Client money protection

Family VIII · Regulation

Not to be confused with anti money laundering check, segregated client account.

Client money protection is a regulatory regime, not a product or a guarantee of profit. It governs how a firm receives, holds, records and returns money belonging to clients, and it is enforced by the relevant regulator in each jurisdiction. The specific rules, permitted depositories and reporting duties vary by country and by licence.^[1]

What the rules typically require

Client money protection regimes generally impose a common set of obligations, though the detail differs between regulators:

Client funds must be kept in one or more accounts designated as client accounts, separate from the firm's own operating funds.
The firm must maintain records and reconciliations showing, at any time, how much it holds for each client and in total.
Client money may only be deposited with approved institutions, and often may not be used to finance the firm's own positions or expenses.
On insolvency, client assets are intended to be excluded from the firm's estate and returned to clients, subject to the costs of distribution.
Some jurisdictions add a statutory compensation scheme with a per-client cap; the existence and size of any cap vary by regulator and are not universal.

Because these requirements are set nationally, a firm's obligations depend on where it is licensed, not on the label it uses in marketing.

Worked example: segregation and a shortfall

A firm holds client funds in a designated client account. It also has its own operating account. The figures below show a reconciliation at a point in time.

CLIENT MONEY RECONCILIATION

Client ledger totalSum of all client balances1,250,000

Client bank balanceFunds held in designated client account1,250,000

Firm's own fundsHeld in separate operating account310,000

Reconciliation difference1,250,000 − 1,250,0000 (compliant)

If the client bank balance were 1,240,000 against a ledger total of 1,250,000, the firm would have a 10,000 shortfall. Under most regimes the firm must top up the client account from its own funds promptly, and report the breach to the regulator within a set period. That period and the reporting threshold vary by jurisdiction.

Limits and common misunderstandings

Client money protection reduces one specific risk: loss of client funds because the firm becomes insolvent or misuses them. It does not protect against trading losses, market movements, or the failure of a bank where client money is deposited. It also does not guarantee that all funds are returned in full or quickly; insolvency distribution can take time and may incur costs.

Whether a compensation scheme applies, what it covers, and any per-client limit are matters of local regulation and should be checked against the firm's licence and the regulator's published rules rather than assumed.

Often confused with

anti money laundering check: An anti-money-laundering check is an identity and source-of-funds verification performed on a client before or during onboarding, whereas client money protection governs how funds are held after they are accepted; the visible sign is that the check happens once at account opening, while client money protection applies continuously to the account balance.
segregated client account: A segregated client account is the specific bank account used to hold customer funds, while client money protection is the wider rulebook covering segregation, record-keeping, reconciliation and return of funds; the visible sign is that the account appears on a bank statement, whereas the protection is set out in the firm's regulatory permissions and client agreement.

References

↑ Financial Conduct Authority, permanent rules restricting the sale of contracts for difference and CFD-like options to retail clients, in force since 2019. UK retail clients. The FCA extended the restrictions to closely similar products.

Family: VIII · Regulation · Index A–Z