Looking after money on behalf of a customer is a high-trust activity with the potential to deliver enormous value - but only if the right guardrails are in place. In the UK, only a few different categories of regulated firms have permission to do so.
The first category is banks (such as Griffin), which are unique as they are able to take money from customers directly in the form of deposits. Deposits are more than just “money sitting in a bank account”: by law, the term deposit encapsulates the permission to take that money and lend it out to other parties, creating a marketplace of lenders and borrowers. This is the key function of the bank in society. (We’ll talk more about this in a future blog post.)
The second category consists of electronic money institutions (EMIs) and payments institutions (PIs). EMIs and PIs may look a bit like banks, in that they can take customer funds and make payments. However, there are significant limitations on what they can do and how they operate. EMIs can only take customer funds in order to issue e-money, and PIs can only take customer funds to execute specific payments. Neither EMIs nor PIs are allowed to loan out customer money or pay interest on the funds they hold. Both must hold all customer funds in a safeguarding account at a bank to keep them separate from their own operating funds.
The third category consists of any other company type that handles money on behalf of their customers, including:
- Investment firms, advisors, scheme operators
- Mortgage brokers, lenders, and other home finance providers
- Trading facility operators
- Property management companies and landlords
- Pension scheme providers and advisors
- Insurance companies
These all fall under a broad Financial Conduct Authority (FCA) regime called the Client Assets Sourcebook or CASS.
What is CASS?
CASS is different from other regulations in the UK because while it does apply to some specific firm types, it also acts as a general guide for any firm wishing to handle client money. In this sense, CASS is an overarching framework for good practices that enhances industry-specific standards.
The core purpose of CASS is to protect customers (both individuals and businesses) from harm. The general principles of CASS can be summarised as follows.
- Customer consent. Firms must secure appropriate consent from their clients to hold their money, and specify what will be done with that money while it is being held.
- Separation. Firms must keep funds received from customers in a bank account separate from their own money. They are allowed to pool different client’s monies together or to keep them separate from each other depending on the use case. Pooling client money is more complex, due to the need to keep track of what money belongs to which client within the pooled account.
- Labelling. Any bank account used to hold client money must be clearly labelled (e.g. “Acme Investments Client Money Account”) to avoid any confusion with the firm’s own funds.
- Rights and recourse. Firms must secure confirmation from their banking partner that they do not have any right over the client funds held and that, in the event that the firm becomes insolvent, the bank will return the funds to the client - not the firm’s creditors.
- Reconciliation. Firms must keep an account of all client money they hold, and reconcile this at least daily against their bank accounts. The exact rules and format of accounts varies depending on firm type and the rules for their industry.
- Record-keeping. Firms must maintain records of all client funds, accounts, and transactions for at least five years.
In applying these principles, industry regulatory bodies often add specific interpretations or additional rules for how to handle client money. For example, the Solicitors Regulation Authority (SRA) has its own accounts rules that apply to the firms it regulates. Other industries, such as property and real estate, are bound by government regulation to use client money accounts with banks, although statutory enforcement obligations for this regulation were only established recently.
Choosing the right banking partner for client money accounts
For firms that handle client money, choosing the right banking partner is important. Opening new accounts, reconciling balances, and record-keeping can all take up significant time and resources. Your choice of banking partner can either make complying with the CASS rules much easier, or become a source of operational complexity and cost that takes attention away from your core business.
- Opening new accounts. Due to the requirements around rights and reconciliation that must be confirmed by a letter ahead of an account being opened, bank accounts to hold client money can take weeks to open with some providers. For a digital wealth manager, investment firm, or any other business that needs to open dedicated accounts en masse for their customers, this kind of lead time can pose significant constraints and lead to customer drop-offs.
- Reconciliation. CASS rules require firms to carry out daily reconciliations between their own records and their bank balances. This can be error-prone, especially when the process is manual. At Griffin, by creating an integration between a firm’s accounting system and our balance query APIs, our customers can automate this process and reduce the risk of human error.
- Record-keeping. Under the CASS rules, companies need to keep an up-to-date record of all inbound and outbound transactions. Traditionally, this can be done via bank statements and, more recently, through the transaction log on an online banking portal. While this may work for small companies with few accounts and transactions, it becomes an unpleasant experience as a company scales. By design, our event-based architecture at Griffin allows our customers to query transaction history and the state of an account at any point in the past. This can help a company to automate or streamline its record-keeping process by giving them real-time access to all the data they need in a way that both humans and machines can understand.
For all firms, an additional consideration will be how much interest is paid on funds held. A competitive interest rate can help differentiate a CASS firm by providing returns to customers, or creating a new revenue stream for the firm if they retain the earned interest.
Client money accounts at Griffin
At Griffin, we are building client money products for both pooled (one account) and dedicated (an account for each customer) use cases. We pay interest on all funds held in client money accounts and provide a seamless onboarding flow for customers via Verify.
We also simplify reconciliation: either via our ledger technology for dedicated accounts, or through seamless integration between your own ledger and a pooled account via API.
Want to try opening an account to hold client money with Griffin? Start building in our sandbox.