Unallocated client money

Template:Anattitle-cass →Go uptown 7.11.50 IMPORTANT: CASS changed quite a bit after MiFID II. This resource therefore may well be out of date, even if it was accurate once, which it might not have been. This is an article about the FCA’s custody and client money rules — client assets — and is fondly known by its chapter in the FCA SourcebookTemplate:Anatnavigation-cass Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

the strange case of when you know who your client is, but you don’t owe them the money

The client money rules tell you how not to lose client money; they’re less helpful about that happens when you lose the client. It's handled in CASS 7.11.50 et seq.

7.11.50 says, in a Nutshell™:

A firm may treat a balance allocated to an individual client as unclaimed and therefore no longer client money under CASS 7.11.34, as long as:

(1) this is permitted by law and consistent with the arrangements under which the client money is held;

(2) the firm held the balance for at least six years following the last movement on the client's account (disregarding interest and charges);

(3) it has taken reasonable steps to trace the client concerned and to return the balance; and

(4) the firm complies with CASS 7.11.54 R.

CASS 7.11.50 et seq. deals with the situation where a firm has allocated client money to a client but, after reasonable efforts, the client cannot be contacted. It does not expressly deal with the situation where the client who is contacted does not want a non-de minimis sum of money: it is almost impossible to conceive of a rational client, who knows it has money allocated to it, who does not want it.

Except in one case: by dint of the specific FCA definition of “client”, we have hit upon the rare case:

If a firm (F) is aware that a person (C1) with or for whom it is providing services is acting as agent for another person (C2) in relation to those services, C1 [the Agent], and not C2 [the Principal], is the client of F in respect of that business.

Here the agent is “client”. The principal, to whom the client money debt is actually owed, is not. Where, as in this case, the principal is no longer in existence, the “client” agent has a good reason not to want the money. It is not owed the money. It can’t take it.

The rules don’t contemplate this situation – they assume either you can contract the client, in which case it will take the money, or you can’t, in which case either:

• The client is simply missing, and may subsequently return; or
• The client no longer exists.

Both scenarios can be handled in the same way: you give the money away to charity, but if the client returns, you have to settle its debt. This dis-incentivises wishful thinking that clients don’t exist: if you are confident that the client has been disestablished, it’ a safe option. If you aren’t, the prudent thing to do is keep the client balance live. You’ll probably have to keep the liability on your balance sheet unless satisfied the client is goneski.

To support that the CASS rules require (CASS 7.11.54) the firm to “unconditionally undertake to pay to the client … a sum equal to the balance paid away” if the client seeks it in the future. It doesn’t say you have to communicate that undertaking to the client (QED, the client can’t be contacted, right?) though since we know an agent of the creditor, who in FCA parlance is the client, it is quite aggressive not to tell the known agent.