On 29 February 2012, the Supreme Court handed down its decision In the matter of Lehman Brothers International (Europe) (In Administration) and In the matter of the Insolvency Act 1986. The appeal addressed the meaning and application of Chapter 7 of the Client Assets Sourcebook (CASS 7) issued by the FSA for the safeguarding and  distributing of client money in implementation of the Markets in Financial Instruments Directive 2004/39/EC.


CASS 7 provides for the joint operation of a statutory trust and segregation of client money in order to give complete protection for clients against the risk of a firm's insolvency. Neither the Directive nor CASS 7 address the possibility of significant non-compliance. Lehman Brothers International (Europe) ("LBIE")'s failure, on a "truly spectacular scale", to identify and segregate vast sums of client money led to the litigation in point.


The issues before the Court were:

  • Does the statutory trust created by CASS 7.7.2(R) arise upon the firm's receipt of client monies, or upon their segregation?
  • Is participation in the notional client money pool ("CMP") dependent on actual segregation of client money or do clients who were entitled to have their money segregated also share in the CMP?
  • Do the primary pooling arrangements in CASS 7 apply to all identifiable client money including client money held in house accounts?


Lord Dyson gave the opinion of the majority of the Supreme Court in dismissing the appeal 3-2. The Court emphasised that CASS 7 must be interpreted in a manner which promotes the purpose of the Directive which is to provide a "high level of protection" for clients.

When does the statutory trust arise?

On the basis of this purposive approach to the interpretation of CASS 7.7.2(R), the Court unanimously held that the statutory trust arises upon receipt of the client money and does not depend upon the firm actually segregating the client money. Firms which operate the "alternative approach" to dealing with client money by receiving it into the firm's own account are therefore not excluded from their obligations as a trustee until that money is segregated.

Is participation in the CMP dependent on actual segregation?

The majority held that participation in the CMP does not depend upon segregation of client money. The Court noted that there are two competing interpretations of CASS 7 and so it applied the one which best promotes the purpose of CASS as a whole. The overriding objective of CASS is to provide a high degree of protection to all clients; therefore, the Court held that the CMP extended to all client money held in any account in the firm, whether or not it was actually segregated.

What client money do the primary pooling arrangements apply to?

The majority held that, in addition to the client money held in segregated accounts, the CMP should include all client monies which should have been segregated but, due to LBIE's non-compliance with CASS, were not. This necessarily included the client money held in house accounts. Lord Dyson stated that an alternative finding would be "arbitrary" and would provide "different levels of protection based on the happenstance of whether the firm has segregated money on behalf of that client".


The immediate effect of the judgment is two-fold; not only has the number of clients with an interest in the CMP increased, but there will also be an increase in the size of the CMP as the administrators can now look to house accounts when ascertaining what constitutes  client money for the purposes of the CMP. The knock-on effect of this is to diminish the assets to which unsecured creditors may lay claim.

While the majority decision ultimately promotes the protection of clients' money, due to the scale and complexity of LBIE's non-compliance, it is now likely that those clients whose money was segregated will receive very little of their money back.

It is also worth noting that the decision is likely to draw out the timescale for distributions to clients as the administrators must employ complex tracing procedures to retrieve client money from a large number of house accounts. This may involve further litigation on the part of the administrators as they seek to define the CMP, resulting in increased costs and delay.