Client Money
In the United Kingdom, client money is a defined regulatory term: money a firm holds for customers under one of the FCA’s client asset regimes, covering investment business, insurance distribution, debt management and claims management. It must be segregated, identifiable, and — in investment business — held on trust for the customers it belongs to.
Also called: client money · customer money · client funds
The idea behind client money is ownership. Cash sitting in a firm’s bank account is not automatically the firm’s cash. If it arrived from a customer and is being held for that customer, an unspent balance, a float funded in advance, a payment waiting to go out, it belongs to the customer and the firm is holding it rather than owning it.
That distinction produces three obligations wherever a client money regime applies. The money must sit in a segregated account away from the firm’s own funds. It must be identifiable on the face of the records as customer money. And the firm’s ledger must show how much of the balance belongs to which customer.
Why the label matters
The classification decides what the firm may do with the balance day to day: whether it can be used to fund the business, where it may be placed, and how often it must be reconciled. It also decides what happens if the firm fails. A firm holding client money for investment business holds it as trustee under a statutory trust, so the money is the customers’ in an insolvency. Payment institutions and electronic money institutions sit outside the client money definition altogether: what they take in is relevant funds, protected by safeguarding rules, and the Court of Appeal has confirmed that no statutory trust attaches to it. The two regimes serve a similar purpose and are not interchangeable — calling safeguarded money client money is the commonest mistake made with the term. In US usage the phrase carries no defined meaning at all.
In practice
Whether money counts as client money is decided by the regime that applies to the firm and to the activity, not by what the firm calls the account. In the United Kingdom the term belongs to the FCA’s client asset rules; money safeguarded by a payment or e-money firm is not client money but relevant funds, and the two are protected in different ways. Naming a bank account “client account” does not move a balance into either regime, and does not take it out of one either.
Example
A payments firm holds $2m in one bank account: $1.75m collected from customers and awaiting payout, and $250,000 of its own fee income left there for convenience. Only the $1.75m is customer money. Once the two are mixed, no one can show from the bank statement alone which dollars belong to whom, which is exactly what a client money or safeguarding regime is written to prevent.
Commonly confused with
| Term | How it differs |
|---|---|
| Safeguarding | Client money describes whose money it is; safeguarding is the UK regulatory regime that tells payment and e-money firms how customer funds must be held. |
| Segregated Account | Segregation is the mechanic of keeping customer funds in a separate account; client money is the classification that makes segregation necessary. |
See also
- SafeguardingSafeguarding is the statutory requirement that an authorized payment or e-money firm keep customer funds apart from its own money, by a method the rules prescribe, so the funds are identifiable and returnable to customers if the firm fails. It is a licensing condition, not best practice.
- Segregated AccountA segregated account holds customer money apart from the firm’s own money, so the two are never mixed and the customer balance is identifiable as customer balance in both the firm’s and the bank’s records.
- FBO AccountAn FBO account is a bank account held in one company’s name for the benefit of its underlying customers. The company controls the account; the money inside belongs to the customers. The bank’s relationship is with the account holder, not with them.
- Relevant FundsRelevant funds are the customer money a UK payment institution or electronic money institution must safeguard: sums received for the execution of a payment transaction, and, for an e-money issuer, funds received in exchange for electronic money issued. Separation from the firm’s own money is immediate on receipt; placing the funds in a designated account comes a day later.
- Safeguarding AccountA safeguarding account is the account at an eligible institution in which a UK payment or e-money firm places the customer funds it must safeguard, held and designated the way the applicable rules require rather than the way a bank chooses to label its product.