Mike Ayres – Senior Manager
The CASS client money rules for investment business make up the largest section of the CASS Sourcebook. The following is a brief summary of what is expected under CASS 7, though of course it is recommended that anyone who is affected by these rules read them in full.
Who needs to be registered?
Where a company holds client money in connection with a MiFID or other investment business it is required to apply the rules set out in CASS 7.
There are certain opt-outs that may be available to firms holding client money.
For example, where they hold this money on behalf of professional clients, the client could provide written acknowledgement that they understand that the funds:
- will not be protected by the CASS client money rules;
- will not be segregated from the firm’s own money; and
- will be considered a general creditor if an event such as liquidation applying. (CASS 7.10.9-15)
What are a Firm’s obligations?
A business holding client funds under CASS 7 must promptly place client funds with one of the following:
- credit institutions;
- banks in other countries; and
- qualifying money market funds.
In all cases it is necessary for these funds to be segregated from the firm’s own money and detailed records kept of where the funds are held.
The firm must obtain acknowledgement from each bank that a client account is held with that the accounts is designated as a client account. (CASS 7 Annex 2)
A firm must segregate client funds from those it holds in its own name. In doing this it must maintain records so that it may, within two business days of a request, demonstrate how much client money is held for every individual client.
Under the ‘Normal’ approach to segregation client funds would be paid directly into a client bank account and any transactions required with client funds are made directly with this account. (CASS 7.13.6)
It must (amongst other things):
- Allocate any receipts to an individual client within 10 business days of receipt.
- Return funds due to clients within 1 business day or pay them into a client bank account.
- Act prudently at all times.
- Where it is identified that the client money accounts may be short, office money may be used to ’top-up’ the client account.
- Where unidentified amounts are received, they should be retained in a client account to ensure the protection of the funds.
- Any funds found not to be client funds should be promptly removed from the client accounts. (CASS 7.13.38A onwards)
Firms have an option to apply the ‘Alternative’ approach to segregation, using this a client money resource calculation is made daily and the office account used to correct the client account balance. This method must be approved by the FCA, and as a result all transactions may go through the office account. Where this is being considered, a thorough review of the required procedures would need to be carried out as there are additional requirements including a ‘reasonable amount’ of office money being held in the client account to cover potential shortfalls. (CASS 7.13.54)
Client Money Reconciliations
Internal client money reconciliations must be carried out daily which demonstrate that the funds the firms should hold for each client (record of the funds held for each individual client) agree to what it is actually holding (record of the client funds shown in the firm’s accounting records).
This would consider:
External client money reconciliations must also be carried at least once a month to demonstrate that the firm’s internal records agree to those of the third parties that actually hold the funds.
To read more on this, please read my blog on Client Money Reconciliations
There are alternative methods that may be applied with FCA approval.
Separate from any statutory audit requirement, a firm holding client money under CASS 7 will be required to obtain assurance from a registered auditor that it complies with the rules, this report is submitted by the audit firm directly to the FCA. (CASS 7.15.34)
To read more on this, please read my blog on Audit Requirements
A firm may allow ‘appointed representatives’ to use its FCA authorisation, where these are in place the firm is responsible for ensuring that its ‘representatives’ apply with the CASS rules. (CASS 7.13.34)
Understanding client money rules under CASS
The CASS client money rules are a complex and detailed area for good reason. The protection of your client’s money is imperative. At Menzies, we understand the rules and how they can impact on your company, we want to get to know you and your business so that we can provide relevant and tailored advice and help your business grow without encountering any unwelcome regulatory issues.
Please note that the above information is a summary of selected chapters of the FCA Handbook and should not be solely relied upon when making decisions. Please always ensure the appropriate professional advice is obtained to ensure compliance. The FCA Handbook contains the detailed rules and can be accessed here. This information is correct as at 18th November 2019.