How SFC intermediaries must segregate client money

Client money is money a regulated intermediary receives or holds for clients. Segregation keeps covered client funds apart from the firm's own operating money and creates a controlled account for those funds. For HKSI questions, distinguish money held for a client from the firm's own funds, client securities from client money, and the general rule from specific exclusions.

The account must be separate and designated

The Client Money Rules require covered licensed corporations or associated entities to establish and maintain segregated accounts in Hong Kong. The account must be designated as a trust account or client account and kept with an authorized financial institution or another person approved by the SFC for this purpose. A ledger entry that labels the firm's ordinary operating account as client money does not itself create the required separation.

Segregation follows receipt and holding

The rules apply to client money received or held in the course of specified regulated activities, subject to their detailed scope and exceptions. In many circumstances, the rules require payment into the segregated account within one business day after receipt. Certain amounts needed for imminent settlement or margin obligations may be treated differently under the rule's conditions. Do not turn that narrow exception into permission to retain all client cash in the firm's own account.

Money stays in the account until a permitted payment

The rules restrict withdrawals. Client money may be paid to the client on whose behalf it is held; paid under a written direction or standing authority where the rule allows; applied to meet settlement or margin obligations for the client's transactions; or used to pay a qualifying amount that the client owes to the intermediary or its associated entity. Each route is conditioned by the Rules. A standing authority is not a blanket right to use client money for the firm's purposes.

Keep client money and securities rules distinct

Cash is governed by the Client Money Rules, while securities held for clients are addressed by the separate Client Securities Rules. One client transaction can involve both. For example, cash held for settlement and securities held in custody create different protection and recordkeeping questions. Identify which asset the exam stem asks about before selecting the rule.

Activity and client category can change the analysis

The rules include specific application provisions, exclusions and amendments for particular activities, including rules added for Type 13 regulated activity. Associated entities may also have distinct duties. First identify the licensed corporation, associated entity, activity and location of receipt or holding; then test the amount against the relevant rule. Use the current consolidated legislation for exact wording.

Exam checklist

1. Is the amount client money within the Rules' definitions and scope?
2. Which regulated activity and entity received or holds it?
3. Does an exception apply, such as a narrowly defined settlement or margin amount?
4. Is it held in a properly designated segregated account in Hong Kong?
5. If withdrawn, is there a specific permitted purpose and required authority?

Key takeaway

Covered client cash belongs in a designated segregated account and can leave only through an allowed payment route. The exact answer depends on the activity and the relevant exception, so distinguish client money from securities and from the firm's own cash.

Segregation is a timed obligation

The Client Money Rules generally require a licensed corporation or associated entity that receives or holds client money in Hong Kong to maintain one or more segregated accounts with an authorized financial institution and to pay client money into them within the prescribed time, generally one business day after receipt. The Rules provide limited treatment for specified settlement or margin money, so firms must classify receipts correctly rather than sweep everything into an operating account. The account’s designation should make its client nature clear; “trust account” is preferred but the SFC FAQ recognizes other adequate labels.

Reconcile ownership and balances

The firm’s books should identify each client’s entitlement even when funds are pooled in a properly designated account. Daily controls should compare the bank balance, client ledger, unsettled trades, interest, fees and transfers. Investigate both shortages and unexplained excesses. Do not use one customer’s credit to cover another’s debit or the firm’s own expense. Non-client money accidentally deposited into the segregated account should be identified and dealt with under the applicable rule, with a traceable record of its removal.

Example and category limits

A customer pays cash for a securities purchase that will settle several business days later. The firm should determine whether the settlement exception applies; if not, it should deposit the funds into the segregated account by the required deadline. A two-business-day exception for certain settlement or margin obligations is narrow and activity-specific. It does not permit long-term operational pooling. Do not confuse client money segregation with client securities custody: each has its own rules, account structures and permitted movements. The exam answer should name the account, deadline, reconciliation and exception control.

Practical control and exam application

A practical daily review should compare the aggregate client ledger liability with funds in the segregated accounts and identify timing items separately. If a firm temporarily holds client money in another permitted account under a rule exception, record the exception, client purpose and expected settlement date. Unidentified receipts require prompt investigation because the firm cannot safely assume they are house funds. Segregation is a property-protection measure; it is not satisfied by an internal spreadsheet if the money remains commingled in an account available for corporate use.

Records and exception handling

If an account contains both client and house funds, the firm should identify the source and amount of every non-client receipt and remove it promptly under the applicable rule. A client-money account is not a source of temporary working capital. Management should receive exception reports on shortages, late deposits, failed reconciliations and unauthorized signatories. Banks should be notified of the client account character where required, and access should be limited to authorized staff. These safeguards support both legal segregation and the firm’s ability to respond if insolvency or a client dispute occurs.