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Client Money and ISAs: More clarity for investment firms

  • United Kingdom
  • Banking and finance
  • Competition, EU and Trade
  • Financial institutions


The day after its policy statement on the review of the client assets regime for investment business – PS14/9, the Financial Conduct Authority (FCA) published its consultation paper on Client Money held in Individual Savings Accounts (ISAs) – CP14/9. The FCA is proposing changes to the client money rules in chapter 7 of the Client Assets Sourcebook (CASS 7). CASS 7 requires an FCA authorised firm that receives money from or holds money for, or on behalf of, a client in the course of, or in connection with, its MiFID business and/or designated investment business (a Firm) to hold that money as “Client Money” in accordance with CASS 7.

Why is the FCA proposing the changes?

The FCA is responding to the changes to the ISA Regulations due to come into effect on 1 July 2014. These will allow cash savings to be held in stocks and shares ISAs, permitting individuals to use stocks and shares ISAs for both deposit and investment purposes.

Why are the changes necessary?

In the FCA’s view, the changes may cause ambiguity to the status of the money investment firms managing stocks and shares ISAs hold within the ISA wrapper because it may not be clear whether money held within a stocks and shares ISA is money held for the purposes of investment or deposit money.

Why is the difference between money held for the purposes of investment and money held on deposit significant?

Whereas money held for the purpose of investment within a stocks and shares ISA is Client Money and, therefore, subject to the rules in CASS 7, deposit money is not. Money held for the purpose of investment should be protected to a maximum value of £50,000 by the Financial Services Compensation Scheme (FSCS) should a Firm acting as ISA manager fail. Unless the contractual arrangements between the Firm and its client provide for any cash held with the Firm to be available for investment, the cash will not be Client Money and will not benefit from FSCS protection.

What is the main proposed change?

The main proposed change is the requirement that any firm undertaking “stocks and shares ISA business” hold that money as Client Money in accordance with CASS 7. Under the FCA proposal, “stocks and shares ISA business” would be defined as “a firm’s activities, in its capacity as an ISA manager, in connection with an ISA which contains only a stocks and shares component and is not either or both MiFID business and designated investment business.” The change will have the effect that any cash held within a stocks and shares ISA is Client Money and can, therefore, benefit from FSCS protection.

What about ISA managers who manage cash ISAs only?

Investment firms that do not undertake “stocks and shares ISA business”, or to whom CASS 7 would otherwise apply, may opt into the CASS 7 regime and elect to hold money in cash ISAs as Client Money. This means that a firm that wishes to offer its clients a cash only product, that would not otherwise qualify for protection under CASS 7 or the FSCS, can do so without having to be a deposit-taking firm.

What about the FCA’s new rules which will prohibit Firms from placing client money in a deposit with an unbreakable term of more than 30 days?

Under the FCA rules introduced in PS14/9, a Firm will be prohibited from placing Client Money in a deposit with an unbreakable term of more than 30 days. Under the proposals in CP14/9, the FCA acknowledges that a customer might want to hold money in an unbreakable term deposit as part of a cash ISA. It is, therefore, proposing to disapply the prohibition on unbreakable term deposits to money held within an ISA.

What's next?

The FCA is seeking feedback on CP14/9 and has requested feedback by 25 June 2014. Changes to the ISA Regulations are due to come into force on 1 July 2014.

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