The Financial Services Authority is a United Kingdom organisation responsible for overseeing the business activities of all businesses and institutions involved in banking and investment in that country. The Financial Services Authority (FSA) publishes handbooks containing its rules for the conduct of specific business activities, and the Client Asset (CASS) handbook contains rules on the use and treatment of client money by businesses temporarily holding money on behalf of their clients.
Chapter seven of the FSA Client Asset handbook states in section 7.2.14 that a firm holding client money must pay the client all the interest earned on the money while the firm held it for the client. The exception, as stated in section 7.2.14, is a written agreement with the client stating whether or not interest is to be paid on client money, and if so, how often it must be paid, and the terms of interest calculation.
Depositing Client Money
When a firm receives money that it is to hold on behalf of a client, the firm must deposit the money into one of several financial institutions as soon as possible. According to CASS 7.4.1, these institutions include a central bank, an authorised bank in another country and a BCD (Banking Consolidation Directive) credit institution. A credit institution receives deposits from the public or other businesses and issues credits against those deposits, which it then invests.The credit institution then assumes the risk and guarantees the client money. Client money can also be deposited in a money market fund, but client money deposited in a money market fund is then governed by the FSA custody rules, and not the FSA client money rules. Client money deposited in money market funds is not guaranteed, as money market investments, although considered to be low-risk investments, can decrease in value depending on factors such as interest rate fluctuations.
Typically, a firm holding client money will place the money in one of two types of accounts, a general client bank account, or a designated client bank account. CASS 7A.2.1 states that clients with money held in a general client account do not have a call against the money in a specific account, but clients with money in a designated account have a call against their specific sums of money in specific accounts. When the firm holding the client money fails, a "primary pooling event" occurs. When a primary pooling event takes place, monies held in general client bank accounts and designated client bank accounts are considered pooled, and all clients have a claim against the pooled fund. The firm's administrators, overseeing the insolvency of the firm, are responsible for the distribution of the pooled money.