Summary

The statutory trust imposed by Chapter 7 of the Client Assets Sourcebook made under the Financial Services and Markets Act 2000 s.139 applied to client money on receipt by an investment firm and not only when the money was placed in a segregated account. When client money was pooled following failure of a firm the pool included not only moneys in segregated accounts but also all identifiable client money in the firm's house accounts, and that pool should be distributed on a claims basis and not a contributions basis. Client money did not include sums due and payable by the firm to its clients but not yet appropriated for that purpose.

Facts

The appellants appealed against a decision ((2009) EWHC 3228 (Ch)) concerning the ownership of client funds held by a bank (L) at the date of its entry into administration. L was the principal United Kingdom trading subsidiary of a United States bank which had filed for protection from its creditors under Chapter 11 of the US Bankruptcy Code. L held considerable amounts of money on behalf of clients. Its business was regulated pursuant to the Financial Services and Markets Act 2000. The client funds were subject to a statutory trust imposed by Chapter 7 of the Client Assets Sourcebook (CASS 7) made under s.139 of the Act. When L went into administration a primary pooling event occurred for the purposes of CASS 7, triggering a requirement to distribute client funds in accordance with section 9 of CASS 7. L operated under the "alternative approach" permitted by CASS 7 in relation to client funds. That meant that the moneys received from clients were paid into an account or accounts of L and then segregated into client accounts each day according to a reconciliation of client moneys conducted as at the end of the close of business on the preceding day. Client funds were not therefore paid directly into segregated client accounts. The last reconciliation of client funds took place some days before L went into administration. That increased the amount of non-segregated clients funds held by L at the pooling date. It was also said that other client funds which should have been segregated were not. The issues on appeal were (i) whether the statutory trust of client moneys was imposed on receipt or only on segregation; (ii) whether the client moneys to be pooled were the moneys in the segregated accounts or all the client moneys; (iii) whether clients participated in the pool if they had claims to client money or only if they had contributed to the pool; (iv) whether the statutory trust of client moneys applied to any debt which L became liable to pay to a client so that the holders of any such debt were entitled to claim in the pool.

Held

(1) On the proper interpretation of the rules of CASS 7 client money became subject to the statutory trust imposed by CASS 7.7.2R on receipt. That rule applied to client money which had not been segregated. That was consistent with the underlying requirements of Directive 2004/39. Article 13(8) of that Directive provided that an investment firm holding client money had to make adequate arrangements to safeguard clients' rights and prevent the use of client funds for its own account and Directive 2006/73 art.16(2) contained a further obligation on Member States to prescribe measures that investment firms had to take if an obligation to place client funds in a separate bank account would not afford investors the protections required by art.13(8) of the 2004 Directive. It was irrelevant that the Directives did not refer to the creation of a trust. (2) Despite the lack of a definition of "client money account" for the purposes of CASS 7.9.6, CASS 7 as a whole demonstrated that what was intended and achieved by CASS 7.9.6 was a pooling of all client money in segregated accounts and L's own accounts. The conclusion that "client money account" had the wider meaning of any account of the firm into which client money had been paid was also more consistent with the thrust of the Directives. (3) Clients participated in the pool if they had claims to client money and not only if they had contributed to the pool. Thus the basis for sharing in the pool was the amount which ought to have been segregated for each client, rather than the amount which was in fact segregated for each client. The underlying concept of "client money entitlement", the term used in CASS 7.9.6R(2), was that of contractual entitlement. (4) A firm did not "hold" moneys for a client for the purposes of the definition of "client money" in CASS 7.2.1R simply where it became indebted to a client, for example in respect of "manufactured" dividends as a result of a stock lending transaction. A trust could not be created without property to which it could attach; where there was no property which was sufficiently identified to form the subject matter of a trust, no trust was created, Hunter v Moss (1994) 1 WLR 452 CA (Civ Div) and R v Preddy (John Crawford) (1996) AC 815 HL considered. Client money did not include sums due and payable by the firm to its clients but not yet appropriated for that purpose.

Appeal allowed in part