Looking after money on behalf of a customer
Looking after money on behalf of a customer is a high-trust activity which needs care and consideration from the trusted body. However, with the right guardrails in place, there is potential to deliver enormous value.
In the UK, only a few different categories of regulated firms have the permission to hold and look after client money. .
The first category is banks (such as Griffin), which are unique as they are able to take money from customers directly in the form of deposits. Deposits are more than just “money sitting in a bank account”: by law, the term deposit encapsulates the permission to take that money and lend it out to other parties, creating a marketplace of lenders and borrowers. This is the key function of the bank in society.
The second category consists of electronic money institutions (EMIs) and payments institutions (PIs). EMIs and PIs may look a bit like banks, in that they can take customer funds and make payments. However, there are significant limitations on what they can do and how they operate. EMIs can only take customer funds in order to issue e-money, and PIs can only take customer funds to execute specific payments. Neither EMIs nor PIs are allowed to loan out customer money or pay interest on the funds they hold. Both must hold all customer funds in a safeguarding account at a bank to keep them separate from their own operating funds.
The third category consists of any other company type that handles money on behalf of their customers, including:
Investment firms, advisors, scheme operators
Mortgage brokers, lenders, and other home finance providers
Trading facility operators
Property management companies and landlords
Pension scheme providers and advisors
Insurance companies
These all fall under a broad Financial Conduct Authority (FCA) regime called the Client Assets Sourcebook or CASS.
‘You must follow rules set out in the Client Assets Sourcebook (CASS) whenever you hold or control client money or safe custody assets as part of your business. This is to keep client money and assets safe if firms fail and exit the market’
Industry regulatory bodies often add specific interpretations or additional rules for how to handle client money. For example, in February 2023 DLUHC changed their stance on EMI accounts, changing their interpretation of the legislation with little warning, meaning that property and real estate are now bound by government regulation to use client money accounts with banks.
For companies such as LettsPay, who were using EMI accounts to hold client money, immediate changes were needed. With the quick thinking and a willingness to adapt from their CEO Garrett Foxon, LettsPay soon found the solution to this problem. It wasn’t long before LettsPay and Griffin met and hashed out a plan to create the perfect solution for letting agents across the UK.
Choosing the right banking partner for client money accounts
For firms, such as LettsPay, that handle client money, choosing the right banking partner is important. Opening new accounts, reconciling balances, and record-keeping can all take up significant time and resources. Your choice of banking partner can either make complying with the CASS rules much easier, or become a source of operational complexity and cost that takes attention away from your core business.
Opening new accounts. Due to the requirements around rights and reconciliation that must be confirmed by a letter ahead of an account being opened, bank accounts to hold client money can take weeks to open with some providers. For a digital wealth manager, investment firm, or any other business that needs to open dedicated accounts en masse for their customers, this kind of lead time can pose significant constraints and lead to customer drop-offs.
Reconciliation. CASS rules require firms to carry out daily reconciliations between their own records and their bank balances. This can be error-prone, especially when the process is manual. At Griffin, by creating an integration between a firm’s accounting system and our balance query APIs, our customers can automate this process and reduce the risk of human error.
Record-keeping. Under the CASS rules, companies need to keep an up-to-date record of all inbound and outbound transactions. Traditionally, this can be done via bank statements and, more recently, through the transaction log on an online banking portal. While this may work for small companies with few accounts and transactions, it becomes an unpleasant experience as a company scales. By design, our event-based architecture at Griffin allows our customers to query transaction history and the state of an account at any point in the past. This can help a company to automate or streamline its record-keeping process by giving them real-time access to all the data they need in a way that both humans and machines can understand.
For all firms, an additional consideration will be how much interest is paid on funds held. A competitive interest rate can help differentiate a CASS firm by providing returns to customers, or creating a new revenue stream for the firm if they retain the earned interest.
Client money accounts at Griffin
Griffin provides a seamless onboarding flow for customers via Verify. ‘Verify helps fintechs manage risk, automate KYC and KYB checks, and approve the right customers quickly’. Working together, LettsPay and Griffin are able to simplify the reconciliation of their client accounts, making accounting simple for agents.