Client money: Overview, definition, and example
What is client money?
Client money refers to funds that are held by a business or financial institution on behalf of its clients. These funds are typically held in trust and are not owned by the business itself. Client money is often associated with industries such as finance, law, and real estate, where professionals manage or hold money for their clients in the course of conducting business. Client money must be handled with care, and there are strict regulations governing its management to ensure that it is protected and used only for its intended purpose, such as facilitating transactions or holding in trust for a future event.
Why is client money important?
Client money is important because it represents the trust that clients place in a business to safeguard their funds and ensure they are used properly. Businesses or professionals who handle client money are typically required to adhere to strict regulations and safeguards to prevent misuse, fraud, or mismanagement. Mismanagement of client money can result in legal and financial consequences for the business and erode client trust. Proper handling of client money is essential to maintaining professional integrity and ensuring compliance with regulatory frameworks, such as those in financial services or law.
Understanding client money through an example
For example, a law firm may hold client money in a client account to pay for expenses related to a client's case, such as court fees, expert witness fees, or settlement payments. The law firm must ensure that the funds are used solely for the client's benefit and that any interest earned on the account is either paid to the client or otherwise handled according to the terms of the client agreement.
In another example, a financial advisor may manage an investment portfolio on behalf of a client. The financial advisor may hold the client’s funds in a separate account while making investment decisions and executing trades. The funds in this account are client money, and the advisor is legally required to ensure the money is used exclusively for the client’s investment purposes, keeping it separate from the advisor's own funds.
An example of a client money clause
Here’s how a client money clause might appear in a contract or service agreement:
“The Company agrees to hold all Client Money in a separate account designated as a client trust account. The Client Money shall not be commingled with the Company’s own funds and shall be used exclusively for the purposes agreed upon in this Agreement. The Company will take all reasonable steps to ensure the safekeeping and proper management of the Client Money in accordance with applicable laws and regulations.”
Conclusion
Client money refers to funds held by a business or professional on behalf of a client and must be managed with strict care and in compliance with legal and regulatory requirements. It is essential that businesses handling client money keep it separate from their own funds, use it only for its intended purpose, and provide clear accounting to ensure transparency. Proper management of client money fosters trust, ensures legal compliance, and protects both the client and the business involved.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.