Banking chaos exposes client money risk

SFC demand greater control of bank accounts

Liquidity issues at Silicon Valley Bank, Signature Bank and now Credit Suisse continue to send shock waves through the market this week and the knock-on effects on the wider financial system are becoming apparent. Those firms who use the affected banks to hold client money will need to take immediate action. And for any firm holding client money it’s a stark reminder to make sure client money holdings are appropriately diversified and include such entities as part of critical third-party infrastructure when considering operational resilience.

How does this impact you from a CASS perspective?

If your client bank accounts were with the UK subsidiary of Silicon Valley Bank (SVB), the news of its acquisition by HSBC will have come as a relief. This means that the moneys you had placed under a deposit with SVB UK would continue to be protected under the client money rules. Therefore, your clients’ funds are protected and there is no secondary pooling event you would need to report to the FCA.

However, if your client money was placed with the US entity or Signature Bank, then we recommend you look at the FCA rules on secondary pooling events.

1) Stop making payments into the accounts

The first step is to make sure that no payments are going into the account(s) with the failed bank. You shouldn’t be paying any new client money receipts to the failed bank going forward unless you have a specific instruction from your client and the money is to settle an obligation your client has to the failing bank. Instead, you should place any funds in a client account with a different entity. For some, this may mean quickly opening a client bank account with another entity and getting a compliant acknowledgement letter in place.

2) Identify client money shortfall

Next, you’ll need to work out whether there’s a shortfall in the client money being held by the bank. You can determine this by carrying out an external reconciliation using the most recently available data from the bank to compare how much should be in the bank according to your records with how much is actually in there.

If a shortfall is identified, you will need to decide whether to cover it with your firm’s own money. This will help protect customers and will mean that you don’t need to consider other FCA requirements for secondary pooling events.

3) Calculate client money entitlements 

If you choose not to cover the shortfall, you’ll need to work out the impact for each of the clients with money in that account. The first step for this is to work out the client money entitlement of each of the relevant clients whose money was deposited with the failing entity. This means calculating your client money requirement as normal and mapping out how much of that requirement is held with the failed entity per client. In doing this, you will need to consider whether accounts are general or designated client bank accounts and ringfence client entitlements accordingly. This can be more difficult for firms that do not have clients diversified across all client bank accounts in the same proportions, or for firms with multiple products who haven’t defined which products feed into which client money bank or transaction accounts.

Once you know how much money each client has held in the client accounts with the failed bank, you will be able to allocate the account shortfall across those clients proportionately.

4) Client claims

It’s important to highlight that you can’t use money held with other banks to meet claims from clients with money held at the failed bank, as clients are not entitled to such claims.

So make sure you’re not offsetting balances when working out client entitlements by understanding what moneys are held in which accounts with which entities and only considering monies at the failed firms.

How we can help

With over 20 years of relevant experience in this space, we can help by providing advice on how to accurately calculate client entitlements, dividing any shortfalls between clients and your prudent segregation record, and any other ad hoc support regarding your CASS compliance after a secondary pooling event.