An Introduction to CASS 7
Broadly, CASS 7 is the part of the FCA Handbook that sets out the rules a firm must follow where they receive or hold money on behalf of a client in relation to Investments, see our brief explainer on Investment firms and MiFID.
The rules are detailed, as they should be, their goal is to ensure that clients’ money is safe and that there continues to be confidence in the UK’s Financial Services sector.
Client Money Rules
CASS 7 is broken down into 10 sections (7.10 – 7.19) which between them set out the requirements for how client money is held, the various options that exist in following the rules and the calculations and processes that are required to ensure clients funds are always held correctly.
The aim of this article is to highlight the areas included in CASS 7.10 ‘Application and Purpose’.
Opt-in to the client money rules (CASS 7.10.3)
CASS 7 includes an option to ‘opt-in’ to the client money rules. For example, if a firm also holds client funds in respect of insurance business, then rather than applying the CASS 5 rules to the insurance monies, CASS 7 can be applied to both. Some key points to note in this respect are:
- A written record of the election must be retained
- Clients must be notified
- Separate client money accounts must be maintained for insurance and investment amounts
NB// CASS 7.10.29 – 32 outline a few further insurance and assurance situations where opt-ins may be considered.
Loan-based crowdfunding firms’ (CASS 7.10.7A)
Whilst firms where an electronic system is operated in relation to P2P agreements are required to apply CASS 7, this section explains that Loan-based crowdfunding firms can opt-in to the rules where they operate an electronic system in relation to non-P2P agreements. It is important to note that:
- A firm must make the election to the FCA in writing at least one month before it intends to start holding client money
- It must also inform any customers impacted by this one month in advance
- One month’s notice is required to be provided to the FCA and customers if is decided the election will no longer apply
Professional client opt out (CASS 7.10.9)
Where written acknowledgement can be obtained, funds held on behalf of ‘professional clients’ (see COBS 3.5 for definition) can be excluded from the requirements of CASS 7. In these cases the client money:
- Would not be segregated
- Could be used by the firm in the course of its own business
- Would be considered as a general creditor of the firm
Credit institutions and banks (CASS 7.10.16)
Designated Investment Services can be provided by CRD credit institutions (a firm which has permission to accept deposits under Part 4A of the FSMA) or banks. Investment deposits with these types of firm are not considered to be client money. Instead, the funds are held under the guidelines for banks (not covered in the scope of CASS). These types of firms are required to notify clients of this fact.
Firms could opt to hold the funds instead under CASS 7 and would then be required to disclose this to the clients for whom it holds funds.
Other miscellaneous holders of client money
Where funds are received from affiliated businesses, the client rules will generally still apply, though if non-MIFID funds are received then the conditions of CASS 7.10.26 should be reviewed.
Where solicitors hold client funds they should follow the rules set out by the SRA.
Trustee firms that hold client money in their capacity as a trustee must keep it separate from their own money. CASS 7.10.34 provides a list of the CASS rules that will apply to a Trustee firm, there are possible opt-ins for trustee firms in addition to these required rules.
A brief note regarding CASS 7.12, a small section on organisational requirements.
This makes it clear that a firm holding client money must have adequate arrangements in place to safeguard the funds and prevent them being used for the firm’s own use, or for the use of another client where their funds have not yet been received or cleared.
For further information, or to discuss your specific circumstances, please contact our Audit and Compliance team or via the below contact form.
Whilst the above is intended to reflect what is included in the FCA Handbook, reading this is not a substitute for reading the Handbook itself and cannot be relied upon in assessing whether the rules covered have been correctly interpreted and followed. Please always ensure the appropriate professional advice is obtained to ensure compliance. The FCA Handbook contains the detailed rules and can be accessed here. This information is correct as at the 5thDecember 2022.
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