Client Asset Protection and Safeguarding
What the domain tests
This domain tests segregation, client-money calculation, reconciliation, trust status, bank due diligence, shortfall handling, insolvency remoteness and restrictions on rehypothecation.
Core rules and concepts
- Client money must be segregated from firm money and held in designated accounts. Segregation is designed to make client assets insolvency-remote.
- The firm must calculate the amount of client money owed, reconcile records to bank accounts and client ledgers, and investigate differences promptly.
- Client money must not be used to fund the firm’s own expenses, and one client’s money must not be used to cover another client’s shortfall.
- Banks holding client money require due diligence, and concentration risk should be monitored.
- Securities lending or rehypothecation of client assets requires explicit consent and appropriate collateral.
Worked example
A firm’s records show client money of 1,000,000, but the segregated bank account holds 990,000. The 10,000 shortfall must be funded from firm money immediately, recorded, investigated and reported under the firm’s breach process. Waiting until month-end reconciliation is wrong because client money must be safeguarded at all times.
Traps that cost marks
Commingling client and firm money; netting client balances across clients; assuming a trust label alone protects assets; and using client money to cover fees without proper consent.