CASS Client Assets Sourcebook

Part

CASS Client Assets Sourcebook

Printed on: 14/10/2024

Rulebook at: 01/12/2004

Chapters

CASS 1 Application and general provisions
CASS 2 Client assets
CASS 3 Collateral
CASS 4 Client
money and mandates: designated investment business
CASS 5 CASS 5
Transitional Provisions and Schedules

CASS 1

Application and general provisions

CASS 1.1

Application and purpose

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Application

CASS 1.1.1

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

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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.

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CASS 1.2

General application: who? what?

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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.

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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.

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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.

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CASS 1.2.4

CASS 2 (Custody rules), CASS 3 (Collateral rules) and CASS 4 (Client money and mandates: designated investment business) do not apply to:

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

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CASS 1.2.6

Authorised professional firms should be aware of PROF 5.2 (Nature of non-mainstream regulated activities).

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General application: what?

CASS 1.2.7

(1) The approach in CASS is to ensure that the rules in a chapter are applied to firms in respect of particular regulated activities or unregulated activities.
(2) The scope of the regulated activities to which CASS applies is determined by the description of the activity as it is set out in the Regulated Activities Order. Accordingly, a firm will not generally be subject to CASS in relation to any aspect of its business activities which fall within an exclusion found in the Regulated Activities Order. The definition of designated investment business includes, however, activities within the exclusion from dealing in investments as principal in article 15 of the Regulated Activities Order (Absence of holding out etc).
(3) CASS 2 (Custody rules), CASS 3 (Collateral rules) and CASS 4 (Client money and mandates: designated investment business) apply in relation to regulated activities, conducted by firms, which fall within the definition of designated investment business.

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Application for private customers, intermediate customers and market counterparties

CASS 1.2.8

(1) CASS applies directly in respect of activities conducted with or for market counterparties as well as with or for customers. The term client refers both to market counterparties and to customers.
(2) In CASS 2 (Custody rules), CASS 3 (Collateral rules) and CASS 4 (Client money and mandates: designated investment business), the term customer refers to private customers and intermediate customers, but not market counterparties. Where relevant, each of the provisions of CASS makes clear whether it applies to activities carried on with or for private customers, intermediate customers, or both.

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CASS 1.2.9

Firms are reminded that the definition of inter-professional business does not include safekeeping and administration of assets or agreeing to carry on that activity: CASS will apply in this context (and will apply to the holding of money for clients in connection with inter-professional business).

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CASS 1.3

General application: where?

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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.

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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.

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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.

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CASS 1.4

Application: particular activities

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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.

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Stock lending activity with or for customers

CASS 1.4.2

CASS 2 (Custody rules) to CASS 4 (Client money and mandates: designated investment business) apply in respect of any stock lending activity undertaken with or for a customer by a firm.

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Corporate finance business

CASS 1.4.3

CASS 2 (Custody rules) to CASS 4 (Client money and mandates: designated investment business) apply in respect of corporate finance business undertaken by a firm.

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Oil market activity and energy market activity

CASS 1.4.4

CASS 2 (Custody rules) to CASS 4 (Client money and mandates: designated investment business) apply in respect of oil market activity and other energy market activity undertaken by a firm.

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Appointed representatives

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).
(2) Firms should also refer to SUP 12 (Appointed representatives), which sets out requirements which apply to firms using appointed representatives.

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Depositaries

CASS 1.4.6

CASS 4.1 to CASS 4.4 do not apply to a depositary when acting as such.

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CASS 1.4.7

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

(1) except in CASS 4.5, 'client' means 'trustee', 'trust' or 'collective investment scheme' as appropriate; and
(2) in CASS 4.5, 'client' means 'trustee' 'collective investment scheme' or 'collective investment scheme instrument' as appropriate.

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CASS 1.4.8

In relation to a trustee firm which is not a depositary, when acting as such, and which falls within COB 11.5.1 R(1);

(1) CASS does not apply except CASS 4.5 (Mandates); and
(2) in CASS 4.5, 'Client' means 'trustee', 'trust' or 'trust instrument' as appropriate.

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CASS 1.5

Application: electronic media and E-Commerce

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Application to electronic media and E-Commerce

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.

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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.

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Modification of CASS resulting from the E-Commerce Directive

CASS 1.5.4

The application of CASS may be modified by ECO (as a result of the E-Commerce Directive implementation). These modifications will only apply to a firm which carries on electronic commerce activity. Firms should consult ECO for details.

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CASS 2

Client assets

CASS 2.1

Custody

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Application and purpose

CASS 2.1.1

This section (the custody rules) apply to a firm when it is safeguarding and administering investments, subject to CASS 2.1.9 R.

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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.

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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.

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CASS 2.1.4

The term 'client' refers to a market counterparty, intermediate customer or private customer. However, the term 'customer' does not include a market counterparty.

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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).

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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.

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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.

01/12/2004

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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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.

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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).

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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.

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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

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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.

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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

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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.

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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.

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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.

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CASS 2.2.6

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

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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.

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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 a market counterparty or an intermediate customer, or obtained his prior written consent if a private customer; 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 private customer, the other person is not an associate of the firm.

01/12/2004

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.

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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).

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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 private customer, with a custodian in an account designated for clients' safe custody investments;
(2) for a market counterparty or intermediate customer, 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 market counterparty's or intermediate customer's specific written instructions.

01/12/2004

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.

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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 private customer, it must undertake an appropriate risk assessment of that custodian.

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CASS 2.2.20

A firm that holds safe custody investments with a custodian or recommends custodians to private customers, 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 (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.

01/12/2004

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.

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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 COB 7.8) (Realisation of a private customer's assets).
(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 market counterparty or intermediate customer and if the client is a private customer, an explanation of the effects of pooling to that private customer.

01/12/2004

CASS 2.3.3

When explaining the meaning of pooling to a private customer, firms are expected to advise the private customer 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.

01/12/2004

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 private customer, or notify a market counterparty or an intermediate customer, 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;

01/12/2004

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 private customer, or give notice to a market counterparty or an intermediate customer, 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.

01/12/2004

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 a market counterparty.

01/12/2004

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 a market counterparty or an intermediate customer, and obtain his prior written consent if the client is a private customer, 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.

01/12/2004

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 private customer 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.

01/12/2004

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 private customer, base the statement on either trade date or settlement date information for cash balances and safe custody investment and notify the basis to the private customer.

01/12/2004

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 COB 8.2 (Periodic statements), 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.

01/12/2004

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 private customer, has given prior written consent to the firm; or
(2) if an intermediate customer or market counterparty, has been notified by the firm.

01/12/2004

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 private customer, has given prior written consent to the firm; or
(2) if an intermediate customer, has been notified by the firm.

01/12/2004

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.

01/12/2004

CASS 2.5.5

(1) In the case of a private customer, the appropriate terms and conditions referred to in CASS 2.5.4 R(2) include those specified in COB 4 Annex 2(18) (Content of terms of business provided to a customer: stock lending).
(2) Compliance with (1) may be relied upon as tending to establish compliance with CASS 2.5.4 R(2).
(3) Contravention of (1) may be relied upon as tending to establish contravention of with CASS 2.5.4 R(2).

01/12/2004

CASS 2.5.6

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

01/12/2004

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 private customer 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.

01/12/2004

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 COB 4 Annex 2(18) 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.

01/12/2004

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 section 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.

01/12/2004

CASS 3.1.2

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

01/12/2004

CASS 3.1.3

This section 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.

01/12/2004

CASS 3.1.4

For the purpose of this section 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.

01/12/2004

Purpose

CASS 3.1.5

The purpose of this section 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 section 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 section 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).

01/12/2004

CASS 3.1.6

Examples of the arrangements covered by this section 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).

01/12/2004

CASS 3.1.7

This section 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.

01/12/2004

CASS 3.2

Requirements

01/12/2004

Application

CASS 3.2.1

CASS 3.2 applies in accordance with CASS 3.1.

01/12/2004

CASS 3.2.2

A firm that receives or holds a client's assets under an arrangement to which this section 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.

01/12/2004

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 section with private customers 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.

01/12/2004

CASS 4

Client
money and mandates: designated investment business

CASS 4.1

Application and Purpose

01/12/2004

Application

CASS 4.1.1

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

(1) its designated investment 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.

01/12/2004

CASS 4.1.1A

A firm that receives or holds money to which this section applies and money in respect of which CASS 5.1 applies, may elect to comply with the provisions of this section CASS 4 in respect of all such money and if it does so CASS 4 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.

01/12/2004

CASS 4.1.2

The client money rules do 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 which are regulated by COB 11.
(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 CASS 5.1 to 5.6.

01/12/2004

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 CASS 4 in respect of such client money and in doing so avoid the need to comply with CASS 5.1 to 5.6 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 CASS 5.1 to 5.6 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 CASS 5.1 to 5.6 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.

01/12/2004

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 (including ISD business) other than insurance mediation activity

CASS 4.1.8

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

01/12/2004

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, a market counterparty or an intermediate customer, other than in the course of insurance mediation activity, and the firm has obtained written acknowledgement from the market counterparty or intermediate customer 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 market counterparty or intermediate customer will rank only as a general creditor of the firm.

01/12/2004

'Opt-outs' for non-ISD or non-IMD business

CASS 4.1.10

For a firm whose business is not governed by the ISD or the IMD, it is possible to 'opt out' on a one-way basis. However, in the case of certain non-ISD investment firms that undertake 'ISD type' business from a branch in the United Kingdom, article 5 of the ISD requires the FSA not to treat this business any more favourably than business of an ISD investment firm. Therefore all ISD and 'ISD type' business should comply with the client money rules or be 'opted out' on a two-way basis.

01/12/2004

CASS 4.1.11

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

(1) holds it on behalf of or receives it from a market counterparty who is not an authorised person or an intermediate customer 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).

01/12/2004

CASS 4.1.12

When a firm undertakes a range of business for a market counterparty or intermediate customer 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.

01/12/2004

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 (see CASS 2.3.2 R to CASS 2.3.6 R), and for a private customer, in accordance with COB 7.8 (Realisation of a private customer's assets).

01/12/2004

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 COB 9.3.29 apply to a trustee firm in respect of client money held in the course of that trustee business.

01/12/2004

CASS 4.1.29

This table belongs to COB 9.3.28

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

01/12/2004

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 private customer 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 private customer all interest earned on that client money. Any interest due to a client will be client money.

01/12/2004

CASS 4.3.27

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

01/12/2004

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, as defined in CASS 4.3.79 R, 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.

01/12/2004

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 private customer, that customer has been notified that the client money may be transferred to the other person.

01/12/2004

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 market counterparty and intermediate customer and obtains the prior written consent of each relevant private customer 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.

01/12/2004

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 4.3.79

A client's equity balance is the amount which the firm would be liable (ignoring for the purposes of this rule any non-cash collateral held) to pay to a client (or the client to the firm) in respect of his margined transactions if each of his open positions was liquidated at the closing or settlement prices published by the relevant exchange or other appropriate pricing source and his account closed.

01/12/2004

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 balances, as defined in CASS 4.3.79 R, 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.

01/12/2004

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' in CASS 4.3.79 R 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.

01/12/2004

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.

01/12/2004

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, in relation to the firm's ability to require repayment of that money.

01/12/2004

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 4.3.107

A firm with a Part 30 exemption order must treat as client money the money of any US resident investor which is held or received in respect of transactions on non-US exchanges.

01/12/2004

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 balances, as defined in CASS 4.3.79 R, 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.

01/12/2004

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 COB 9.3.99 to COB 9.3.119.

01/12/2004

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

Application

CASS 4.5.1

This section applies to a firm 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 designated investment business.

01/12/2004

CASS 4.5.2

Mandates or similar authorities for the purpose of CASS 4.5.1 R 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.

01/12/2004

CASS 4.5.3

Firms are reminded that, under CASS 1.2.1 G(1), 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).

01/12/2004

Purpose

CASS 4.5.4

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.

01/12/2004

General

CASS 4.5.5

A firm that holds authorities of the sort referred to in CASS 4.5.1 R, 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; and
(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.

01/12/2004

CASS 5

Requirement to segregate

Money due to a client from a firm

Immediate segregation

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

COB TP 1 to COB TP 4 apply to provisions in CASS in the same way as they did to the equivalent provisions included in COB 9 before 1 January 2004.

Indefinite

1 January 2004

Every rule in the Handbook

If a firm or its auditors make reference to a provision in COB 9 in a document, record, report or return, the FSA will take this as a reference to the equivalent provision in CASS 2 to CASS 4.

1 January 2004 for 12 months

1 January 2004

As a result of 2, firms will not have to replace their terms of business or client agreements immediately on the introduction of CASS

If a waiver granted before 1 January 2004 refers to a provision in COB 9 it will continue to be effective in relation to the equivalent provision in CASS.

01/12/2004

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 4.5.5 R

Adequate records and internal controls in respect of the firm's use of mandates (see CASS 4.5.5 R (1) to (4))

Up to date list of firm's authorities, all transactions entered into, important client documents held by the firm

Maintain current full details

01/12/2004

CASS Sch 2

Notification requirements

01/12/2004

CASS Sch 2.1

Handbook reference

Matter to be notified

Contents of notification

Trigger event

Time allowed

CASS 2.6.14 R (1)

Non-compliance with reconciliation requirements in CASS 2.6.2 R, CASS 2.6.4 R, CASS 2.6.6 R, CASS 2.6.8 R, CASS 2.6.10 R

Reason for Non-compliance

Non-compliance

Immediately

CASS 2.6.14 R (2)

Non-compliance of reconciliation requirements in CASS 2.6.11 R

Reason for Non-compliance once reconciliation carried out

Non-compliance

Immediately

CASS 4.3.64 R

Failure of a third party with which money is held - ie: bank, intermediate broker, settlement agent or OTC counterparty or other entity with which it has placed or to which it has passed client money

Full details

When firm becomes aware of the failure of the entity

Immediately

CASS 4.3.64 R

Failure of a third party with which money is held - ie: bank, intermediate broker, settlement agent or OTC counterparty or other entity with which it has placed or to which it has passed client money

Intentions regarding making good any shortfall that has arisen or may arise, and of the amounts involved

Failure of third party with which money is held

As soon as reasonably practical

CASS 4.3.87 R

Daily calculation required by CASS 4.3.66 R or CASS 4.3.67 R

Inability to perform daily calculation

Immediately

CASS 4.3.88 R

Daily calculation required by CASS 4.3.66 R or CASS 4.3.67 R

Inability to make good any shortfall identified by daily calculation

Inability to make good any shortfall identified by close of business on the day of calculation

Immediately

CASS 4.3.97 R

Requirements detailed in 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.

Inability to comply with any of the requirements

As soon as possible

CASS 4.3.110 R

LME bond arrangements

Issue of an individual letter of credit issued by the firm

Upon issue of an individual letter of credit under an LME bond arrangement

Immediately

CASS 4.4.33 R (see CASS 4.3.64 R)

Failure of a third party with which money is held - ie: bank, intermediate broker, settlement agent or OTC counterparty or other entity with which it has placed or to which it has passed client money

Full details

When the firm becomes aware of the failure of the entity

Immediately

CASS 4.4.33 R (see CASS 4.3.64 R)

Failure of a third party with which money is held - i.e. bank, intermediate broker, settlement agent or OTC counterparty

Intentions regarding making good any shortfall that has arisen or may arise, and of the amounts involved

Upon first delegation of regulated activity

As soon as reasonably practical

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