Compound Growth Ltd 2016 -
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CLIENT MONEY
SEGREGATION
Client Money Segregation: What the Rules say
The rules on the segregation of client money are detailed in CASS 7.13 of the FCA’s Handbook.
Under the rules, regulated firms must promptly place client money upon receipt into one or more client bank accounts, separately identifiable from the firm’s own bank accounts (or pay it away, for example in settlement of a transaction). This is true even in instances where the money concerned is held for only a short time before being paid onward.
The firm should understand where client bank accounts are held, check that these are designated as a ‘client bank account’ and gain an understanding over the firm’s processes and controls applied to those accounts to identify changes to the client money requirement versus the client money resource and make any necessary transfers.
Segregation:
As CASS 7.13 details, there are two approaches that a firm can operate in discharging its obligations for client money segregation:
(1) the 'normal approach'; or
(2) the 'alternative approach'.
While many firms will adopt the ‘normal approach’ where cash flows (such as settlement balances, interest or dividend payments etc) will be placed directly into/out of a client bank account, firms will still need to ensure that appropriate adjustments are made. E.g. Excluding fees which are properly due and payable to the firm.
In particular circumstances, the use of the ‘normal approach’ for a particular business line of a firm could lead to significant operational risks to client money protection. Such business lines may include those under which clients' transactions are complex, numerous, closely related to the firm's proprietary business and/or involve a number of currencies and time zones.
So, where client money is first paid into the firm’s account and transfers made to a client bank account on a daily basis, then the firm is operating under the ‘alternative approach’. Operationally, this approach is more complex than the ‘normal approach’ and therefore a firm should expect to spend additional time fully understanding and testing the firm’s processes and controls.
One of the conditions before adopting the alternative approach is that the firm must send written confirmation to the regulator from the firm’s auditor that systems and controls to operate the alternative approach effectively have been put in place by the firm.
Client Money Support & Compliance Assistance
Compound Growth can assist firms of all sizes to ensure they have the necessary procedures in place to remain compliant with the regulator’s rules pertaining to client money and client assets as set out in the CASS Sourcebook.
In particular we can support your firm in establishing suitable accounting systems as well as developing client money policies in line with industry best practice and the FCA’s guidance.
If you would like to discuss client money or client assets further, please feel free to contact us or email enquiries@compoundgrowth.co.uk.
