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The Checklist: Is Your Bank Protecting Your Money?

  • By Staff Writers
  • Published: 7/14/2015

(Ed. Note: The following article appears in the recent MiniGuide, Protecting Client Money: Best Practices, sponsored by Cashfac.)

Corporate treasury and finance professionals need to be sure that their money is safe in their bank(s) of choice. Although the following checklist is primarily intended for financial institutions to make sure they are handling their client’s money correctly, corporates can also use it to evaluate their banking partners.

Client money must be promptly segregated and held in a separate bank account from bank’s money. The designation (naming of the account) at the bank must make it clear that the account contains client money. The bank must not be put in a position where it might consider the money in the account as available to offset money owed to the bank.

Designated client bank accounts, or bank accounts holding the money of just one client, must be titled so it is clear to the bank whose money (which client) the account holds. Failure to designate properly will most likely lead to the balance in such an account being pooled with the balances on pooled client money bank accounts. Dependent on sector and client/trust agreement, the firm may be obliged to open a separate designated bank account.

The firm must maintain complete and accurate records for each client’s money. The timeliness of the maintenance of these records is the earlier of (1) the maximum delay set by the regulator (or self-regulatory organization) and (2) what is reasonable for the proper control of client money in the circumstances of the business. Clearly there is a difference between managing client money in a law firm and managing client money in active accounts at a stock-broking firm.

The firm must reconcile client money. This reconciliation must be external to bank, and internal to ensure that all externally reconciled money is properly allocated to the client accounts. The frequency and timing (delay) of these reconciliations is determined as a long stop by the regulator or self-regulatory organization, but the timeliness of reconciliation must be appropriate for the circumstances.

A client money position may not be overdrawn. Clearly, if one client account in a pool is overdrawn then the other clients are unknowingly lending that client money. Quite likely the directors of the business would be personally liable for losses incurred by a client as a result of an overdrawn client position. The firm may be able to lend the client money in which case the firm must promptly credit the pooled client account with its own funds (which must be separately accounted) to fund the client.

The firm must ensure that there is an appropriate system of controls over the administration of client money. These include segregation of function and controls (including KYC) over the opening of accounts, over payments into and withdrawals from client accounts, over low activity/dormant accounts and over internal transfers between accounts for different clients.

Dependent on sector/industry or client agreement, interest may need to be paid in respect of the balance on the client account either to the credit of the client account or to an industry body.

Dependent on sector/industry and the value of client balances, the firm may be required to spread client money over multiple banks and/or deposit money at banks of a minimum credit rating.

For financial services groups, there may be limits on the percentage of client money that can be placed with an in-house bank.

Fees can only be deducted from client money if the client has agreed to the amount of the fee or it is calculated in accordance with an agreed formula or according to regulation (for example with 30 days’ notice).

Adhere to client notification requirements when funds are received and before funds are withdrawn for fees.

Know who is responsible for the operational oversight function to ensure accountability and communication throughout the firm.

Comply with KYC and money laundering regulations.

Perform a self-audit of client accounting. Annual reviews of procedures for dealing with clients’ money are recommended.

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