In a recent case the Supreme Court ruled that clients of Lehman Brothers International (Europe) ("LBIE") whose money was not properly segregated from the Bank’s own funds can now access some $2 billion in customer accounts.
Under FSA imposed regulations, one of the most important rules is that firms keep client money separate from their own monies and this requires firms to credit client money to separate client-designated accounts.
The Regulations do make a concession for large investment firms by allowing client money to be received into and paid out of a firm’s house account. The firms that do this are required to segregate client money into a client bank account on a daily basis according to reconciliations of client monies conducted as at the close of business on the preceding day.
In LBIE's circumstances, the firm had failed to identify client money on a spectacular scale and as such also failed to segregate those sums received by the number of its clients.
One of the questions that was considered in this case was when a statutory trust was created under the Regulations.
The court unanimously held that the trust arose at the time of receipt of client monies as opposed to when the client monies were segregated from the account as provided above.
The principle was that it would be wholly contradictory for a client’s money to cease to be that client’s money on receipt of funds and then only to become its property again on segregation.
Whilst this does assist investor protection it is still an administrative nightmare for these larger firms to ascertain what money should be added to which pot and who is entitled to it. We shall watch with interest how this develops.