Can client money be mixed with the firm’s money?
No. The FSA rules does not permit a firm to place client money with a bank under the firm’s name, the money must be segregated into a client pool account.
For some non-Mifid business professional clients may opt out and can consent for their money to be held under the firm’s name. Client money rules may also not apply to regulated collective investment schemes but only for non-Mifid business like Pensions.
For Mifid business, instances where a firm can hold client money in the firm’s name are:
- if the firm is a bank holding a bank deposit(CASS 7.1.8);
- if it is a DVP transaction within one business day(CASS 7.2.8);
- where the firm acts as principal and have paid for securities in advance(CASS 7.2.9);
- if money has been transferred to the firm as collateral (CASS 7.2.3).
Are firms liable if the bank holding the client money collapses?
To increase the security of the client money, firms use several banks, not just one single bank. Firms also use due diligence to choose the type of Bank. The aim of holding client money on trust is to protect the client in the event of the failure of the firm, or a third party at which the money may be held. In such circumstances, the general creditors should not be able to make claims on client money as it will not form part of the firm’s or third party’s assets in event of failure. As trustee of the account firms have a fiduciary duty to take good care of the client money. But the firm will not be liable in the event of default by any Bank with whom deposit is placed.
If a Bank should become insolvent, then a firm will be responsible for making all effort to recover the client money. This will depend on the compensation scheme of the country in which the Bank is based. Whatever the firm manages to recover should be distributed pro rata to the all clients in the fund.
If there is a shortfall, the clients may have to sue the firm and can only succeed if they can show that the firm have been negligent in placing their money with that Bank. 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.
Can I place client money with any bank I wish?
Client money must be placed in an approved bank
Approved bank is defined as follows:
“(except in COLL and CIS) (in relation to a bank account opened by a firm):
(a) if the account is opened at a branch in the United Kingdom:
(i) the Bank of England; or
(ii) the central bank of a member state of the OECD; or
(iii) a bank; or
(iv) a building society 39 ; or
(v) a bank which is supervised by the central bank or other banking regulator of a member state of the OECD; or
(b) if the account is opened elsewhere:
(i) a bank in (a); or
(ii) a credit institution established in an EEA State other than the United Kingdom and duly authorised by the relevant Home State regulator; or
(iii) a bank which is regulated in the Isle of Man or the Channel Islands; or
(c) a bank supervised by the South African Reserve Bank; or
(d) any other bank that:
(i) is subject to regulation by a national banking regulator;
(ii) is required to provide audited accounts;
(iii) has minimum net assets of 5 million (or its equivalent in any other currency at the relevant time) and has a surplus revenue over expenditure for the last two financial years; and
(iv) has an annual audit report which is not materially qualified. (in COLL and CIS) any person falling within (a-c). “
Do firms need to hold PII cover?
Firms regarded as a ‘personal investment firms’ are required to hold PII cover. They are mainly firms that do mortgage or general insurance business. Some BIPRU firms also do mortgage & general insurance business, so they will need to have PII cover.
Firms that are purely a BIPRU firm are not required to hold PII cover but can still hold PII just as a
