CASS Client Assets Sourcebook

Part

CASS Client Assets Sourcebook

Printed on: 01/11/2024

Rulebook at: 31/12/2008

Chapters

CASS 1 Application and general provisions
CASS 2 Non-directive custody rules
CASS 3 Collateral
CASS 4 Non-directive client money rules
CASS 5 Client money: insurance mediation activity
CASS 6 Custody: MiFID business
CASS 7 Client money: MiFID business
CASS 8 Mandates
Transitional Provisions and Schedules

CASS 1

Application and general provisions

CASS 1.1

Application and purpose

01/12/2004

Application

CASS 1.1.1

CASS applies to a firm as specified in the remainder of this chapter.

01/12/2004

Purpose

CASS 1.1.2

The purpose of this chapter is to set out to whom, for what activities, and within what territorial limits the rules, evidential provisions and guidance in CASS apply.

01/12/2004

CASS 1.2

General application: who? what?

01/12/2004

General application: who?

CASS 1.2.1

The rules in CASS 1.2 set out the maximum scope of this sourcebook. The application of CASS is modified for certain activities by 1 CASS 1.4. Also particular chapters or sections of CASS may have provisions which limit their application.

01/12/2004

CASS 1.2.2

CASS applies to every firm, except as provided for in CASS 1.2.3 R, with respect to the carrying on of:

(1) all regulated activities except to the extent that a provision of CASS provides for a narrower application; and
(2) unregulated activities to the extent specified in any provision of CASS.

01/12/2004

CASS 1.2.3

CASS does not apply to:

(1) an ICVC; or
(2) an incoming EEA firm other than an insurer, with respect to its passported activities; or
(3) a UCITS qualifier.

01/12/2004

CASS 1.2.4

With the exception of this chapter and the insurance client money chapter, CASS does not apply to:

(1) an authorised professional firm with respect to its non-mainstream regulated activities; or
(2) the Society.

01/11/2007

CASS 1.2.5

The insurance client money chapter does not apply to an authorised professional firm with respect to its non-mainstream regulated activities, which are insurance mediation activities, if:

(1) the firm's designated professional body has made rules which implement article 4 of the Insurance Mediation Directive;
(2) those rules have been approved by the FSA under section 332(5) of the Act; and
(3) the firm is subject to the rules in the form in which they were approved.

01/11/2007

General application: what?

Application for retail clients, professional clients and eligible counterparties

CASS 1.2.8

(1) CASS applies directly in respect of activities conducted with or for all categories of clients.
(2) In CASS, except in the insurance client money chapter, MiFID custody chapter and MiFID client money chapter, the term customer refers to retail clients and professional clients, but not eligible counterparties. Where relevant, each of the provisions of CASS makes clear whether it applies to activities carried on with or for retail clients or professional clients, or both.
(3) The insurance client money chapter does not generally distinguish between different categories of client. However, the term consumer is used for those to whom additional obligations are owed, rather than the term retail client. This is to be consistent with the client categories used in the Insurance: New Conduct of Business sourcebook.
(4) Each provision in the MiFID custody chapter and the MiFID client money chapter makes it clear whether it applies to activities carried on or for retail clients, professional clients or both. There is no further modification of the rules in these chapters in relation to activities carried on for eligible counterparties. Such clients are treated in the same way as other professional clients for the purposes of these rules.

06/01/2008

Investments and money held under different regimes

CASS 1.2.10

Where a firm is subject to both the non-directive custody chapter and the MiFID custody chapter, it must ensure segregation between designated investments held under each chapter, including that designated investments held under different chapters with the same third party, are held in different, separately designated, accounts.

01/11/2007

CASS 1.2.11

Where a firm is subject to more than one of the non-directive client money chapter, the insurance client money chapter and the MiFID client money chapter, it must ensure segregation between money held under each chapter, including that money held under different chapters is held, in different, separately designated, client bank accounts or client transaction accounts.

01/11/2007

CASS 1.2.12

The purpose of the rules regarding the segregation of investments and money held under different regimes is to reduce the risk of confusion between assets held under different regimes either on an on-going basis or on the failure of a firm or a third party holding those assets.

01/11/2007

CASS 1.2.13

A firm may opt to hold under a single chapter designated investments that would otherwise be held under different chapters (see CASS 6.1.7 G). A firm may also opt to hold under a single chapter money that would otherwise be held under different chapters (see CASS 4.1.1A R, CASS 5.1.1 R (3) and CASS 7.1.3R (1)).

01/11/2007

CASS 1.3

General application: where?

01/12/2004

CASS 1.3.1

The rules in CASS 1.3 set out the maximum territorial scope of this sourcebook. Particular rules may have express territorial limitations.

01/12/2004

UK establishments: general

CASS 1.3.2

Except as provided for in CASS 1.2.3 R (2), CASS applies to every firm, in relation to regulated activities carried on by it from an establishment in the United Kingdom.

01/12/2004

UK firms: passported activities from EEA branches

CASS 1.3.3

CASS applies to every UK firm, other than an insurer, in relation to passported activities carried on by it from a branch in another EEA State.

01/12/2004

CASS 1.3.4

CASS does not apply to an incoming ECA provider acting as such.

01/11/2007

CASS 1.4

Application: particular activities

01/12/2004

Occupational pension scheme firms (OPS firms)

CASS 1.4.1

In the case of OPS activity undertaken by an OPS firm, CASS applies with the following general modifications:

(1) references to customer are to the OPS or welfare trust, whichever fits the case, in respect of which the OPS firm is acting or intends to act, and with or for the benefit of which the relevant activity is to be carried on; and
(2) if an OPS firm is required by any rule in CASS to provide information to, or obtain consent from, a customer, that firm must ensure that the information is provided to, or consent obtained from, each of the trustees of the OPS or welfare trust in respect of which that firm is acting, unless the context requires otherwise.

01/12/2004

Stock lending activity with or for customers

CASS 1.4.2

(1) The non-directive custody chapter and the non-directive client money chapter apply in respect of any stock lending activity that is not MiFID business undertaken with or for a customer by a firm. If the stock lending activity involves MiFID business or if the firm has opted to comply with the MiFID custody chapter or the MiFID client money chapter with respect to its non-MiFID business, then the MiFID custody chapter and the MiFID client money chapter apply.
(2) The collateral rules apply, where relevant, in respect of stock lending activity, whether or not the activity amounts to MiFID business

01/11/2007

Corporate finance business

CASS 1.4.3

(1) The non-directive custody chapter and the non-directive client money chapter apply in respect of corporate finance business that is not MiFID business undertaken by a firm. If the corporate finance business involves MiFID business or if the firm has opted to comply with the MiFID custody chapter or the MiFID client money chapter with respect to its non-MiFID business, then the MiFID custody chapter and the MiFID client money chapter apply.
(2) The collateral rules apply, where relevant, in respect of corporate finance business, whether or not the activity amounts to MiFID business.

01/11/2007

Oil market activity and energy market activity

CASS 1.4.4

(1) The non-directive custody chapter and the non-directive client money chapter apply in respect of oil market activity and other energy market activity that is not MiFID business undertaken by a firm. If the energy market activity (including oil market activity) involves MiFID business or if the firm has opted to comply with the MiFID custody chapter or the MiFID client money chapter with respect to its non-MiFID business, then the MiFID custody chapter and the MiFID client money chapter apply.
(2) The collateral rules apply, where relevant, in respect of energy market activity, whether or not the activity amounts to MiFID business.

01/11/2007

Appointed representatives and tied agents

CASS 1.4.5

(1) Although CASS does not apply directly to a firm's appointed representatives, a firm will always be responsible for the acts and omissions of its appointed representatives in carrying on business for which the firm has accepted responsibility (section 39(3) of the Act). In determining whether a firm has complied with any provision of CASS, anything done or omitted by a firm's appointed representative (when acting as such) will be treated as having been done or omitted by the firm (section 39(4) of the Act ). Equally, CASS does not apply directly to tied agents. A MiFID investment firm will be fully and unconditionally responsible for the acts and omission of the tied agents that it appoints.
(2) Firms should also refer to SUP 12 (Appointed representatives), which sets out requirements which apply to firms using appointed representatives and tied agents.

01/11/2007

Depositaries

CASS 1.4.6

The non-directive client money chapter and the MiFID client money chapter do not apply to a depositary when acting as such.

01/11/2007

CASS 1.4.7

The remainder of CASS applies to a depositary, when acting as such, with the following general modifications:

(1) except in the mandate rules, 'client' means 'trustee', 'trust' or 'collective investment scheme' as appropriate; and
(2) in the mandate rules, 'client' means 'trustee' 'collective investment scheme' or 'collective investment scheme instrument' as appropriate.

01/11/2007

CASS 1.4.8

(1) CASS does not apply to a trustee firm which is not a depositary or the trustee of a personal pension scheme or stakeholder pension scheme, except for the MiFID custody chapter, the MiFID client money chapter and the mandate rules.
(2) In the MiFID custody chapter, the MiFID client money chapter and the mandate rules, 'client' means 'trustee', 'trust', 'trust instrument' or 'beneficiary', as appropriate.

01/11/2007

CASS 1.5

Application: electronic media and E-Commerce

01/12/2004

Application to electronic media

CASS 1.5.1

GEN 2.2.14 R (References to writing) has the effect that electronic media may be used to make communications that are required by the Handbook to be "in writing" unless a contrary intention appears.

01/12/2004

CASS 1.5.2

For any electronic communication with a customer, a firm should:

(1) have in place appropriate arrangements, including contingency plans, to ensure the secure transmission and receipt of the communication; it should also be able to verify the authenticity and integrity of the communication; the arrangements should be proportionate and take into account the different levels of risk in a firm's business;
(2) be able to demonstrate that the customer wishes to communicate using this form of media; and
(3) if entering into an agreement, make it clear to the customer that a contractual relationship is created that has legal consequences.

01/12/2004

CASS 1.5.3

Firms should note that GEN 2.2.14 R does not affect any other legal requirement that may apply in relation to the form or manner of executing a document or agreement.

01/12/2004

CASS 2

Non-directive custody rules

CASS 2.1

Custody

01/12/2004

Application and purpose

CASS 2.1.1

This chapter (the custody rules) applies to a firm when it is safeguarding and administering investments other than:

(1) when it is holding financial instruments belonging to a client in the course of conducting MiFID business; or
(2) in the circumstances set out in CASS 2.1.9 R.

01/11/2007

CASS 2.1.2

The regulated activity of safeguarding and administering investments covers both the safeguarding and administration of assets (without arranging) and arranging the safeguarding and administration of assets, when those assets are either safe custody investments or custody assets. A safe custody investment is, in summary, a designated investment that a firm receives or holds on behalf of a client. Custody assets include designated investments, and any other assets that the firm holds or may hold in the same portfolio as a designated investment held for or on behalf of the client.

01/12/2004

CASS 2.1.2A

The MiFID custody chapter applies when a firm holds financial instruments belonging to a client in the course of its MiFID business.

01/11/2007

CASS 2.1.3

Firms must apply the custody rules to those custody assets which are not safe custody investment in a manner appropriate to the nature and value of those custody assets.

01/12/2004

CASS 2.1.4

The term 'client' refers to an eligible counterparty, a professional client or a retail client. However, the term 'customer' does not include an eligible counterparty.

01/11/2007

CASS 2.1.5

In accordance with article 42 of the Regulated Activities Order, a firm ("I") will not be arranging safeguarding and administration of assets if it introduces a client to another firm whose permitted activities include the safeguarding and administration of investments, or to an exempt person acting as such, with a view to that other firm or exempt person:

(1) providing a safe custody service in the United Kingdom; or
(2) arranging for the provision of a safe custody service in the United Kingdom by another person;

and the other firm, exempt person or other person who is to provide the safe custody service is not in the same group as I, and does not remunerate I.

01/12/2004

CASS 2.1.6

Firms are reminded that, under CASS 1.3.3 R, the custody rules do not apply to an incoming EEA firm, other than an insurer, with respect to its passported activities. The application of the custody rules to the activity of a firm is also dependent on the location from which the activity is undertaken (see CASS 1.3.2 R).

01/12/2004

CASS 2.1.7

The Home State regulator of an incoming EEA firm has regulatory oversight for that firm's custody activities; if an EEA firm wishes to comply with the custody rules it should apply to its Home State regulator for permission to do so.

01/12/2004

CASS 2.1.8

The FSA has regulatory oversight for a UK firm's custody activities in an EEA Host State; if a firm wishes to comply with an EEA Host State regime for regulating custody activities it should apply to the FSA for a waiver from the custody rules.

01/12/2004

CASS 2.1.9

The custody rules do not apply to:

(1) a firm when it safeguards and administers a designated investment on behalf of an affiliated company, unless:

(a) the firm has been notified that the designated investment belongs to a client of the affiliated company; or
(b) the affiliated company is a client dealt with at arm's length;

(2) a firm, when it acts as the operator of a regulated collective investment scheme, in relation to activities carried on for the purpose of, or in connection with, the operation of the scheme;
(3) a personal investment firm when it temporarily holds a designated investment, other than in bearer form, belonging to a client, if the firm:

(a) keeps it secure, records it as belonging to that client, and forwards it to the client or in accordance with the client's instructions, as soon as practicable after receiving it;
(b) retains the designated investment for no longer than the firm has taken reasonable steps to determine is necessary to check for errors and to receive the final document in connection with any series of transactions to which the documents relate; and
(c) makes a record, which must then be retained for a period of 3 years after the record is made, of all the designated investments handled in accordance with (3)(a) and (b) together with the details of the clients concerned and of any action the firm has taken;

(4) a MiFID investment firm or a third country investment firm that has opted to act in accordance with the MiFID custody chapter in respect of designated investments that it safeguards and administers which are subject to the opt-in to the MiFID custody chapter.

01/11/2007

CASS 2.1.10

Administrative convenience alone should not lead a personal investment firm to rely on CASS 2.1.9 R(3). Personal investment firms should consider what is in the client's interest and not rely on CASS 2.1.9 R(3) as a matter of course.

01/12/2004

CASS 2.1.10A

Firms that safeguard and administer designated investments including financial instruments and that are subject to both sets of custody rules, should refer to CASS 6.1.17 R (Opt-in to the MiFID custody rules) which contains provisions enabling these firms to opt to comply solely with the MiFID custody chapter. This is also relevant to the equivalent business of a third country investment firm.

01/11/2007

CASS 2.1.11

A firm must accept the same level of responsibility to its client for any nominee company controlled by the firm in respect of any requirements of the custody rules.

01/12/2004

General purpose

CASS 2.1.12

Principle 10 (Clients' assets) requires a firm to arrange adequate protection for clients' assets when it is responsible for them. As part of these protections, the custody rules require a firm to take appropriate steps to protect safe custody investments for which it is responsible. The rules are designed primarily to restrict the commingling of client and firm's assets and minimise the risk of the client's safe custody investments being used by the firm without the client's agreement or contrary to the client's wishes, or being treated as the firm's assets in the event of its insolvency.

01/12/2004

Delivery versus payment transactions

CASS 2.1.13

A designated investment need not be treated as a safe custody investment in respect of a delivery versus payment transaction through a commercial settlement system if it is intended that the designated investment is either to be:

(1) in respect of a client's purchase, due to the client within one business day following the client's fulfilment of a payment obligation; or
(2) in respect of a client's sale, due to the firm within one business day following the fulfilment of a payment obligation;

unless the delivery or payment by the firm does not occur by the close of business on the third business day following the date of payment or delivery of the designated investment by the client.

01/12/2004

CASS 2.1.14

Until a transaction of the type described in CASS 2.1.13 R settles, a firm may segregate money (in accordance with the client money rules) instead of the client's safe custody investment.

01/12/2004

Modification of scope

CASS 2.1.15

It is not necessary to apply the full range of the custody rules to all types of firm. For example, certain firms already have extensive obligations imposed on them under the general law with regard to the correct treatment of client's safe custody investment. Likewise the full range of the rules is not appropriate for a firm that only arranges safe custody services for its clients. Consequently, the rules provide for appropriate differentiation of scope and application of the rules.

01/12/2004

Trustees and depositaries

CASS 2.1.16

When a trustee firm or depositary acts as a custodian for a trust or collective investment scheme and

(1) the trust or scheme is established by written instrument; and
(2) the trustee firm or depositary has taken reasonable steps to determine that the relevant law and provisions of the trust instrument or scheme constitution will provide protections at least equivalent to the custody rules for the trust property or scheme property,

the trustee firm or depositary need comply only with the custody rules listed in CASS 2.1.18 R.

01/12/2004

CASS 2.1.17

The reasonable steps referred in CASS 2.1.16 R(2) could include obtaining an appropriate legal opinion to that effect.

01/12/2004

CASS 2.1.18

This table belongs to CASS 2.1.16 R.

Reference

Rule

CASS 2.1.1 R to CASS 2.1.12 G

Application

CASS 2.1.16 R to CASS 2.1.20 G

Trustees and depositaries

CASS 2.2.3 R to CASS 2.2.7 R

Segregation

CASS 2.2.10 R to CASS 2.2.12 G

Registration and recording

CASS 2.2.15 R (2), CASS 2.2.16 G and CASS 2.2.17 R

Holding

CASS 2.5.4 R to CASS 2.5.10 R

Stocklending

CASS 2.6.2 R to CASS 2.6.14 R

Reconciliation

CASS 2.6.15 R to CASS 2.6.16 R

Records

01/12/2004

CASS 2.1.19

When a trustee firm or depositary within CASS 2.1.16 R arranges for or delegates the provision of safe custody services by or to another person, the trustee firm or depositary must also comply with CASS 2.2.18 R, CASS 2.2.23 R (Assessment of a custodian), CASS 2.3.7 R (Risk disclosure) and CASS 2.4.2 R (Custodian agreement) in addition to the custody rules listed in CASS 2.1.18 R.

01/12/2004

CASS 2.1.20

A trustee firm or depositary that just arranges safeguarding and administration of assets may also take advantage of the exemption in CASS 2.1.21 R (Arrangers).

01/12/2004

Arrangers

CASS 2.1.21

Only the custody rules in CASS 2.1.22 R apply to a firm when arranging safeguarding and administration of assets.

01/12/2004

CASS 2.1.22

This table belongs to CASS 2.1.21 R.

Reference

Rule

CASS 2.1.1 R to CASS 2.1.12 G

Application

CASS 2.1.21 R to CASS 2.1.22 R

Arrangers

CASS 2.2.18 R, CASS 2.2.21 G to CASS 2.2.22 G

Assessment of custodian

CASS 2.3.7 R to CASS 2.3.9 G

Risk disclosures

CASS 2.6.15 R

Records

01/12/2004

Depositary receipt business

CASS 2.1.23

For firms that issue depositary receipts, the underlying security is held for the benefit of the depositary receipt holder. Clients for whom depositary receipts are held will be known to the firm and will have the necessary agreements in place. However, other persons who purchase depositary receipts in the secondary market will not be known to the firm until after they become clients. Consequently, firms that issue depositary receipts will accordingly not be able to comply with certain custody rules.

01/12/2004

CASS 2.1.24

Firms that hold securities, which are represented by depositary receipts or documents which have the characteristics of depositary receipts and these receipts or documents entitle the holders to all dividends and other rights given by the underlying securities held by the firm, need not comply with the rules listed in CASS 2.1.25 R in respect of clients who acquire the depositary receipts in the secondary market:

01/12/2004

CASS 2.1.25

This table belongs to CASS 2.1.24 R.

Reference

Rule

CASS 2.2.8 R

Segregation

CASS 2.2.23 R

Assessment of custodian

CASS 2.3.2 R to CASS 2.3.5 R

Client agreement

CASS 2.3.7 R to CASS 2.3.9 G

Risk disclosures

CASS 2.3.12 R to CASS 2.3.16 R

Production and despatch of statements

CASS 2.3.17 R to CASS 2.3.21 R

Content of client statements

01/12/2004

CASS 2.1.26

When a firm arranges safeguarding and administration of assets in respect of depositary receipts, it need not comply with CASS 2.3.7 R (risk disclosures) for that business.

01/12/2004

CASS 2.2

Segregation, registration and recording, and holding

01/12/2004

Application

CASS 2.2.1

CASS 2.2 applies in accordance with CASS 2.1

01/12/2004

CASS 2.2.2

The rules governing the segregation, registration or recording, and holding of a client's safe custody investments require a clear distinction to be maintained, to the extent practicable, between safe custody investment held for the clients and those designated investments held for the firm.

01/12/2004

General

CASS 2.2.3

A firm must segregate safe custody investments from its own designated investments except to the extent required by law or permitted by the custody rules.

01/12/2004

CASS 2.2.4

A firm which is a trustee is bound in relation to safe custody investments by the terms of its trust and applicable law and CASS 2.2.3 R does not modify those obligations.

01/12/2004

CASS 2.2.5

A firm must ensure that if a safe custody investment is recorded in an account with itself, the title of that account makes it clear that the safe custody investment belongs to a client, and is segregated from the firm's designated investments.

01/12/2004

CASS 2.2.6

CASS 2.2.5 R refers to the firm's own records.

01/12/2004

CASS 2.2.7

A firm must require that if a safe custody investment is recorded in an account with a custodian, the custodian makes it clear in the title of the account that the safe custody investment belongs to one or more clients of the firm.

01/12/2004

Affiliated companies

CASS 2.2.8

If a firm holds a designated investment on behalf of an affiliated company, it must not hold that designated investment in the same account as a safe custody investment (of a client who is not an affiliated company) unless CASS 2.1.9 R(1) (Application) applies, and consequently, the firm is applying the custody rules to that investment.

01/12/2004

Registration and recording: purpose

CASS 2.2.9

The registration and recording rules are designed to safeguard and secure a client's entitlement. The rules are not in order of priority and firms are expected to register and record the legal title of a safe custody investment in such a manner as to provide the client with appropriate protection.

01/12/2004

CASS 2.2.10

To the extent practicable, a firm must effect appropriate registration or recording of legal title to a safe custody investment in the name of:

(1) the client (or where appropriate, the trustee firm), unless the client is an authorised person acting on behalf of its client, in which case it may be registered in the name of the client of that authorised person;
(2) a nominee company which is controlled by:

(a) the firm;
(b) an affiliated company;
(c) a recognised investment exchange or designated investment exchange;
(d) a custodian;

(3) a custodian if:

(a) the safe custody investment is subject to the law or market practice of a jurisdiction outside the United Kingdom and the firm has taken reasonable steps to determine that it is in the client's best interests to register or record it in that way, or that it is not feasible to do otherwise, because of the nature of the applicable law or market practice; and
(b) the firm has notified the client in writing;

(4) the firm if:

(a) the safe custody investment is subject to the law or market practice of a jurisdiction outside the United Kingdom and the firm has taken reasonable steps to determine that it is in the client's best interests to register or record it in that way, or that it is not feasible to do otherwise, because of the nature of the applicable law or market practice; and
(b) the firm has notified the client in accordance with CASS 2.3.10 R (Risk disclosures) if an eligible counterparty or a professional client, or obtained his prior written consent if a retail client; or

(5) any other person, in accordance with the client's specific written instruction, provided:

(a) the firm complies with CASS 2.3.11 R (Risk disclosures); and
(b) in the case of a retail client, the other person is not an associate of the firm.

01/11/2007

CASS 2.2.11

If the client in CASS 2.2.10 R(1) is an authorised person and the safe custody investments belong to clients of that authorised person, it is the responsibility of that authorised person to ensure that the registering or recording is appropriate for the client concerned.

01/12/2004

CASS 2.2.12

A firm that applies CASS 2.2.10 R (3) or (4) will be expected to demonstrate that adequate investigations have been made of the market concerned by reference to local sources which may include appropriate legal opinion.

01/12/2004

CASS 2.2.13

A firm may register or record legal title to its own designated investment in the same name as that in which legal title to a safe custody investment is registered or recorded, but only if:

(1) the firm's designated investments are separately identified in the firm's records from safe custody investment; or
(2) the firm registers or records a safe custody investment in accordance with CASS 2.2.10 R(4).

01/12/2004

Holding: purpose

CASS 2.2.14

The following rules are designed to provide an appropriate level of protection for a safe custody investment which the firm physically holds. A firm should ensure that the arrangements for holding any document of title to a safe custody investment are appropriate to the value and risk of loss of the safe custody investment concerned, and that there are adequate controls designed to safeguard it from damage, misappropriation or other loss.

01/12/2004

CASS 2.2.15

A firm must hold any document of title to a safe custody investment either in the physical possession of the firm or:

(1) for a retail client, with a custodian in an account designated for clients' safe custody investments;
(2) for an eligible counterparty or a professional client, with one or more of the following:

(a) a custodian in an account designated for clients' safe custody investment;
(b) any person whom the firm has taken reasonable steps to determine is a person whose business includes the provision of appropriate safe custody services; or
(c) subject to CASS 2.3.11 R (Risk disclosures) in accordance with the eligible counterparty's or professional client's specific written instructions.

01/11/2007

CASS 2.2.16

In CASS 2.2.15 R reasonable steps may include on the basis of an appropriate legal opinion obtained by the firm or another person.

01/12/2004

CASS 2.2.17

A firm must ensure that any documents of title to designated investments in bearer form, belonging to the firm and which it holds in its physical possession, are kept separately from any document of title to a client's safe custody investment in bearer form.

01/12/2004

Assessment of a custodian

CASS 2.2.18

Before a firm holds a safe custody investment with a custodian or arranges registration of a safe custody investment through a custodian, it must undertake an appropriate risk assessment of that custodian.

01/12/2004

CASS 2.2.19

Before a firm recommends a custodian to a retail client, it must undertake an appropriate risk assessment of that custodian.

01/11/2007

CASS 2.2.20

A firm that holds safe custody investments with a custodian or recommends custodians to retail clients, is expected to establish and maintain a system for assessing the appropriateness of its selection of the custodian and to assess the continued appointment of that custodian periodically as often as is reasonable in the relevant market. In order to comply with SYSC 3.2.20 R and SYSC 9 (Records), the firm is also expected to make and retain a record of the grounds on which it satisfies itself as to the appropriateness of its selection or, following a periodic assessment, continued appropriateness of the custodian.

01/11/2007

CASS 2.2.21

In undertaking an appropriate risk assessment of the custodian in accordance with CASS 2.2.18 R and CASS 2.2.19 R, firms might take into account any or all of the following matters:

(1) the expertise and market reputation of the custodian, and, once a safe custody investment has been lodged by the firm with the custodian, the custodian's performance of its services to the firm;
(2) the arrangements for holding and safeguarding an investment;
(3) an appropriate legal opinion as to the protection of custody assets in the event of the insolvency of the custodian;
(4) current industry standard reports, for example Financial reporting and auditing group (FRAG) 21 report or its equivalent;
(5) whether the custodian is regulated and by whom;
(6) the capital or financial resources of the custodian;
(7) the credit rating of the custodian;
(8) any other activities undertaken by the custodian and, if relevant, any affiliated company.

01/12/2004

CASS 2.2.22

In undertaking the risk assessment of a custodian, a firm should have regard to all relevant circumstances including legal requirements and custodial practices, in the relevant jurisdiction. For example, if the legal requirements of a jurisdiction in which the firm proposes to hold a safe custody investment with a custodian, makes it mandatory to use a particular custodian for that purpose, then the FSA will regard this fact alone as justifying the use of that custodian. If the use of that custodian is a matter of custodial practice in that jurisdiction, the custodian is likely to be appropriate for that purpose subject to the firm checking whether following that practice is appropriate for the client's purposes. In both circumstances, the firm will still be under a duty to ensure the continued appropriateness of the custodian, taking account of the current legal requirements and custodial practice of that jurisdiction.

01/12/2004

CASS 2.2.23

Before a firm holds a custody asset with a custodian which is in the same group as the firm, it must inform the client in writing that it intends to do so.

01/12/2004

CASS 2.3

Client agreement and client statements

01/12/2004

Application

CASS 2.3.1

CASS 2.3 applies in accordance with CASS 2.1

01/12/2004

CASS 2.3.2

Before a firm provides safe custody services to a client, unless CASS 2.3.5 R applies, the firm must notify the client as to the appropriate terms and conditions which apply to this service, including, where applicable, those covering:

(1) registration of the safe custody investments if these will not be registered in the client's name;
(2) the extent of the firm's liability in the event of a default by a custodian, except that a firm must accept the same level of responsibility to its client for any nominee company controlled by the firm or by its affiliated company as for itself and may not disclaim responsibility for losses arising directly from the fraud, wilful default or negligence of the firm;
(3) the circumstances in which the firm may realise a safe custody investment held as collateral to meet the client's liabilities (see CASS 2.3.2A R);
(4) claiming and receiving dividends, interest payments and other entitlements accruing to the client;
(5) dealing with takeovers, other offers or capital reorganisations and exercising voting, conversion and subscription rights;
(6) arrangements for the distribution of entitlements to shares and any other benefits arising from corporate events, where clients' balances have been pooled;
(7) arrangements for the provision of information to the client relating to the safe custody investment which the firm, or its nominee company, holds on behalf of the client;
(8) how often a statement of custody assets will be sent to the client and the basis on which assets shown on the statement are valued;
(9) fees and costs for safe custody services to the extent that they are not notified to the client elsewhere; and
(10) if the firm intends to pool a safe custody investment with that of one or more other clients, notification of its intention to the eligible counterparty or professional client and if the client is a retail client, an explanation of the effects of pooling to that retail client.

01/11/2007

CASS 2.3.2A

A firm must not realise a retail client's assets unless it is legally entitled to do so and it has either:

(1) set out in a client agreement provided to the retail client:

(a) the action it may take to realise any assets of the retail client;
(b) the circumstances in which it may do so; and
(c) each asset (if relevant) or type or class of asset over which it may exercise the right; or

(2) give the retail client notice (oral or written) of its intention to exercise its rights at least three business days before it does so.

01/11/2007

CASS 2.3.3

When explaining the meaning of pooling to a retail client, firms are expected to advise the retail client that:

(1) individual entitlements may not be identifiable by separate certificates, other physical documents or equivalent electronic record; and
(2) in the event of an unreconcilable shortfall after the failure of a custodian, clients may share in that shortfall in proportion to their original share of the assets in the pool.

01/11/2007

CASS 2.3.4

Unless CASS 2.3.5 R or CASS 2.3.6 R applies, the firm must obtain the written agreement of a retail client, or notify an eligible counterparty or a professional client, as to:

(1) the arrangements for the giving and receiving of instructions by or on behalf of the client in respect of the safe custody service which is to be provided, including, if applicable, the arrangements for the giving of authority by the client to another person and the extent of that authority and any limitation on it; and
(2) any lien or security interest taken over a safe custody investment by the firm or a third party, except in respect of any charges relating to the administration or safekeeping of the safe custody investments;

01/11/2007

CASS 2.3.5

A firm need not obtain the written agreement or give notice as required by CASS 2.3.4 R, or give notice to a client in accordance with CASS 2.3.2 R, if the firm has no intention of providing a safe custody service to the client but unintentionally holds a safe custody investment for the client as a result of circumstances that could not reasonably have been foreseen by the firm.

01/12/2004

CASS 2.3.6

(1) A firm need not obtain the written agreement of a retail client, or give notice to an eligible counterparty or a professional client, as required by CASS 2.3.4 R if:

(a) the client is ordinarily resident outside the United Kingdom;
(b) the firm has taken reasonable steps to determine that the client does not wish to execute that agreement; and
(c) the firm makes and retains a record of those steps and their results.

(2) For a firm acting as an outgoing ECA provider, the exemption in (1) applies only if the client is ordinarily resident outside the EEA.

01/11/2007

Risk disclosures

CASS 2.3.7

Before holding or arranging for another person or firm to hold a customer's safe custody investment overseas, a firm must notify the customer in writing that there may be different settlement, legal and regulatory requirements in overseas jurisdictions from those applying in the United Kingdom, or such jurisdiction as is appropriate in the circumstances, and that there may be different practices for the separate identification of safe custody investments.

01/12/2004

CASS 2.3.8

The term "customer" does not include an eligible counterparty.

01/11/2007

CASS 2.3.9

It is intended that the application of CASS 2.3.7 R be appropriate to the circumstance, so for example, a European branch of a UK firm which provides services to customers in the country where the branch is located may adapt the risk disclosure required by CASS 2.3.7 R to suit the particular circumstances applicable to that branch and customer.

01/12/2004

CASS 2.3.10

Before a firm registers or records legal title to a safe custody investment in the name of the firm, it must notify the client if an eligible counterparty or a professional client, and obtain his prior written consent if the client is a retail client, that:

(1) the safe custody investment will or may be registered or recorded in the firm's name;
(2) as a result the safe custody investment may not be segregated from the designated investments of the firm; and
(3) in the event of the failure of the firm, the client's assets may not be as well protected from claims made on behalf of the general creditors of the firm.

01/11/2007

CASS 2.3.11

If a client has instructed the firm on the holding, registration or recording of a safe custody investment under CASS 2.2.10 R(5) (Registration and recording) or CASS 2.2.15 R(2)(c) (Holding) the firm must notify the client that the consequences of doing so are at the client's own risk, unless the firm has agreed otherwise.

01/12/2004

Production and despatch of client statements

CASS 2.3.12

A firm must, as often as necessary or as often as agreed with its client, but in any event not less frequently than annually, provide to each client, or to a representative nominated by the client in writing, a statement prepared in accordance with CASS 2.3.17 R (Content of client statements) unless:

(1) the account of a client for whom a custody asset has been held at any time during the firm's financial year has been closed; and
(2) the firm has sent the client a closing statement which shows that the firm no longer holds any custody asset for the client.

01/12/2004

CASS 2.3.13

Statements must be provided in accordance with CASS 2.3.12 R within 25 business days of the date as at which the statement is made.

01/12/2004

CASS 2.3.14

(1) A firm may, with the client's prior written agreement, retain statements required to be sent to a client who is ordinarily resident outside the United Kingdom.
(2) For a firm acting as an outgoing ECA provider, the exemption in (1) applies only if the client is ordinarily resident outside the EEA.

01/12/2004

CASS 2.3.15

The statements referred to in CASS 2.3.14 R may be retained either electronically or in hard copy. Wherever possible responsibility within a firm for such statements should be given to an employee or department not otherwise involved with that client.

01/12/2004

CASS 2.3.16

If a firm provides a range of safe custody services for a retail client which result in statements being generated from more than one system, it must ensure that all the statements in respect of those services are produced as at the same date and despatched within one week of each other, unless each statement makes clear that it relates to a particular service.

01/11/2007

Content of client statements

CASS 2.3.17

All statements produced by or on behalf of a firm in accordance with CASS 2.3.12 R - CASS 2.3.14 R and CASS 2.3.16 R, must list all custody assets held for the client for which the firm is accountable and:

(1) identify any safe custody investment registered in the client's own name separately from those registered in any other name;
(2) identify any custody assets which are being used as collateral or have been pledged to third parties, separately from any other custody assets;
(3) show the market value of any collateral held, as at the date of the statement; and
(4) for a retail client, base the statement on either trade date or settlement date information for cash balances and safe custody investment and notify the basis to the retail client.

01/11/2007

CASS 2.3.18

A firm may include the information required by CASS 2.3.17 R in any statement provided by the firm to the client in accordance with the rules on periodic reporting in COBS 16.3, or by other separate documents, as long as they are prepared in relation to the same date and delivered to the client within a reasonable period of one another.

01/11/2007

CASS 2.3.19

A statement under CASS 2.3.17 R must include client money unless this has been included in a statement separately despatched to the client within one month before or after the statement date.

01/12/2004

CASS 2.3.20

CASS 2.3.19 R refers to the client money balance as at the statement date for each client.

01/12/2004

CASS 2.3.21

A safe custody investment need not be included in a statement if a client transaction has been carried out within the previous three months and the firm does not intend to offer a safe custody service in relation to the safe custody investment.

01/12/2004

CASS 2.4

Custodian agreement

01/12/2004

Application

CASS 2.4.1

CASS 2.4 applies in accordance with CASS 2.1

01/12/2004

CASS 2.4.2

Before a firm holds a safe custody investment for or on behalf of a client with a custodian, it must agree in writing appropriate terms and conditions with the custodian, including, where applicable:

(1) that the title of the account indicates that any safe custody investment credited to it does not belong to the firm or to an affiliated company that is not being treated as an arm's length client in accordance with CASS 2.1.9 R(1)(b) (Application));
(2) that the custodian will hold or record a safe custody investment belonging to the firm's client (or where the firm is a trustee firm, the trustees), separately from any designated investment belonging to the firm or to the custodian;
(3) that the custodian will deliver to the firm a statement as at a date or dates specified by the firm which details the description and amounts of all the safe custody investments credited to the account;
(4) that the custodian will not claim any lien, right of retention or sale over any safe custody investment standing to the credit of any account set up in accordance with (1) except:

(a) where the firm has notified the custodian in writing that the client has provided written consent; or
(b) in respect of any charges relating to the administration or safekeeping of the safe custody investment;

(5) the arrangements for registration or recording of the safe custody investment if this will not be registered in the client's name;
(6) that the custodian is not to permit withdrawal of any safe custody investment from the account except for delivery to the firm or on the firm's instructions;
(7) the procedures and authorities for the passing of instructions to or by the firm;
(8) the claiming and receiving of dividends, interest payments and other entitlements accruing to the client; and
(9) the extent of the custodian's liability in the event of the loss of a safe custody investment caused by the fraud, wilful default or negligence of the custodian, or an agent appointed by him.

01/12/2004

CASS 2.4.3

Firms should seek to ensure that custodians deliver the statement referred to in CASS 2.4.2 R(3) to the firm within 20 business days of the date of the statement.

01/12/2004

CASS 2.4.4

Firms need not include in the custodian agreement, any of the provisions set out in CASS 2.4.2 R if, for example, the firm or custodian is unable to comply with the provision on account of legal requirements or custodial practice imposed on or by a securities depository or clearance system.

01/12/2004

CASS 2.5

Use of a safe custody investment and stock lending

01/12/2004

Application

CASS 2.5.1

CASS 2.5 applies in accordance with CASS 2.1

01/12/2004

CASS 2.5.2

A firm must not use a safe custody investment for its own account unless the client:

(1) if a retail client, has given prior written consent to the firm; or
(2) if a professional client or eligible counterparty, has been notified by the firm.

01/11/2007

Use of a safe custody investment: by another client

CASS 2.5.3

A firm must not use, for the account of one client, the safe custody investment of any other customer, unless that other customer:

(1) if a retail client, has given prior written consent to the firm; or
(2) if a professional client, has been notified by the firm.

01/11/2007

Stock lending

CASS 2.5.4

A firm must not undertake or otherwise engage in stock lending activity with or for a customer unless:

(1) the firm has obtained the consent of the customer; and
(2) the stock lending activity is subject to appropriate terms and conditions, which includes a provision that, in the case of a retail client, the firm may undertake stock lending with or for the retail client (if that is the case), specifying the assets to be lent, the type and value of the relevant collateral from the borrower and the method and amount of payment due to the retail client in respect of the lending.

01/11/2007

CASS 2.5.6

Firms are reminded that the term "customer" does not include an eligible counterparty.

01/11/2007

CASS 2.5.7

To the extent that specific instructions are given by the customer, they are an important factor in assessing what terms and conditions are appropriate and should, in the absence of a reason not to do so, normally be followed. The specific requirements of the markets in which the lending takes place are another factor to be considered when assessing what terms and conditions are appropriate.

01/12/2004

CASS 2.5.8

If a safe custody investment belonging to a retail client is used for stock lending activity, the firm must ensure that:

(1) relevant collateral is provided by the borrower in favour of the customer;
(2) the current realisable value of the safe custody investment and of the relevant collateral is monitored daily; and
(3) the firm provides relevant collateral to make up the difference where the current realisable value of the collateral falls below that of the safe custody investment, unless otherwise agreed in writing by the customer.

01/11/2007

CASS 2.5.9

If safe custody investments of more than one customer are registered or otherwise held together, none of those safe custody investments may be used for a stock lending activity unless:

(1) all of those customers have consented to their safe custody investments being used for that activity; or
(2) the firm has adequate systems and procedures in place to ensure that only safe custody investments belonging to customers who have given their consent are used for stock lending activity.

01/12/2004

CASS 2.5.10

Any cash or custody assets held in favour of a customer for stock lending activity must be held in accordance with the client money rules or custody rules.

01/12/2004

CASS 2.5.11

The stock lending requirements in CASS 2.5.4 R (2) also apply to safe custody investments held collectively on behalf of a firm's customers in any custody or settlement system. If the custody or settlement system operates an 'automatic' stock lending programme, the firm should maintain a separate account or be able to demonstrate that it maintains adequate systems to differentiate between the safe custody investments of those customers who have not consented to stock lending activity through that programme from the designated investments of those that have consented.

06/05/2008

CASS 2.5.12

A firm is expected to have documentation in place with borrowing counterparties which is adequate and appropriate having regard to the customers whose safe custody investments are being lent. The terms and conditions of lending should be appropriate to the markets in which lending takes place (for example by reference to the Stock lending and Repo Committee's Stock Borrowing and Lending Code of Guidance), and to the other circumstances of the transaction, in particular, the various types of risk involved in the transaction.

01/12/2004

CASS 2.5.13

If a borrower is required to provide collateral (for example, to protect against settlement risk), the firm should consider whether it is appropriate to require this collateral be provided in advance of the stock lending activity. When making this decision the firm should consider all the circumstances of the transaction, including normal practice in the relevant market. The level and type of collateral required should take account of the credit-worthiness of the borrower and the market risks associated with the particular collateral.

01/12/2004

CASS 2.5.14

Firms are reminded that dividends (actual or payments in lieu), stock lending fees and other payments received for the benefit of a customer, belong to the customer and should be held in accordance with the client money rules or custody rules as appropriate.

01/12/2004

CASS 2.6

Operation

01/12/2004

Application

CASS 2.6.1

CASS 2.6 applies in accordance with CASS 2.1

01/12/2004

CASS 2.6.2

A firm must, as often as is necessary, but no less than every 25 business days, perform a reconciliation of its record of safe custody investments for which it is accountable but which it does not physically hold, with statements obtained from custodians, and in the case of dematerialised safe custody investments not held through a custodian, statements obtained from the person who maintains the record of legal entitlement.

01/12/2004

CASS 2.6.3

Information about client holdings obtained from, for example CREST, in respect of dematerialised safe custody investments may be used to comply with CASS 2.6.2 R.

01/12/2004

CASS 2.6.4

If a firm is unable to obtain no less than every 25 business days, statements of clients' entitlement from unit trust manager, operators of ICVCs or administrators of offshore mutual funds, it need perform a reconciliation of the client's unit trusts, ICVCs and offshore mutual funds holdings only as often as the statements are received but no less than every 6 months.

01/12/2004

CASS 2.6.5

When a firm relies on CASS 2.6.4 R the FSA will still expect the firm to make reasonable efforts to obtain statements on a monthly basis.

01/12/2004

CASS 2.6.6

A firm must, as often as is necessary, but no less than every 6 months (or twice in a period of 12 months but at least 5 months apart), carry out:

(1) a count of all safe custody investments it physically holds on behalf of clients and reconcile the result of that count with its record of safe custody investments that it physically holds on behalf of its clients; and
(2) a reconciliation between the firm's record of client holdings, and the firm's record of the location of safe custody investments.

01/12/2004

CASS 2.6.7

Whenever possible, a firm should ensure that reconciliations are carried out by a person (for example an employee of the firm) who is independent of the production or maintenance of the records to be reconciled.

01/12/2004

CASS 2.6.8

A firm must perform the reconciliation in CASS 2.6.6 R as soon as reasonably practicable after the date to which the reconciliation relates.

01/12/2004

CASS 2.6.9

Firms will normally be expected to perform the reconciliation in CASS 2.6.6 R within 25 business days of the date to which the statements relate.

01/12/2004

Reconciliation methods

CASS 2.6.10

The reconciliation referred to in CASS 2.6.6 R must cover all safe custody investments recorded in the firm's books and records and those of any nominee company which the firm uses for the provision of safe custody services and is controlled by the firm or by an affiliated company, and must be performed by:

(1) the 'total count method', which requires that all safe custody investments be counted and reconciled as at the same date; or
(2) an alternative reconciliation method (for example the rolling stock method) provided that:

(a) all of a particular safe custody investment are counted and reconciled as at the same date;
(b) all safe custody investments are counted and reconciled during a period of six months; and
(c) written confirmation is given to the FSA from the firm's auditor that the firm has in place systems and controls which enable it to adequately perform the alternative method of reconciliation which the firm proposes to use.

01/12/2004

Reconciliation discrepancies

CASS 2.6.11

A firm must promptly correct any discrepancies which are revealed, and make good, or provide the equivalent of, any unreconciled shortfall for which there are reasonable grounds for concluding that the firm is responsible.

01/12/2004

CASS 2.6.12

Items recorded or held within a suspense or error account fall within the scope of discrepancies.

01/12/2004

CASS 2.6.13

A firm may, where justified, conclude that another person is responsible for an irreconcilable shortfall despite the existence of a dispute with that other person about the unreconciled item. In those circumstances, the firm is not required to make good the shortfall but is expected to take reasonable steps to resolve the position with the other person.

01/12/2004

Notification requirement

CASS 2.6.14

A firm must inform the FSA in writing without delay:

(1) if it has not complied with, or is unable, in any material respect, to comply with the reconciliation requirements in CASS 2.6.2 R, CASS 2.6.4 R, CASS 2.6.6 R, CASS 2.6.8 R and CASS 2.6.10 R; or
(2) if having carried out a reconciliation it is unable, in any material respect, to comply with CASS 2.6.11 R.

01/12/2004

Records

CASS 2.6.15

A firm must ensure that proper records of the custody assets which it holds or receives, or arranges for another to hold or receive, on behalf of the client, are made and retained for a period of 3 years after they are made.

01/12/2004

CASS 2.6.16

A firm that uses a safe custody investment in stock lending activity must ensure that its records identify which safe custody investments are available to be lent, and which have been lent.

01/12/2004

CASS 3

Collateral

CASS 3.1

Application and Purpose

01/12/2004

Application

CASS 3.1.1

This chapter applies to a firm when it receives or holds assets in connection with an arrangement to secure the obligation of a client in the course of, or in connection with, its designated investment business, including MiFID business.

01/11/2007

CASS 3.1.2

Firms are reminded that this chapter does not apply to an incoming EEA firm, other than an insurer, with respect to its passported activities. The application of this chapter is also dependent on the location from which the activity is undertaken (see CASS 1.3.2 R and CASS 1.3.3 R).

01/11/2007

CASS 3.1.3

This chapter does not apply to a firm that has only a bare security interest (without rights to hypothecate) in the client's asset. In such circumstances, the firm must comply with the custody rules or client money rules as appropriate.

01/11/2007

CASS 3.1.4

For the purpose of this chapter only, a bare security interest in the client's asset gives a firm the right to realise the assets only on a client's default and without the right to use other than in default.

01/11/2007

Purpose

CASS 3.1.5

The purpose of this chapter is to ensure that an appropriate level of protection is provided for those assets over which a client gives a firm certain rights. The arrangements covered by this chapter are those under which the firm is given a right to use the asset, and the firm treats the asset as if legal title and associated rights to that asset had been transferred to the firm subject only to an obligation to return equivalent assets to the client upon satisfaction of the client's obligation to the firm. The rights covered in this chapter do not include those arrangements by which the firm has only a bare security interest in the client's asset (in which case the custody rules or client money rules apply).

01/11/2007

CASS 3.1.6

Examples of the arrangements covered by this chapter include the taking of collateral by a firm, under the ISDA English Law (transfer of title) and the New York Law Credit Support Annexes (assuming the right to rehypothecate has not been disapplied).

01/11/2007

CASS 3.1.7

This chapter recognises the need to apply a differing level of regulatory protection to the assets which form the basis of the two different types of arrangement described in CASS 3.1.5 G. Under the bare security interest arrangement, the asset continues to belong to the client until the firm's right to realise that asset crystallises (that is, on the client's default). But under a "right to use arrangement", the client has transferred to the firm the legal title and associated rights to the asset, so that when the firm exercises its right to treat the asset as its own, the asset ceases to belong to the client and in effect becomes the firm's asset and is no longer in need of the full range of client asset protection. The firm may exercise its right to treat the asset as its own by, for example, clearly so identifying the asset in its own books and records.

01/11/2007

CASS 3.2

Requirements

01/12/2004

Application

CASS 3.2.2

A firm that receives or holds a client's assets under an arrangement to which this chapter applies and which exercises its right to treat the assets as its own must ensure that it maintains adequate records to enable it to meet any future obligations including the return of equivalent assets to the client.

01/11/2007

CASS 3.2.3

If the firm has the right to use the client's asset under a "right to use arrangement" but has not yet exercised its right to treat the asset as its own, the client money rules or the custody rules will continue to apply as appropriate until such time as the firm exercises its right, at which time CASS 3.2.2 R will apply.

01/12/2004

CASS 3.2.4

When appropriate, firms that enter into the arrangements covered in this chapter with retail clients will be expected to identify in the statement of custody assets sent to the client in accordance with CASS 2.3.12 R (Production and despatch of client statements) details of the assets which form the basis of the arrangements. Where the firm utilises global netting arrangements, a statement of the assets held on this basis will suffice.

01/11/2007

CASS 4

Non-directive client money rules

CASS 4.1

Application and Purpose

01/12/2004

Application

CASS 4.1.1

This chapter (the client money rules) applies to a firm that receives money from or holds money for, or on behalf of, a client in the course of, or in connection with:

(1) its designated investment business other than MiFID business; or
(2) in the circumstances set out in CASS 4.1.1A R ( insurance mediation activity);

except where CASS 4.1.2 R applies.

01/11/2007

CASS 4.1.1A

A firm that receives or holds money to which this chapter applies and money in respect of which the insurance client money chapter applies, may elect to comply with the provisions of this chapter in respect of all such money and if it does so this chapter applies as if all such money were money that the firm receives and holds in the course of or in connection with its designated investment business.

01/11/2007

CASS 4.1.2

This chapter does not apply with respect to:

(1) the permitted activities of a long-term insurer or a friendly society; or
(2) coins held on behalf of a client if the firm and the client have agreed that the money (or money of that type) is to be held by the firm for the intrinsic value of the metal which constitutes the coin; or
(3) money held by a firm which is an approved bank, but only when held in an account with itself, in which case the firm must notify the client in writing that:

(a) money held for that client in an account with the approved bank will be held by the firm as banker and not as trustee (or in Scotland as agent); and
(b) as a result, the money will not be held in accordance with the client money rules; or

(4) money held by depositaries to which chapter 11 (Trustee and depositary activities) of COB applied, or would have applied, on 31 October 2007; or
(5) client money held by a firm which:

(a) receives or holds client money in relation to contracts of insurance; but which
(b) in relation to such client money elects to act in accordance with the insurance client money chapter; or

(6) client money held by a firm which:

(a) receives or holds client money in relation to designated investment business other than MiFID business; but which
(b) in relation to such client money elects to act in accordance with the MiFID client money chapter under the opt-in to that chapter (CASS 7.1.3 R).

01/11/2007

CASS 4.1.2A

A firm should make and retain a written record of any election which it makes under CASS 4.1.1A R or CASS 4.1.2 R (5).

01/12/2004

CASS 4.1.2B

(1) A firm which receives and holds client money in respect of life assurance business in the course of its designated investment business may:

(a) in accordance with CASS 4.1.1A R elect to comply with the non-directive client money chapter in respect of such client money and in doing so avoid the need to comply with the insurance client money chapter which would otherwise apply to the firm in respect of client money received in the course of its insurance mediation activity; or
(b) in accordance with CASS 4.1.2 R (5), elect to comply with the insurance client money chapter in respect of such client money.

(2) These options are available to a firm irrespective of whether it also receives and holds client money in respect of other parts of its designated investment business. A firm may not however choose to comply with the insurance client money chapter in respect of client money which it receives and holds in the course of any part of its designated investment business which does not involve an insurance mediation activity.

01/11/2007

CASS 4.1.2C

Firms that hold client money in the course of, or in connection with, designated investment business that is not MiFID business and also in the course of, or in connection with, MiFID business (and are therefore subject to the non-directive client money chapter and the MiFID client money chapter), should refer to CASS 7.1.3 R (Opt-in to the MiFID client money rules) which contains provisions enabling these firms to opt to comply solely with the MiFID client money chapter. This is also relevant to the equivalent business of a third country investment firm.

01/11/2007

CASS 4.1.3

Firms are reminded that, under CASS 1.3.3 R, the client money rules do not apply to an incoming EEA firm, other than an insurer, with respect to its passported activities. The application of the client money rules to the activity of a firm is also dependent on the location from which the activity is undertaken (see CASS 1.3.2 R).

01/12/2004

CASS 4.1.4

The custody rules will apply when a firm holds, for example, gold coins on behalf of the client in accordance with CASS 4.1.2 R(2) in the same portfolio as safe custody investments.

01/12/2004

CASS 4.1.5

A firm that is an approved bank, and relies on the exemption under CASS 4.1.2 R(3), should be able to account to all of its clients for amounts held on their behalf at all times. A bank account opened with the firm that is in the name of the client would generally be sufficient. When money from clients deposited with the firm is held in a pooled account, this account should be clearly identified as an account for clients. The firm should also be able to demonstrate that an amount owed to a specific client that is held within the pool can be reconciled with a record showing that individual's client balance and is, therefore, identifiable at any time. Similarly, where that money is reflected only in a firm's bank account with other banks (nostro accounts), the firm should be able to reconcile amounts owed to that client within a reasonable period of time.

01/12/2004

CASS 4.1.6

A firm that is an approved bank is reminded that CASS 4.1.2 R(3) is not an absolute exemption from the client money rules.

01/12/2004

General purpose

CASS 4.1.7

Principle 10 (Clients' assets) requires a firm to arrange adequate protection for clients' assets when the firm is responsible for them. An essential part of that protection is the proper accounting and handling of client money. The client money rules provide requirements for firms that receive or hold client money, in whatever form.

01/12/2004

Money that is not client money: 'opt outs' for any business other than insurance mediation activity

CASS 4.1.8

The 'opt out' provisions provide a firm with the option of allowing a professional client or an eligible counterparty to choose whether their money is subject to the client money rules (unless the firm is conducting insurance mediation activity).

01/11/2007

CASS 4.1.9

Subject to CASS 4.1.11 R, money is not client money when a firm (other than a sole trader) holds that money on behalf of, or receives it from, an eligible counterparty or a professional client, other than in the course of insurance mediation activity, and the firm has obtained written acknowledgement from the eligible counterparty or professional client that:

(1) the money will not be subject to the protections conferred by the client money rules;
(2) as a consequence, this money will not be segregated from the money of the firm in accordance with the client money rules and will be used by the firm in the course of its own business; and
(3) the eligible counterparty or professional client will rank only as a general creditor of the firm.

01/11/2007

'Opt-outs' for non-IMD business

CASS 4.1.10

For a firm whose business is not governed by the Insurance Mediation Directive, it is possible to 'opt out' on a one-way basis. However, in order to maintain a comparable regime to that applying to MiFID business, all 'MiFID type' business undertaken outside the scope of MiFID, should comply with the client money rules or be 'opted out' on a two-way basis.

01/11/2007

CASS 4.1.11

Money is not client money if a firm, in respect of designated investment business which is not an investment service or activity, an ancillary service, a listed activity or insurance mediation activity:

(1) holds it on behalf of or receives it from an eligible counterparty who is not an authorised person or a professional client who is not an authorised person; and
(2) has sent a separate written notice stating the matters set out in CASS 4.1.9 R (1) to (3).

01/11/2007

CASS 4.1.12

When a firm undertakes a range of business for an eligible counterparty or professional client and has separate agreements for each type of business undertaken, the firm may treat client money held on behalf of the client differently for different types of business; for example, a firm may, under CASS 4.1.9 R or CASS 4.1.11 R, elect to segregate client money in connection with securities transactions and not segregate (by complying with CASS 4.1.9 R or CASS 4.1.11 R) money in connection with contingent liability investments for the same client.

01/11/2007

CASS 4.1.13

When a firm transfers client money to another person, the firm must not enter into an agreement under CASS 4.1.9 R or CASS 4.1.11 R with that other person in relation to that client money or represent to that other person that the money is not client money.

01/12/2004

CASS 4.1.14

CASS 4.1.13 R prevents a firm, when passing client money to another person under CASS 4.3.30 R (transfer of assets to a third party), from making use of the 'opt out' provisions under CASS 4.1.9 R or CASS 4.1.11 R.

01/12/2004

Money in connection with a "delivery versus payment" transaction

CASS 4.1.15

Money need not be treated as client money in respect of a delivery versus payment transaction through a commercial settlement system if it is intended that either:

(1) in respect of a client's purchase, money from a client will be due to the firm within one business day upon the fulfilment of a delivery obligation; or
(2) in respect of a client's sale, money is due to the client within one business day following the client's fulfilment of a delivery obligation;

unless the delivery or payment by the firm does not occur by the close of business on the third business day following the date of payment or delivery of the investments by the client.

01/12/2004

CASS 4.1.16

Money need not be treated as client money in respect of a delivery versus payment transaction, for the purpose of settling a transaction in relation to units in a regulated collective investment scheme, if:

(1) the authorised fund manager receives it from a client in relation to the authorised fund manager's obligation to issue units, in an AUT or to arrange for the issue of units in an ICVC, in accordance with CIS, unless the price of those units has not been determined by the close of business on the next business day:

(a) following the date of the receipt of the money from the client; or
(b) if the money was received by an appointed representative of the authorised fund manager, in accordance with CASS 4.3.15 R, following the date of receipt at the specified business address of the authorised fund manager; or

(2) the money is held in the course of redeeming units where the proceeds of that redemption are paid to a client within the time specified in CIS; when an authorised fund manager draws a cheque or other payable order within these timeframes the provisions of CASS 4.3.101 R and CASS 4.3.102 R will not apply.

01/12/2004

Affiliated companies

CASS 4.1.17

Money from an affiliated company is not treated as client money unless the provisions of CASS 4.1.18 R apply. This seeks to ensure that client money is protected against the potential contagion that may arise on the failure of a firm which is itself part of a group which, if treated as a client, would expose the other clients of the firm to the risks of other parts of the group.

01/12/2004

CASS 4.1.18

Money is not client money if the firm holds it on behalf of, or receives it from, an affiliated company, unless:

(1) the firm has been notified by the affiliated company that the money belongs to a client of the affiliated company; or
(2) the affiliated company is a client dealt with at arm's length; or
(3) the affiliated company is a manager of an occupational pension scheme or is an overseas company; and

(a) the money is given to the firm in order to carry on designated investment business for or on behalf of the clients of the affiliated company; and
(b) the firm has been notified by the affiliated company that the money is to be treated as client money.

01/12/2004

Money due and payable to the firm

CASS 4.1.19

Money is not client money when it becomes properly due and payable to the firm for its own account.

01/12/2004

CASS 4.1.20

(1) For fees and commissions payable by customers, 'due and payable' means:

(a) they have been accurately calculated and are in accordance with a formula or basis previously disclosed to the client by the firm; or
(b) five business days have elapsed since a statement showing the amount of those fees and commissions has been despatched to the client, and the firm has taken reasonable steps to ensure that the client does not question that sum specified; or
(c) the precise amount of the fees or commissions has been agreed by the client, or has been determined by a court, arbitrator or arbiter;

(2) Compliance with (1) may be relied on as tending to establish compliance with CASS 4.1.19 R;
(3) Contravention of (1) may be relied on as tending to establish contravention of CASS 4.1.19 R.

01/12/2004

CASS 4.1.21

Money held as client money becomes due and payable to the firm or for the firm's own account, for example, because the firm acted as principal in the contract or the firm, acting as agent, has itself paid for securities in advance of receiving the purchase money from its client. The circumstances in which it is due and payable will depend on the contractual arrangement between the firm and the client and on the provisions of CASS 4.1.20 E.

01/12/2004

CASS 4.1.22

When a firm has entered into an arrangement under which commission is rebated to a client, those rebates should be treated as client money when the firm has performed its obligations in accordance with the relevant contract. The circumstances in which they become due and payable will depend on the contractual arrangements between the firm and the client.

01/12/2004

CASS 4.1.23

When a client's obligation or liability, that is secured by that client's asset, crystallises, and the firm realises the asset in accordance with an agreement entered into between the client and the firm, the part of the proceeds of the asset to cover such liability that is due and payable to the firm is not client money. However, any proceeds of sale in excess of the amount owed by the client to the firm should be paid over to the client immediately or be held in accordance with the client money rules.

01/12/2004

CASS 4.1.24

When a firm realises client collateral to meet liabilities of that client, it should do so in accordance with the relevant terms and conditions and other requirements (see CASS 2.3.2 R to CASS 2.3.6 R).

01/11/2007

Solicitors

CASS 4.1.25

An authorised professional firm regulated by The Law Society (England and Wales), The Law Society of Scotland or The Law Society of Northern Ireland must comply with the rules of its designated professional body as specified in CASS 4.1.26 R, in force at commencement, and if it does so, it will be deemed to comply with CASS 4.1 to CASS 4.3.

01/12/2004

CASS 4.1.26

For the purposes of CASS 4.1.25 R the relevant rules are:

(1) if regulated by the Law Society (of England and Wales):

(a) the Solicitors' Accounts Rules 1998; or
(b) where applicable, the Solicitors Overseas Practice Rules 1990;

(2) if regulated by the Law Society of Scotland, the Solicitors' (Scotland) Accounts, Accounts Certificate, Professional Practice and Guarantee Fund Rules 2001;
(3) if regulated by the Law Society of Northern Ireland, the Solicitors' Accounts Regulations 1998.

01/12/2004

Trustee firms (other than trustees of unit trust schemes)

CASS 4.1.27

A trustee firm must hold any client money separate from its own money at all times.

01/12/2004

CASS 4.1.28

Only the client money rules listed in CASS 4.1.29 R apply to a trustee firm in respect of client money held in the course of that trustee business.

06/05/2008

CASS 4.1.29

This table belongs to CASS 4.1.28 R

Reference

Rule

CASS 4.1.1 R - CASS 4.1.7 G

Application

CASS 4.1.27 R - CASS 4.1.29 R

Trustee firms (other than trustees of unit trust schemes)

CASS 4.2.3 R - CASS 4.2.7 G

Requirement

CASS 4.3.33 G - CASS 4.3.40 R

Client bank accounts

CASS 4.3.41 G - CASS 4.3.45 G

A firm's selection of bank

CASS 4.3.46 R - CASS 4.3.47 R

Group banks

CASS 4.3.89 R - CASS 4.3.97 R

Reconciliation of client money balances

06/05/2008

CASS 4.2

Statutory trust

01/12/2004

Application

CASS 4.2.1

CASS 4.2 applies in accordance with CASS 4.1

01/12/2004

CASS 4.2.2

Section 139(1) of the Act (Miscellaneous ancillary matters) provides that rules may make provision which result in client money being held by a firm on trust (England and Wales and Northern Ireland) or as agent (Scotland only). CASS 4.2.3 R creates a fiduciary relationship between the firm and its client under which client money is in the legal ownership of the firm but remains in the beneficial ownership of the client. In the event of failure of the firm, costs relating to the distribution of client money may have to be borne by the trust.

01/12/2004

Requirement

CASS 4.2.3

A firm (other than a firm acting in accordance with CASS 4.2.6 R) receives and holds client money as trustee (or in Scotland as agent) on the following terms:

(1) for the purposes of and on the terms of the client money rules and the client money distribution rules;
(2) subject to (3), for the clients for whom that money is held, according to their respective interests in it;
(3) on failure of the firm, for the payment of the costs properly attributable to the distribution of the client money in accordance with (2); and
(4) after all valid claims and costs under (2) and (3) have been met, for the firm itself.

01/12/2004

CASS 4.2.4

A firm can hold client money in either a general client bank account or a designated client bank account. A firm holds all client money in general client bank accounts for its clients as part of a common pool of money so those particular clients do not have a claim against a specific sum in a specific account; they only have a claim to the client money in general. A firm holds client money in designated client bank accounts for those clients that requested their client money be part of a specific pool of money, so those particular clients do have a claim against a specific sum in a specific account; they do not have a claim to the client money in general unless a primary pooling event occurs. If the firm becomes insolvent, and there is (for whatever reason) a shortfall in money held for a client compared with that client's entitlements, the available funds will be distributed in accordance with the client money distribution rules.

01/12/2004

CASS 4.2.5

CASS 4.3.5 R to CASS 4.3.7 G set out the circumstances in which it is permissible for a firm to hold money, which would otherwise be money belonging to the firm, in a client bank account.

01/12/2004

CASS 4.2.6

A trustee firm:

(1) must receive and hold client money in accordance with the relevant instrument of trust;
(2) subject to that, receives and holds client money on trust on the terms (or in Scotland on the agency terms) specified in CASS 4.2.3 R.

01/12/2004

CASS 4.2.7

If a trustee firm holds client money in accordance with CASS 4.2.6 R(2), the firm should follow the provisions in CASS 4.1.27 R and CASS 4.1.28 R.

01/12/2004

CASS 4.3

Segregation and operation of client money accounts

01/12/2004

Application

CASS 4.3.1

CASS 4.3 applies in accordance with CASS 4.1

01/12/2004

CASS 4.3.2

The purpose of the client money rules is to ensure that, unless otherwise permitted, client money is kept separate from the firm's own money. Segregation, in the event of a firm's failure, is important for the effective operation of the statutory trust that is created to protect client money. The aim is to clarify the difference between client money and general creditors' entitlements in the event of the failure of the firm.

01/12/2004

CASS 4.3.3

A firm must, except to the extent permitted by the client money rules, hold client money separate from the firm's money.

01/12/2004

CASS 4.3.4

A firm may segregate client money in a different currency from that of receipt. If it does so, the firm must ensure that the amount held is adjusted each day to an amount at least equal to the original currency amount (or the currency in which the firm has its liability to its clients, if different), translated at the previous day's closing spot exchange rate.

01/12/2004

CASS 4.3.5

A firm must not hold money other than client money in a client bank account unless it is:

(1) a minimum sum required to open the account, or to keep it open; or
(2) money temporarily in the account in accordance with CASS 4.3.13 R (Mixed remittance); or
(3) interest credited to the account which exceeds the amount due to clients as interest and has not yet been withdrawn by the firm.

01/12/2004

CASS 4.3.6

If it is prudent to do so to ensure that client money is protected, a firm may pay into a client bank account money of its own, and that money will then become client money for the purposes of the client money rules and the client money distribution rules.

01/12/2004

CASS 4.3.7

Firms are reminded of the requirements of CASS 4.3.66 R and CASS 4.3.67 R. The money paid into the client bank account by the firm, in accordance with CASS 4.3.6 R, does not lessen the requirement to carry out the daily client money calculation.

01/12/2004

Payment of client money into a client bank account

CASS 4.3.8

A firm must segregate client money it receives using either:

(1) the approach detailed in CASS 4.3.10 R (the 'normal approach'); or
(2) the approach detailed in CASS 4.3.12 R (the 'alternative approach'), subject to:

(a) written confirmation to the FSA from the firm's auditor that the firm has in place systems and controls which are adequate to enable it to operate the alternative approach effectively; and
(b) the firm appointing a manager responsible for compliance with the client money rules.

01/12/2004

CASS 4.3.9

The alternative approach is designed for a firm that operates in a multi-product, multi-currency environment for which adopting the normal approach would be unduly burdensome and would not achieve the client protection objective. Under the alternative approach, client money is received into and paid out of a firm's own bank accounts; consequently systems and controls that are capable of monitoring the client money flows are required, so that the firm can perform the daily client money calculation accurately. A firm that adopts the alternative approach will segregate client money into a client bank account on a daily basis, after having performed the client money calculation to determine what the client money requirement was at the close of the previous business day.

01/12/2004

CASS 4.3.10

If a firm receives and segregates client money, unless it adopts the alternative approach, it must, subject to CASS 4.1.15 R and CASS 4.1.16 R, CASS 4.3.11 R, CASS 4.3.13 R, CASS 4.3.15 R and CASS 4.3.21 R (delivery versus payment) either:

(1) pay it as soon as possible, and in any event no later than the next business day after receipt, into a client bank account; or
(2) pay it out in accordance with CASS 4.3.99 R.

01/12/2004

CASS 4.3.11

If client money is received by the firm in the form of an automated transfer, the firm must take reasonable steps to ensure that:

(1) the money is received directly into a client bank account; and
(2) if money is received directly into the firm's own account, the money is transferred into a client bank account no later than the next business day after receipt.

01/12/2004

CASS 4.3.12

Under the alternative approach, a firm receiving and segregating client money:

(1) is required to pay any money to or on behalf of clients out of its own account;
(2) is required to perform the segregation calculation contained in CASS 4.3.67 R, adjust the balance held in its client bank accounts and then segregate the money in the client bank account until the calculation is re-performed on the next business day;
(3) is not required to pay client money into a client bank account in accordance with any of CASS 4.3.10 R(1), CASS 4.3.11 R, CASS 4.3.13 R, CASS 4.3.15 R(1) and (2), CASS 4.3.21 R(1) and (2)(b) and CASS 4.3.24 R(1);
(4) may receive all client money into its own bank account;
(5) may choose to operate the alternative approach for some types of business (for example overseas equities transactions) and operate the normal approach for other types of business (for example contingent liability investments) if the firm can demonstrate that its systems and controls are adequate; and
(6) may use an historic average to account for uncleared cheques in accordance with CASS 4.3.69 G.

01/12/2004

Mixed remittance

CASS 4.3.13

If a firm receives a mixed remittance (that is part client money and part other money), it must:

(1) pay the full sum into a client bank account in accordance with CASS 4.3.10 R(1); and
(2) pay the money that is not client money out of the client bank account within one business day of the day on which the firm would normally expect the remittance to be cleared.

01/12/2004

CASS 4.3.14

When money is due to the firm in respect of fees and commissions, the firm should follow the provisions in CASS 4.1.20 E.

01/12/2004

Appointed representatives, field representatives and other agents

CASS 4.3.15

A firm must establish and maintain procedures to ensure that client money received by its appointed representatives, field representatives or other agents is:

(1) paid into a client bank account of the firm in accordance with CASS 4.3.10 R(1); or
(2) forwarded to the firm, or in the case of a field representative forwarded to a specified business address of the firm, so as to ensure that the money arrives at the specified business address by the close of the third business day.

01/12/2004

CASS 4.3.16

For the purposes of CASS 4.3.15 R(2), the client money received on business day one should be forwarded to the firm or specified business address of the firm no later than the next business day after receipt (business day two) in order for it to reach that firm or specified business address by the close of the third business day. Procedures requiring the client money to be sent to the firm or the specified business address of the firm by first class post no later than the next business day after receipt would meet the requirements of CASS 4.3.15 R(2).

01/12/2004

CASS 4.3.17

If client money is received in accordance with CASS 4.3.15 R, the firm must ensure that its appointed representative, field representative or other agent keeps client money separately identifiable from any other money (including that of the firm) until the client money is paid into a client bank account or sent to the firm.

01/12/2004

CASS 4.3.18

For the purposes of CASS 4.3.15 R and CASS 4.3.17 R, a firm that operates a number of small branches, but handles or accounts for all client money centrally, may treat those small branches as appointed representatives.

01/12/2004

Client entitlements

CASS 4.3.19

A firm must take reasonable steps to ensure that it is notified promptly of any receipt of client money in the form of client entitlements.

01/12/2004

CASS 4.3.20

The firm should receive regular statements from overseas depositaries used by the firm. The frequency of such statements will depend on the volume of business. Client entitlements are such things as dividends, coupons and other distributions with similar characteristics.

01/12/2004

CASS 4.3.21

When a firm receives a client entitlement on behalf of a client, it must pay any part of it which is client money:

(1) for client entitlements received in the United Kingdom, into a client bank account in accordance with CASS 4.3.10 R(1); or
(2) for client entitlements received outside the United Kingdom, into any bank account operated by the firm, provided that such client money is:

(a) paid to, or in accordance with, the instructions of the client concerned; or
(b) paid into a client bank account in accordance with CASS 4.3.10 R(1), as soon as possible but no later than five business days after the firm is notified of its receipt.

01/12/2004

CASS 4.3.22

A firm must take reasonable steps to ensure that a client entitlement, which is client money, is allocated within a reasonable period of time after notification of receipt.

01/12/2004

CASS 4.3.23

(1) A firm should allocate client entitlements due to the individual clients within a period of ten business days.
(2) Compliance with (1) may be relied on as tending to establish compliance with CASS 4.3.22 R.
(3) Contravention of (1) may be relied on as tending to establish contravention of CASS 4.3.22 R.

01/12/2004

Money due to a client from a firm

CASS 4.3.24

If a firm is liable to pay money to a client, it must as soon as possible, and no later than one business day after the money is due and payable:

(1) pay it into a client bank account, in accordance with CASS 4.3.10 R(1); or
(2) pay it to, or to the order of, the client.

01/12/2004

CASS 4.3.25

Money may become due to a client in respect of an agreement entered into with, or for, that client, in the course of the firm's business.

01/12/2004

Interest

CASS 4.3.26

Unless a firm notifies a retail client in writing whether or not interest is to be paid on client money and, if so, on what terms and at what frequency, it must pay that retail client all interest earned on that client money. Any interest due to a client will be client money.

01/11/2007

CASS 4.3.27

If no interest is payable to a retail client, that fact should be separately identified in an agreement or notification.

01/11/2007

CASS 4.3.28

If a firm outlines its policy on its payment of interest under CASS 4.3.26 R, it need not necessarily disclose the actual rates prevailing at any particular time; the firm should disclose the terms, for example, LIBOR plus or minus 'x' percent.

01/12/2004

Transfer of client money to a third party

CASS 4.3.29

CASS 4.3.30 R sets out the requirements a firm must comply with when it transfers client money to another person without discharging its fiduciary duty owed to that client. Such circumstances arise when, for example, a firm passes client money to an intermediate broker for contingent liability investments in the form of initial or variation margin on behalf of a client. In these circumstances, the firm remains responsible for that client's equity balance held at the intermediate broker until the contract is terminated and all of that client's positions at that broker closed. If a firm wishes to discharge itself from its fiduciary duty, it should do so in accordance with CASS 4.3.99 R.

01/11/2007

CASS 4.3.30

A firm may allow another person, such as an exchange, a clearing house or an intermediate broker, to hold or control client money, but only if:

(1) the firm transfers the client money:

(a) for the purpose of a transaction for a client through or with that person; or
(b) to meet a client's obligation to provide collateral for a transaction (for example, an initial margin requirement for a contingent liability investment); and

(2) in the case of a retail client, that customer has been notified that the client money may be transferred to the other person.

01/11/2007

CASS 4.3.31

In relation to the notification required by CASS 4.3.30 R(2), there is no need for a firm to make a separate disclosure in relation to each transfer made.

01/12/2004

CASS 4.3.32

A firm should not hold excess client money in its client transaction accounts with intermediate brokers, settlement agents and OTC counterparties; it should be held in a client bank account.

01/12/2004

Client bank accounts

CASS 4.3.33

The FSA generally requires a firm to place client money in a client bank account with an approved bank.

01/12/2004

CASS 4.3.34

(1) A firm must ensure that, subject to CASS 4.3.30 R and CASS 4.3.40 R, client money is held in a client bank account at one or more approved banks.
(2) If the firm is a trustee firm, it must:

(a) hold client money in a client bank account with an approved bank at all times; and
(b) maintain separate client bank accounts for each trust.

01/12/2004

CASS 4.3.35

A firm may open one or more client bank accounts in the form of a designated client bank account. Characteristics of these accounts are that:

(1) the account holds money of one or more clients;
(2) the account includes in its title the word 'designated';
(3) the clients whose money is in the account have each consented in writing to the use of the bank with which the client money is to be held; and
(4) in the event of the failure of that bank, the account is not pooled with any other type of account unless a primary pooling event occurs.

01/12/2004

CASS 4.3.36

A firm may open one or more client bank accounts in the form of a designated client fund account. Characteristics of these accounts are that:

(1) the account holds at least part of the client money of one or more clients, each of whom has consented to that money being held in the same client bank accounts at the same banks (the client money of such clients constituting a designated fund);
(2) the account includes in its title the words 'designated fund'; and
(3) in the event of the failure of a bank with which part of a designated fund is held, each designated client fund account held with the failed bank will form a pool with any other designated client fund account containing part of that same designated fund unless a primary pooling event occurs.

01/12/2004

CASS 4.3.37

The client money distribution rules set out the provisions of a primary pooling event on the failure of a firm.

01/12/2004

CASS 4.3.38

The effect of CASS 4.3.36 R is that a designated client fund account may be used for a client only where that client has consented to the use of that account and all other designated client fund accounts which may be pooled with it. A client who consents to the use of bank A and bank B should have his money held in a different designated client fund account at bank B from a client who has consented to the use of banks B and C.

01/12/2004

CASS 4.3.39

A firm may operate as many client bank accounts as it wishes. When, for example, a firm has previously operated a dividend claims bank account and a margined transaction bank account under the Financial Services (Client Money) Regulations 1991 and Financial Services (Client Money) (Supplementary) Regulations 1991, these will be client bank accounts for the purposes of the client money rules.

01/12/2004

CASS 4.3.40

A firm (other than a trustee firm) may hold client money with a bank that is not an approved bank if all of the following conditions are met:

(1) the client money relates to:

(a) the settlement of a transaction, or a series of transactions; or
(b) the distribution of income;

subject to the law or market practice of a jurisdiction outside the United Kingdom;
(2) because of the applicable law or market practice of that overseas jurisdiction, it is not possible to hold the client money in a client bank account with an approved bank;
(3) the firm holds the money with such a bank for no longer than is necessary to effect the transaction, or series of transactions;
(4) the firm notifies each relevant eligible counterparty and professional client and obtains the prior written consent of each relevant retail client that:

(a) the client money will not be held with an approved bank;
(b) in such circumstances, the legal and regulatory regime applying to the bank with which the client money is held will be different from that of the United Kingdom and, in the event of a failure of the bank, the client money may be treated differently from the treatment which would apply if the client money were held by an approved bank in the United Kingdom; and
(c) if it is the case, the particular bank has not accepted that it has no right of set off or counterclaim against client money held, in respect of any sum owed by the firm on any other account held at that bank, as required by CASS 4.3.48 R; and

(5) the client money is held in a designated bank account.

01/11/2007

A firm's selection of a bank

CASS 4.3.41

A firm owes a duty of care to a client when it decides where to place client money. The review required by CASS 4.3.42 R is intended to ensure that the risks inherent in placing client money with the banks are minimised or appropriately diversified by requiring a firm to consider carefully the bank or banks with which it chooses to place client money.

01/12/2004

CASS 4.3.42

Before a firm opens a client bank account and as often as is appropriate on a continuing basis (no less than once in each financial year), it must take reasonable steps to establish that the bank is appropriate for that purpose.

01/12/2004

CASS 4.3.43

A firm should consider diversifying placements of client money with more than one bank where the amounts are, for example, of sufficient size to warrant such diversification.

01/12/2004

CASS 4.3.44

When considering where to place client money and to determine the frequency of the appropriateness test under CASS 4.3.42 R, a firm should consider taking into account, together with any other relevant matters:

(1) the capital of the bank;
(2) the amount of client money placed, as a proportion of the bank's capital and deposits;
(3) the credit rating of the bank (if available); and
(4) to the extent that the information is available, the level of risk in the investment and loan activities undertaken by the bank and its affiliated companies.

01/12/2004

CASS 4.3.45

A firm will be expected to perform due diligence when opening a client bank account with a bank that is authorised by an EEA regulator. Any continuing assessment of that bank may be restricted to verification that it remains authorised by an EEA regulator.

01/12/2004

Group banks

CASS 4.3.46

Subject to CASS 4.3.40 R, a firm that holds or intends to hold client money with a bank which is in the same group as the firm must:

(1) undertake a continuous review in relation to that bank which is at least as rigorous as the review of any bank which is not in the same group, in order to ensure that the decision to use a group bank is appropriate for the client or trust;
(2) disclose in writing to its client at the outset of the client relationship or, if later, not less than 20 business days before it begins to hold client money of that client with that bank:

(a) that it is holding or intends to hold client money with a bank in the same group; and
(b) the identity of the bank concerned.

01/12/2004

CASS 4.3.47

If a client has notified a firm in writing that he does not wish his money to be held with a bank in the same group as the firm, the firm must either:

(1) place that client money in a client bank account with another bank in accordance with CASS 4.3.34 R; or
(2) return that client money to, or pay it to the order of, the client.

01/12/2004

Notification and acknowledgement of trust (banks)

CASS 4.3.48

When a firm opens a client bank account, the firm must give or have given written notice to the bank requesting the bank to acknowledge to it in writing:

(1) that all money standing to the credit of the account is held by the firm as trustee (or if relevant, as agent) and that the bank is not entitled to combine the account with any other account or to exercise any right of set-off or counterclaim against money in that account in respect of any sum owed to it on any other account of the firm; and
(2) that the title of the account sufficiently distinguishes that account from any account containing money that belongs to the firm, and is in the form requested by the firm.

01/12/2004

CASS 4.3.49

In the case of a client bank account in the United Kingdom, if the bank does not provide the acknowledgement referred to in CASS 4.3.48 R within 20 business days after the firm dispatched the notice, the firm must withdraw all money standing to the credit of the account and deposit it in a client bank account with another bank as soon as possible.

01/12/2004

CASS 4.3.50

In the case of a client bank account outside the United Kingdom, if the bank does not provide the acknowledgement referred to in CASS 4.3.48 R within 20 business days after the firm dispatched the notice, the firm must notify the client of this fact as set out in CASS 4.3.56 R(3).

01/12/2004

CASS 4.3.51

Firms are reminded of the provisions of CASS 4.3.40 R(4), that sets out the notification and consents required when using a bank that is not an approved bank.

01/12/2004

Notification and acknowledgement of trust (exchange, clearing house, intermediate broker or OTC counterparty)

CASS 4.3.52

A firm which undertakes any contingent liability investment for clients through an exchange, clearing house, intermediate broker or OTC counterparty must, before the client transaction account is opened with the exchange, clearing house, intermediate broker or OTC counterparty:

(1) notify the person with whom the account is to be opened that the firm is under an obligation to keep client money separate from the firm's own money, placing client money in a client bank account;
(2) instruct the person with whom the account is to be opened that any money paid to it in respect of that transaction is to be credited to the firm's client transaction account; and
(3) require the person with whom the account is to be opened to acknowledge in writing that the firm's client transaction account is not to be combined with any other account, nor is any right of set-off to be exercised by that person against money credited to the client transaction account in respect of any sum owed to that person on any other account.

01/12/2004

CASS 4.3.53

If the intermediate broker or OTC counterparty does not provide the acknowledgement required by CASS 4.3.52 R(3) within 20 business days of the dispatch of the notice and instruction, the firm must cease using the client transaction account with that broker or counterparty and arrange as soon as possible for the transfer or liquidation of any open positions and the repayment of any money.

01/12/2004

CASS 4.3.54

If a firm knows or reasonably ought to know that an intermediate broker or OTC counterparty will not provide the acknowledgement required by CASS 4.3.52 R, the firm should not open a client transaction account with that intermediate broker or OTC counterparty.

01/12/2004

CASS 4.3.55

If the exchange or clearing house does not provide the acknowledgement required by CASS 4.3.52 R(3) within 20 business days of the despatch of the notice and instruction, the firm must notify the client that a particular exchange or clearing house has not accepted that it has no right of set-off or counterclaim against money held in a client transaction account in respect of any sum owed on any other account of the firm, in that particular case or generally in an agreement entered into between the firm and its client.

01/12/2004

Notification to clients: use of an approved bank outside the United Kingdom

CASS 4.3.56

A firm must not hold client money in a client bank account outside the United Kingdom, unless the firm has previously disclosed to the client in writing:

(1) that his money may be deposited in a client bank account outside the United Kingdom;
(2) that in such circumstances, the legal and regulatory regime applying to the approved bank will be different from that of the United Kingdom and, in the event of a failure of the bank, his money may be treated in a different manner from that which would apply if the client money was held by a bank in the United Kingdom; and
(3) if it is the case, that a particular bank has not accepted that it has no right of set-off or counterclaim against money held in a client bank account in respect of any sum owed on any other account of the firm, notwithstanding the firm's request to the bank as required by CASS 4.3.48 R.

01/12/2004

CASS 4.3.57

There is no need for a firm to make a separate disclosure under CASS 4.3.56 R(1) and (2) in relation to each jurisdiction.

01/12/2004

CASS 4.3.58

Firms are reminded of the provisions of CASS 4.3.40 R(4), that sets out the notification and consents required when using a bank that is an not approved bank.

01/12/2004

CASS 4.3.59

If a client has notified a firm in writing before entering into a transaction that client money is not to be held in a particular jurisdiction, the firm must either:

(1) hold the client money in a client bank account in a jurisdiction to which the client has not objected; or
(2) return the client money to, or to the order of, the client.

01/12/2004

CASS 4.3.60

Firms are reminded of the provisions of CASS 4.3.40 R(4), that sets out the notification and consents required when using a bank that is not an approved bank.

01/12/2004

Notification to clients: use of an intermediate broker, settlement agent or OTC counterparty outside the United Kingdom.

CASS 4.3.61

A firm must not undertake any transaction for a client that involves client money being passed to an intermediate broker, settlement agent or OTC counterparty located in a jurisdiction outside the United Kingdom, unless the firm has previously disclosed in writing to the client:

(1) that his client money may be passed to a person outside the United Kingdom; and
(2) that, in such circumstances, the legal and regulatory regime applying to the intermediate broker, settlement agent or OTC counterparty will be different from that of the United Kingdom and, in the event of a failure of the intermediate broker, settlement agent or OTC counterparty, this money may be treated in a different manner from that which would apply if the money was held by an intermediate broker, settlement agent or OTC counterparty in the United Kingdom.

01/12/2004

CASS 4.3.62

There is no need for a firm to make a separate disclosure under CASS 4.3.61 R in relation to each jurisdiction.

01/12/2004

CASS 4.3.63

If a client has notified a firm before entering into a transaction that he does not wish his money to be passed to an intermediate broker, settlement agent or OTC counterparty located in a particular jurisdiction, the firm must either:

(1) hold the client money in a client bank account in the United Kingdom or a jurisdiction to which the client has not objected and pay its own money to the firm's own account with the broker, agent or counterparty; or
(2) return the money to, or to the order of, the client.

01/12/2004

Notification to the FSA: failure of a bank, intermediate broker, settlement agent or OTC counterparty

CASS 4.3.64

On the failure of a third party with which money is held, a firm must notify the FSA:

(1) as soon as it becomes aware of the failure of any bank, intermediate broker, settlement agent, OTC counterparty or other entity with which it has placed, or to which it has passed, client money; and
(2) as soon as reasonably practical, whether it intends to make good any shortfall that has arisen or may arise and of the amounts involved.

01/12/2004

Client money calculation

CASS 4.3.65

The purpose of the client money calculation is:

(1) for the normal approach, to act as a check that the amount of client money that is segregated at banks and third parties is sufficient to meet the firm's obligations to its clients on a daily basis;
(2) for the alternative approach, to calculate the appropriate amount of client money to be segregated at banks and third parties which is sufficient to meet a firm's obligations to its clients on a daily basis.

01/12/2004

CASS 4.3.66

Each business day, a firm that adopts the normal approach in accordance with CASS 4.3.8 R must:

(1) check whether its client money resource, being the aggregate balance on the firm's client bank accounts, as at the close of business on the previous business day, was at least equal to the client money requirement, as defined in CASS 4.3.71 R, as at the close of business on that day; and
(2) ensure that:

(a) any shortfall is paid into a client bank account by the close of business on the day the calculation is performed; or
(b) any excess is withdrawn within the same time period unless CASS 4.3.5 R or CASS 4.3.6 R applies.

01/12/2004

CASS 4.3.67

Each business day, a firm that adopts the alternative approach, in accordance with CASS 4.3.8 R, must ensure that its client money resource, being the aggregate balance on the firm's client bank accounts, as at the close of business on that business day is at least equal to the client money requirement, as defined in CASS 4.3.71 R, as at the close of business on the previous business day.

01/12/2004

CASS 4.3.68

No excess or shortfall should arise when adopting the alternative approach.

01/12/2004

CASS 4.3.69

If a firm is operating under the alternative approach allowed by CASS 4.3.8 R, and draws a cheque on its own bank account, it will be expected to account for those cheques that have not yet cleared under CASS 4.3.101 R when performing the client money calculation in CASS 4.3.67 R. An historic average estimate of uncleared cheques may be used to satisfy this obligation.

01/12/2004

CASS 4.3.70

For the purposes of CASS 4.3.66 R and CASS 4.3.67 R, a firm should use the values contained in its accounting records, for example its cash book, rather than values contained in statements received from its banks and other third parties.

01/12/2004

Client money requirement

CASS 4.3.71

The client money requirement is either:

(1) (subject to CASS 4.3.85 R) the sum of, for all clients:

(a) the individual client balances calculated in accordance with CASS 4.3.72 R, excluding:

(i) individual client balances which are negative (that is, debtors); and
(ii) clients' equity balances calculated in accordance with CASS 4.3.79 R; and

(b) the total margined transaction requirement, calculated in accordance with CASS 4.3.81 R; or

(2) the sum of:

(a) for each client bank account:

(i) the amount which the firm's records show as held on that account; and
(ii) an amount that offsets each negative net amount which the firm's records show attributed to that account for an individual client; and

(b) the total margined transaction requirement, which is calculated in accordance with CASS 4.3.81 R.

01/12/2004

General transactions

CASS 4.3.72

The individual client balance for each client is calculated in accordance with CASS 4.3.73 R.

01/12/2004

CASS 4.3.73

This table belongs to CASS 4.3.72 R.

Individual client balance calculation

Free money (no trades) and

sale proceeds due to the client:

(a)

in respect of principal deals when the client has delivered the designated investments; and

(b)

in respect of agency deals, when either:

(i)

the sale proceeds have been received by the firm and the client has delivered the designated investments; or

(ii)

the firm holds the designated investments for the client; and

the cost of purchases:

(c)

in respect of principal deals, paid for by the client but the firm has not delivered the designated investments to the client; and

(d)

in respect of agency deal, paid for by the client when either:

(i)

the firm has not remitted the money to, or to the order of, the counterparty; or

(ii)

the designated investments have been received by the firm but have not been delivered to the client;

Less

money owed by the client in respect of unpaid purchases by or for the client if delivery of those designated investments has been made to the client; and

Proceeds remitted to the client in respect of sales transactions by or for the client if the client has not delivered the designated investments.

Individual Client Balance 'X' = (A+B+C1+C2+D+E1+E2)-F-G

01/12/2004

CASS 4.3.74

In CASS 4.3.72 R a firm must calculate the individual client balance using the contract value of any client purchases or sales.

01/12/2004

CASS 4.3.75

A firm may choose to segregate designated investments instead of the value identified in CASS 4.3.73 R (except E1) if it ensures that the designated investments are held in such a manner that the firm cannot use them for its own purposes.

01/12/2004

CASS 4.3.76

Segregation in the context of CASS 4.3.75 R can take many forms, including the holding of a safe custody investment in a nominee name and the safekeeping of certificates evidencing title in a fire resistant safe. It is not the intention that all the custody rules should be applied to designated investments held in the course of settlement.

01/12/2004

CASS 4.3.77

In determining the client money requirement under CASS 4.3.71 R, a firm need not include money held in accordance with CASS 4.1.15 R and CASS 4.1.16 R (delivery versus payment).

01/12/2004

CASS 4.3.78

Firms are reminded of the provisions of CASS 4.3.10 R and CASS 4.3.12 R which require a firm to segregate client money into client bank accounts within a certain period. In determining the client money requirement under CASS 4.3.71 R, a firm:

(1) should include dividends received and interest earned and allocated;
(2) may deduct outstanding fees, calls, rights and interest charges and other amounts owed by the client in accordance with CASS 4.1.20 E;
(3) need not include client money which, under CASS 4.3.21 R(2), is not required to be segregated nor include client money forwarded to the firm, in accordance with CASS 4.3.17 R, but not received;
(4) should take into account any client money arising from CASS 4.3.95 R; and
(5) should include any unallocated client money.

01/12/2004

Equity balance

CASS 4.3.80

A firm's equity balance, whether with an exchange, intermediate broker or OTC counterparty, means the amount which the firm would be liable to pay to the exchange, intermediate broker or OTC counterparty (or vice versa) in respect of the firm's margined transactions if each of the open positions of the firm's clients was liquidated at the closing or settlement prices published by the relevant exchange or other appropriate pricing source and the firm's account with the exchange, intermediate broker or OTC counterparty is closed.

01/12/2004

Margined transaction requirement

CASS 4.3.81

The total margined transaction requirement is:

(1) the sum of each of the client's equity balance which are positive;

Less

(2) the proportion of any individual negative client equity balance which is secured by approved collateral; and
(3) the net aggregate of the firm's equity balance (negative balances being deducted from positive balances) on transaction accounts for clients with exchanges, clearing houses, intermediate brokers and OTC counterparties.

01/11/2007

CASS 4.3.82

To meet a shortfall that has arisen in respect of the requirement in CASS 4.3.71 R(2), a firm may utilise its own approved collateral provided it is held on terms specifying when it is to be realised for the benefit of clients, it is clearly identifiable from the firm's own property and the relevant terms are evidenced in writing by the firm. In addition, the proceeds of the sale of that collateral should be paid into a client bank account.

01/12/2004

CASS 4.3.83

If a firm's total margined transaction requirement is negative, the firm should treat it as zero for the purposes of calculating its client money requirement in accordance with CASS 4.3.71 R(2).

01/12/2004

CASS 4.3.84

The terms 'client equity balance' and 'firm's equity balance' in CASS 4.3.80 R refer to cash values and do not include non-cash collateral or other designated investments held in respect of a margined transaction.

01/11/2007

Reduced client money requirement option

CASS 4.3.85

(1) When, in respect of a client, there is a positive individual client balance and a negative client equity balance, a firm may offset the credit against the debit and hence have a reduced individual client balance in CASS 4.3.72 R for that client.
(2) When, in respect of a client, there is a negative individual client balance and a positive client equity balance, a firm may offset the credit against the debit and hence have a reduced client equity balance in CASS 4.3.81 R for that client.

01/11/2007

CASS 4.3.86

The effect of CASS 4.3.85 R is to allow a firm to offset, on a client by client basis, a negative amount with a positive amount arising out of the calculations in CASS 4.3.72 R and CASS 4.3.81 R, and, by so doing, reduce the amount the firm is required to segregate.

01/12/2004

Failure to perform calculations

CASS 4.3.87

A firm must notify the FSA immediately if it is unable to, or does not, perform the daily calculation required by CASS 4.3.66 R or CASS 4.3.67 R.

01/12/2004

CASS 4.3.88

A firm must notify the FSA immediately it becomes aware that it may not be able to make good any shortfall identified by CASS 4.3.66 R by the close of business on the day the calculation is performed.

01/12/2004

Reconciliation of client money balances: frequency of reconciliation

CASS 4.3.89

A firm must perform a reconciliation of the client money balances which it holds, or for which it is responsible, as frequently as is necessary to ensure the accuracy of its record of money so held, and no less than once in every 25 business days.

01/12/2004

CASS 4.3.90

In determining whether the minimum acceptable frequency is sufficient, a firm should consider the risks to which the business is exposed, such as the volume of business, and where and with whom the client money is held.

01/12/2004

CASS 4.3.91

A firm must complete the reconciliation of client money within ten business days of the date to which the reconciliation relates.

01/12/2004

Reconciliation method

CASS 4.3.92

A firm must compare:

(1) the balance on each client bank account as recorded by the firm with the balance on that account as set out on the statement or other form of confirmation issued by the bank with which those accounts are held; and
(2) the balance, currency by currency, on each client transaction account as recorded by the firm, with the balance on that account as set out in the statement or other form of confirmation issued by the person with whom the account is held;

and identify any discrepancies between them.

01/12/2004

CASS 4.3.93

Any approved collateral held in accordance with the client money rules must be included within this reconciliation.

01/12/2004

Reconciliation discrepancies

CASS 4.3.94

When any discrepancy arises as a result of the reconciliation carried out under CASS 4.3.92 R, the firm must identify the reason for the discrepancy and correct it as soon as possible, unless the discrepancy arises solely as a result of timing differences between the accounting systems of the party providing the statement or confirmation and that of the firm.

01/12/2004

CASS 4.3.95

While a firm is unable to resolve a difference arising from a reconciliation, and one record or a set of records examined by the firm during its reconciliation indicates that there is a need to have a greater amount of client money or approved collateral than is in fact the case, the firm must assume, until the matter is finally resolved, that the record or set of records is accurate and pay its own money into a relevant account.

01/12/2004

CASS 4.3.96

Items recorded or held within a suspense or error account fall within the scope of discrepancies.

01/12/2004

CASS 4.3.97

A firm must notify the FSA as soon as possible if it is unable to comply with any of the requirements of CASS 4.3.89 R, CASS 4.3.91 R, CASS 4.3.92 R, CASS 4.3.94 R and CASS 4.3.95 R.

01/12/2004

Discharge of fiduciary duty

CASS 4.3.98

The purpose of CASS 4.3.99 R to CASS 4.3.102 R is to set out those situations in which a firm will have fulfilled its contractual and fiduciary obligations in relation to any client money held for or on behalf of its client, or in relation to the firm's ability to require repayment of that money from a third party.

06/07/2006

CASS 4.3.99

Money ceases to be client money if it is paid:

(1) to the client, or a duly authorised representative of the client; or
(2) to a third party on the instruction of the client, unless it is transferred to a third party in the course of effecting a transaction, in accordance with CASS 4.3.30 R; or
(3) into a bank account of the client (not being an account which is also in the name of the firm); or
(4) to the firm itself, when it is due and payable to the firm in accordance with CASS 4.1.19 R to CASS 4.1.24 G; or
(5) to the firm itself, when it is an excess in the client bank account as set out in CASS 4.3.66 R(2)(b).

01/12/2004

CASS 4.3.100

When a firm wishes to transfer client money balances to a third party in the course of transferring its business to another firm, it should do so in compliance with CASS 4.3.99 R.

01/12/2004

CASS 4.3.101

When a firm draws a cheque or other payable order to discharge its fiduciary duty under CASS 4.3.99 R, it must continue to treat the sum concerned as client money until the cheque or order is presented and paid by the bank.

01/12/2004

CASS 4.3.102

For the purposes of CASS 4.1.19 R, if a firm makes a payment to, or on the instructions of, a client, from an account other than a client bank account, until that payment has cleared, no equivalent sum from a client bank account for reimbursement will become due and payable to the firm.

01/12/2004

Allocated but unclaimed client money

CASS 4.3.103

The purpose of CASS 4.3.104 R is to allow a firm, in the normal course of its business, to cease to treat as client money any balances, allocated to an individual client, when those balances remain unclaimed.

01/12/2004

CASS 4.3.104

A firm may cease to treat as client money any unclaimed client money balance if it can demonstrate that it has taken reasonable steps to trace the client concerned and to return the balance.

01/12/2004

CASS 4.3.105

(1) Reasonable steps should include:

(a) entering into a written agreement, in which the client consents to the firm releasing, after the period of time specified in (b), any client money balances, for or on behalf of that client, from client bank accounts;
(b) determining that there has been no movement on the client's balance for a period of at least six years (notwithstanding any payments or receipts of charges, interest or similar items);
(c) writing to the client at the last known address informing the client of the firm's intention of no longer treating that balance as client money, giving the client 28 days to make a claim;
(d) making and retaining records of all balances released from client bank accounts; and
(e) undertaking to make good any valid claim against any released balances;

(2) Compliance with (1) may be relied on as tending to establish compliance with CASS 4.3.104 R;
(3) Contravention of (1) may be relied on as tending to establish contravention of CASS 4.3.104 R.

01/12/2004

CASS 4.3.106

When a firm gives an undertaking in CASS 4.3.105 E(1)(e), it should make arrangements authorised by the firm's relevant controllers that are legally enforceable by any person with a valid claim to such money.

01/12/2004

Commodity Futures Trading Commission Part 30 exemption order

CASS 4.3.106A

United States (US) legislation restricts the ability of non-US firms to trade on behalf of US customers on non-US futures and options exchanges. The relevant US regulator (the CFTC) operates an exemption system for firms authorised by the FSA. The FSA sponsors the application from a firm for exemption from Part 30 of the General Regulations under the US Commodity Exchange Act in line with this system. The application forms and associated information can be found on the FSA website in the "Forms" section.

01/01/2005

CASS 4.3.107

A firm with a Part 30 exemption order undertakes to the CFTC that it will refuse to allow any US customer to opt not to have his money treated as client money if it is held or received in respect of transactions on non-US exchanges, unless that US customer is an "eligible contract participant" as defined in section 1a(12) of the Commodity Exchange Act, 7 U.S.C. In doing so, the firm is representing that it will not make use of the opt-out arrangements in CASS 4.1.8 G to CASS 4.1.11 R in relation to that business.

01/01/2005

CASS 4.3.108

A firm with a Part 30 exemption order which also operates an LME bond arrangement for the benefit of US-resident investors, must exclude the client's equity balance for transactions undertaken on the London Metal Exchange on behalf of those US-resident investors from the calculation required by CASS 4.3.81 R.

01/11/2007

CASS 4.3.109

A firm must not reduce the amount of, or cancel a letter of credit issued under, an LME bond arrangement where this will cause the firm to be in breach of its Part 30 exemption order.

01/12/2004

CASS 4.3.110

A firm must notify the FSA immediately it arranges the issue of an individual letter of credit under an LME bond arrangement.

01/12/2004

Records

CASS 4.3.111

A firm must ensure that proper records, sufficient to show and explain the firm's transactions and commitments in respect of its client money, are made and retained for a period of three years after they were made.

01/12/2004

CASS 4.4

Client money distribution

01/12/2004

Application

CASS 4.4.1

CASS 4.4 (the client money distribution rules) applies to a firm that holds client money which is subject to the client money rules when a primary pooling event or a secondary pooling event occurs.

01/12/2004

CASS 4.4.2

The client money distribution rules have force and effect on any firm that holds client money. Therefore, they will apply to a UK branch of a non-EEA firm. In this case the UK branch of the firm may be treated as if the branch itself is a free standing entity subject to the client money distribution rules.

01/12/2004

Purpose

CASS 4.4.3

The client money distribution rules seek to facilitate the timely return of client money to a client in the event of the failure of a firm or third party at which the firm holds client money.

01/12/2004

Failure of the authorised firm: primary pooling event

CASS 4.4.4

A primary pooling event triggers a notional pooling of all the client money, in every type of client money account, and the obligation to distribute it.

01/12/2004

CASS 4.4.5

A primary pooling event occurs:

(1) on the failure of the firm; or
(2) on the vesting of assets in a trustee in accordance with an 'assets requirement' imposed under section 48(1)(b) of the Act; or
(3) on the coming into force of a requirement for all client money held by the firm; or
(4) when the firm notifies, or is in breach of its duty to notify, the FSA, in accordance with CASS 4.3.97 R, that it is unable correctly to identify and allocate in its records all valid claims arising as a result of a secondary pooling event.

01/12/2004

CASS 4.4.6

CASS 4.4.5 R(4) does not apply so long as:

(1) the firm is taking steps, in consultation with the FSA, to establish those records; and
(2) there are reasonable grounds to conclude that the records will be capable of rectification within a reasonable period.

01/12/2004

Pooling and distribution

CASS 4.4.7

If a primary pooling event occurs:

(1) client money held in each client money account of the firm is treated as pooled; and
(2) the firm must distribute that client money in accordance with CASS 4.2.3 R, so that each client receives a sum which is rateable to the client money entitlement calculated in accordance with CASS 4.3.85 R.

01/12/2004

CASS 4.4.8

A client's main claim is for the return of client money held in a client bank account. A client may claim for any shortfall against money held in a firm's own account. For that claim, the client will be an unsecured creditor of the firm.

01/12/2004

Client money received after the failure of the firm

CASS 4.4.9

Client money received by the firm after a primary pooling event must not be pooled with client money held in any client money account operated by the firm at the time of the primary pooling event. It must be placed in a client bank account that has been opened after that event and must be handled in accordance with the client money rules, and returned to the relevant client without delay, except to the extent that:

(1) it is client money relating to a transaction that has not settled at the time of the primary pooling event; or
(2) it is client money relating to a client, for whom the client money entitlement, calculated in accordance with CASS 4.3.85 R, shows that money is due from the client to the firm at the time of the primary pooling event.

01/12/2004

CASS 4.4.10

Client money received after the primary pooling event relating to an unsettled transaction should be used to settle that transaction. Examples of such transactions include:

(1) an equity transaction with a trade date before the date of the primary pooling event and a settlement date after the date of the primary pooling event; or
(2) a contingent liability investment that is 'open' at the time of the primary pooling event and is due to settle after the primary pooling event.

01/12/2004

CASS 4.4.11

If a firm receives a mixed remittance after a primary pooling event, it must:

(1) pay the full sum into the separate client bank account opened in accordance with CASS 4.4.9 R; and
(2) pay the money that is not client money out of that client bank account into a firm's own bank account within one business day of the day on which the firm would normally expect the remittance to be cleared.

01/12/2004

CASS 4.4.12

Whenever possible the firm should seek to split a mixed remittance before the relevant accounts are credited.

01/12/2004

Failure of a bank, intermediate broker, settlement agent or OTC counterparty: secondary pooling events

CASS 4.4.13

If both a primary pooling event and a secondary pooling event occur, the provisions of this section relating to a primary pooling event apply.

01/12/2004

CASS 4.4.14

A secondary pooling event occurs on the failure of a third party to which client money held by the firm has been transferred under CASS 4.3.8 R or CASS 4.3.30 R.

01/12/2004

CASS 4.4.15

CASS 4.4.20 R to CASS 4.4.32 R do not apply if, on the failure of the third party, the firm repays to its clients or pays into a client bank account, at an unaffected bank, an amount equal to the amount of client money which would have been held if a shortfall had not occurred at that third party.

01/12/2004

CASS 4.4.16

When client money is transferred to a third party, a firm continues to owe a fiduciary duty to the client. However, consistent with a fiduciary's responsibility (whether as agent or trustee) for third parties under general law, a firm will not be held responsible for a shortfall in client money caused by a third party failure if it has complied with those duties.

01/12/2004

CASS 4.4.17

To comply with its duties the firm should show proper care:

(1) in the selection of a third party; and
(2) when monitoring the performance of the third party.

By demonstrating compliance with CASS 4.3.42 R, a firm should be able to demonstrate that it has taken reasonable steps to comply with its duties.

01/12/2004

Failure of a bank

CASS 4.4.18

When a bank fails and the firm decides not to make good the shortfall in the amount of client money held at that bank, a secondary pooling event will occur in accordance with CASS 4.4.20 R. The firm would be expected to reflect the shortfall that arises at the failed bank in the daily client money calculation by reducing the client money resource and client money requirement accordingly.

01/12/2004

CASS 4.4.19

The client money distribution rules seek to ensure that clients who have previously specified that they are not willing to accept the risk of the bank that has failed, and who therefore requested that their client money be placed in a designated client bank account at a different bank, should not suffer the loss of the bank that has failed.

01/12/2004

Failure of a bank: pooling

CASS 4.4.20

If a secondary pooling event occurs as a result of the failure of a bank where one or more general client bank accounts are held, then:

(1) in relation to every general client bank account of the firm, the provisions of CASS 4.4.22 R and CASS 4.4.27 R to CASS 4.4.29 G will apply:
(2) in relation to every designated client bank account held by the firm with the failed bank, the provisions of CASS 4.4.24 R and CASS 4.4.27 R to CASS 4.4.29 G will apply;
(3) in relation to each designated client fund account held by the firm with the failed bank, the provisions of CASS 4.4.25 R and CASS 4.4.27 R to CASS 4.4.29 G will apply;
(4) any money held at a bank, other than the bank that has failed, in designated client bank accounts, is not pooled with any other client money; and
(5) any money held in a designated client fund account, no part of which is held by the bank that has failed, is not pooled with any other client money.

01/12/2004

CASS 4.4.21

If a secondary pooling event occurs as a result of the failure of a bank where one or more designated client bank accounts or designated client fund accounts are held, then;

(1) in relation to every designated client bank account held by the firm with the failed bank, the provisions of CASS 4.4.24 R and CASS 4.4.27 R to CASS 4.4.29 G will apply; and
(2) in relation to each designated client fund account held by the firm with the failed bank, the provisions of CASS 4.4.25 R and CASS 4.4.27 R to CASS 4.4.29 G will apply.

01/12/2004

CASS 4.4.22

Money held in each general client bank account and client transaction account of the firm must be treated as pooled and:

(1) any shortfall in client money held, or which should have been held, in general client bank accounts and client transaction accounts, that has arisen as a result of the failure of the bank, must be borne by all the clients whose client money is held in either a general client bank account or client transaction account of the firm, rateably in accordance with their entitlements;
(2) a new client money entitlement must be calculated for each client by the firm, to reflect the requirements in (1), and the firm's records must be amended to reflect the reduced client money entitlement;
(3) the firm must make and retain a record of each client's share of the client money shortfall at the failed bank until the client is repaid; and
(4) the firm must use the new client entitlements, calculated in accordance with (2), when performing the daily client money calculation in accordance with CASS 4.3.65 G to CASS 4.3.85 R.

01/12/2004

CASS 4.4.23

The term 'which should have been held' is a reference to the failed bank's failure to hold the client money at the time of the pooling event.

01/12/2004

CASS 4.4.24

For each client with a designated client bank account held at the failed bank:

(1) any shortfall in client money held, or which should have been held, in designated client bank accounts that has arisen as a result of the failure, must be borne by all the clients whose client money is held in a designated client bank account of the firm at the failed bank, rateably in accordance with their entitlements;
(2) a new client money entitlement must be calculated for each of the relevant clients by the firm, and the firm's records must be amended to reflect the reduced client money entitlement;
(3) the firm must make and retain a record of each client's share of the client money shortfall at the failed bank until the client is repaid; and
(4) the firm must use the new client money entitlements, calculated in accordance with (2), when performing the daily client money calculation, in accordance with CASS 4.3.65 G to CASS 4.3.85 R.

01/12/2004

CASS 4.4.25

Money held in each designated client fund account with the failed bank must be treated as pooled with any other designated client fund accounts of the firm which contain part of the same designated fund and:

(1) any shortfall in client money held, or which should have been held, in designated client fund accounts that has arisen as a result of the failure, must be borne by each of the clients whose client money is held in that designated fund, rateably in accordance with their entitlements;
(2) a new client entitlement must be calculated for each client by the firm, in accordance with (1), and the firm's records must be amended to reflect the reduced client money entitlement;
(3) the firm must make and retain a record of each client's share of the client money shortfall at the failed bank until the client is repaid; and
(4) the firm must use the new client money entitlements, calculated in accordance with (2), when performing the daily client money calculation in accordance with CASS 4.3.66 R to CASS 4.3.85 R.

06/05/2008

CASS 4.4.26

A client whose money was held, or which should have been held, in a designated client bank account with a bank that has failed is not entitled to claim in respect of that money against any other client bank account or client transaction account of the firm.

01/12/2004

Client money received after the failure of a bank

CASS 4.4.27

Client money received by the firm after the failure of a bank, that would otherwise have been paid into a client bank account at that bank:

(1) must not be transferred to the failed bank unless specifically instructed by the client in order to settle an obligation of that client to the failed bank; and
(2) must be, subject to (1), placed in a separate client bank account that has been opened after the secondary pooling event and either:

(a) on the written instruction of the client, transferred to a bank other than the one that has failed; or
(b) returned to the client as soon as possible.

01/12/2004

CASS 4.4.28

If a firm receives a mixed remittance after the secondary pooling event which consists of client money that would have been paid into a general client bank account, a designated client bank account or a designated client fund account maintained at the bank that has failed, it must:

(1) pay the full sum into a client bank account other than one operated at the bank that has failed; and
(2) pay the money that is not client money out of that client bank account within one business day of the day on which the firm would normally expect the remittance to be cleared.

01/12/2004

CASS 4.4.29

Whenever possible the firm should seek to split a mixed remittance before the relevant accounts are credited.

01/12/2004

Failure of an intermediate broker, settlement agent or OTC counterparty: Pooling

CASS 4.4.30

If a secondary pooling event occurs as a result of the failure of an intermediate broker, settlement agent or OTC counterparty, then in relation to every general client bank account and client transaction account of the firm, the provisions of CASS 4.4.31 R and CASS 4.4.27 R to CASS 4.4.29 G will apply.

01/12/2004

CASS 4.4.31

Money held in each general client bank account and client transaction account of the firm must be treated as pooled and:

(1) any shortfall in client money held, or which should have been held, in general client bank accounts and client transaction account, that has arisen as a result of the failure, must be borne by all the clients whose client money is held in either a general client bank account or a client transaction accounts of the firm, rateably in accordance with their entitlements;
(2) a new client money entitlement must be calculated for each client by the firm, to reflect the requirements of (1), and the firm's records must be amended to reflect the reduced client money entitlement;
(3) the firm must make and retain a record of each client's share of the client money shortfall at the failed intermediate broker, settlement agent or OTC counterparty until the client is repaid; and
(4) the firm must use the new client money entitlements, calculated in accordance with (2), when performing the daily client money calculation, in accordance with CASS 4.3.65 G to CASS 4.3.85 R.

01/12/2004

Client money received after the failure of an intermediate broker, settlement agent or OTC counterparty

CASS 4.4.32

Client money received by the firm after the failure of an intermediate broker, settlement agent or OTC counterparty, that would otherwise have been paid into a client transaction account at that intermediate broker, settlement agent or OTC counterparty:

(1) must not be transferred to the failed third party unless specifically instructed by the client in order to settle an obligation of that client to the failed intermediate broker, settlement agent or OTC counterparty; and
(2) must be, subject to (1), placed in a separate client bank account that has been opened after the secondary pooling event and either:

(a) on the written instruction of the client, transferred to a third party other than the one that has failed; or
(b) returned to the client as soon as possible.

01/12/2004

Notification on the failure of a bank, intermediate broker, settlement agent or OTC counterparty

CASS 4.4.33

The provisions of CASS 4.3.64 R apply.

01/12/2004

CASS 4.5

Mandate Rules

01/12/2004

CASS 5

Client money: insurance mediation activity

CASS 5.1

Application

14/01/2005

CASS 5.1.1

(1) CASS 5.1 to CASS 5.6 apply, subject to (2), (3) and CASS 5.1.3 R to CASS 5.1.6 R, to a firm that receives or holds money in the course of or in connection with its insurance mediation activity.
(2) CASS 5.1 to CASS 5.6 do not, subject to (3), apply:

(a) to a firm to the extent that it acts in accordance with the non-directive client money chapter or the MiFID client money chapter; or
(b) to a firm in carrying on an insurance mediation activity which is in respect of a reinsurance contract; or
(c) to an insurance undertaking in respect of its permitted activities; or
(d) to a managing agent when acting as such; or
(e) with respect to money held by a firm which:

(i) is an approved bank; and
(ii) has requisite capital under article 4(4)(b) of the Insurance Mediation Directive;

but only when held by the firm in an account with itself, in which case the firm must notify the client (whether through a client agreement, terms of business, or otherwise in writing) that:

(iii) money held for that client in an account with the approved bank will be held by the firm as banker and not as trustee (or in Scotland as agent); and
(iv) as a result, the money will not be held in accordance with CASS 5.1 to CASS 5.6.

(3) A firm may elect to comply with:

(a) CASS 5.1 to CASS 5.6 in respect of client money which it receives in the course of carrying on insurance mediation activity in respect of reinsurance contracts; and
(b) CASS 5.1, CASS 5.2 and CASS 5.4 to CASS 5.6 in respect of money which it receives in the course of carrying on an activity which would be insurance mediation activity, and which money would be client money, but for article 72D of the Regulated Activities Order (Large risks contracts where risk situated outside the EEA);

but the election must be in respect of all the firm's business which consists of that activity.
(4) A firm must keep a record of any election in (3).

01/11/2007

CASS 5.1.2

A firm that is an approved bank, and relies on the exemption under CASS 5.1.1 R (2)(e), should be able to account to all of its clients for amounts held on their behalf at all times. A bank account opened with the firm that is in the name of the client would generally be sufficient. When money from clients deposited with the firm is held in a pooled account, this account should be clearly identified as an account for clients. The firm should also be able to demonstrate that an amount owed to a specific client that is held within the pool can be reconciled with a record showing that individual's client balance and is, therefore, identifiable at any time.

14/01/2005

CASS 5.1.3

An authorised professional firm regulated by The Law Society (of England and Wales), The Law Society of Scotland or The Law Society of Northern Ireland must comply with the rules of its designated professional body as specified in CASS 5.1.4 R, in force on 14 January 2005, and if it does so, it will be deemed to comply with CASS 5.2 to CASS 5.6.

14/01/2005

CASS 5.1.4

For the purposes of CASS 5.1.3 R the relevant rules are:

(1) If regulated by the Law Society (of England and Wales);

(a) the Solicitors' Accounts Rules 1998; or
(b) where applicable, the Solicitors Overseas Practice Rules 1990;

(2) if regulated by the Law Society of Scotland, the Solicitors' (Scotland) Accounts, Accounts Certificate, Professional Practice and Guarantee Fund Rules 2001;
(3) if regulated by the Law Society of Northern Ireland, the Solicitors' Accounts Regulations 1998.

14/01/2005

CASS 5.1.4A

(1) A firm will, subject to (3), be deemed to comply with CASS 5.3 to CASS 5.6 if it receives or holds client money and it either:

(a) in relation to a service charge, complies with the requirement to segregate such money in accordance with section 42 of the Landlord and Tenant Act 1987 ("the 1987 Act"); or
(b) in relation to money which is clients' money for the purpose of the Royal Institution of Chartered Surveyors' Rules of Conduct ("RICS rules") in force as at 14 January 2005, it complies with the requirement to segregate and account for such money in accordance with the RICS Members' Accounts rules.

(2) Paragraph (1)(a) also applies to a firm in Scotland or in Northern Ireland if in acting as a property manager the firm receives or holds a service charge and complies (so far as practicable) with section 42 of the 1987 Act as if the requirements of that provision applied to it.
(3) In addition to complying with (1), a firm must ensure that an account in which money held pursuant to the trust fund mentioned in section 42(3) of the 1987 Act or an account maintained in accordance with the RICS rules satisfies the requirements in CASS 5.5.49 R to the extent that the firm will hold money as trustee or otherwise on behalf of its clients.

14/01/2005

CASS 5.1.5

Subject to CASS 5.1.5A R money is not client money when:

(1) it becomes properly due and payable to the firm:

(a) for its own account; or
(b) in its capacity as agent of an insurance undertaking where the firm acts in accordance with CASS 5.2; or

(2) it is otherwise received by the firm pursuant to an arrangement made between an insurance undertaking and another person (other than a firm) by which that other person has authority to underwrite risks, settle claims or handle refunds of premiums on behalf of that insurance undertaking outside the United Kingdom and where the money relates to that business.

14/01/2005

CASS 5.1.5A

CASS 5.1.5 R (1)(b) and CASS 5.1.5 R (2) do not apply, and hence money is client money, in any case where:

(1) in relation to an activity specified in CASS 5.2.3 R (1) (a) to CASS 5.2.3 R (1) (c), the insurance undertaking has agreed that the firm may treat money which it receives and holds as agent of the undertaking, as client money and in accordance with the provisions of CASS 5.3 to CASS 5.6; and
(2) the agreement in (1) is in writing and adequate to show that the insurance undertaking consents to its interests under the trusts (or in Scotland agency) in CASS 5.3.2 R or CASS 5.4.7 R being subordinated to the interests of the firm's other clients.

14/01/2005

CASS 5.1.6

Except where a firm and an insurance undertaking have (in accordance with CASS 5.1.5A R) agreed otherwise, for the purposes of CASS 5.1 to CASS 5.6 an insurance undertaking (when acting as such) with whom a firm conducts insurance mediation activity is not to be treated as a client of the firm.

14/01/2005

Purpose

CASS 5.1.7

(1) Principle 10 (Clients' assets) requires a firm to arrange adequate protection for clients' assets when the firm is responsible for them. An essential part of that protection is the proper accounting and handling of client money. The rules in CASS 5.1 to CASS 5.6 also give effect to the requirement in article 4.4 of the Insurance Mediation Directive that all necessary measures should be taken to protect clients against the inability of an insurance intermediary to transfer premiums to an insurance undertaking or to transfer the proceeds of a claim or premium refund to the insured.

(2) There are two particular approaches which firms can adopt which reflect options given in article 4.4. The first is to provide by law or contract for a transfer of risk from the insurance intermediary to the insurance undertaking (CASS 5.2). The second is that client money is strictly segregated by being transferred to client accounts that cannot be used to reimburse other creditors in the event of the firm's insolvency (CASS 5.3 and CASS 5.4 provide different means of achieving such segregation). CASS 5.1.5A R permits a firm subject to certain conditions to treat money which it collects as agent of an insurance undertaking as client money; the principle of strict segregation is, however, satisfied because such undertakings must agree to their interests being subordinated to the interests of the firm's other clients.

01/11/2007

CASS 5.1.8

Firms which carry on designated investment business which may, for example, involve them handling client money in respect of life assurance business should refer to the non-directive client money chapter which includes provisions enabling firms to elect to comply solely with that chapter or with the insurance client money chapter in respect of that business. Firms that also carry on MiFID or equivalent third country business may elect to comply solely with the MiFID client money chapter with respect of client money in respect of which the non-directive client money chapter or the insurance client money chapter apply.

01/11/2007

CASS 5.1.9

Firms are reminded that SUP 3 contains provisions which are relevant to the preparation and delivery of reports by auditors.

14/01/2005

CASS 5.2

Holding money as agent of insurance undertaking

14/01/2005

Introduction

CASS 5.2.1

If a firm holds money as agent of an insurance undertaking then the firm's clients (who are not insurance undertakings) will be adequately protected to the extent that the premiums which it receives are treated as being received by the insurance undertaking when they are received by the agent and claims money and premium refunds will only be treated as received by the client when they are actually paid over. The rules in CASS 5.2 make provision for agency agreements between firms and insurance undertakings to contain terms which make clear when money should be held by a firm as agent of an undertaking. Firms should refer to CASS 5.1.5 R to determine the circumstances in which they may treat money held on behalf of insurance undertakings as client money.

14/01/2005

CASS 5.2.2

(1) Agency agreements between insurance intermediaries and insurance undertakings may be of a general kind and facilitate the introduction of business to the insurance undertaking. Alternatively, an agency agreement may confer on the intermediary contractual authority to commit the insurance undertaking to risk or authority to settle claims or handle premium refunds (often referred to as "binding authorities"). CASS 5.2.3 R requires that binding authorities of this kind must provide that the intermediary is to act as the agent of the insurance undertaking for the purpose of receiving and holding premiums (if the intermediary has authority to commit the insurance undertaking to risk), claims monies (if the intermediary has authority to settle claims on behalf of the insurance undertaking) and premium refunds (if the intermediary has authority to make refunds of premium on behalf of the insurance undertaking). Accordingly such money is not, except where a firm and an insurance undertaking have in compliance with CASS 5.1.5A R agreed otherwise, client money for the purposes of CASS 5.
(2) Other introductory agency agreements may also, depending on their precise terms, satisfy some or all of the requirements of the type of written agreement described in CASS 5.2.3 R. It is desirable that an intermediary should, before informing its clients (in accordance with CASS 5.2.3 R (3)) that it will receive money as agent of an insurance undertaking, agree the terms of that notification with the relevant insurance undertakings.

14/01/2005

Requirement for written agreement before acting as agent of insurance undertaking

CASS 5.2.3

(1) A firm must not agree to:

(a) deal in investments as agent for an insurance undertaking in connection with insurance mediation; or
(b) act as agent for an insurance undertaking for the purpose of settling claims or handling premium refunds; or
(c) otherwise receive money as agent of an insurance undertaking;
unless:
(d) it has entered into a written agreement with the insurance undertaking to that effect; and
(e) it is satisfied on reasonable grounds that the terms of the policies issued by the insurance undertaking to the firm's clients are likely to be compatible with such an agreement; and
(f)

(i) (in the case of (a)) the agreement required by (d) expressly provides for the firm to act as agent of the insurance undertaking for the purpose of receiving premiums from the firm's clients; and
(ii) (in the case of (b)) the agreement required by (d) expressly provides for the firm to act as agent of the insurance undertaking for the purpose of receiving and holding claims money (or, as the case may be, premium refunds) prior to transmission to the client making the claim (or, as the case may be, entitled to the premium refund) in question.

(2) A firm must retain a copy of any agreement it enters pursuant to (1) for a period of at least six years from the date on which it is terminated.
(3) Where a firm holds, or is to hold, money as agent for an insurance undertaking it must ensure that it informs those of its clients which are not insurance undertakings and whose transactions may be affected by the arrangement (whether in its terms of business, client agreements or otherwise in writing) that it will hold their money as agent of the insurance undertaking and if necessary the extent of such agency and whether it includes all items of client money or is restricted, for example, to the receipt of premiums.
(4) A firm may (subject to the consent of the insurance undertaking concerned) include in an agreement in (1) provision for client money received by its appointed representative, field representatives and other agents to be held as agent for the insurance undertaking (in which event it must ensure that the representative or agent provides the information to clients required by (3)).

14/01/2005

CASS 5.2.4

Firms are reminded that CASS 5.1.5A R provides that, if the insurance undertaking has agreed in writing, money held in accordance with an agreement made under CASS 5.2.3 R may be treated as client money and may (but not otherwise) be kept in a client bank account.

14/01/2005

CASS 5.2.5

A firm which provides for the protection of a client(which is not an insurance undertaking) under CASS 5.2 is relieved of the obligation to provide protection for that client under CASS 5.3 or CASS 5.4 to the extent of the items of client money protected by the agency agreement.

14/01/2005

CASS 5.2.6

A firm may, in accordance with CASS 5.2.3 R (4), arrange for an insurance undertaking to accept responsibility for the money held by its appointed representatives, field representatives, and other agents, in which event CASS 5.5.18 R to CASS 5.5.25 G will not apply.

14/01/2005

CASS 5.2.7

A firm may operate on the basis of an agency agreement as provided for by CASS 5.2.3 R for some of its clients and with protection provided by a client money trust in accordance with CASS 5.3 or CASS 5.4 for other clients. A firm may also operate on either basis for the same client but in relation to different transactions. A firm which does so should be satisfied that its administrative systems and controls are adequate and, in accordance with CASS 5.2.4 G, should ensure that money held for both types of client and business is kept separate.

14/01/2005

CASS 5.3

Statutory trust

14/01/2005

CASS 5.3.1

Section 139(1) of the Act (Miscellaneous ancillary matters) provides that rules may make provision which results in client money being held by a firm on trust (England and Wales and Northern Ireland) or as agent (Scotland only). CASS 5.3.2 R creates a fiduciary relationship between the firm and its client under which client money is in the legal ownership of the firm but remains in the beneficial ownership of the client. In the event of failure of the firm, costs relating to the distribution of client money may have to be borne by the trust.

14/01/2005

CASS 5.3.2

A firm (other than a firm acting in accordance with CASS 5.4) receives and holds client money as trustee (or in Scotland as agent) on the following terms:

(1) for the purposes of and on the terms of CASS 5.3, CASS 5.5 and the client money (insurance) distribution rules;
(2) subject to (4), for the clients (other than clients which are insurance undertakings when acting as such) for whom that money is held, according to their respective interests in it;
(3) after all valid claims in (2) have been met, for clients which are insurance undertakings according to their respective interests in it;
(4) on the failure of the firm, for the payment of the costs properly attributable to the distribution of the client money in accordance with (2) and (3); and
(5) after all valid claims and costs under (2) to (4) have been met, for the firm itself.

14/01/2005

CASS 5.3.3

(1) A firm which holds client money can discharge its obligation to ensure adequate protection for its clients in respect of such money by complying with CASS 5.3 which provides for such money to be held by the firm on the terms of a trust imposed by the rules.
(2) The trust imposed by CASS 5.3 is limited to a trust in respect of client money which a firm receives and holds. The consequential and supplementary requirements in CASS 5.5 are designed to secure the proper segregation and maintenance of adequate client money balances. In particular, CASS 5.5 does not permit a firm to use client money balances to provide credit for clients (or potential clients) such that, for example, their premium obligations may be met in advance of the premium being remitted to the firm. A firm wishing to provide credit for clients may however do so out of its own funds.

14/01/2005

CASS 5.4

Non-statutory client money trust

14/01/2005

Introduction

CASS 5.4.1

(1) CASS 5.4 permits a firm, which has adequate resources, systems and controls, to declare a trust on terms which expressly authorise it, in its capacity as trustee, to make advances of credit to the firm's clients. The client money trust required by CASS 5.4 extends to such debt obligations which will arise if the firm, as trustee, makes credit advances, to enable a client's premium obligations to be met before the premium is remitted to the firm and similarly if it allows claims and premium refunds to be paid to the client before receiving remittance of those monies from the insurance undertaking.
(2) CASS 5.4 does not permit a firm to make advances of credit to itself out of the client money trust. Accordingly, CASS 5.4 does not permit a firm to withdraw commission from the client money trust before it has received the premium from the client in relation to the non-investment insurance contract which generated the commission.

14/01/2005

Voluntary nature of this section

CASS 5.4.2

A firm may elect to comply with the requirements in this section, and may do so for some of its business whilst complying with CASS 5.3 for other parts.

14/01/2005

CASS 5.4.3

A firm is not subject to CASS 5.3 when and to the extent that it acts in accordance with this section.

14/01/2005

Conditions for using the non-statutory client money trust

CASS 5.4.4

A firm may not handle client money in accordance with the rules in this section unless each of the following conditions is satisfied:

(1) the firm must have and maintain systems and controls which are adequate to ensure that the firm is able to monitor and manage its client money transactions and any credit risk arising from the operation of the trust arrangement and, if in accordance with CASS 5.4.2 R a firm complies with both the rules in CASS 5.3 and CASS 5.4, such systems and controls must extend to both arrangements;
(2) the firm must obtain, and keep current, written confirmation from its auditor that it has in place systems and controls which are adequate to meet the requirements in (1);
(3) the firm must designate a manager with responsibility for overseeing the firm's day to day compliance with the systems and controls in (1) and the rules in this section;
(4) the firm (if, under the terms of the non-statutory trust, it is to handle client money for retail customers) must have and at all times maintain capital resources of not less than £50,000 calculated in accordance with MIPRU 4.4.1 R; and
(5) in relation to each of the clients for whom the firm holds money in accordance with CASS 5.4, the firm must take reasonable steps to ensure that its terms of business or other client agreements adequately explain, and obtain the client's informed consent to, the firm holding the client's money in accordance with CASS 5.4 (and in the case of a client which is an insurance undertaking (when acting as such) there must be an agreement which satisfies CASS 5.1.5A R).

01/01/2007

CASS 5.4.5

The amount of a firm's capital resources maintained for the purposes of MIPRU 4.2.11 R will also satisfy (in whole or in part) the requirement in CASS 5.4.4 R (4).

01/01/2007

Client money to be received under the non-statutory client money trust

CASS 5.4.6

Except to the extent that a firm acts in accordance with CASS 5.3, a firm must not receive or hold any client money unless it does so as trustee (or, in Scotland, as agent) and has properly executed a deed (or equivalent formal document) to that effect.

14/01/2005

Contents of trust deed

CASS 5.4.7

The deed referred to in CASS 5.4.6 R must provide that the money (and, if appropriate, designated investments) are held:

(1) for the purposes of and on the terms of:

(a) CASS 5.4;
(b) the applicable provisions of CASS 5.5; and
(c) the client money (insurance) distribution rules

(2) subject to (4), for the clients (other than clients which are insurance undertakings when acting as such) for whom that money is held, according to their respective interests in it;
(3) after all valid claims in (2) have been met for clients which are insurance undertakings according to their respective interests in it;
(4) on failure of the firm, for the payment of the costs properly attributable to the distribution of the client money in accordance with (2) and (3); and
(5) after all valid claims and costs under (2) to (4) have been met, for the firm itself.

14/01/2005

CASS 5.4.8

The deed (or equivalent formal document) referred to in CASS 5.4.6 R may provide that:

(1) the firm, acting as trustee (or, in Scotland, as agent), has power to make advances or give credit to clients or insurance undertakings from client money, provided that it also provides that any debt or other obligation of a client or resulting obligation of an insurance undertaking, in relation to an advance or credit, is held on the same terms as CASS 5.4.7 R;
(2) the benefit of a letter of credit or unconditional guarantee provided by an approved bank on behalf of a firm to satisfy any shortfall in the firm's client money resource (as calculated under CASS 5.5.65 R) when compared with the firm's client money requirement (as calculated under CASS 5.5.66 R or as appropriate CASS 5.5.68 R), is held on the same terms as CASS 5.4.7 R.

14/01/2005

CASS 5.5

Segregation and the operation of client money accounts

14/01/2005

Application

CASS 5.5.1

Unless otherwise stated each of the provisions in CASS 5.5 applies to firms which are acting in accordance with CASS 5.3 (Statutory trust) or CASS 5.4 (Non-statutory trust).

14/01/2005

CASS 5.5.2

One purpose of CASS 5.5 is to ensure that, unless otherwise permitted, client money is kept separate from the firm's own money. Segregation, in the event of a firm's failure, is important for the effective operation of the trust that is created to protect client money. The aim is to clarify the difference between client money and general creditors' entitlements in the event of the failure of the firm.

14/01/2005

Requirement to segregate

CASS 5.5.3

A firm must, except to the extent permitted by CASS 5.5, hold client money separate from the firm's money.

14/01/2005

Money due to a client from a firm

CASS 5.5.4

If a firm is liable to pay money to a client, it must as soon as possible, and no later than one business day after the money is due and payable:

(1) pay it into a client bank account, in accordance with CASS 5.5.5 R; or
(2) pay it to, or to the order of, the client.

14/01/2005

Segregation

CASS 5.5.5

A firm must segregate client money by either:

(1) paying it as soon as is practicable into a client bank account; or
(2) paying it out in accordance with CASS 5.5.80 R.

14/01/2005

CASS 5.5.6

The FSA expects that in most circumstances it will be practicable for a firm to pay client money into a client bank account by not later than the next business day after receipt.

14/01/2005

CASS 5.5.7

Where an insurance transaction involves more than one firm acting in a chain such that for example money is transferred from a "producing" broker who has received client money from a consumer to an intermediate broker and thereafter to an insurance undertaking, each broker firm will owe obligations to its immediate client to segregate client money which it receives (in this example the producing broker in relation to the consumer and the intermediate broker in relation to the producing broker). A firm which allows a third party broker to hold or control client money will not thereby be relieved of its fiduciary obligations (see CASS 5.5.34 R).

06/01/2008

CASS 5.5.8

A firm may segregate client money in a different currency from that of receipt. If it does so, the firm must ensure that the amount held is adjusted at intervals of not more than twenty five business days to an amount at least equal to the original currency amount (or the currency in which the firm has its liability to its clients, if different), translated at the previous day's closing spot exchange rate.

14/01/2005

CASS 5.5.9

A firm must not hold money other than client money in a client bank account unless it is:

(1) a minimum sum required to open the account, or to keep it open; or
(2) money temporarily in the account in accordance with CASS 5.5.16 R (Withdrawal of commission and mixed remittance); or
(3) interest credited to the account which exceeds the amount due to clients as interest and has not yet been withdrawn by the firm.

14/01/2005

CASS 5.5.10

If it is prudent to do so to ensure that client money is protected (and provided that doing so would otherwise be in accordance with CASS 5.5.63 R (1)(b)(ii)), a firm may pay into, or maintain in, a client bank account money of its own, and that money will then become client money for the purposes of CASS 5 and the client money (insurance) distribution rules.

14/01/2005

CASS 5.5.11

A firm, when acting in accordance with CASS 5.3 (statutory trust), must ensure that the total amount of client money held for each client in any of the firm's client money bank accounts is positive and that no payment is made from any such account for the benefit of a client unless the client has provided the firm with cleared funds to enable the payment to be made.

14/01/2005

CASS 5.5.11A

When a firm acts in accordance with CASS 5.3 (Statutory trust) it should not make a payment from the client bank account unless it is satisfied on reasonable grounds that the client has provided it with cleared funds. Accordingly, a firm should normally allow a reasonable period of time for cheques to clear. If a withdrawal is made and the client's cheque is subsequently dishonoured it will be the firm's responsibility to make good the shortfall in the account as quickly as possible (and without delay whilst a cheque is re-presented).

14/01/2005

CASS 5.5.12

If client money is received by the firm in the form of an automated transfer, the firm must take reasonable steps to ensure that:

(1) the money is received directly into a client bank account; and
(2) if money is received directly into the firm's own account, the money is transferred into a client bank account no later than the next business day after receipt.

14/01/2005

CASS 5.5.13

A firm can hold client money in either a general client bank account (CASS 5.5.38 R) or a designated client bank account (CASS 5.5.39 R). A firm holds all client money in general client bank accounts for its clients as part of a common pool of money so those particular clients do not have a claim against a specific sum in a specific account; they only have a claim to the client money in general. A firm holds client money in designated client bank accounts for those clients who requested that their client money be part of a specific pool of money, so those particular clients do have a claim against a specific sum in a specific account; they do not have a claim to the client money in general unless a primary pooling event occurs. If the firm becomes insolvent, and there is (for whatever reason) a shortfall in money held for a client compared with that client's entitlements, the available funds will be distributed in accordance with the client money (insurance) distribution rules.

14/01/2005

Non-statutory trust - segregation of designated investments

CASS 5.5.14

(1) A firm which handles client money in accordance with the rules for a non-statutory trust in CASS 5.4 may, to the extent it considers appropriate, but subject to (2), satisfy the requirement to segregate client money by segregating or arranging for the segregation of designated investments with a value at least equivalent to such money as would otherwise have been segregated into a client bank account.
(2) A firm may not segregate designated investments unless it:

(a) takes reasonable steps to ensure that any consumers whose client money interests may be protected by such segregation are aware that the firm may operate such an arrangement and have (whether through its terms of business, client agreements, or otherwise in writing) an adequate opportunity to give their informed consent;
(b) ensures that the terms on which it will segregate designated investments include provision for it to take responsibility for meeting any shortfall in its client money resource which is attributable to falls in the market value of a segregated investment;
(c) provides in the deed referred to in CASS 5.4.6 R for designated investments which it segregates to be held by it on the terms of the non-statutory trust; and
(d) takes reasonable steps to ensure that the segregation is at all times in conformity with the range of permitted investments, general principles and conditions in CASS 5 Annex 1 R.

06/01/2008

CASS 5.5.15

A firm which takes advantage of CASS 5.5.14 R will need to consider whether its permission should include the permitted activity of managing investments. If the firm is granted a power to manage with discretion the funds over which it is appointed as trustee under the trust deed required by CASS 5.4 then it will be likely to need a permission to manage investments. It is unlikely to need such a permission, however, if it is merely granted a power to invest but the deed stipulates that the funds may only be managed with discretion by another firm (which has the necessary permission). Such an arrangement would not preclude the firm holding client money as trustee from appointing another firm (or firms) as manager and setting an appropriate strategy and overall asset allocation, subject to the limits set out in CASS 5 Ann 1 R. A firm may also need to consider whether it needs a permission to operate a collective investment scheme if any of its clients are to participate in the income or gains arising from the acquisition or disposal of designated investments.

14/01/2005

Withdrawal of commission and mixed remittance

CASS 5.5.16

(1) A firm may draw down commission from the client bank account if:

(a) it has received the premium from the client (or from a third party premium finance provider on the client's behalf); and
(b) this is consistent with the firm's terms of business which it maintains with the relevant client and the insurance undertaking to whom the premium will become payable;

and the firm may draw down commission before payment of the premium to the insurance undertaking, provided that the conditions in (a) and (b) are satisfied.
(2) If a firm receives a mixed remittance (that is part client money and part other money), it must:

(a) pay the full sum into a client bank account in accordance with CASS 5.5.5 R; and
(b) pay the money that is not client money out of the client bank account as soon as reasonably practicable and in any event by not later than twenty-five business days after the day on which the remittance is cleared (or, if earlier, when the firm performs the client money calculation in accordance with CASS 5.5.63 R (1)).

14/01/2005

CASS 5.5.17

(1) As soon as commission becomes due to the firm (in accordance with CASS 5.5.16 R (1)) it must be treated as a remittance which must be withdrawn in accordance with CASS 5.5.16 R (2). The procedure required by CASS 5.5.16 R will also apply where money is due and payable to the firm in respect of fees due from clients (whether to the firm or other professionals).
(2) Firms are reminded that money received in accordance with CASS 5.2 must not, except where a firm and an insurance undertaking have (in accordance with CASS 5.1.5A R) agreed otherwise, be kept in a client bank account. Client money received from a third-party premium finance provider should, however, be segregated into a client bank account.
(3) Where a client makes payments of premium to a firm in instalments, CASS 5.5.16 R (1) applies in relation to each instalment.
(4) If a firm is unable to match a remittance with a transaction it may be unable to immediately determine whether the payment comprises a mixed remittance or is client money. In such cases the remittance should be treated as client money while the firm takes steps to match the remittance to a transaction as soon as possible.

14/01/2005

Appointed representatives, field representatives and other agents

CASS 5.5.18

(1) Subject to (4), a firm must in relation to each of its appointed representatives, field representatives and other agents comply with CASS 5.5.19 R to CASS 5.5.21 R (Immediate segregation) or with CASS 5.5.23 R (Periodic segregation and reconciliation).
(2) A firm must in relation to each representative or other agent keep a record of whether it is complying with CASS 5.5.19 R to CASS 5.5.21 R or with CASS 5.5.23 R.
(3) A firm is, but without affecting the application of CASS 5.5.19 R to CASS 5.5.23 R, to be treated as the recipient of client money which is received by any of its appointed representatives, field representatives or other agents.
(4) (1) to (3) do not apply in relation to an appointed representative, field representative or other agent to which (if it were a firm) CASS 5.1.4AR (1) or CASS 5.1.4AR (2) would apply, but subject to the representative or agent maintaining an account which satisfies the requirements of CASS 5.5.49 R to the extent that the representative or agent will hold client money on trust or otherwise on behalf of its clients.

14/01/2005

Immediate segregation

CASS 5.5.19

A firm must establish and maintain procedures to ensure that client money received by its appointed representatives, field representatives, or other agents of the firm is:

(1) paid into a client bank account of the firm in accordance with CASS 5.5.5 R; or
(2) forwarded to the firm, or in the case of a field representative forwarded to a specified business address of the firm, so as to ensure that the money arrives at the specified business address by the close of the third business day.

14/01/2005

CASS 5.5.20

For the purposes of CASS 5.5.19 R, the client money received on business day one should be forwarded to the firm or specified business address of the firm no later than the next business day after receipt (business day two) in order for it to reach that firm or specified business address by the close of the third business day. Procedures requiring the client money to be sent to the firm or the specified business address of the firm by first class post no later than the next business day after receipt would meet the requirements of CASS 5.5.19 R.

14/01/2005

CASS 5.5.21

If client money is received in accordance with CASS 5.5.19 R, the firm must ensure that its appointed representatives, field representatives or other agents keep client money (whether in the form of premiums, claims money or premium refunds) separately identifiable from any other money (including that of the firm) until the client money is paid into a client bank account or sent to the firm.

14/01/2005

CASS 5.5.22

A firm which acts in accordance with CASS 5.5.19 R to CASS 5.5.21 R need not comply with CASS 5.5.23 R.

14/01/2005

Periodic segregation and reconciliation

CASS 5.5.23

(1) A firm must, on a regular basis, and at reasonable intervals, ensure that it holds in its client bank account an amount which (in addition to any other amount which it is required by these rules to hold) is not less than the amount which it reasonably estimates to be the aggregate of the amounts held at any time by its appointed representatives, field representatives, and other agents.
(2) A firm must, not later than ten business days following the expiry of each period in (1):

(a) carry out, in relation to each such representative or agent, a reconciliation of the amount paid by the firm into its client bank account with the amount of client money actually received and held by the representative or other agent; and
(b) make a corresponding payment into, or withdrawal from, the account.

14/01/2005

CASS 5.5.24

(1) CASS 5.5.23 R allows a firm with appointed representatives, field representatives and other agents to avoid the need for the representative to forward client money on a daily basis but instead requires a firm to segregate into its client money bank account amounts which it reasonably estimates to be sufficient to cover the amount of client money which the firm expects its representatives or agents to receive and hold over a given period. At the expiry of each such period, the firm must obtain information about the actual amount of client money received and held by its representatives so that it can reconcile the amount of client money it has segregated with the amounts actually received and held by its representatives and agents. The frequency at which this reconciliation is to be performed is not prescribed but it must be at regular and reasonable intervals having regard to the nature and frequency of the insurance business carried on by its representatives and agents. For example, a period of six months might be appropriate for a representative which conducts business involving the receipt of premiums only infrequently whilst for other representatives a periodic reconciliation at monthly intervals (or less) may be appropriate.
(2) Where a firm operates on the basis of CASS 5.5.23 R, the money which is segregated into its client bank account is client money and will be available to meet any obligations owed to the clients of its representatives who for this purpose are treated as the firm's clients.

14/01/2005

CASS 5.5.25

A firm which acts in accordance with CASS 5.5.23 R need not comply with CASS 5.5.19 R to CASS 5.5.21 R.

14/01/2005

Client entitlements

CASS 5.5.26

A firm must take reasonable steps to ensure that it is notified promptly of any receipt of client money in the form of client entitlements.

14/01/2005

CASS 5.5.27

The 'entitlements' mentioned in CASS 5.5.26 R refer to any kind of miscellaneous payment which the firm receives on behalf of a client and which are due to be paid to the client.

14/01/2005

CASS 5.5.28

When a firm receives a client entitlement on behalf of a client, it must pay any part of it which is client money:

(1) for client entitlements received in the United Kingdom, into a client bank account in accordance with CASS 5.5.5 R; or
(2) for client entitlements received outside the United Kingdom, into any bank account operated by the firm, provided that such client money is:

(a) paid to, or in accordance with, the instructions of the client concerned; or
(b) paid into a client bank account in accordance with CASS 5.5.5 R (1), as soon as possible but no later than five business days after the firm is notified of its receipt.

14/01/2005

CASS 5.5.29

A firm must take reasonable steps to ensure that a client entitlement which is client money is allocated within a reasonable period of time after notification of receipt.

14/01/2005

Interest and investment returns

CASS 5.5.30

(1) In relation to consumers, a firm must, subject to (2), take reasonable steps to ensure that its terms of business or other client agreements adequately explain, and where necessary obtain a client's informed consent to, the treatment of interest and, if applicable, investment returns, derived from its holding of client money and any segregated designated investments.
(2) In respect of interest earned on client bank accounts, (1) does not apply if a firm has reasonable ground to be satisfied that in relation to insurance mediation activities carried on with or for a consumer the amount of interest earned will be not more than £20 per transaction.

06/01/2008

CASS 5.5.31

If no interest is payable to a consumer, that fact should be separately identified in the firm's client agreement or terms of business.

06/01/2008

CASS 5.5.32

If a firm outlines its policy on its payment of interest, it need not necessarily disclose the actual rates prevailing at any particular time; the firm should disclose the terms, for example, LIBOR plus or minus 'x' percentage points.

14/01/2005

Transfer of client money to a third party

CASS 5.5.33

CASS 5.5.34 R sets out the requirements a firm must comply with when it transfers client money to another person without discharging its fiduciary duty owed to that client. Such circumstances arise when, for example, a firm passes client money to another broker for the purposes of the client's transaction being effected. A firm can only discharge itself from its fiduciary duty by acting in accordance with, and in the circumstances permitted by, CASS 5.5.80 R.

14/01/2005

CASS 5.5.34

A firm may allow another person, such as another broker to hold or control client money, but only if:

(1) the firm transfers the client money for the purpose of a transaction for a client through or with that person; and
(2) in the case of a consumer, that customer has been notified (whether through a client agreement, terms of business, or otherwise in writing) that the client money may be transferred to another person.

06/01/2008

CASS 5.5.35

In relation to the notification required by CASS 5.5.34 R (2), there is no need for a firm to make a separate disclosure in relation to each transfer made.

14/01/2005

CASS 5.5.36

A firm should not hold excess client money with another broker. It should be held in a client bank account.

14/01/2005

Client bank accounts

CASS 5.5.37

The FSA generally requires a firm to place client money in a client bank account with an approved bank. However, a firm which is an approved bank must not (subject to CASS 5.1.1 R (2)(e)) hold client money in an account with itself.

14/01/2005

CASS 5.5.38

(1) A firm must ensure that client money is held in a client bank account at one or more approved banks.
(2) If the firm is a bank, it must not hold client money in an account with itself.

14/01/2005

CASS 5.5.39

A firm may open one or more client bank accounts in the form of a designated client bank account. Characteristics of these accounts are that:

(1) the account holds money of one or more clients;
(2) the account includes in its title the word 'designated';
(3) the clients whose money is in the account have each consented in writing to the use of the bank with which the client money is to be held; and
(4) in the event of the failure of that bank, the account is not pooled with any other type of account unless a primary pooling event occurs.

14/01/2005

CASS 5.5.40

(1) A firm may operate as many client accounts as it wishes.
(2) A firm is not obliged to offer its clients the facility of a designated client bank account.
(3) Where a firm holds money in a designated client bank account, the effect upon either:

(a) the failure of a bank where any other client bank account is held; or
(b) the failure of a third party to whom money has been transferred out of any other client bank account in accordance with CASS 5.5.34 R;
(each of which is a secondary pooling event) is that money held in the designated client bank account is not pooled with money held in any other account. Accordingly clients whose money is held in a designated client bank account will not share in any shortfall resulting from a failure of the type described in (a) or (b).

(4) Where a firm holds client money in a designated client bank account, the effect upon the failure of the firm (which is a primary pooling event) is that money held in the designated client bank account is pooled with money in every other client bank account of the firm. Accordingly, clients whose money is held in a designated client bank account will share in any shortfall resulting from a failure of the firm.

14/01/2005

CASS 5.5.41

A firm may hold client money with a bank that is not an approved bank if all the following conditions are met:

(1) the client money relates to one or more insurance transactions which are subject to the law or market practice of a jurisdiction outside the United Kingdom;
(2) because of the applicable law or market practice of that overseas jurisdiction, it is not possible to hold the client money in a client bank account with an approved bank;
(3) the firm holds the money with such a bank for no longer than is necessary to effect the transactions;
(4) the firm notifies each relevant client and has, in relation to a consumer, a client agreement, or terms of business which adequately explain that:

(a) client money will not be held with an approved bank;
(b) in such circumstances, the legal and regulatory regime applying to the bank with which the client money is held will be different from that of the United Kingdom and, in the event of a failure of the bank, the client money may be treated differently from the treatment which would apply if the client money were held by an approved bank in the United Kingdom; and
(c) if it is the case, the particular bank has not accepted that it has no right of set-off or counterclaim against money held in a client bank account, in respect of any sum owed on any other account of the firm, notwithstanding the firm's request to the bank as required by CASS 5.5.49 R; and

(5) the client money is held in a designated bank account.

06/01/2008

A firm's selection of a bank

CASS 5.5.42

A firm owes a duty of care to a client when it decides where to place client money. The review required by CASS 5.5.43 R is intended to ensure that the risks inherent in placing client money with a bank are minimised or appropriately diversified by requiring a firm to consider carefully the bank or banks with which it chooses to place client money. For example, a firm which is likely only to hold relatively modest amounts of client money will be likely to be able to satisfy this requirement if it selects an authorised UK clearing bank.

14/01/2005

CASS 5.5.43

Before a firm opens a client bank account and as often as is appropriate on a continuing basis (and no less than once in each financial year), it must take reasonable steps to establish that the bank is appropriate for that purpose.

14/01/2005

CASS 5.5.44

A firm should consider diversifying placements of client money with more than one bank where the amounts are, for example, of sufficient size to warrant such diversification.

14/01/2005

CASS 5.5.45

When considering where to place client money and to determine the frequency of the appropriateness test under CASS 5.5.43 R, a firm should consider taking into account, together with any other relevant matters:

(1) the capital of the bank;
(2) the amount of client money placed, as a proportion of the bank's capital and deposits;
(3) the credit rating of the bank (if available); and
(4) to the extent that the information is available, the level of risk in the investment and loan activities undertaken by the bank and its affiliated companies.

14/01/2005

CASS 5.5.46

14/01/2005

Group banks

CASS 5.5.47

Subject to CASS 5.5.41 R, a firm that holds or intends to hold client money with a bank which is in the same group as the firm must:

(1) undertake a continuous review in relation to that bank which is at least as rigorous as the review of any bank which is not in the same group, in order to ensure that the decision to use a group bank is appropriate for the client;
(2) disclose in writing to its client at the outset of the client relationship (whether by way of a client agreement, terms of business or otherwise in writing) or, if later, not less than 20 business days before it begins to hold client money of that client with that bank:

(a) that it is holding or intends to hold client money with a bank in the same group;
(b) the identity of the bank concerned; and
(c) that the client may choose not to have his money placed with such a bank.

01/11/2007

CASS 5.5.48

If a client has notified a firm in writing that he does not wish his money to be held with a bank in the same group as the firm, the firm must either:

(1) place that client money in a client bank account with another bank in accordance with CASS 5.5.38 R; or
(2) return that client money to, or pay it to the order of, the client.

14/01/2005

Notification and acknowledgement of trust (banks)

CASS 5.5.49

When a firm opens a client bank account, the firm must give or have given written notice to the bank requesting the bank to acknowledge to it in writing:

(1) that all money standing to the credit of the account is held by the firm as trustee (or if relevant in Scotland, as agent) and that the bank is not entitled to combine the account with any other account or to exercise any right of set-off or counterclaim against money in that account in respect of any sum owed to it on any other account of the firm; and
(2) that the title of the account sufficiently distinguishes that account from any account containing money that belongs to the firm, and is in the form requested by the firm.

14/01/2005

CASS 5.5.50

In the case of a client bank account in the United Kingdom, if the bank does not provide the acknowledgement referred to in CASS 5.5.49 R within 20 business days after the firm dispatched the notice, the firm must withdraw all money standing to the credit of the account and deposit it in a client bank account with another bank as soon as possible.

14/01/2005

CASS 5.5.51

In the case of a client bank account outside the United Kingdom, if the bank does not provide the acknowledgement referred to in CASS 5.5.49 R within 20 business days after the firm dispatched the notice, the firm must notify the client of this fact as set out in CASS 5.5.53 R.

14/01/2005

CASS 5.5.52

Firms are reminded of the provisions of CASS 5.5.41 R (4), which sets out the notification and consents required when using a bank that is not an approved bank.

14/01/2005

Notification to clients: use of an approved bank outside the United Kingdom

CASS 5.5.53

A firm must not hold, for a consumer, client money in a client bank account outside the United Kingdom, unless the firm has previously disclosed to the consumer (whether in its terms of business, client agreement or otherwise in writing):

(1) that his money may be deposited in a client bank account outside the United Kingdom but that the client may notify the firm that he does not wish his money to be held in a particular jurisdiction;
(2) that in such circumstances, the legal and regulatory regime applying to the approved bank will be different from that of the United Kingdom and, in the event of a failure of the bank, his money may be treated in a different manner from that which would apply if the client money were held by a bank in the United Kingdom; and
(3) if it is the case, that a particular bank has not accepted that it has no right of set-off or counterclaim against money held in a client bank account in respect of any sum owed on any other account of the firm, notwithstanding the firm's request to the bank as required by CASS 5.5.49 R.

06/01/2008

CASS 5.5.54

There is no need for a firm to make a separate disclosure under CASS 5.5.53 R (1) and CASS 5.5.53 R (2) in relation to each jurisdiction.

14/01/2005

CASS 5.5.55

Firms are reminded of the provisions of CASS 5.5.41 R (4), which sets out the notification and consents required when using a bank that is not an approved bank.

14/01/2005

CASS 5.5.56

If a client has notified a firm in writing before entering into a transaction that client money is not to be held in a particular jurisdiction, the firm must either:

(1) hold the client money in a client bank account in a jurisdiction to which the client has not objected; or
(2) return the client money to, or to the order of, the client.

14/01/2005

CASS 5.5.57

Firms are reminded of the provisions of CASS 5.5.41 R (4), which sets out the notification and consents required when using a bank that is not an approved bank.

14/01/2005

Notification to consumers: use of broker or settlement agent outside the United Kingdom

CASS 5.5.58

A firm must not undertake any transaction for a consumer that involves client money being passed to another broker or settlement agent located in a jurisdiction outside the United Kingdom, unless the firm has previously disclosed to the consumer (whether in its terms of business, client agreement or otherwise in writing):

(1) that his client money may be passed to a person outside the United Kingdom but the client may notify the firm that he does not wish his money to be passed to a money in a particular jurisdiction; and
(2) that, in such circumstances, the legal and regulatory regime applying to the broker or settlement agent will be different from that of the United Kingdom and, in the event of a failure of the broker or settlement agent, this money may be treated in a different manner from that which would apply if the money were held by a broker or settlement agent in the United Kingdom.

06/01/2008

CASS 5.5.59

There is no need for a firm to make a separate disclosure under CASS 5.5.58 R in relation to each jurisdiction.

14/01/2005

CASS 5.5.60

If a client has notified a firm before entering into a transaction that he does not wish his money to be passed to another broker or settlement agent located in a particular jurisdiction, the firm must either:

(1) hold the client money in a client bank account in the United Kingdom or a jurisdiction to which the money has not objected and pay its own money to the firm's own account with the broker, agent or counterparty; or
(2) return the money to, or to the order of, the client.

14/01/2005

Notification to the FSA: failure of a bank, broker or settlement agent

CASS 5.5.61

On the failure of a third party with which client money is held, a firm must notify the FSA:

(1) as soon as it becomes aware, of the failure of any bank, other broker or settlement agent or other entity with which it has placed, or to which it has passed, client money; and
(2) as soon as reasonably practical, whether it intends to make good any shortfall that has arisen or may arise and of the amounts involved.

14/01/2005

Client money calculation and reconciliation

CASS 5.5.62

(1) In order that a firm may check that it has sufficient money segregated in its client bank account (and held by third parties) to meet its obligations to clients it is required periodically to calculate the amount which should be segregated (the client money requirement) and to compare this with the amount shown as its client money resource. This calculation is, in the first instance, based upon the firm's accounting records and is followed by a reconciliation with its banking records. A firm is required to make a payment into the client bank account if there is a shortfall or to remove any money which is not required to meet the firm's obligations.
(2) For the purpose of calculating its client money requirement two alternative calculation methods are permitted, but a firm must use the same method in relation to CASS 5.3 and CASS 5.4. The first refers to individual client cash balances; the second to aggregate amounts of client money recorded on a firm business ledgers.

14/01/2005

CASS 5.5.63

(1) A firm must, as often as is necessary to ensure the accuracy of its records and at least at intervals of not more than 25 business days:

(a) check whether its client money resource, as determined by CASS 5.5.65 R on the previous business day, was at least equal to the client money requirement, as determined by CASS 5.5.66 R or CASS 5.5.68 R, as at the close of business on that day; and
(b) ensure that:

(i) any shortfall is paid into a client bank account by the close of business on the day the calculation is performed; or
(ii) any excess is withdrawn within the same time period unless CASS 5.5.9 R or CASS 5.5.10 R applies to the extent that the firm is satisfied on reasonable grounds that it is prudent to maintain a positive margin to ensure the calculation in (a) is satisfied having regard to any unreconciled items in its business ledgers as at the date on which the calculations are performed; and

(c) include in any calculation of its client money requirement (whether calculated in accordance with CASS 5.5.66 R or CASS 5.5.68 R) any amounts attributable to client money received by its appointed representatives, field representatives or other agents and which, as at the date of calculation, it is required to segregate in accordance with CASS 5.5.19 R.

(2) A firm must within ten business days of the calculation in (a) reconcile the balance on each client bank account as recorded by the firm with the balance on that account as set out in the statement or other form of confirmation used by the bank with which that account is held.
(3) When any discrepancy arises as a result of the reconciliation carried out in (2), the firm must identify the reason for the discrepancy and correct it as soon as possible, unless the discrepancy arises solely as a result of timing differences between the accounting systems of the party providing the statement or confirmation and those of the firm.
(4) While a firm is unable to resolve a difference arising from a reconciliation, and one record or a set of records examined by the firm during its reconciliation indicates that there is a need to have a greater amount of client money than is in fact the case, the firm must assume, until the matter is finally resolved, that the record or set of records is accurate and either pay its own money into a relevant account or make a withdrawal of any excess.

14/01/2005

CASS 5.5.64

A firm must keep a record of whether it calculates its client money requirement in accordance with CASS 5.5.66 R or CASS 5.5.68 R and may only use one method during each annual accounting period (which method must be the same in relation to both CASS 5.3 and CASS 5.4).

14/01/2005

Client money resource

CASS 5.5.65

The client money resource, for the purposes of CASS 5.5.63 R (1)(a), is:

(1) the aggregate of the balances on the firm's client money bank accounts, as at the close of business on the previous business day and, if held in accordance with CASS 5.4, designated investments (valued on a prudent and consistent basis) together with client money held by a third party in accordance with CASS 5.5.34 R; and
(2) (but only if the firm is comparing the client money resource with its client's money (accruals) requirement in accordance with CASS 5.5.68 R) to the extent that client money is held in accordance with CASS 5.3 (statutory trust), insurance debtors (which in this case cannot include pre-funded items); and
(3) (but only if the firm is comparing the client money resource with its client's money (accruals) requirement in accordance with CASS 5.5.68 R) to the extent that client money is held in accordance with CASS 5.4 (non-statutory trust):

(a) all insurance debtors (including pre-funded items whether in respect of advance premiums, claims, premium refunds or otherwise) shown in the firm's business ledgers as amounts due from clients, insurance undertakings and other persons, such debts valued on a prudent and consistent basis to the extent required to meet any shortfall of the client money resource compared with the firm's client money requirement; and
(b) the amount of any letter of credit or unconditional guarantee provided by an approved bank and held on the terms of the trust (or, in Scotland, agency), limited to:

(i) the maximum sum payable by the approved bank under the letter of credit or guarantee; or
(ii) if less, the amount which would, apart from the benefit of the letter of credit or guarantee, be the shortfall of the client money resource compared with the client money requirement under CASS 5.5.66 R or CASS 5.5.68 R.

But a firm may treat a transaction with an insurance undertaking which is not a UK domestic firm as complete, and accordingly may (but only for the purposes of the calculation in (1)) disregard any unreconciled items of client money transferred to an intermediate broker relating to such a transaction, if:
(4) it has taken reasonable steps to ascertain whether the transaction is complete; and
(5) it has no reason to consider the transaction has not been completed; and
(6) a period of at least 12 months has elapsed since the money was transferred to the intermediate broker for the purpose of the transaction.

14/01/2005

Client money (client balance) requirement

CASS 5.5.66

A firm's client money (client balance) requirement is the sum of, for all clients, the individual client balances calculated in accordance with CASS 5.5.67 R but excluding any individual balances which are negative (that is, uncleared client funds).

14/01/2005

CASS 5.5.67

The individual client balance for each client must be calculated as follows:

(1) the amount paid by a client to the client (to include all premiums); plus
(2) the amount due to the client (to include all claims and premium refunds); plus
(3) the amount of any interest or investment returns due to the client;
(4) less the amount paid to insurance undertakings for the benefit of the client (to include all premiums and commission due to itself) (i.e. commissions that are due but have not yet been removed from the client account);
(5) less the amount paid by the firm to the client (to include all claims and premium refunds);

and where the individual client balance is found by the sum ((1) + (2) + (3)) - ((4) + (5)).

14/01/2005

Client money (accruals) requirement

CASS 5.5.68

A firm's client money (accruals) requirement is the sum of the following:

(1) all insurance creditors shown in the firm's business ledgers as amounts due to insurance undertakings, clients and other persons; plus
(2) unearned commission being the amount of commission shown as accrued (but not shown as due and payable) as at the date of the calculation (a prudent estimate must be used if the firm is unable to produce an exact figure at the date of the calculation).

14/01/2005

CASS 5.5.69

A firm which calculates its client money requirement on the preceding basis must in addition and within a reasonable period be able to match its client money resource to its requirement by reference to individual clients (with such matching being achieved for the majority of its clients and transactions).

14/01/2005

Failure to perform calculations or reconciliation

CASS 5.5.76

A firm must notify the FSA immediately if it is unable to, or does not, perform the calculation required by CASS 5.5.63 R (1).

14/01/2005

CASS 5.5.77

A firm must notify the FSA immediately it becomes aware that it may not be able to make good any shortfall identified by CASS 5.5.63 R (1) by the close of business on the day the calculation is performed and if applicable when the reconciliation is completed.

14/01/2005

Discharge of fiduciary duty

CASS 5.5.79

The purpose of CASS 5.5.80 R to CASS 5.5.83 R is to set out those situations in which a firm will have fulfilled its contractual and fiduciary obligations in relation to any client money held for or on behalf of its client, orin relation to the firm's ability to require repayment of that money from a third party.

06/07/2006

CASS 5.5.80

Money ceases to be client money if it is paid:

(1) to the client, or a duly authorised representative of the client; or
(2) to a third party on the instruction of or with the specific consent of the client, but not if it is transferred to a third party in the course of effecting a transaction, in accordance with CASS 5.5.34 R; or
(3) into a bank account of the client (not being an account which is also in the name of the firm); or
(4) to the firm itself, when it is due and payable to the firm in accordance with CASS 5.1.5 R (1); or
(5) to the firm itself, when it is an excess in the client bank account as set out in CASS 5.5.63 R (1)(b)(ii).

14/01/2005

CASS 5.5.81

(1) A firm which pays professional fees (for example to a loss adjuster or valuer) on behalf of a client may do so in accordance with CASS 5.5.80 R (2) where this is done on the instruction of or with the consent of the client.
(2) When a firm wishes to transfer client money balances to a third party in the course of transferring its business to another firm, it should do so in compliance with CASS 5.5.80 R and a transferee firm will come under an obligation to treat any client money so transferred in accordance with these rules.
(3) Firms are reminded of their obligation, when transferring money to third parties in accordance with CASS 5.5.34 R, to use appropriate skill, care and judgment in their selection of third parties in order to ensure adequate protection of client money.
(4) Firms are reminded that, in order to calculate their client money resource in accordance with CASS 5.5.63 R to CASS 5.5.65 R, they will need to have systems in place to produce an accurate accounting record showing how much client money is being held by third parties at any point in time. For the purposes of CASS 5.5.63 R to CASS 5.5.65 R, however, a firm must assume that monies remain at an intermediate broker awaiting completion of the transaction unless it has received confirmation that the transaction has been completed.

14/01/2005

CASS 5.5.82

When a firm draws a cheque or other payable order to discharge its fiduciary duty under CASS 5.5.80 R, it must continue to treat the sum concerned as client money until the cheque or order is presented and paid by the bank.

14/01/2005

CASS 5.5.83

For the purposes of CASS 5.1.5 R, if a firm makes a payment to, or on the instructions of, a client, from an account other than a client bank account, until that payment has cleared, no equivalent sum will become due and payable to the firm or may be withdrawn from a client bank account by way of reimbursement.

14/01/2005

Records

CASS 5.5.84

14/01/2005

CASS 5.6

Client money distribution

14/01/2005

Application

CASS 5.6.1

(1) CASS 5.6 (the client money (insurance) distribution rules) applies to a firm that in holding client money is subject to CASS 5.3 (statutory trust) or CASS 5.4 (Non-statutory trust) when a primary pooling event or a secondary pooling event occurs.
(2) In the event of there being any discrepancy between the terms of the trust as required by CASS 5.4.7 R (1)(c) and the provisions of CASS 5.6, the latter shall apply.

14/01/2005

CASS 5.6.2

(1) The client money (insurance) distribution rules have force and effect on any firm that holds client money in accordance with CASS 5.3 or CASS 5.4. Therefore, they may apply to a UK branch of a non-EEA firm. In this case, the UK branch of the firm may be treated as if the branch itself is a free-standing entity subject to the client money (insurance) distribution rules.
(2) Firms that act in accordance with CASS 5.4 (Non-statutory trust) are reminded that the client money (insurance) distribution rules should be given effect in the terms of trust required by CASS 5.4.

14/01/2005

Purpose

CASS 5.6.3

The client money (insurance) distribution rules seek to facilitate the timely return of client money to a client in the event of the failure of a firm or third party at which the firm holds client money.

14/01/2005

Failure of the authorised firm: primary pooling event

CASS 5.6.4

A primary pooling event triggers a notional pooling of all the client money, in every type of client money account, and the obligation to distribute it.

14/01/2005

CASS 5.6.5

A primary pooling event occurs:

(1) on the failure of the firm; or
(2) on the vesting of assets in a trustee in accordance with an 'assets requirement' imposed under section 48(1)(b) of the Act; or
(3) on the coming into force of a requirement for all client money held by the firm; or
(4) when the firm notifies, or is in breach of its duty to notify, the FSA, in accordance with CASS 5.5.77 R, that it is unable correctly to identify and allocate in its records all valid claims arising as a result of a secondary pooling event.

14/01/2005

CASS 5.6.6

CASS 5.6.5 R (4) does not apply so long as:

(1) the firm is taking steps, in consultation with the FSA, to establish those records; and
(2) there are reasonable grounds to conclude that the records will be capable of rectification within a reasonable period.

14/01/2005

Pooling and distribution

CASS 5.6.7

If a primary pooling event occurs:

(1) client money held in each client money account of the firm is treated as pooled;
(2) the firm must distribute that client money in accordance with CASS 5.3.2 R or, as appropriate, CASS 5.4.7 R, so that each client receives a sum which is rateable to the client money entitlement calculated in accordance with CASS 5.5.66 R; and
(3) the firm must, as trustee, call in and make demand in respect of any debt due to the firm as trustee, and must liquidate any designated investment, and any letter of credit or guarantee upon which it relies for meeting any shortfall in its client money resource and the proceeds shall be pooled together with other client money as in (1) and distributed in accordance with (2).

14/01/2005

CASS 5.6.8

14/01/2005

Client money received after the failure of the firm

CASS 5.6.9

Client money received by the firm (including in its capacity as trustee under CASS 5.4 (Non-statutory trust)) after a primary pooling event must not be pooled with client money held in any client money account operated by the firm at the time of the primary pooling event. It must be placed in a client bank account that has been opened after that event and must be handled in accordance with the client money rules, and returned to the relevant client without delay, except to the extent that:

(1) it is client money relating to a transaction that has not completed at the time of the primary pooling event; or
(2) it is money relating to a client, for whom the client money requirement, calculated in accordance with CASS 5.5.66 R or CASS 5.5.68 R, shows that money is due from the client to the firm including in its capacity as trustee under CASS 5.4 (Non-statutory trust) at the time of the primary pooling event.

06/07/2006

CASS 5.6.10

Client money received after the primary pooling event relating to an incomplete transaction should be used to complete that transaction.

14/01/2005

CASS 5.6.11

If a firm receives a mixed remittance after a primary pooling event, it must:

(1) pay the full sum into the separate client bank account opened in accordance with CASS 5.6.9 R; and
(2) pay the money that is not client money out of that client bank account into the firm's own bank account within one business day of the day on which the remittance is cleared.

14/01/2005

CASS 5.6.12

Whenever possible the firm should seek to split a mixed remittance before the relevant accounts are credited.

14/01/2005

Failure of a bank, other broker or settlement agent: secondary pooling events

CASS 5.6.13

If both a primary pooling event and a secondary pooling event occur, the provisions of this section relating to a primary pooling event apply.

14/01/2005

CASS 5.6.14

A secondary pooling event occurs on the failure of a third party to which client money held by the firm has been transferred under CASS 5.5.34 R.

14/01/2005

CASS 5.6.15

CASS 5.6.20 R to CASS 5.6.31 R do not apply if, on the failure of the third party, the firm repays to its clients or pays into a client bank account, at an unaffected bank, an amount equal to the amount of client money which would have been held if a shortfall had not occurred at that third party.

14/01/2005

CASS 5.6.16

14/01/2005

CASS 5.6.17

To comply with its duties, the firm should show proper care:

(1) in the selection of a third party; and
(2) when monitoring the performance of the third party.

In the case of client money transferred to a bank, by demonstrating compliance with CASS 5.5.43 R, a firm should be able to demonstrate that it has taken reasonable steps to comply with its duties.

14/01/2005

Failure of a bank

CASS 5.6.18

When a bank fails and the firm decides not to make good the shortfall in the amount of client money held at that bank, a secondary pooling event will occur in accordance with CASS 5.6.20 R. The firm would be expected to reflect the shortfall that arises at the firm's bank in the periodic client money calculation by reducing the client money resource and client money requirement accordingly.

14/01/2005

CASS 5.6.19

The client money (insurance) distribution rules seek to ensure that clients who have previously specified that they are not willing to accept the risk of the bank that has fails, and who therefore requested that their client money be placed in a designated client bank account as a different bank, should not suffer the loss of the bank that has failed.

14/01/2005

Failure of a bank: pooling

CASS 5.6.20

If a secondary pooling event occurs as a result of the failure of a bank where one or more general client bank accounts are held, then:

(1) in relation to every general client bank account of the firm, the provisions of CASS 5.6.22 R and CASS 5.6.26 R to CASS 5.6.28 G will apply;
(2) in relation to every designated client bank account held by the firm with the failed bank, the provisions of CASS 5.6.24 R and CASS 5.6.26 R to CASS 5.6.28 G will apply; and
(3) any money held at a bank, other than the bank that has failed, in designated client bank accounts is not pooled with any other client money.

14/01/2005

CASS 5.6.21

If a secondary pooling event occurs as a result of the failure of a bank where one or more designated client bank accounts are held then in relation to every designated client bank account held by the firm with the failed bank, the provisions of CASS 5.6.24 R and CASS 5.6.26 R to CASS 5.6.28 G will apply.

14/01/2005

CASS 5.6.22

Money held in each general client bank account of the firm must be treated as pooled and:

(1) any shortfall in client money held, or which should have been held, in general client bank accounts, that has arisen as a result of the failure of the bank, must be borne by all the clients whose client money is held in a general client bank account of the firm, rateably in accordance with their entitlements;
(2) a new client money entitlement must be calculated for each client by the firm, to reflect the requirements in (1), and the firm's records must be amended to reflect the reduced client money entitlement;
(3) the firm must make and retain a record of each client's share of the client money shortfall at the failed bank until the client is repaid; and
(4) the firm must use the new client entitlements, calculated in accordance with (2), when performing the client money calculation in accordance with CASS 5.5.63 R to CASS 5.5.69 R.

14/01/2005

CASS 5.6.23

The term 'which should have been held' is a reference to the failed bank's failure (and elsewhere, as appropriate, is a reference to the other failed third party's failure) to hold the client money at the time of the pooling event.

14/01/2005

CASS 5.6.24

For each client with a designated client bank account held at the failed bank:

(1) any shortfall in client money held, or which should have been held, in designated client bank accounts that has arisen as a result of the failure, must be borne by all the clients whose client money is held in a designated client bank account of the firm at the failed bank, rateably in accordance with their entitlements;
(2) a new client money entitlement must be calculated for each of the relevant clients by the firm, and the firm's records must be amended to reflect the reduced client money entitlement;
(3) the firm must make and retain a record of each client's share of the client money shortfall at the failed bank until the client is repaid; and
(4) the firm must use the new client money entitlements, calculated in accordance with (2), when performing the periodic client money calculation, in accordance with CASS 5.5.63 R to CASS 5.5.69 R.

14/01/2005

CASS 5.6.25

14/01/2005

Client money received after the failure of a bank

CASS 5.6.26

Client money received by the firm after the failure of a bank, that would otherwise have been paid into a client bank account at that bank:

(1) must not be transferred to the failed bank unless specifically instructed by the client in order to settle an obligation of that client to the failed bank; and
(2) must be, subject to (1), placed in a separate client bank account that has been opened after the secondary pooling event and either:

(a) on the written instruction of the client, transferred to a bank other than the one that has failed; or
(b) returned to the client as soon as possible.

14/01/2005

CASS 5.6.27

(1) pay the full sum into a client bank account other than one operated at the bank that has failed; and
(2) pay the money that is not client money out of that client bank account within one business day of the day on which the remittance is cleared.

14/01/2005

CASS 5.6.28

Whenever possible the firm should seek to split a mixed remittance before the relevant accounts are credited.

14/01/2005

Failure of an intermediate broker or settlement agent: pooling

CASS 5.6.29

If a secondary pooling event occurs as a result of the failure of another broker or settlement agent to whom the firm has transferred client's money then, in relation to every general client bank account of the firm, the provisions of CASS 5.6.26 R to CASS 5.6.28 G and CASS 5.6.30 R will apply.

14/01/2005

CASS 5.6.30

Money held in each general client bank account of the firm must be treated as pooled and:

(1) any shortfall in client money held, or which should have been held, in general client bank accounts, that has arisen as a result of the failure, must be borne by all the clients whose client money is held in a general client bank account of the firm, rateably in accordance with their entitlements;
(2) a new client money entitlement must be calculated for each client by the firm, to reflect the requirements of (1), and the firm's records must be amended to reflect the reduced client money entitlement;
(3) the firm must make and retain a record of each client's share of the client money shortfall at the failed intermediate broker or settlement agent until the client is repaid; and
(4) the firm must use the new client money entitlements, calculated in accordance with (2), when performing the periodic client money calculation, in accordance with CASS 5.5.63 R to CASS 5.5.69 R.

14/01/2005

Client money received after the failure of a broker or settlement agent

CASS 5.6.31

Client money received by the firm after the failure of another broker or settlement agent, to whom the firm has transferred client money that would otherwise have been paid into a client bank account at that broker or settlement agent:

(1) must not be transferred to the failed thirty party unless specifically instructed by the client in order to settle an obligation of that client to the failed broker or settlement agent; and
(2) must be, subject to (1), placed in a separate client bank account that has been opened after the secondary pooling event and either:

(a) on the written instruction of the client, transferred to a third party other than the one that has failed; or
(b) returned to the client as soon as possible.

14/01/2005

Notification on the failure of a bank, other broker or settlement agent

CASS 5.6.32

The provisions of CASS 5.5.61 R apply.

14/01/2005

CASS 5.7

Mandates

14/01/2005

CASS 5.8

Safe keeping of client's documents and other assets

14/01/2005

Application

CASS 5.8.1

(1) CASS 5.8 applies to a firm (including in its capacity as trustee under CASS 5.4) which in the course of insurance mediation activity takes into its possession for safekeeping any client title documents (other than documents of no value) or other tangible assets belonging to clients.
(2) CASS 5.8 does not apply to a firm when:

(a) carrying on an insurance mediation activity which is in respect of a reinsurance contract; or
(b) acting in accordance with CASS 2 (Custody rules).

14/01/2005

Purpose

CASS 5.8.2

The rules in this section amplify the obligation in Principle 10 which requires a firm to arrange adequate protection for client's assets. Firms carrying on insurance mediation activities may hold, on a temporary or longer basis, client title documents such as policy documents (other than policy documents of no value) and also items of physical property if, for example, a firm arranges for a valuation. The rules are intended to ensure that firms make adequate arrangements for the safe keeping of such property.

14/01/2005

Requirement

CASS 5.8.3

(1) A firm which has in its possession or control documents evidencing a client's title to a contract of insurance or other similar documents (other than documents of no value) or which takes into its possession or control tangible assets belonging to a client, must take reasonable steps to ensure that any such documents or items of property:

(a) are kept safe until they are delivered to the client;
(b) are not delivered or given to any other person except in accordance with instructions given by the client; and that

a record is kept as to the identity of any such documents or items of property and the dates on which they were received by the firm and delivered to the client or other person.
(2) A firm must retain the record required in (1) for a period of three years after the document or property concerned is delivered to the client or other person.

14/01/2005

CASS 5 Annex 1

Segregation of designated investments: permitted investments, general principles and conditions (This Annex belongs to CASS 5.5.14 R)

14/01/2005

The general principles which must be followed when client money segregation includes designated investments:

(a)

there must be a suitable spread of investments;

(b)

investments must be made in accordance with an appropriate liquidity strategy;

(c)

the investments must be in accordance with an appropriate credit risk policy;

(d)

any foreign exchange risks must be prudently managed.

Table of permitted designated investments for the purpose of CASS 5.5.14 R (1).

Investment type

Qualification

1. Negotiable debt security (including a certificate of deposit)

(a) Remaining term to maturity of 5 years or less; and
(b) The issuer or investment must have a short-term credit rating of A1 by Standard and Poor's, or P1 by Moody's Investor Services, or F1 by Fitch if the instrument has a remaining term to maturity of 366 days or less; or a minimum long term credit rating of AA- by Standards and Poor's, or Aa3 by Moody's Investor Services or AA- by Fitch if the instrument has a term to maturity of more than 366 days.

2. A repo in relation to negotiable debt security

As for 1 above and where the credit rating of the counterparty also meets the criteria in 1.

3. Bond funds

(a) An authorised fund or a recognised scheme or an investment company which is registered by the Securities and Exchange Commission of the United States of America under the Investment Company Act 1940;
(b) A minimum credit rating and risk rating of Aaf and S2 respectively by Standard and Poor's or Aa and MR2 respectively by Moody's Investor Services or AA and V2 respectively by Fitch.

4. Money market fund

(a) An authorised fund or a recognised scheme;
(b) A minimum credit and risk rating of Aaa and MR1+ respectively by Moody's Investor Services or AAAm by Standard and Poor's or AAA and V1+ respectively by Fitch.

5. Derivatives

Only for the purpose of prudently managing foreign currency risks.

The general conditions which must be satisfied in the segregation of designated investments are:

(a)

any redemption of an investment must be by payment into the firm's client money bank account;

(b)

where the credit or risk rating of a designated investment falls below the minimum set out in the Table, the firm must dispose of the investment as soon as possible and in any event not later than 20 business days following the downgrade;

(c)

where any investment or issuer has more than one rating, the lowest shall apply.

14/01/2005

CASS 6

Custody: MiFID business

CASS 6.1

Application

01/11/2007

CASS 6.1.1

This chapter (the custody rules) applies to:

(1) a MiFID investment firm:

(a) when it holds financial instruments belonging to a client in the course of its MiFID business; or
(b) that opts to comply with the custody rules under this chapter in accordance with CASS 6.1.17R (1) (Opt-in to the MiFID custody rules); and

(2) a third country investment firm that opts to comply with the custody rules under this chapter in accordance with CASS 6.1.17R (2) (Opt-in to the MiFID client money rules).

01/11/2007

CASS 6.1.2

Firms are reminded that dividends (actual or payments in lieu), stock lending fees and other payments received for the benefit of a client, and which are due to the clients should be held in accordance with the MiFID client money chapter where appropriate.

01/11/2007

CASS 6.1.3

This chapter does not apply where a firm issues depositary receipts. The custody rules in the non-directive custody chapter provide a specialist regime for the issue of depositary receipts (see CASS 2.1.24 R to CASS 2.1.26 R).

01/11/2007

Business in the name of the firm

CASS 6.1.4

The custody rules do not apply where a firm carries on business in its name but on behalf of the client where that is required by the very nature of the transaction and the client is in agreement.

[Note: recital 26 to MiFID]

01/11/2007

CASS 6.1.5

For example, this chapter does not apply where a firm borrows financial instruments from a client as principal under a stock lending agreement.

01/11/2007

Title transfer collateral arrangements

CASS 6.1.6

The custody rules do not apply where a client transfers full ownership of a financial instrument to a firm for the purpose of securing or otherwise covering present or future, actual, contingent or prospective obligations.

[Note: recital 27 to MiFID]

01/11/2007

CASS 6.1.7

A title transfer financial collateral arrangement under the Financial Collateral Directive is a type of transfer of instruments to cover obligations where the financial instrument will not be regarded as belonging to the client.

01/11/2007

CASS 6.1.8

Firms are reminded of the client's best interests rule, which requires them to act honestly, fairly and professionally in accordance with the best interests of their clients when structuring their business particularly in respect of the effect of that structure on firms' obligations under this chapter.

01/11/2007

CASS 6.1.9

Firms are reminded that, in certain cases, the collateral rules apply where a firm receives collateral from a client in order to secure the obligations of the client.

01/11/2007

Affiliated companies

CASS 6.1.10

The fact that a client is an affiliated company does not affect the operation of the custody rules in relation to that client.

01/11/2007

CASS 6.1.11

A firm that holds financial instruments on behalf of an affiliated company in respect of its non-MiFID business and opts under CASS 6.1.17 R to comply with this chapter in respect of that non-MiFID business, should refer to CASS 2.1.9 R (1) to determine whether the assets falls within the scope of the custody rules in the non-directive custody chapter and therefore within the scope of the opt-in.

01/11/2007

Delivery versus payment transactions

CASS 6.1.12

(1) A firm need not treat this chapter as applying in respect of a delivery versus payment transaction through a commercial settlement system if it is intended that the financial instrument is either to be:

(a) in respect of a client's purchase, due to the client within one business day following the client's fulfilment of a payment obligation; or
(b) in respect of a client's sale, due to the firm within one business day following the fulfilment of a payment obligation;

unless the delivery or payment by the firm does not occur by the close of business on the third business day following the date of payment or delivery of the financial instrument by the client.
(2) Until such a delivery versus payment transaction through a commercial settlement system settles, a firm may segregate money (in accordance with the MiFID client money chapter) instead of the client's financial instruments.

01/11/2007

Arranging registration and recommendations

CASS 6.1.13

This chapter does not apply where a firm arranges registration of a financial instrument. In such circumstances, a firm must comply with the relevant custody rules in the non-directive custody chapter (see CASS 2.1.22 R).

01/11/2007

CASS 6.1.14

This chapter does not apply where a firm recommends to a retail client a third party to hold the assets of that client. In such circumstances, a firm must comply with the relevant custody rules in the non-directive custody chapter (see CASS 2.2.19 R).

01/11/2007

Temporary handling of financial instruments

CASS 6.1.15

The custody rules do not apply if a firm temporarily handles a financial instrument belonging to a client. A firm should temporarily handle financial instrument for no longer than is reasonably necessary. In most transactions this would be no longer than one business day, but it may be longer or shorter depending upon the transaction in question. For example, when a firm executes an order to sell shares which have not been registered on a de-materialised exchange, handling documents for longer periods may be reasonably necessary. However, in the case of financial instruments in bearer form, the firm is expected to handle them for less than one business day. When a firm temporarily handles financial instruments, it is still obliged to comply with Principle 10 (Clients' assets).

01/11/2007

CASS 6.1.16

When a firm temporarily handles a financial instrument, in order to comply with its obligation to act in accordance with Principle 10 (Clients' assets), the following are guides to good practice:

(1) a firm should keep the financial instrument secure, record it as belonging to that client, and forward it to the client or in accordance with the client's instructions as soon as practicable after receiving it; and
(2) a firm should make and retain a record of the fact that the firm has handled that financial instrument and of the details of the client concerned and of any action the firm has taken.

01/11/2007

Opt-in to the MiFID custody rules

CASS 6.1.17

(1) A firm that holds financial instruments to which this chapter applies and assets in respect of which the non-directive custody chapter applies, may elect to comply with the provisions of this chapter in respect of all assets so held and if it does so, this chapter applies as if all such assets were financial instruments that the firm receives and holds in the course of, or in connection with, its MiFID business.
(1A) A third country investment firm that holds designated investments belonging to a client in the course of its equivalent business may elect to comply with the provisions of this chapter in respect of the assets it holds to which the non-directive custody chapter applies. If it does so, this chapter applies as if all such assets were assets that the firm receives and holds in the course of, or in connection with, MiFID business.
(2) An election under this rule must be in respect of all the activities of the firm when it is safeguarding and administering investments belonging to a client with the exception of arranging safeguarding and administration of assets within the scope of CASS 2.1.21 R and CASS 2.1.22 R and depositary receipt business within the scope of CASS 2.1.24 R to CASS 2.1.26 R.
(3) A firm must make and retain a written record of the election it makes under this rule, including the date from which the election is to be effective. The firm must make the record on the date it makes the election and must keep it for a period of five years after ceasing to use it.

01/11/2007

CASS 6.1.18

A firm cannot rely upon this opt-in in respect of arranging safeguarding and administration of assets and depositary receipt business as the custody rules in the non-directive custody chapter provide specialised regimes in respect of these types of business which are outside the scope of this chapter.

01/11/2007

CASS 6.1.19

If a firm has opted to comply with this chapter, the non-directive custody chapter will have no application to the activities to which the election applies.

01/11/2007

CASS 6.1.20

A firm (other than a third country investment firm) that is only subject to the non-directive custody chapter may not choose to comply with this chapter.

01/11/2007

CASS 6.1.20A

The information requirements concerning the safeguarding of financial instruments belonging to a client (see COBS 6.1.7 R) apply to a firm that has elected to comply with this chapter with respect of all assets to which the election applies.

31/12/2008

Disposal of financial instruments

CASS 6.1.21

The custody rules cease to have effect in relation to a financial instrument it has been disposed of in accordance with a valid client instruction.

01/11/2007

General purpose

CASS 6.1.22

01/11/2007

CASS 6.1.23

The rules in this chapter are designed primarily to restrict the commingling of client and the firm's assets and minimise the risk of the client's financial instruments being used by the firm without the client's agreement or contrary to the client's wishes, or being treated as the firm's assets in the event of its insolvency.

01/11/2007

CASS 6.1.24

The custody rules also implement the provisions of MiFID which regulate the obligations of a firm when it holds financial instruments belonging to a client.

01/11/2007

CASS 6.2

Holding of client assets

01/11/2007

Requirement to protect clients' financial instruments

CASS 6.2.1

A firm must, when holding financial instruments belonging to clients, make adequate arrangements so as to safeguard clients' ownership rights, especially in the event of the firm's insolvency, and to prevent the use of financial instruments belonging to a client on the firm's own account except with the client's express consent.

[Note: article 13(7) of MiFID]

01/11/2007

Requirement to have adequate organisational arrangements

CASS 6.2.2

A firm must introduce adequate organisational arrangements to minimise the risk of the loss or diminution of clients' financial instruments, or the rights in connection with those financial instruments, as a result of the misuse of the financial instruments, fraud, poor administration, inadequate record-keeping or negligence.

[Note: article 16(1)(f) of the MiFID implementing Directive]

01/11/2007

CASS 6.2.3

To the extent practicable, a firm must effect appropriate registration or recording of legal title to a financial instrument in the name of:

(1) the client (or, where appropriate, the trustee firm), unless the client is an authorised person acting on behalf of its client, in which case it may be registered in the name of the client of that authorised person;
(2) a nominee company which is controlled by:

(a) the firm;
(b) an affiliated company;
(c) a recognised investment exchange or a designated investment exchange; or
(d) a third party with whom financial instruments are deposited under CASS 6.3;

(3) any other third party if:

(a) the financial instrument is subject to the law or market practice of a jurisdiction outside the United Kingdom and the firm has taken reasonable steps to determine that it is in the client's best interests to register or record it in that way, or that it is not feasible to do otherwise, because of the nature of the applicable law or market practice; and
(b) the firm has notified the client in writing;

(4) the firm if:

(a) the financial instrument is subject to the law or market practice of a jurisdiction outside the United Kingdom and the firm has taken reasonable steps to determine that it is in the client's best interests to register or record it in that way, or that it is not feasible to do otherwise, because of the nature of the applicable law or market practice; and
(b) the firm has notified the client if a professional client, or obtained prior written consent if a retail client.

01/11/2007

CASS 6.2.4

A firm must accept the same level of responsibility to its client for any nominee company controlled by the firm with respect of any requirements of the custody rules.

01/11/2007

CASS 6.2.5

A firm may register or record legal title to its own financial instrument in the same name as that in which legal title to a financial instrument is registered or recorded, but only if:

(1) the firm's financial instruments are separately identified in the firm's records from the financial instruments; or
(2) the firm registers or records a financial instrument in accordance with CASS 6.2.3R (4).

01/11/2007

CASS 6.2.6

A firm when complying with CASS 6.2.3R (3) or CASS 6.2.3R (4) will be expected to demonstrate that adequate investigations have been made of the market concerned by reference to local sources, which may include an appropriate legal opinion.

01/11/2007

CASS 6.2.7

A firm must ensure that any documents of title to financial instruments in bearer form, belonging to the firm and which it holds in its physical possession, are kept separately from any document of title to a client's financial instrument in bearer form.

01/11/2007

CASS 6.3

Depositing assets with third parties

01/11/2007

CASS 6.3.1

(1) A firm may deposit financial instruments held by it on behalf of its clients into an account or accounts opened with a third party, but only if it exercises all due skill, care and diligence in the selection, appointment and periodic review of the third party and of the arrangements for the holding and safekeeping of those financial instruments.
(2) A firm must take the necessary steps to ensure that any client's financial instruments deposited with a third party, in accordance with this rule are identifiable separately from the financial instruments belonging to the firm and from the financial instruments belonging to that third party, by means of differently titled accounts on the books of the third party or other equivalent measures that achieve the same level of protection.
(3) When a firm makes the selection, appointment and conducts the periodic review referred under this rule, it must take into account:

(a) the expertise and market reputation of the third party; and
(b) any legal requirements or market practices related to the holding of those financial instruments that could adversely affect clients' rights.

(4) A firm must make a record of the grounds upon which it satisfies itself as to the appropriateness of its selection of a third party as required in this rule. The firm must make the record on the date it makes the selection and must keep it from the date of such selection until five years after the firm ceases to use the third party to hold financial instruments belonging to clients.

[Note: articles 16(1)(d) and 17(1) of the MiFID implementing Directive]

01/11/2007

CASS 6.3.2

In discharging its obligations under this section, a firm should also consider, together with any other relevant matters:

(1) once a financial instrument has been lodged by the firm with the third party, the third party's performance of its services to the firm;
(2) the arrangements that the third party has in place for holding and safeguarding the financial instrument;
(3) current industry standard reports, for example Financial Reporting and Auditing Group (FRAG) 21 report or its equivalent;
(4) the capital or financial resources of the third party;
(5) the credit rating of the third party; and and
(6) any other activities undertaken by the third party and, if relevant, any affiliated company.

01/11/2007

CASS 6.3.3

A firm should consider carefully the terms of its agreements with third parties with which it will deposit financial instruments belonging to a client. The following terms are examples of the issues firms should address in this agreement:

(1) that the title of the account indicates that any financial instrument credited to it does not belong to the firm;
(2) that the third party will hold or record a financial instrument belonging to the firm's client separately from any financial instrument belonging to the firm or to the third party;
(3) the arrangements for registration or recording of the financial instrument if this will not be registered in the client's name;
(4) the restrictions over the third party's right to claim a lien, right of retention or sale over any financial instrument standing to the credit of the account;
(5) the restrictions over the circumstances in which the third party may withdraw assets from the account;
(6) the procedures and authorities for the passing of instructions to or by the firm;
(7) the procedures regarding the claiming and receiving of dividends, interest payments and other entitlements accruing to the client; and
(8) the provisions detailing the extent of the third party's liability in the event of the loss of a financial instrument caused by the fraud, wilful default or negligence of the third party or an agent appointed by him.

01/11/2007

CASS 6.3.4

(1) A firm must only deposit financial instruments with a third party in a jurisdiction which specifically regulates and supervises the safekeeping of financial instruments for the account of another person with a third party who is subject to such regulation.
(2) A firm must not deposit financial instruments held on behalf of a client with a third party in a country that is not an EEA State (third country) and which does not regulate the holding and safekeeping of financial instruments for the account of another person unless:

(a) the nature of the financial instruments or of the investment services connected with those financial instruments requires them to be deposited with a third party in that third country; or
(b) the financial instruments are held on behalf of a professional client and the client requests the firm in writing to deposit them with a third party in that third country.

(3) In the case of activities a firm has opted into this chapter under CASS 6.1.17R (1) and (2) do not apply. However, the firm must deposit financial instruments belonging to clients pursuant to such activities with a custodian and must hold any document of title to a financial instrument either in the physical possession of the firm or:

(a) for a retail client, with a custodian;
(b) for a professional client, with one or more of the following:

(i) a custodian;
(ii) any person whom the firm has taken reasonable steps to determine is a person whose business includes the provision of appropriate safe custody services; or
(iii) in accordance with the professional client's specific written instructions.

[Note: article 17(2) and (3) of the MiFID implementing Directive]

01/11/2007

CASS 6.4

Use of financial instruments

01/11/2007

CASS 6.4.1

(1) A firm must not enter into arrangements for securities financing transactions in respect of financial instruments held by it on behalf of a client or otherwise use such financial instruments for its own account or the account of another client of the firm, unless:

(a) the client has given express prior consent to the use of the financial instruments on specified terms; and
(b) the use of that client's financial instruments is restricted to the specified terms to which the client consents.

(2) A firm must not enter into arrangements for securities financing transactions in respect of financial instruments held by it on behalf of a client in an omnibus account held by a third party, or otherwise use financial instruments held in such an account for its own account or for the account of another client unless, in addition to the conditions set out in (1):

(a) each client whose financial instruments are held together in an omnibus account has given express prior consent in accordance with (1)(a); or
(b) the firm has in place systems and controls which ensure that only financial instruments belonging to clients who have given express prior consent in accordance with the requirements of (1)(a) are used.

(3) For the purposes of obtaining the express prior consent of a retail client under this rule the signature of the retail client or an equivalent alternative mechanism is required.

[Note: article 19 of the MiFID implementing Directive]

01/11/2007

CASS 6.4.2

Firms are reminded of the client's best interests rule, which requires the firm to act honestly, fairly and professionally in accordance with the best interests of their clients. An example of what is generally considered to be such conduct, in the context of stock lending activities involving retail clients is that:

(1) the firm ensures that relevant collateral is provided by the borrower in favour of the client;
(2) the current realisable value of the financial instrument and of the relevant collateral is monitored daily; and
(3) the firm provides relevant collateral to make up the difference where the current realisable value of the collateral falls below that of the financial instrument, unless otherwise agreed in writing by the client.

01/11/2007

CASS 6.4.3

Where a firm uses financial instruments as permitted in this section, the records of the firm must include details of the client on whose instructions the use of the financial instruments has been effected, as well as the number of financial instruments used belonging to each client who has given consent, so as to enable the correct allocation of any loss.

[Note: article 19(2) of the MiFID implementing Directive]

01/11/2007

CASS 6.5

Records, accounts and reconciliations

01/11/2007

Records and accounts

CASS 6.5.1

A firm must keep such records and accounts as necessary to enable it at any time and without delay to distinguish financial instruments held for one client from financial instruments held for any other client, and from the firm's own financial instruments.

[Note: article 16(1)(a) of the MiFID implementing Directive]

01/11/2007

CASS 6.5.2

A firm must maintain its records and accounts in a way that ensures their accuracy, and in particular their correspondence to the financial instruments held for clients.

[Note: article 16(1)(b) of the MiFID implementing Directive]

01/11/2007

Record keeping

CASS 6.5.3

A firm must ensure that the records made under this section are retained for a period of five years after they are made.

01/11/2007

Internal reconciliation of financial instruments held for clients

CASS 6.5.4

(1) SYSC 4.1.1 R requires firms to have robust governance arrangements, such as internal control mechanisms, including sound administrative and accounting procedures and effective control and safeguard arrangements for information processing systems. In addition, SYSC 6.1.1 R requires firms to establish, implement and maintain adequate policies and procedures sufficient to ensure the firm's compliance with its obligations under the regulatory system. Carrying out internal reconciliations of the financial instruments held for each client with the financial instruments held by the firm and third parties is an important step in the discharge of the firm's obligations under CASS 6.5.2 R, SYSC 4.1.1 R and SYSC 6.1.1 R.
(2) A firm should perform such internal reconciliations:

(a) as often as is necessary; and
(b) as soon as reasonably practicable after the date to which the reconciliation relates;

to ensure the accuracy of the firm's records and accounts.
(3) Reconciliation methods which can be adopted for these purposes include the 'total count method', which requires that all financial instruments be counted and reconciled as at the same date.
(4) If a firm chooses to use an alternative reconciliation method (for example the 'rolling stock method') it needs to ensure that:

(a) all of a particular financial instrument are counted and reconciled as at the same date; and
(b) all financial instruments are counted and reconciled during a period of six months.

01/11/2007

CASS 6.5.5

A firm that uses an alternative reconciliation method must first send a written confirmation to the FSA from the firm's auditor that the firm has in place systems and controls which are adequate to enable it to use the method effectively.

01/11/2007

Reconciliations with external records

CASS 6.5.6

A firm must conduct on a regular basis, reconciliations between its internal accounts and records and those of any third parties by whom those financial instruments are held.

[Note: article 16(1)(c) of the MiFID implementing Directive]

01/11/2007

CASS 6.5.7

Where a firm deposits financial instruments belonging to a client with a third party, in complying with the requirements of CASS 6.5.6 R, the firm should seek to ensure that the third party will deliver to the firm a statement as at a date or dates specified by the firm which details the description and amounts of all the financial instruments credited to the account, and that this statement is delivered in adequate time to allow the firm to carry out the periodic reconciliations required in CASS 6.5.6 R.

01/11/2007

Frequency of external reconciliations

CASS 6.5.8

A firm should perform the reconciliation required by CASS 6.5.6 R:

(1) as regularly as is necessary; and
(2) as soon as reasonably practicable after the date to which the reconciliation relates;

to ensure the accuracy of its internal accounts and records against those of third parties by whom financial instruments are held.

01/11/2007

Independence of person conducting reconciliations

CASS 6.5.9

01/11/2007

Reconciliation discrepancies

CASS 6.5.10

A firm must promptly correct any discrepancies which are revealed in the reconciliations envisaged by this section, and make good, or provide the equivalent of, any unreconciled shortfall for which there are reasonable grounds for concluding that the firm is responsible.

01/11/2007

CASS 6.5.11

Items recorded or held within a suspense or error account fall within the scope of discrepancies.

01/11/2007

CASS 6.5.12

01/11/2007

Notification requirements

CASS 6.5.13

A firm must inform the FSA in writing without delay:

(1) if it has not complied with, or is unable, in any material respect, to comply with the requirements in CASS 6.5.1 R, CASS 6.5.2 R or CASS 6.5.6 R; or
(2) if, having carried out a reconciliation, it has not complied with, or is unable, in any material respect, to comply with CASS 6.5.10 R.

01/11/2007

Audit of compliance with the MiFID custody rules

CASS 6.5.14

Firms are reminded that the auditor of the firm has to confirm in the report submitted to the FSA under SUP 3.10 (Duties of auditors: notification and report on client assets) that the firm has maintained systems adequate to enable it to comply with the rules in this chapter.

01/11/2007

CASS 6.5.15

Firms that use an alternative reconciliation method are reminded that the firm's auditor must confirm to the FSA in writing that the firm has in place systems and controls which are adequate to enable it to use another method effectively (see CASS 6.5.5 R).

01/11/2007

CASS 7

Client money: MiFID business

CASS 7.1

Application and Purpose

01/11/2007

Application

CASS 7.1.1

This chapter (the client money rules) applies to:

(1) a MiFID investment firm:

(a) that holds client money; or
(b) that opts to comply with this chapter in accordance with CASS 7.1.3R (1) (Opt-in to the MiFID client money rules); and

(2) a third country investment firm that opts to comply with this chapter in accordance with CASS 7.1.3R (2) (Opt-in to the MiFID client money rules);

unless otherwise specified in this section.

01/11/2007

CASS 7.1.2

CASS 7.2 (Definition of client money) sets out the circumstances in which money is considered client money for the purposes of this chapter.

01/11/2007

Opt-in to the MiFID client money rules

CASS 7.1.3

(1) A firm that receives or holds money in respect of which this chapter applies and money in respect of which the non-directive client money chapter or the insurance client money chapter applies, may elect to comply with the provisions of this chapter in respect of all such money and if it does so, this chapter applies as if all such money were money that the firm receives and holds in the course of, or in connection with, its MiFID business.
(1A) A third country investment firm that receives or holds money from, for or on behalf of a client in the course of, or in connection with, its equivalent business of a third country investment firm may elect to comply with the provisions of this chapter in respect of the money it holds to which the non-directive client money chapter or the insurance client money chapter applies. If it does so, this chapter applies as if all such money were money that the firm receives and holds in the course of, or in connection with, MiFID business.
(2) A firm must make and retain a written record of any election it makes under this rule, including the date from which the election is to be effective. The firm must make the record on the date it makes the election and must keep it for a period of five years after ceasing to use it.

01/11/2007

CASS 7.1.4

The opt-in to the client money rules inthis chapter does not apply in respect of money that a firm holds outside of the scope of the non-directive client money chapter or the insurance client money chapter, such as money falling within the scope of the opt-out for non-IMD designated investment business (see CASS 4.1.11 R).

(2) relevant cash deposit ISA wrapper;

01/11/2007

CASS 7.1.5

If a firm has opted to comply with this chapter, the non-directive client money chapter or the insurance client money chapter will have no application to the activities to which the election applies.

01/11/2007

CASS 7.1.6

A firm (other than a third country investment firm) that is only subject to the non-directive client money chapter or the insurance client money chapter may not opt to comply with this chapter.

01/11/2007

CASS 7.1.7

If a firm that has agreed with an insurance undertaking under the client money rules in the insurance client money chapter to treat the undertaking's money as client money, opts in to this chapter in accordance with this section, the insurance undertaking's interest under the trust (or in Scotland agency) will be subordinated to the interests of the firm's other clients.

01/11/2007

CASS 7.1.7A

The information requirements concerning the safeguarding of client money (see COBS 6.1.7 R) apply to a firm that has elected to comply with this chapter with respect of all client money to which the election applies.

01/11/2007

Credit institutions

CASS 7.1.8

The client money rules do not apply to a BCD credit institution in relation to deposits within the meaning of the BCD held by that institution.

[Note: article 13(8) of MiFID and article 18(1) of the MiFID implementing Directive]

01/11/2007

CASS 7.1.9

If a credit institution that holds money as a deposit with itself is subject to the requirement to disclose information before providing services, it should, in compliance with that obligation, notify the client that:

(1) money held for that client in an account with the credit institution will be held by the firm as banker and not as trustee (or in Scotland as agent); and
(2) as a result, the money will not be held in accordance with the client money rules.

01/11/2007

CASS 7.1.10

Pursuant to Principle 10 (Clients' assets), a credit institution that holds money as a deposit with itself should be able to account to all of its clients for amounts held on their behalf at all times. A bank account opened with the firm that is in the name of the client would generally be sufficient. When money from clients deposited with the firm is held in a pooled account, this account should be clearly identified as an account for clients. The firm should also be able to demonstrate that an amount owed to a specific client that is held within the pool can be reconciled with a record showing that individual's client balance and is, therefore, identifiable at any time. Similarly, where that money is reflected only in a firm's bank account with other banks (nostro accounts), the firm should be able to reconcile amounts owed to that client within a reasonable period of time.

(1) it should be able to account to all of its clients sums held for them at all times; and
(2) that money should, pursuant to Principle 10, be allocated to the relevant client promptly. This should be done no later than ten business days after the firm has received the money.

01/11/2007

CASS 7.1.11

A credit institution is reminded that the exemption for deposits is not an absolute exemption from the client money rules.

01/11/2007

Affiliated companies

CASS 7.1.12

A firm that holds money on behalf of, or receives money from, an affiliated company in respect of MiFID business must treat the affiliated company as any other client of the firm for the purposes of this chapter.

01/11/2007

CASS 7.1.13

A firm that holds client money on behalf of, or receives money from, an affiliated company in respect of its non-MiFID business and opts under CASS 7.1.3R (1) to comply with this chapter in with respect of that non-MiFID business, should refer to the non-directive client money chapter (see CASS 4.1.18 R (Affiliated companies)) to determine whether that money falls within the scope of the non-directive client money chapter and therefore within the scope of the opt-in.

01/11/2007

Coins

CASS 7.1.14

The client money rules do not apply with respect to coins held on behalf of a client if the firm and the client have agreed that the money (or money of that type) is to be held by the firm for the intrinsic value of the metal which constitutes the coin.

01/11/2007

Solicitors

CASS 7.1.15

(1) An authorised professional firm regulated by the Law Society (of England and Wales), the Law Society of Scotland or the Law Society of Northern Ireland must comply with the MiFID client money (minimum implementing) rules and also with the following rules of its designated professional body and, if it does so, it will be deemed to comply with the client money rules in this chapter.
(2) The relevant rules are:

(a) if the firm is regulated by the Law Society (of England and Wales):

(i) the Solicitors' Accounts Rules 1998; or
(ii) where applicable, the Solicitors Overseas Practice Rules 1990;

(b) if the firm is regulated by the Law Society of Scotland, the Solicitors' (Scotland) Accounts, Accounts Certificate, Professional Practice and Guarantee Fund Rules 2001; and
(c) if the firm is regulated by the Law Society of Northern Ireland, the Solicitors' Accounts Regulations 1998.

01/11/2007

General purpose

CASS 7.1.16

(1) Principle 10 (Clients' assets) requires a firm to arrange adequate protection for clients' assets when the firm is responsible for them. An essential part of that protection is the proper accounting and treatment of client money. The client money rules provide requirements for firms that receive or hold client money, in whatever form.
(2) The client money rules also, implement the provisions of MiFID which regulate the obligations of a firm when it holds client money.

01/11/2007

CASS 7.2

Definition of client money

01/11/2007

CASS 7.2.1

For the purposes of this chapter and the MiFID custody chapter, client money means any money that a firm receives from or holds for, or on behalf of, a client in the course of, or in connection with, its MiFID business unless otherwise specified in this section.

01/11/2007

Business in the name of the firm

CASS 7.2.2

Money is not client money where the firm carries on business in its own name on behalf of the client where that is required by the very nature of the transaction and the client is in agreement.

[Note: recital 26 to MiFID]

01/11/2007

Title transfer collateral arrangements

CASS 7.2.3

Where a client transfers full ownership of money to a firm for the purpose of securing or otherwise covering present or future, actual or contingent or prospective obligations, such money should no longer be regarded as client money.

[Note: recital 27 to MiFID]

01/11/2007

CASS 7.2.4

A title transfer financial collateral arrangement under the Financial Collateral Directive is an example of a type of transfer of money to cover obligations where that money will not be regarded as client money.

01/11/2007

CASS 7.2.5

Where a firm has received full title or full ownership to money under a collateral arrangement, the fact that it has also taken a security interest over its obligation to repay that money to the client would not result in the money being client money. This can be compared to a situation in which a firm takes a charge or other security interest over money held in a client bank account, where that money would still be client money as there would be no absolute transfer of title to the firm. However, if that security interest includes a "right to use arrangement", under which the client agrees to transfer all of its rights to money in that account to the firm upon the exercise of the right to use, the money may cease to be client money, but only once the right to use is exercised and the money is transferred out of the account to the firm.

01/11/2007

CASS 7.2.6

Firms are reminded of the client's best interest rule, which requires a firm to act honestly, fairly and professionally in accordance with the best interests of its clients when structuring its business particularly in respect of the effect of that structure on firms' obligations under the client money rules.

01/11/2007

CASS 7.2.7

Pursuant to the client's best interests rule, a firm should ensure that where a retail client transfers full ownership of money to a firm:

(1) the client is notified that full ownership of the money has been transferred to the firm and, as such, the client no longer has a proprietary claim over this money and the firm can deal with it on its own right;
(2) the transfer is for the purposes of securing or covering the client's obligations;
(3) an equivalent transfer is made back to the client if the provision of collateral by the client is no longer necessary; and
(4) there is a reasonable link between the timing and the amount of the collateral transfer and the obligation that the client owes, or is likely to owe, to the firm.

01/11/2007

Money in connection with a "delivery versus payment" transaction

CASS 7.2.8

Money need not be treated as client money in respect of a delivery versus payment transaction through a commercial settlement system if it is intended that either:

(1) in respect of a client's purchase, money from a client will be due to the firm within one business day upon the fulfilment of a delivery obligation; or
(2) in respect of a client's sale, money is due to the client within one business day following the client's fulfilment of a delivery obligation;

unless the delivery or payment by the firm does not occur by the close of business on the third business day following the date of payment or delivery of the investments by the client.

01/11/2007

Money due and payable to the firm

CASS 7.2.9

(1) Money is not client money when it becomes properly due and payable to the firm for its own account.
(2) For these purposes, if a firm makes a payment to, or on the instructions of, a client, from an account other than a client bank account, until that payment has cleared, no equivalent sum from a client bank account for reimbursement will become due and payable to the firm.

01/11/2007

CASS 7.2.10

01/11/2007

CASS 7.2.11

01/11/2007

Commission rebate

CASS 7.2.12

When a firm has entered into an arrangement under which commission is rebated to a client, those rebates need not be treated as client money until they become due and payable to the client in accordance with the terms of the contractual arrangements between the parties.

01/11/2007

CASS 7.2.13

When commission rebate becomes due and payable to the client, the firm should:

(1) treat it as client money; or
(2) pay it out in accordance with the rule regarding the discharge of a firm's fiduciary duty to the client (see CASS 7.2.15 R);

unless the firm and the client have entered into an arrangement under which the client has agreed to transfer full ownership of this money to the firm as collateral against payment of future professional fees (see CASS 7.2.3 R (Title transfer collateral arrangements)).

01/11/2007

Interest

CASS 7.2.14

Unless a firm notifies a retail client in writing whether or not interest is to be paid on client money and, if so, on what terms and at what frequency, it must pay that client all interest earned on that client money. Any interest due to a client will be client money.

01/11/2007

Discharge of fiduciary duty

CASS 7.2.15

Money ceases to be client money if it is paid:

(1) to the client, or a duly authorised representative of the client; or
(2) to a third party on the instruction of the client, unless it is transferred to a third party in the course of effecting a transaction, in accordance with CASS 7.5.2 R (Transfer of client money to a third party); or
(3) into a bank account of the client (not being an account which is also in the name of the firm); or
(4) to the firm itself, when it is due and payable to the firm (see CASS 7.2.9 R (Money due and payable to the firm)); or
(5) to the firm itself, when it is an excess in the client bank account (see CASS 7.6.13R (2) (Reconciliation discrepancies)).

01/11/2007

CASS 7.2.16

When a firm wishes to transfer client money balances to a third party in the course of transferring its business to another firm, it should do so in a way which it discharges its fiduciary duty to the client under this section.

01/11/2007

CASS 7.2.17

When a firm draws a cheque or other payable order to discharge its fiduciary duty to the client, it must continue to treat the sum concerned as client money until the cheque or order is presented and paid by the bank.

01/11/2007

Allocated but unclaimed client money

CASS 7.2.18

The purpose of the rule on allocated but unclaimed client money is to allow a firm, in the normal course of its business, to cease to treat as client money any balances, allocated to an individual client, when those balances remain unclaimed.

01/11/2007

CASS 7.2.19

A firm may cease to treat as client money any unclaimed client money balance if it can demonstrate that it has taken reasonable steps to trace the client concerned and to return the balance.

01/11/2007

CASS 7.2.20

(1) Taking reasonable steps should include:

(a) entering into a written agreement, in which the client consents to the firm releasing, after the period of time specified in (b), any client money balances, for or on behalf of that client, from client bank accounts;
(b) determining that there has been no movement on the client's balance for a period of at least six years (notwithstanding any payments or receipts of charges, interest or similar items);
(c) writing to the client at the last known address informing the client of the firm's intention of no longer treating that balance as client money, giving the client 28 days to make a claim;
(d) making and retaining records of all balances released from client bank accounts; and
(e) undertaking to make good any valid claim against any released balances.

(2) Compliance with (1) may be relied on as tending to establish compliance with CASS 7.2.19 R.
(3) Contravention of (1) may be relied on as tending to establish contravention of CASS 7.2.19 R.

01/11/2007

CASS 7.2.21

When a firm gives an undertaking to make good any valid claim against released balances, it should make arrangements authorised by the firm's relevant controllers that are legally enforceable by any person with a valid claim to such money.

01/11/2007

CASS 7.3

Organisational requirements: client money

01/11/2007

Requirement to protect client money

CASS 7.3.1

A firm must, when holding client money, make adequate arrangements to safeguard the client's rights and prevent the use of client money for its own account.

[Note: article 13(8) of MiFID]

01/11/2007

Requirement to have adequate organisational arrangements

CASS 7.3.2

A firm must introduce adequate organisational arrangements to minimise the risk of the loss or diminution of client money, or of rights in connection with client money, as a result of misuse of client money, fraud, poor administration, inadequate record-keeping or negligence.

[Note: article 16(1)(f) of the MiFID implementing Directive]

01/11/2007

CASS 7.4

Segregation of client money

01/11/2007

CASS 7.4.1

A firm, on receiving any client money, must promptly place this money into one or more accounts opened with any of the following:

(1) a central bank;
(2) a BCD credit institution;
(3) a bank authorised in a third country;
(4) a qualifying money market fund.

[Note: article 18(1) of the MiFID implementing Directive]

01/11/2007

CASS 7.4.2

An account with a central bank, a BCD credit institution or a bank authorised in a third country in which client money is placed is a client bank account.

01/11/2007

Qualifying money market funds

CASS 7.4.3

Where a firm deposits client money with a qualifying money market fund, the units in that fund should be held in accordance with the MiFID custody chapter.

[Note: recital 23 to the MiFID implementing Directive]

01/11/2007

CASS 7.4.4

A firm that places client money in a qualifying money market fund should ensure that it has the permissions required to invest in and hold units in that fund and must comply with the rules that are relevant for those activities.

01/11/2007

CASS 7.4.5

A firm must give a client the right to oppose the placement of his money in a qualifying money market fund.

[Note: article 18(3) of the MiFID implementing Directive]

01/11/2007

CASS 7.4.6

If a firm that intends to place client money in a qualifying money market fund is subject to the requirement to disclose information before providing services, it should, in compliance with that obligation, notify the client that:

(1) money held for that client will be held in a qualifying money market fund; and
(2) as a result, the money will not be held in accordance with the client money rules but in accordance with the custody rules.

01/11/2007

A firm's selection of a credit institution, bank or money market fund

CASS 7.4.7

A firm that does not deposit client money with a central bank must exercise all due skill, care and diligence in the selection, appointment and periodic review of the credit institution, bank or qualifying money market fund where the money is deposited and the arrangements for the holding of this money.

[Note: article 18(3) of the MiFID implementing Directive]

01/11/2007

CASS 7.4.8

When a firm makes the selection, appointment and conducts the periodic review of a credit institution, a bank or a qualifying money market fund, it must take into account:

(1) the expertise and market reputation of the third party; and
(2) any legal requirements or market practices related to the holding of client money that could adversely affect clients' rights.

[Note: article 18(3) of the MiFID implementing Directive]

01/11/2007

CASS 7.4.9

In discharging its obligations when selecting, appointing and reviewing the appointment of a credit institution, a bank or a qualifying money market fund, a firm should also consider, together with any other relevant matters:

(1) the need for diversification of risks;
(2) the capital of the credit institution or bank;
(3) the amount of client money placed, as a proportion of the credit institution or bank's capital and deposits, and, in the case of a qualifying money market fund, compared to any limit the fund may place on the volume of redemptions in any period;
(4) the credit rating of the credit institution or bank; and
(5) to the extent that the information is available, the level of risk in the investment and loan activities undertaken by the credit institution or bank and affiliated companies.

01/11/2007

CASS 7.4.10

A firm must make a record of the grounds upon which it satisfies itself as to the appropriateness of its selection of a credit institution, a bank or a qualifying money market fund. The firm must make the record on the date it makes the selection and must keep it from the date of such selection until five years after the firm ceases to use the third party to hold client money.

01/11/2007

Client bank accounts

CASS 7.4.11

A firm must take the necessary steps to ensure that client money deposited, in accordance with CASS 7.4.1 R, in a central bank, a credit institution, a bank authorised in a third country or a qualifying money market fund is held in an account or accounts identified separately from any accounts used to hold money belonging to the firm.

[Note: article 16(1)(e) of the MiFID implementing Directive]

01/11/2007

CASS 7.4.12

A firm may open one or more client bank accounts in the form of a general client bank account, a designated client bank account or a designated client fund account (see CASS 7.9.3 G).

01/11/2007

CASS 7.4.13

A designated client fund account may be used for a client only where that client has consented to the use of that account and all other designated client fund accounts which may be pooled with it. For example, a client who consents to the use of bank A and bank B should have his money held in a different designated client fund account at bank B from a client who has consented to the use of banks B and C.

01/11/2007

Payment of client money into a client bank account

CASS 7.4.14

Two approaches that a firm can adopt in discharging its obligations under the MiFID client money segregation requirements are:

(1) the 'normal approach'; or
(2) the 'alternative approach'.

01/11/2007

CASS 7.4.15

A firm that does not adopt the normal approach must first send a written confirmation to the FSA from the firm's auditor that the firm has in place systems and controls which are adequate to enable it to operate another approach effectively.

01/11/2007

CASS 7.4.16

The alternative approach would be appropriate for a firm that operates in a multi-product, multi-currency environment for which adopting the normal approach would be unduly burdensome and would not achieve the client protection objective. Under the alternative approach, client money is received into and paid out of a firm's own bank accounts; consequently the firm should have systems and controls that are capable of monitoring the client money flows so that the firm can comply with its obligations to perform reconciliations of records and accounts (see CASS 7.6.2 R). A firm that adopts the alternative approach will segregate client money into a client bank account on a daily basis, after having performed a reconciliation of records and accounts of the entitlement of each client for whom the firm holds client money with the records and accounts of the client money the firm holds in client bank accounts and client transaction accounts to determine what the client money requirement was at the close of the previous business day.

01/11/2007

CASS 7.4.17

Under the normal approach, a firm that receives client money should either:

(1) pay it promptly, and in any event no later than the next business day after receipt, into a client bank account; or
(2) pay it out in accordance with the rule regarding the discharge of a firm's fiduciary duty to the client (see CASS 7.2.15 R).

01/11/2007

CASS 7.4.18

Under the alternative approach, a firm that receives client money should:

(a) pay any money to or on behalf of clients out of its own account; and
(b) perform a reconciliation of records and accounts required under CASS 7.6.2 R (Records and accounts), SYSC 4.1.1 R and SYSC 6.1.1 R, adjust the balance held in its client bank accounts and then segregate the money in the client bank account until the calculation is re-performed on the next business day; or

(2) pay it out in accordance with the rule regarding the discharge of a firm's fiduciary duty to the client (see CASS 7.2.15 R).

01/11/2007

CASS 7.4.19

A firm that adopts the alternative approach may:

(1) receive all client money into its own bank account;
(2) choose to operate the alternative approach for some types of business (for example, overseas equities transactions) and operate the normal approach for other types of business (for example, contingent liability investments) if the firm can demonstrate that its systems and controls are adequate (see CASS 7.4.15 R); and
(3) use an historic average to account for uncleared cheques (see paragraph 4 of CASS 7 Annex 1).

01/11/2007

CASS 7.4.20

Pursuant to the MiFID client money segregation requirements, a firm should ensure that any money other than client money deposited in a client bank account is promptly paid out of that account unless it is a minimum sum required to open the account, or to keep it open.

01/11/2007

CASS 7.4.21

01/11/2007

Automated transfers

CASS 7.4.22

Pursuant to the MiFID client money segregation requirements, a firm operating the normal approach that receives client money in the form of an automated transfer should take reasonable steps to ensure that:

(1) the money is received directly into a client bank account; and
(2) if money is received directly into the firm's own account, the money is transferred into a client bank account promptly, and in any event, no later than the next business day after receipt.

01/11/2007

Mixed remittance

CASS 7.4.23

Pursuant to the MiFID client money segregation requirements, a firm operating the normal approach that receives a mixed remittance (that is part client money and part other money) should:

(1) pay the full sum into a client bank account promptly, and in any event, no later than the next business day after receipt; and
(2) pay the money that is not client money out of the client bank account promptly, and in any event, no later than one business day of the day on which the firm would normally expect the remittance to be cleared.

01/11/2007

Appointed representatives, tied agents, field representatives and other agents

CASS 7.4.24

(1) Pursuant to the MiFID client money segregation requirements, a firm operating the normal approach should establish and maintain procedures to ensure that client money received by its appointed representatives, tied agents, field representatives or other agents is:

(a) paid into a client bank account of the firm promptly, and in any event, no later than the next business day after receipt; or
(b) forwarded to the firm, or in the case of a field representative forwarded to a specified business address of the firm, so as to ensure that the money arrives at the specified business address promptly, and in any event, no later than the close of the third business day.

(2) For the purposes of 1(b), client money received on business day one should be forwarded to the firm or specified business address of the firm promptly, and in any event, no later than the next business day after receipt (business day two) in order for it to reach that firm or specified business address by the close of the third business day. Procedures requiring the client money in the form of a cheque to be sent to the firm or the specified business address of the firm by first class post promptly, and in any event, no later than the next business day after receipt, would be in line with 1(b).

01/11/2007

CASS 7.4.25

The firm should ensure that its appointed representatives, tied agents, field representatives or other agents keep client money separately identifiable from any other money (including that of the firm) until the client money is paid into a client bank account or sent to the firm.

01/11/2007

CASS 7.4.26

A firm that operates a number of small branches, but holds or accounts for all client money centrally, may treat those small branches in the same way as appointed representatives and tied agents.

01/11/2007

Client entitlements

CASS 7.4.27

Pursuant to the MiFID client money segregation requirements, a firm operating the normal approach that receives outside the United Kingdom a client entitlement on behalf of a client should pay any part of it which is client money:

(1) to, or in accordance with, the instructions of the client concerned; or
(2) into a client bank account promptly, and in any event, no later than five business days after the firm is notified of its receipt.

01/11/2007

CASS 7.4.28

Pursuant to the MiFID client money segregation requirements, a firm operating the normal approach should allocate a client entitlement that is client money to the individual client promptly and, in any case, no later than ten business days after notification of receipt.

01/11/2007

Money due to a client from a firm

CASS 7.4.29

Pursuant to the MiFID client money segregation requirements, a firm operating the normal approach that is liable to pay money to a client should promptly, and in any event no later than one business day after the money is due and payable, pay the money:

(1) to, or to the order of, the client; or
(2) into a client bank account.

01/11/2007

Segregation in different currency

CASS 7.4.30

01/11/2007

CASS 7.4.31

The rule on segregation of client money in a different currency (CASS 7.4.30 R) does not apply where the client has instructed the firm to convert the money into and hold it in a different currency.

01/11/2007

Commodity Futures Trading Commission Part 30 exemption order

CASS 7.4.32

01/11/2007

CASS 7.4.33

A firm with a Part 30 exemption order undertakes to the CFTC that it will refuse to allow any US customer to opt not to have his money treated as client money if it is held or received in respect of transactions on non-US exchanges, unless that US customer is an "eligible contract participant" as defined in section 1a(12) of the Commodity Exchange Act, 7 U.S.C. The MiFID client money chapter does not have the option of allowing the firm or the client to choose whether money belonging to the client is subject to the client money rules.

01/11/2007

CASS 7.4.34

A firm must not reduce the amount of, or cancel a letter of credit issued under, an LME bond arrangement where this will cause the firm to be in breach of its Part 30 exemption order.

01/11/2007

CASS 7.4.35

A firm must notify the FSA immediately it arranges the issue of an individual letter of credit under an LME bond arrangement.

01/11/2007

CASS 7.5

Transfer of client money to a third party

01/11/2007

CASS 7.5.1

This section sets out the requirements a firm must comply with when it transfers client money to another person without discharging its fiduciary duty owed to that client. Such circumstances arise when, for example, a firm passes client money to a clearing house in the form of margin for the firm's obligations to the clearing house that are referable to transactions undertaken by the firm for the relevant clients. They may also arise when a firm passes client money to an intermediate broker for contingent liability investments in the form of initial or variation margin on behalf of a client. In these circumstances, the firm remains responsible for that client's equity balance held at the intermediate broker until the contract is terminated and all of that client's positions at that broker closed. If a firm wishes to discharge itself from its fiduciary duty, it should do so in accordance with the rule regarding the discharge of a firm's fiduciary duty to the client (CASS 7.2.15 R).

01/11/2007

CASS 7.5.2

A firm may allow another person, such as an exchange, a clearing house or an intermediate broker, to hold or control client money, but only if:

(1) the firm transfers the client money:

(a) for the purpose of a transaction for a client through or with that person; or
(b) to meet a client's obligation to provide collateral for a transaction (for example, an initial margin requirement for a contingent liability investment); and

(2) in the case of a retail client, that client has been notified that the client money may be transferred to the other person.

01/11/2007

CASS 7.5.3

A firm should not hold excess client money in its client transaction accounts with intermediate brokers, settlement agents and OTC counterparties; it should be held in a client bank account.

01/11/2007

CASS 7.6

Records, accounts and reconciliations

01/11/2007

CASS 7.6.1

A firm must keep such records and accounts as are necessary to enable it, at any time and without delay, to distinguish client money held for one client from client money held for any other client, and from its own money.

[Note: article 16(1)(a) of the MiFID implementing Directive]

01/11/2007

CASS 7.6.2

A firm must maintain its records and accounts in a way that ensures their accuracy, and in particular their correspondence to the client money held for clients.

[Note: article 16(1)(b) of the MiFID implementing Directive]

01/11/2007

Client entitlements

CASS 7.6.3

Pursuant to CASS 7.6.2 R, SYSC 4.1.1 R and SYSC 6.1.1 R, a firm should take reasonable steps to ensure that is notified promptly of any receipt of client money in the form of a client entitlement.

01/11/2007

Record keeping

CASS 7.6.4

A firm must ensure that records made under CASS 7.6.1 R and CASS 7.6.2 R are retained for a period of five years after they were made.

01/11/2007

CASS 7.6.5

A firm should ensure that it makes proper records, sufficient to show and explain the firm's transactions and commitments in respect of its client money.

01/11/2007

Internal reconciliations of client money balances

CASS 7.6.6

(1) SYSC 4.1.1 R requires firms to have robust governance arrangements, such as internal control mechanisms, including sound administrative and accounting procedures and effective control and safeguard arrangements for information processing systems. In addition, SYSC 6.1.1 R requires firms to establish, implement and maintain adequate policies and procedures sufficient to ensure the firm's compliance with its obligations under the regulatory system. Carrying out internal reconciliations of records and accounts of the entitlement of each client for whom the firm holds client money with the records and accounts of the client money the firm holds in client bank accounts and client transaction accounts should be one of the steps a firm takes to satisfy its obligations under CASS 7.6.2 R, SYSC 4.1.1 R and SYSC 6.1.1 R.
(2) A firm should perform such internal reconciliations:

(a) as often as is necessary; and
(b) as soon as reasonably practicable after the date to which the reconciliation relates;

to ensure the accuracy of the firm's records and accounts.
(3) The standard method of internal client money reconciliation sets out a method of reconciliation of client money balances that the FSA believes should be one of the steps that a firm takes when carrying out internal reconciliations of client money.

01/11/2007

Records

CASS 7.6.7

(1) A firm must make records, sufficient to show and explain the method of internal reconciliation of client money balances under CASS 7.6.2 R used, and if different from the standard method of internal client money reconciliation, to show and explain that:

(a) the method of internal reconciliation of client money balances used affords an equivalent degree of protection to the firm's clients to that afforded by the standard method of internal client money reconciliation; and
(b) in the event of a primary pooling event or a secondary pooling event, the method used is adequate to enable the firm to comply with the client money (MiFID business) distribution rules.

(2) A firm must make these records on the date it starts using a method of internal reconciliation of client money balances and must keep it made for a period of five years after ceasing to use it.

01/11/2007

CASS 7.6.8

A firm that does not use the standard method of internal client money reconciliation must first send a written confirmation to the FSA from the firm's auditor that the firm has in place systems and controls which are adequate to enable it to use another method effectively.

01/11/2007

Reconciliations with external records

CASS 7.6.9

A firm must conduct, on a regular basis, reconciliations between its internal accounts and records and those of any third parties by whom client money is held.

[Note: article 16(1)(c) of the MiFID implementing Directive]

01/11/2007

Frequency of external reconciliations

CASS 7.6.10

(1) A firm should perform the required reconciliation of client money balances with external records:

(a) as regularly as is necessary; and
(b) as soon as reasonably practicable after the date to which the reconciliation relates;

to ensure the accuracy of its internal accounts and records against those of third parties by whom client money is held.
(2) In determining whether the frequency is adequate, the firm should consider the risks which the business is exposed, such as the nature, volume and complexity of the business, and where and with whom the client money is held.

01/11/2007

Method of external reconciliations

CASS 7.6.11

A method of reconciliation of client money balances with external records that the FSA believes is adequate is when a firm compares:

(1) the balance on each client bank account as recorded by the firm with the balance on that account as set out on the statement or other form of confirmation issued by the bank with which those accounts are held; and
(2) the balance, currency by currency, on each client transaction account as recorded by the firm, with the balance on that account as set out in the statement or other form of confirmation issued by the person with whom the account is held;

and identifies any discrepancies between them.

01/11/2007

CASS 7.6.12

Any approved collateral held in accordance with the client money rules must be included within this reconciliation.

01/11/2007

Reconciliation discrepancies

CASS 7.6.13

When any discrepancy arises as a result of a firm's internal reconciliations, the firm must identify the reason for the discrepancy and ensure that:

(1) any shortfall is paid into a client bank account by the close of business on the day that the reconciliation is performed; or
(2) any excess is withdrawn within the same time period (but see CASS 7.4.20 G and CASS 7.4.21 R).

01/11/2007

CASS 7.6.14

When any discrepancy arises as a result of the reconciliation between a firm's internal records and those of third parties that hold client money, the firm must identify the reason for the discrepancy and correct it as soon as possible, unless the discrepancy arises solely as a result of timing differences between the accounting systems of the party providing the statement or confirmation and that of the firm.

01/11/2007

CASS 7.6.15

While a firm is unable to resolve a difference arising from a reconciliation between a firm's internal records and those of third parties that hold client money, and one record or a set of records examined by the firm during its reconciliation indicates that there is a need to have a greater amount of client money or approved collateral than is in fact the case, the firm must assume, until the matter is finally resolved, that the record or set of records is accurate and pay its own money into a relevant account.

01/11/2007

Notification requirements

CASS 7.6.16

A firm must inform the FSA in writing without delay:

(1) if it has not complied with, or is unable, in any material respect, to comply with the requirements in CASS 7.6.1 R, CASS 7.6.2 R or CASS 7.6.9 R;
(2) if having carried out a reconciliation it has not complied with, or is unable, in any material respect, to comply with CASS 7.6.13 R to CASS 7.6.15 R.

01/11/2007

Audit of compliance with the MiFID client money rules

CASS 7.6.17

01/11/2007

CASS 7.6.18

Firms that do not adopt the normal approach are reminded that the firm's auditor must confirm to the FSA in writing that the firm has in place systems and controls which are adequate to enable it to operate the alternative approach effectively (see CASS 7.4.15 R).

01/11/2007

CASS 7.6.19

Firms that do not use the standard method of internal client money reconciliation are reminded that the firm's auditor must confirm to the FSA in writing that the firm has in place systems and controls which are adequate to enable it to use another method effectively (see CASS 7.6.8 R).

01/11/2007

CASS 7.7

Statutory trust

01/11/2007

CASS 7.7.1

Section 139(1) of the Act (Miscellaneous ancillary matters) provides that rules may make provision which result in client money being held by a firm on trust (England and Wales and Northern Ireland) or as agent (Scotland only). This section creates a fiduciary relationship between the firm and its client under which client money is in the legal ownership of the firm but remains in the beneficial ownership of the client. In the event of failure of the firm, costs relating to the distribution of client money may have to be borne by the trust.

01/11/2007

Requirement

CASS 7.7.2

A firm receives and holds client money as trustee (or in Scotland as agent) on the following terms:

(1) for the purposes of and on the terms of the client money rules and the client money (MiFID business) distribution rules;
(2) subject to (3), for the clients (other than clients which are insurance undertakings when acting as such with respect of client money received in the course of insurance mediation activity and that was opted in to this chapter) for whom that money is held, according to their respective interests in it;
(3) after all valid claims in (2) have been met, for clients which are insurance undertakings with respect of client money received in the course of insurance mediation activity according to their respective interests in it;
(4) on failure of the firm, for the payment of the costs properly attributable to the distribution of the client money in accordance with (2); and
(5) after all valid claims and costs under (2) to (4) have been met, for the firm itself.

01/11/2007

CASS 7.8

Notification and acknowledgement of trust

01/11/2007

Banks

CASS 7.8.1

(1) When a firm opens a client bank account, the firm must give or have given written notice to the bank requesting the bank to acknowledge to it in writing that:

(a) all money standing to the credit of the account is held by the firm as trustee (or if relevant, as agent) and that the bank is not entitled to combine the account with any other account or to exercise any right of set-off or counterclaim against money in that account in respect of any sum owed to it on any other account of the firm; and
(b) the title of the account sufficiently distinguishes that account from any account containing money that belongs to the firm, and is in the form requested by the firm.

(2) In the case of a client bank account in the United Kingdom, if the bank does not provide the required acknowledgement within 20 business days after the firm dispatched the notice, the firm must withdraw all money standing to the credit of the account and deposit it in a client bank account with another bank as soon as possible.

01/11/2007

Exchange, clearing house, intermediatebroker or OTC counterparty

CASS 7.8.2

(1) A firm which undertakes any contingent liability investment for clients through an exchange, clearing house, intermediate broker or OTC counterparty must, before the client transaction account is opened with the exchange, clearing house, intermediate broker or OTC counterparty:

(a) notify the person with whom the account is to be opened that the firm is under an obligation to keep client money separate from the firm's own money, placing client money in a client bank account;
(b) instruct the person with whom the account is to be opened that any money paid to it in respect of that transaction is to be credited to the firm's client transaction account; and
(c) require the person with whom the account is to be opened to acknowledge in writing that the firm's client transaction account is not to be combined with any other account, nor is any right of set-off to be exercised by that person against money credited to the client transaction account in respect of any sum owed to that person on any other account.

(2) If the intermediate broker or OTC counterparty does not provide the required acknowledgement within 20 business days of the dispatch of the notice and instruction, the firm must cease using the client transaction account with that broker or counterparty and arrange as soon as possible for the transfer or liquidation of any open positions and the repayment of any money.

01/11/2007

CASS 7.9

Client money distribution

01/11/2007

Application

CASS 7.9.1

This section (the client money (MiFID business) distribution rules) applies to a firm that holds client money which is subject to the client money rules when a primary pooling event or a secondary pooling event occurs.

01/11/2007

Purpose

CASS 7.9.2

The client money (MiFID business) distribution rules seek to facilitate the timely return of client money to a client in the event of the failure of a firm or third party at which the firm holds client money.

01/11/2007

Failure of the authorised firm: primary pooling event

CASS 7.9.3

A firm can hold client money in either a general client bank account, a designated client bank account or a designated client fund account. A firm holds all client money in general client bank accounts for its clients as part of a common pool of money so those particular clients do not have a claim against a specific sum in a specific account; they only have a claim to the client money in general. A firm holds client money in designated client bank accounts or designated client fund accounts for those clients that requested their client money be part of a specific pool of money, so those particular clients do have a claim against a specific sum in a specific account; they do not have a claim to the client money in general unless a primary pooling event occurs. A primary pooling event triggers a notional pooling of all the client money, in every type of client money account, and the obligation to distribute it. If the firm becomes insolvent, and there is (for whatever reason) a shortfall in money held for a client compared with that client's entitlements, the available funds will be distributed in accordance with the client money (MiFID business) distribution rules.

01/11/2007

CASS 7.9.4

A primary pooling event occurs:

(1) on the failure of the firm;
(2) on the vesting of assets in a trustee in accordance with an 'assets requirement' imposed under section 48(1)(b) of the Act;
(3) on the coming into force of a requirement for all client money held by the firm; or
(4) when the firm notifies, or is in breach of its duty to notify, the FSA, in accordance with CASS 7.6.16 R (Notification requirements), that it is unable correctly to identify and allocate in its records all valid claims arising as a result of a secondary pooling event.

01/11/2007

CASS 7.9.5

CASS 7.9.4R (4) does not apply so long as:

(1) the firm is taking steps, in consultation with the FSA, to establish those records; and
(2) there are reasonable grounds to conclude that the records will be capable of rectification within a reasonable period.

01/11/2007

Pooling and distribution

CASS 7.9.6

If a primary pooling event occurs:

(1) client money held in each client money account of the firm is treated as pooled; and
(2) the firm must distribute that client money in accordance with CASS 7.7.2 R, so that each client receives a sum which is rateable to the client money entitlement calculated in accordance with CASS 7.9.7 R.

01/11/2007

CASS 7.9.7

(1) When, in respect of a client, there is a positive individual client balance and a negative client equity balance, the credit must be offset against the debit reducing the individual client balance for that client.
(2) When, in respect of a client, there is a negative individual client balance and a positive client equity balance, the credit must be offset against the debit reducing client equity balance for that client.

01/11/2007

CASS 7.9.8

A client's main claim is for the return of client money held in a client bank account. A client may be able to claim for any shortfall against money held in a firm's own account. For that claim, the client will be an unsecured creditor of the firm.

01/11/2007

Client money received after the failure of the firm

CASS 7.9.9

(1) it is client money relating to a transaction that has not settled at the time of the primary pooling event; or
(2) it is client money relating to a client, for whom the client money entitlement, calculated in accordance with CASS 7.9.7 R, shows that money is due from the client to the firm at the time of the primary pooling event.

01/11/2007

CASS 7.9.10

Client money received after the primary pooling event relating to an unsettled transaction should be used to settle that transaction. Examples of such transactions include:

(1) an equity transaction with a trade date before the date of the primary pooling event and a settlement date after the date of the primary pooling event; or
(2) a contingent liability investment that is 'open' at the time of the primary pooling event and is due to settle after the primary pooling event.

01/11/2007

CASS 7.9.11

If a firm receives a mixed remittance after a primary pooling event, it must:

(1) pay the full sum into the separate client bank account opened in accordance with CASS 7.9.9 R; and
(2) pay the money that is not client money out of that client bank account into a firm's own bank account within one business day of the day on which the firm would normally expect the remittance to be cleared.

01/11/2007

CASS 7.9.12

Whenever possible the firm should seek to split a mixed remittance before the relevant accounts are credited.

01/11/2007

Failure of a bank, intermediate broker, settlement agent or OTC counterparty: secondary pooling events

CASS 7.9.13

If both a primary pooling event and a secondary pooling event occur, the provisions of this section relating to a primary pooling event apply.

01/11/2007

CASS 7.9.14

A secondary pooling event occurs on the failure of a third party to which client money held by the firm has been transferred under CASS 7.4.1R (1) to CASS 7.4.1R (3) (Depositing client money) or CASS 7.5.2 R (Transfer of client money to a third party).

01/11/2007

CASS 7.9.15

CASS 7.9.19 R to CASS 7.9.31 R do not apply if, on the failure of the third party, the firm repays to its clients or pays into a client bank account, at an unaffected bank, an amount equal to the amount of client money which would have been held if a shortfall had not occurred at that third party.

01/11/2007

CASS 7.9.16

When client money is transferred to a third party, a firm continues to owe fiduciary duties to the client. Whether a firm is liable for a shortfall in client money caused by a third party failure will depend on whether it has complied with its duty of care as agent or trustee.

01/11/2007

Failure of a bank

CASS 7.9.17

When a bank fails and the firm decides not to make good the shortfall in the amount of client money held at that bank, a secondary pooling event will occur in accordance with CASS 7.9.19 R. The firm would be expected to reflect the shortfall that arises at the failed bank in its records of the entitlement of clients and of money held with third parties.

01/11/2007

CASS 7.9.18

The client money (MiFID business) distribution rules seek to ensure that clients who have previously specified that they are not willing to accept the risk of the bank that has failed, and who therefore requested that their client money be placed in a designated client bank account at a different bank, should not suffer the loss of the bank that has failed.

01/11/2007

Failure of a bank: pooling

CASS 7.9.19

If a secondary pooling event occurs as a result of the failure of a bank where one or more general client bank accounts are held, then:

(1) in relation to every general client bank account of the firm, the provisions of CASS 7.9.21 R, CASS 7.9.26 R and CASS 7.9.27 R will apply;
(2) in relation to every designated client bank account held by the firm with the failed bank, the provisions of CASS 7.9.23 R, CASS 7.9.26 R and CASS 7.9.27 R will apply;
(3) in relation to each designated client fund account held by the firm with the failed bank, the provisions of CASS 7.9.24 R, CASS 7.9.26 R and CASS 7.9.27 R will apply;
(4) any money held at a bank, other than the bank that has failed, in designated client bank accounts, is not pooled with any other client money; and
(5) any money held in a designated client fund account, no part of which is held by the bank that has failed, is not pooled with any other client money.

01/11/2007

CASS 7.9.20

If a secondary pooling event occurs as a result of the failure of a bank where one or more designated client bank accounts or designated client fund accounts are held, then:

(1) in relation to every designated client bank account held by the firm with the failed bank, the provisions of CASS 7.9.23 R, CASS 7.9.26 R and CASS 7.9.27 R will apply; and
(2) in relation to each designated client fund account held by the firm with the failed bank, the provisions of CASS 7.9.24 R, CASS 7.9.26 R and CASS 7.9.27 R will apply.

01/11/2007

CASS 7.9.21

Money held in each general client bank account and client transaction account of the firm must be treated as pooled and:

(1) any shortfall in client money held, or which should have been held, in general client bank accounts and client transaction accounts, that has arisen as a result of the failure of the bank, must be borne by all the clients whose client money is held in either a general client bank account or client transaction account of the firm, rateably in accordance with their entitlements;
(2) a new client money entitlement must be calculated for each client by the firm, to reflect the requirements in (1), and the firm's records must be amended to reflect the reduced client money entitlement;
(3) the firm must make and retain a record of each client's share of the client money shortfall at the failed bank until the client is repaid; and
(4) the firm must use the new client money entitlements, calculated in accordance with (2), for the purposes of reconciliations pursuant to CASS 7.6.2 R (Records and accounts), SYSC 4.1.1 R (General organisational requirements) and SYSC 6.1.1 R (Compliance) (as described in CASS 7.6.6 G).

01/11/2007

CASS 7.9.22

The term 'which should have been held' is a reference to the failed bank's failure to hold the client money at the time of the pooling event.

01/11/2007

CASS 7.9.23

For each client with a designated client bank account held at the failed bank:

(1) any shortfall in client money held, or which should have been held, in designated client bank accounts that has arisen as a result of the failure, must be borne by all the clients whose client money is held in a designated client bank account of the firm at the failed bank, rateably in accordance with their entitlements;
(2) a new client money entitlement must be calculated for each of the relevant clients by the firm, and the firm's records must be amended to reflect the reduced client money entitlement;
(3) the firm must make and retain a record of each client's share of the client money shortfall at the failed bank until the client is repaid; and
(4) the firm must use the new client money entitlements, calculated in accordance with (2), for the purposes of reconciliations pursuant to CASS 7.6.2 R (Records and accounts), SYSC 4.1.1 R (General organisational requirements) and SYSC 6.1.1 R (Compliance) (as described in CASS 7.6.6 G).

01/11/2007

CASS 7.9.24

(1) any shortfall in client money held, or which should have been held, in designated client fund accounts that has arisen as a result of the failure, must be borne by each of the clients whose client money is held in that designated fund, rateably in accordance with their entitlements;
(2) a new client money entitlement must be calculated for each client by the firm, in accordance with (1), and the firm's records must be amended to reflect the reduced client money entitlement;
(3) the firm must make and retain a record of each client's share of the client money shortfall at the failed bank until the client is repaid; and
(4) the firm must use the new client money entitlements, calculated in accordance with (2), for the purposes of reconciliations pursuant to CASS 7.6.2 R (Records and accounts), SYSC 4.1.1 R (General organisational requirements) and SYSC 6.1.1 R (Compliance) (as described in CASS 7.6.6 G).

01/11/2007

CASS 7.9.25

01/11/2007

Client money received after the failure of a bank

CASS 7.9.26

Client money received by the firm after the failure of a bank, that would otherwise have been paid into a client bank account at that bank:

(1) must not be transferred to the failed bank unless specifically instructed by the client in order to settle an obligation of that client to the failed bank; and
(2) must be, subject to (1), placed in a separate client bank account that has been opened after the secondary pooling event and either:

(a) on the written instruction of the client, transferred to a bank other than the one that has failed; or
(b) returned to the client as soon as possible.

01/11/2007

CASS 7.9.27

(1) pay the full sum into a client bank account other than one operated at the bank that has failed; and
(2) pay the money that is not client money out of that client bank account within one business day of the day on which the firm would normally expect the remittance to be cleared.

01/11/2007

CASS 7.9.28

Whenever possible the firm should seek to split a mixed remittance before the relevant accounts are credited.

01/11/2007

Failure of an intermediate broker, settlement agent or OTC counterparty: Pooling

CASS 7.9.29

01/11/2007

CASS 7.9.30

Money held in each general client bank account and client transaction account of the firm must be treated as pooled and:

(1) any shortfall in client money held, or which should have been held, in general client bank accounts and client transaction account, that has arisen as a result of the failure, must be borne by all the clients whose client money is held in either a general client bank account or a client transaction accounts of the firm, rateably in accordance with their entitlements;
(2) a new client money entitlement must be calculated for each client by the firm, to reflect the requirements of (1), and the firm's records must be amended to reflect the reduced client money entitlement;
(3) the firm must make and retain a record of each client's share of the client money shortfall at the failed intermediate broker, settlement agent or OTC counterparty until the client is repaid; and
(4) the firm must use the new client money entitlements, calculated in accordance with (2), for the purposes of reconciliations pursuant to CASS 7.6.2 R (Records and accounts), SYSC 4.1.1 R (General organisational requirements) and SYSC 6.1.1 R (Compliance) (as described in CASS 7.6.6 G).

01/11/2007

Client money received after the failure of an intermediate broker, settlement agent or OTC counterparty

CASS 7.9.31

(1) must not be transferred to the failed third party unless specifically instructed by the client in order to settle an obligation of that client to the failed intermediate broker, settlement agent or OTC counterparty; and
(2) must be, subject to (1), placed in a separate client bank account that has been opened after the secondary pooling event and either:

(a) on the written instruction of the client, transferred to a third party other than the one that has failed; or
(b) returned to the client as soon as possible.

01/11/2007

Notification to the FSA: failure of a bank, intermediate broker, settlement agent or OTC counterparty

CASS 7.9.32

On the failure of a third party with which money is held, a firm must notify the FSA:

(1) as soon as it becomes aware of the failure of any bank, intermediate broker, settlement agent, OTC counterparty or other entity with which it has placed, or to which it has passed, client money; and
(2) as soon as reasonably practical, whether it intends to make good any shortfall that has arisen or may arise and of the amounts involved.

01/11/2007

CASS 7 Annex 1

Annex 1

01/11/2007

As explained in CASS 7.6.6 G, in complying with its obligations under CASS 7.6.2 R (Records and accounts), SYSC 4.1.1 R (General organisational requirements) and SYSC 6.1.1 R (Compliance), a firm should carry out internal reconciliations of records and accounts of client money the firm holds in client bank accounts and client transaction accounts. This Annex sets out a method of reconciliation that the FSA believes is appropriate for these purposes (the standard method of internal client money reconciliation).

1. Each business day, a firm that adopts the normal approach (see CASS 7.4.17 G) should check whether its client money resource, being the aggregate balance on the firm's client bank accounts, as at the close of business on the previous business day, was at least equal to the client money requirement, as defined in paragraph 6 below, as at the close of business on that day.

2. Each business day, a firm that adopts the alternative approach (see CASS 7.4.18 G) should ensure that its client money resource, being the aggregate balance on the firm's client bank accounts, as at the close of business on that business day is at least equal to the client money requirement, as defined in paragraph 6 below, as at the close of business on the previous business day.

3. No excess or shortfall should arise when adopting the alternative approach.

4. If a firm is operating the alternative approach and draws a cheque on its own bank account, it will be expected to account for those cheques that have not yet cleared when performing its reconciliations of records and accounts under paragraph 2. An historic average estimate of uncleared cheques may be used to satisfy this obligation (see CASS 7.4.19G (3)).

5. For the purposes of performing its reconciliations of records and accounts under paragraphs 1 or 2, a firm should use the values contained in its accounting records, for example its cash book, rather than values contained in statements received from its banks and other third parties.

Client money requirement

6. The client money requirement is either:

(1) (subject to paragraph 18) the sum of, for all clients:

(a) the individual client balances calculated in accordance with paragraph 7, excluding:

(i) individual client balances which are negative (that is, debtors); and
(ii) clients' equity balances; and

(b) the total margined transaction requirement calculated in accordance with paragraph 14; or

(2) the sum of:

(a) for each client bank account:

(i) the amount which the firm's records show as held on that account; and
(ii) an amount that offsets each negative net amount which the firm's records show attributed to that account for an individual client; and

(b) the total margined transaction requirement calculated in accordance with paragraph 14.

General transactions
7. The individual client balance for each client should be calculated in accordance with this table:

Individual client balance calculation

Free money (no trades) and

sale proceeds due to the client:

(a)

in respect of principal deals when the client has delivered the designated investments; and

(b)

in respect of agency deals, when either:

(i)

the sale proceeds have been received by the firm and the client has delivered the designated investments; or

(ii)

the firm holds the designated investments for the client; and

the cost of purchases:

(c)

in respect of principal deals, paid for by the client but the firm has not delivered the designated investments to the client; and

(d)

in respect of agency deals, paid for by the client when either:

(i)

the firm has not remitted the money to, or to the order of, the counterparty; or

(ii)

the designated investments have been received by the firm but have not been delivered to the client;

Less

money owed by the client in respect of unpaid purchases by or for the client if delivery of those designated investments has been made to the client; and

Proceeds remitted to the client in respect of sales transactions by or for the client if the client has not delivered the designated investments.

Individual Client Balance 'X' = (A+B+C1+C2+D+E1+E2)-F-G

8. A firm should calculate the individual client balance using the contract value of any client purchases or sales.

9. A firm may choose to segregate designated investments instead of the value identified in paragraph 7 (except E1) if it ensures that the designated investments are held in such a manner that the firm cannot use them for its own purposes.

10. Segregation in the context of paragraph 9 can take many forms, including the holding of a safe custody investment in a nominee name and the safekeeping of certificates evidencing title in a fire resistant safe. It is not the intention that all the custody rules in the MiFID custody chapter should be applied to designated investments held in the course of settlement.

11. In determining the client money requirement under paragraph 6, a firm need not include money held in accordance with CASS 7.2.8 R (Delivery versus payment transaction).

12. In determining the client money requirement under paragraph 6, a firm:

(1) should include dividends received and interest earned and allocated;
(2) may deduct outstanding fees, calls, rights and interest charges and other amounts owed by the client which are due and payable to the firm (see CASS 7.2.9 R);
(3) need not include client money in the form of client entitlements which are not required to be segregated (see CASS 7.4.27 G) nor include client money forwarded to the firm by its appointed representatives, tied agents, field representatives and other agents, but not received (see CASS 7.4.24 G);
(4) should take into account any client money arising from CASS 7.6.13 R (Reconciliation discrepancies); and
(5) should include any unallocated client money.

Equity balance

13. A firm's equity balance, whether with an exchange, intermediate broker or OTC counterparty, is the amount which the firm would be liable to pay to the exchange, intermediate broker or OTC counterparty (or vice-versa) in respect of the firm's margined transactions if each of the open positions of the firm's clients was liquidated at the closing or settlement prices published by the relevant exchange or other appropriate pricing source and the firm's account with the exchange, intermediate broker or OTC counterparty is closed.

Margined transaction requirement

14. The total margined transaction requirement is:

(1) the sum of each of the client's equity balances which are positive;
Less
(2) the proportion of any individual negative client equity balance which is secured by approved collateral; and
(3) the net aggregate of the firm's equity balance (negative balances being deducted from positive balances) on transaction accounts for customers with exchanges, clearing houses, intermediate brokers and OTC counterparties.

15. To meet a shortfall that has arisen in respect of the requirement in paragraph 6(1)(b) or 6(2)(b), a firm may utilise its own approved collateral provided it is held on terms specifying when it is to be realised for the benefit of clients, it is clearly identifiable from the firm's own property and the relevant terms are evidenced in writing by the firm. In addition, the proceeds of the sale of that collateral should be paid into a client bank account.

16. If a firm's total margined transaction requirement is negative, the firm should treat it as zero for the purposes of calculating its client money requirement.

17. The terms 'client equity balance' and 'firm's equity balance' in paragraph 13 refer to cash values and do not include non-cash collateral or other designated investments held in respect of a margined transaction.

17A. A firm with a Part 30 exemption order which also operates an LME bond arrangement for the benefit of US-resident investors, should exclude the client equity balances for transactions undertaken on the London Metal Exchange on behalf of those US-resident investors from the calculation of the margined transaction requirement.

Reduced client money requirement option

18.

(1) When, in respect of a client, there is a positive individual client balance and a negative client equity balance, a firm may offset the credit against the debit and hence have a reduced individual client balance in paragraph 7 for that client.

(2) When, in respect of a client, there is a negative individual client balance and a positive client equity balance, a firm may offset the credit against the debit and hence have a reduced client equity balance in paragraph 14 for that client.

19. The effect of paragraph 18 is to allow a firm to offset, on a client by client basis, a negative amount with a positive amount arising out of the calculations in paragraphs 7 and 14, and, by so doing, reduce the amount the firm is required to segregate.

01/11/2007

CASS 8

Mandates

CASS 8.1

Application

01/11/2007

CASS 8.1.1

This chapter applies to a firm (including in its capacity as trustee under CASS 5.4) in respect of any written authority from a client under which the firm may control a client's assets or liabilities in the course of, or in connection with, the firm's:

(1) designated investment business (including MiFID business); and
(2) insurance mediation activity, except where it relates to a reinsurance contract.

01/11/2007

CASS 8.1.2

Mandates or similar authorities for the purpose of this chapter include a firm's authority over a client's safe custody account, for example for stock lending purposes, a firm's authority over a client's bank or building society account including direct debits in favour of the firm, and a firm holding a client's credit card details.

01/11/2007

CASS 8.1.3

Firms are reminded that the mandate rules do not apply to an incoming EEA firm, other than an insurer, with respect to its passported activities. The application of the mandate rules is also dependent on the location from which the activity is undertaken (see CASS 1.4.3 G).

01/11/2007

Purpose

CASS 8.1.4

The mandate rules apply to those firms that control, rather than hold, clients' assets or are able to create liabilities in the name of a client. These rules seek to ensure that firms establish and maintain records and internal controls to prevent the misuse of the authority granted by the client.

01/11/2007

General

CASS 8.1.5

A firm that holds authorities of the sort referred to in this chapter, must establish and maintain adequate records and internal controls in respect of its use of the mandates, which must include:

(1) an up-to-date list of the authorities and any conditions placed by the client or the firm's management on the use of them;
(2) a record of all transactions entered into using the authority and internal controls to ensure that they are within the scope of authority of the person and the firm entering into the transaction;
(3) the details of the procedures and authorities for the giving and receiving of instructions under the authority; and
(4) where the firm holds a passbook or similar documents belonging to the client, internal controls, for the safeguarding (including against loss, unauthorised destruction, theft, fraud or misuse) of any passbook or similar document belonging to the client held by the firm.

01/11/2007

Transitional Provisions and Schedules

CASS TP 1

Transitional Provisions

CASS TP 1.1

(1)

(2) Material to which the transitional provision applies

(3)

(4) Transitional provision

(5) Transitional provision: dates in force

(6) Handbook provision: coming into force

CASS 2 to CASS 4

[deleted]

Every rule in the Handbook

Expired

[deleted]

CASS 5.1 to CASS 5.6

Apply in relation to money (and where appropriate designated investments) held by a firm on 14 January 2005 (being money or designated investments to which CASS 5.1 to CASS 5.6 would not otherwise apply) to the extent that such money (or designated investments) relate to business carried on before 14 January 2005 and which would, if conducted on or after 14 January 2005, be an insurance mediation activity.

Indefinitely

14 January 2005

CASS 5.1.5A R

A firm will satisfy the requirements of this paragraph, and money is client money, notwithstanding that an insurance undertaking which is the firm's counterparty to an agreement required by CASS 5.1.5A R has not given written consent to its interests under the trusts (or in Scotland agency) in CASS 5.3.2 R or CASS 5.4.7 R being subordinated to the interests of the firm's other clients.

14 January 2005 for 6 months

14 January 2005

CASS 5.3.2 R

The interests of a firm's clients which are insurance undertakings will rank equally with the interests of the firm's other clients.

14 January 2005 for 6 months

14 January 2005

CASS 5.4.7 R

A firm will satisfy the requirements of this rule notwithstanding that the deed referred to in CASS 5.8.3 R provides that money (and if appropriate designated investments) are held on terms which provide for the interests of the firm's clients which are insurance undertakings to rank equally with the interests of the firm's other clients.

14 January 2005 for 6 months

14 January 2005

CASS 5.5.65 R

A firm may for the purpose of calculating its client money resource disregard any money which the firm had before 14 January 2005 transferred to an intermediate broker in circumstances analogous to those described in CASS 5.5.84 R.

14 January 2005 for 12 months

14 January 2005

01/11/2007

CASS Sch 1

Record keeping requirements

01/12/2004

CASS Sch 1.1

The aim of the guidance in the following table is to give the reader a quick overall view of the relevant record keeping requirements.

01/12/2004

CASS Sch 1.2

It is not a complete statement of those requirements and should not be relied on as if it were.

01/12/2004

CASS Sch 1.3

Handbook reference

Subject of record

Contents of record

When record must be made

Retention period

CASS 2.1.9 R

A personal investment firm that temporarily holds a client's designated investments

Client details and any actions taken by the firm

3 years (from the making of the record)

CASS 2.3.6 R (1)(c)

Safe custody: arrangements for clients ordinarily outside the United Kingdom

The steps taken and result under CASS 2.3.6 R (1)(c)

On determination that client does not wish to execute agreement

3 years

CASS 2.6.15 R

Client custody assets held or received by or on behalf of a client or which the firm has arranged for another to hold or receive

Full details

On receipt

3 years

CASS 2.6.16 R

Safe custody investments used for stock lending activities

The identity of safe custody investments available to be lent, and those which have been lent

On receipt

3 years

CASS 4.3.111 R

Client money

Sufficient records to show and explain firm's transactions and commitments

Maintain current full details

3 years (after records made)

CASS 4.4.24 R (3)

Client money shortfall

Each client's entitlement to client money shortfall at the failed bank

Maintain up to date records

Until client repaid

CASS 4.4.25 R (3)

Client money shortfall

Each client's entitlement to client money shortfall at the failed intermediate broker, settlement agent or OTC counterparty

Maintain up to date records

Until client repaid

CASS 4.4.31 R (3)

Client money shortfall

Each client's entitlement to client money shortfall at the failed intermediate broker, settlement agent or OTC counterparty

Maintain up to date records

Until client repaid

CASS 5.1.1 R (4)

Record of election of compliance with CASS 5.8 to CASS 5.8 provisions

Record of compliance with CASS 5.8 to CASS 5.8 provisions on client money

Not specified

CASS 5.2.3 R (2)

Holding client money as agent

The terms of the agreement

Not specified

Six years

CASS 5.4.4 R (2)

Adequacy of systems and controls

Written confirmation of adequate systems and controls from its auditor

Not specified

CASS 5.5.84 R

Client money calculation

Whether the firm calculates its client money requirements according to CASS 5.5.84 R or CASS 5.5.84 R

Not specified

CASS 5.5.84 R

Transactions and commitments for client money

Explanation of the firm's transactions and commitments for client money

Not specified

Three years

CASS 5.8.3 R (1)

Client's title to a contract of insurance

Identity of such documents and/or property and dates received and delivered to client

Not specified

Three years

CASS 6.1.17 R

Record of election to comply with the MiFID custody chapter

Record of election to comply with the MiFID custody chapter, including the date from which the election is to be effective

Date of the election

5 years (from the date the firm ceases to use the election)

CASS 6.3.1R (4)

Appropriateness of a MiFID investment firm's selection of a third party

Grounds upon which a MiFID investment firm satisfies itself as to the appropriateness of the firm's selection of a third party to hold financial instruments belonging to clients

Date of the selection

5 years (from the date the firm ceases to use the third party to hold financial instruments belonging to clients)

CASS 6.4.3 R

Details of clients and financial instruments used for the firm's own account or the account of another client of the firm

Details of the client on whose instructions the use of the financial instruments has been effected and the number of financial instruments used belonging to each client

Maintain up to date records

5 years (from the date the record was made)

CASS 6.5.1 R

Financial instruments held for each client and the firm's own financial instruments

All that is necessary to enable the firm to distinguish financial instruments held for one client from financial instruments held for any other client, and from the firm's own financial instruments

Maintain up to date records

5 years (from the date the record was made)

CASS 6.5.2 R

Financial instruments held for clients

Accurate records to ensure the correspondence between the financial instruments held for each client and the financial instruments held by the firm and third parties

Maintain up to date records

5 years (from the date the record was made)

CASS 7.1.3R(3)

Record of election to comply with the MiFID client money chapter

Record of election to comply with the MiFID client money chapter, including the date from which the election is to be effective

Date of the election

5 years (from the date the firm ceases to use the election)

CASS 7.4.10 R

Appropriateness of a MiFID investment firm's selection of a third party

Grounds upon which a MiFID investment firm satisfies itself as to the appropriateness of the firm's selection of a third party to hold client money

Date of the selection

5 years (from the firm ceases to use the third party to hold client money)

CASS 7.6.1 R

Client money held for each client and the firm's own money

All that is necessary to enable the firm to distinguish client money held for one client from client money held for any other client, and from the firm's own money

Maintain up to date records

Five years (from the date the record was made)

CASS 7.6.2 R

Client money held for each client

Accurate records to ensure the correspondence between the records and accounts of the entitlement of each client for whom the firm holds client money with the records and accounts of the client money the firm holds in client bank accounts and client transaction accounts

Maintain up to date records

Five years (from the date the record was made)

CASS 7.6.7 R

Internal reconciliation of client money balances

Explanation of method of internal reconciliation of client money balances used by the firm, and if different from the standard method of internal client money reconciliation, an explanation as to how the method used affords equivalent degree of protection to clients, and how it enables the firm to comply with the client money (MiFID business) distribution rules

Date the firm starts using the method

5 years (from the date the firm ceases to use the method)

CASS 7.9.21R (3)

Client money shortfall

Each client's entitlement to client money shortfall at the failed bank

Maintain up to date records

Until client is repaid

CASS 7.9.23R (3)

Client money shortfall

Each client's entitlement to client money shortfall at the failed bank

Maintain up to date records

Until client is repaid

CASS 7.9.24R (3)

Client money shortfall

Each client's entitlement to client money shortfall at the failed bank

Maintain up to date records

Until client is repaid

CASS 7.9.30R (3)

Client money shortfall

Each client's entitlement to client money shortfall at the failed intermediate broker, settlement agent or OTC counterparty

Maintain up to date records

Until client is repaid

CASS 8.1.5 R

Adequate records and internal controls in respect of the firm's use of mandates (see CASS 8.1.5R (1) to CASS 8.1.5R (4) )

Up to date list of firm's authorities and any conditions regarding the use of authorities, all transactions entered into, details of procedures and authorities for giving and receiving of instructions under authorities, and important client documents held by the firm

Maintain current full details

Not specified

01/11/2007

CASS Sch 2

Notification requirements

01/12/2004

CASS Sch 3

Fees and other required payments

01/12/2004

CASS Sch 3.1

There are no requirements for fees or other payments in CASS.

01/12/2004

CASS Sch 4

Powers exercised

01/12/2004

CASS Sch 4.1

The following powers and related provisions in or under the Act have been exercised by the FSA to make the rules in CASS:

Section 138 (General rule-making power)

Section 139(1) (Miscellaneous ancillary matters)

Section 149 (Evidential provisions)

Section 156 (General supplementary powers)

01/12/2004

CASS Sch 4.2

The following powers in the Act have been exercised by the FSA to give the guidance in CASS:

Section 157(1) (Guidance)

01/12/2004

CASS Sch 5

Rights of actions for damages

01/12/2004

CASS Sch 5.1

The table below sets out the rules in CASS contravention of which by an authorised person may be actionable under section 150 of the Act (Actions for damages) by a person who suffers loss as a result of the contravention

If a 'Yes' appears in the column headed 'For private person?', the rule may be actionable by a 'private person' under section 150 (or, in certain circumstances, his fiduciary or representative; see article 6(2) and (3)(c) of the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 (SI 2001/2256)). A 'Yes' in the column headed 'Removed' indicates that the FSA has removed the right of action under section 150(2) of the Act. If so, a reference to the rule in which it is removed is also given.

The column headed 'For other person?' indicates whether the rule may be actionable by a person other than a private person (or his fiduciary or representative) under article 6(2) and (3) of those Regulations. If so, an indication of the type of person by whom the rule may be actionable is given.

01/12/2004

CASS Sch 5.2

Chapter / Appendix

Section / Annex

Paragraph

Right of action under section 150

For private person?

Removed?

For other person?

All rules in CASS with the status letter "E"

All other rule in CASS.

Yes

01/12/2004

CASS Sch 6

Rules that can be waived

01/12/2004

CASS Sch 6.1

The rules in CASS can be waived by the FSA under section 148 of the Act (Modification or waiver of rules).

01/12/2004