Client Money Distribution on Insolvency: What CASS Provides

When an FCA-regulated investment firm becomes insolvent, the client asset rules in CASS determine how client money and custody assets are identified, protected and returned to clients. Understanding this process — and the protections and limitations it provides — is essential for compliance officers, finance directors and any senior manager accountable for the adequacy of client asset protections.

Why CASS Matters in Insolvency

The purpose of CASS is to ensure that client assets — money held for clients and securities held in custody — are kept separate from the firm’s own assets and are therefore not available to the firm’s creditors in an insolvency. Without adequate CASS compliance, client money and client assets would rank as unsecured claims in an insolvency — meaning clients could recover only a fraction of their assets, or nothing at all, from the general estate. CASS’s segregation requirement is the mechanism that prevents this outcome.

The CASS Pool: How Client Money Is Protected

When a firm is subject to a primary pooling event — typically the appointment of an insolvency practitioner — CASS triggers the pooling of all client money held by the firm into a single pool. The pool is then distributed to clients in proportion to their individual entitlements at the point of the primary pooling event. Critically, the pool is available only to clients — not to the firm’s general creditors — because it sits outside the firm’s estate by virtue of the CASS trust structure.

What Is a Primary Pooling Event?

A primary pooling event (PPE) occurs when: the firm fails; an insolvency practitioner is appointed; or the FCA has determined that the firm is unable to return client assets and has taken action accordingly. The PPE triggers the pooling of all client money and sets the date at which individual client entitlements are calculated. Determining the PPE date accurately is one of the first tasks of the CASS administrator — it determines which clients are in the pool and what each client is entitled to receive.

The CASS Resolution Pack

Every CASS-compliant investment firm must maintain a CASS resolution pack — a set of documents and records that allows a CASS administrator to identify, safeguard and distribute client assets quickly in the event of the firm’s failure. The resolution pack must include: a description of the firm’s client money and custody asset arrangements; the identity of each client account held at third-party banks and custodians; the reconciliation records; and the contact details for key operational staff who can assist the administrator. The FCA regularly assesses the adequacy of resolution packs in its CASS supervision, and inadequate resolution packs are among the most commonly cited CASS deficiencies.

Shortfalls in the Client Money Pool

Where a CASS administrator identifies that the client money pool is smaller than the aggregate of individual client entitlements — because of a CASS shortfall arising from inadequate segregation, reconciliation failures or misappropriation — not all clients will recover their full entitlements from the pool. The shortfall is distributed pro-rata across clients in proportion to their entitlements, meaning all clients bear a proportionate loss rather than earlier-identifying clients being paid in full at the expense of others.

Custody Assets: A Different Mechanism

Custody assets — securities held in custody for clients — are returned differently from client money. Because custody assets are held at third-party custodians in the client’s name (or in an omnibus account designated as client assets), they are not part of the firm’s estate and can in principle be returned to clients directly. The practical challenge arises where assets are held in omnibus accounts, where there are discrepancies between the firm’s records and the custodian’s records, or where the firm has pledged client assets as collateral in a way that creates recovery complexity.

The FSCS and CASS: Interaction

The Financial Services Compensation Scheme (FSCS) provides a backstop for clients who suffer losses as a result of CASS failures at authorised firms. The FSCS compensation limit for investment business is £85,000 per eligible claimant. Where a CASS shortfall results in clients recovering less than their full entitlement from the pool, the FSCS can compensate eligible clients for the difference up to the compensation limit. FSCS coverage is not universal — it applies only to eligible claimants (retail and some professional clients) and does not cover all categories of investment loss.

Implications for Compliance and Finance Functions

The compliance and finance functions at an investment firm are jointly responsible for ensuring the firm can demonstrate adequate CASS compliance and maintain a sound resolution pack. The SMF18 (CASS Oversight Function) holder carries personal accountability for the adequacy of the firm’s CASS framework. The finance director’s role covers the daily reconciliation process, the management of the client money pool, and the capital adequacy monitoring that reduces the risk of the firm reaching an insolvency position in the first place.

Key References

• FCA Handbook CASS — Client Assets Sourcebook
• FCA — Client assets and custody