule was revised in December 2014 so that the exception is only permitted while carrying out a DvP transaction through a commercial settlement system (CSS) and only applies where

    1. the firm is a direct or sponsored member or participant in a CSS and

    2. the relevant transaction is not settled by a third party on behalf of the firm through that third party’s account held with the CSS

    In June 2015, the FCA revised the circumstances in which authorised fund managers (AFMs) can cease to treat money as client money for a one-day window while carrying out a DvP transaction for the purpose of setting a transaction in relation to units in a regulated collective investment scheme. An AFM will have to ensure that, where it is unable to pass money received from a client to the depositary of the fund which the AFM manages by close of the business day following receipt, it ceases to rely on the exemption and treats that money as client money. Firms are also obliged to obtain client's agreement to these arrangements

  3. Where the money is due and payable to the firm—for example, where a firm has purchased something on a client's behalf, or where fees are owing to the firm from the client, the client money rules do not apply. However, a firm is not permitted to raid a client bank account, and the circumstances in which a firm can retain client monies in settlement of debts will be governed by the contractual relationship between the parties.

  4. Commission rebate—for example, where a firm has agreed to rebate commission to a client, these sums will not be client money until they become due and payable to the client, whereupon they must be segregated in accordance with the CASS rules.

  5. Interest due to a client is client money. The changes made in July 2014 make it clear that firms are able to contractually agree how much interest on client money they will pay to clients. Where a firm is not going to pay all the interest on the client money to the clients, the clients must be notified of this in writing. Since 1 December 2014, CASS 7.11.33G (previously CASS 7.2.14BG) provides that wherever interest is paid to a client it should be segregated in accordance with the FCA's client money segregation requirements in CASS 7.13 or when contractually agreed with clients, and

  6. Discharge of fiduciary duty—a number of changes were introduced in December 2014 so that money ceases to be client money if it is:

    1. paid to a third party on the instructions of, or with the specific consent of, the client (unless it is being transferred to an exchange, clearing house or intermediate broker in the course of effecting a transaction under CASS 7.14.2R, in which case it will remain client money)

    2. paid to a third party pursuant to an obligation on the firm where the obligation arises under law which is applicable to the firm as a result of the nature of the business being undertaken by the firm for its client (eg to Her Majesty's Revenue and Customs)

    3. transferred under the 'transfer of business' rules set out in CASS 7.11.42R or the 'transfer of business: de minimis sums' rules set out in CASS 7.11.44R)

    4. (subject to CASS 7.11.38R) paid into a bank account in the name of the client (not being an account which is also in the name of the firm)

    5. paid to the firm where it is due and payable to the firm in accordance with CASS 7.11.25R

    6. paid to the firm as an excess in the client bank account (see CASS 7.11.29)

    7. paid by an authorised central counterparty to a clearing member other than the firm in connection with a porting arrangement in accordance with CASS 7.11.35R

    8. paid by an authorised central counterparty directly to the client in accordance with the procedure described CASS 7.11.36R

    9. transferred by the firm to a clearing member in connection with a regulated clearing arrangement and the clearing member remits payment to another firm or to another clearing member, or to the indirect clients of the firm in accordance with CASS 7.11.37R (1) and (2)

  7. Transfer of business—CASS 7.11.41G to CASS 7.11.47R (which were introduced on 1 December 2014 as CASS 7.2.17AG to CASS 7.2.17GR) sets out the requirements when transferring client money to a third party in the context of a business transfer and the notifications that must accompany such transfers. Firms have three options when client money to a third party as part of a transfer of business:

    1. obtain consent from the client at the time of transfer, or

    2. include a clause in its terms of business with the client, which complies with CASS 7.11.42 (3)R. This requires firms to commit to transferring the sums to another firm who will hold those sums under the client money rules or to exercise all due skill, care and diligence in assessing whether the person to whom the client money is being transferred will apply adequate measures to protect these sums, or

    3. if the amount of money held is less than £25 in the case of a retail client or £100 for any other client, the transfer can take place without consent

    Where a transfer is to take place under (b) and (c), the firm will be required to notify the FCA seven days before and the relevant client seven days after the transfer. The notice to the client must include whether the sums have been transferred in accordance with the client money rules and, if not, how they will be held by the transferee firm, the extent of any protection provided under a compensation scheme and the option to have the sums transferred returned to the client at the client's request

  8. Unclaimed client money (CASS 7.11.47A to CASS 7.11.55)—The unclaimed client money rules were significantly amended in December 2014 and July. Subject to a de minimis threshold of £25 for retail

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