Pre-funding or Prudent Segregation?

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Some interesting debates have been taking place lately on the status of money that has been paid into a client money account ahead of time, to fund a planned payment out. It could be argued (and some have) that any corporate money paid into a client money account should be regarded as prudent segregation – therefore traced back to policy decisions and detailed record keeping.

Except of course for funding payments to correct shortfalls, but of course after June those will never happen again – according to the expectations of the regulator anyway.

But are pre-funding payments actually prudent segregation? Well yes, if you start from the position they are firm’s money paid in to protect against the risk of a shortfall. But no, if you start from the position that they are paid in to address what would otherwise definitely be a shortfall i.e. not really a risk but a stone cold certainty. You might also consider that pre-funding payments are not the kind of longer term static funding sums which appear to have been envisaged by the rules.

We’d like to ask a different question.

Should they be categorised as prudent segregation?

The argument, we think, is worthy of consideration. It hinges on the fact that for a finite period of time – could be a few hours, could be a weekend – that corporate money sitting in the account awaiting due date may be an excess over the client money requirements. An example would be money paid into an account on one business day to support a BACS payment out the next morning. During the period when the excess is held – which could be a significant amount of money – the shutters could come down on the firm. In which case the general creditors of the firm might well argue that this excess sum represents a commingling of firm’s and client’s money, putting the clients’ positions at risk.

In the above scenario, an amount of money which had been placed into the account under prudent segregation methodology might be protected from such claims as it would be defined as client money under those rules.

The risk here is ostensibly the risk associated with an excess client money holding, not a shortfall. But the operation of insolvency rules could still lead to a shortfall in clients’ assets if general creditors succeeded in breaking down that all important ringfence around the client money accounts.

What do you think?

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