How must an investment firm safeguard client money and financial instruments?

When a firm holds financial instruments or money belonging to clients, it must make adequate arrangements to protect the clients' ownership rights, especially if the firm becomes insolvent. It may not use clients' instruments for its own account without their express consent, and, unless it is a bank, it may not use client money for its own account.

The firm keeps records and accounts that let it tell, at any time and without delay, which assets belong to which client and keep them apart from its own. The records must be accurate and allow an audit trail, and the firm reconciles them regularly with the records of any third party holding the assets. At third-party custodians and banks, client assets are held in accounts identified separately from the firm's own. The firm also guards against misuse, fraud, poor administration and negligence.

Client money deposited with a bank or qualifying money market fund in the firm's own group may not exceed 20% of all the client money the firm holds, unless the firm can show the limit is not proportionate, for example because client balances are small; the assessment is notified to CySEC. A single officer with sufficient skill and authority is responsible for safeguarding, and the firm's external auditors report to CySEC at least once a year on whether the arrangements are adequate.

A firm may enter into securities financing transactions with clients' instruments, or otherwise use them, only with the client's express prior consent, evidenced in writing and signed or equivalently confirmed, and only on the terms the client accepted. In good time before using them, it gives the client clear, full and accurate information on a durable medium about the obligations and responsibilities involved, including the terms for returning the instruments and the risks.

Title transfer financial collateral arrangements, where ownership of the client's assets passes to the firm as security, are prohibited with retail clients. With professional clients and eligible counterparties they are allowed only where appropriate, and the firm must point out the risks and the effect on the client's assets.

Clients must be told if a third party may hold their instruments or money for the firm, what the firm is responsible for under national law if that third party acts wrongly, and what happens to the client if the third party becomes insolvent. If the client's instruments may sit in an omnibus account alongside other clients' assets, the firm says so and gives a prominent warning of the risks. It does the same where the applicable law does not let the client's instruments at a third party be told apart from the instruments belonging to that third party or to the firm.

The firm also tells clients when accounts are subject to the law of a non-EU country, where their rights may differ, and about any security interest, lien or right of set-off that the firm, or a depository, has or may have over their assets.