Client Money

Client Money is distinct from a firm's own assets because it is held in a fiduciary capacity, meaning the firm acts as a custodian, not the owner, of the funds. The primary difference lies in the legal and regulatory treatment, which is designed to protect the customer. For instance, under the UK's Financial Conduct Authority (FCA) rules, specifically the Client Assets Sourcebook (CASS), firms must adhere to strict safeguarding requirements. This involves placing client funds into a segregated bank account, often referred to as a Client Money Account (CMA), which is legally distinct from the firm's own business accounts. In the event of the firm's failure or insolvency, these segregated funds are protected from the claims of the firm's general creditors. This protection is not absolute, as the costs of administering the insolvency and distributing the funds are typically deducted, but it significantly increases the likelihood of customers recovering their money. For example, a Payment Institution (PI) handling millions of transactions daily might hold £50 million in client money. This entire sum must be held in a CMA. If the PI were to enter administration, the administrator would be legally required to return the £50 million to the clients, rather than using it to pay the PI's outstanding debts to suppliers or landlords. This contrasts sharply with a traditional bank deposit, where the customer's money becomes the bank's asset, and the customer becomes an unsecured creditor, relying on deposit guarantee schemes like the Financial Services Compensation Scheme (FSCS) in the UK, which only covers up to £85,000 per person. The fintech sector, particularly in embedded finance and PayFi, relies heavily on this distinction to provide services like digital wallets and payment processing, where the firm is often an EMI or PI and must comply with these stringent safeguarding rules to maintain regulatory compliance and customer trust. The regulatory framework ensures that the funds are always identifiable as belonging to the client, even if they are physically held by the firm's banking partner. This legal separation is the cornerstone of client money protection across global financial services.