Keeping client money separate from business money
“Client money” can be a precise regulatory concept, not simply a label for cash that belongs to a customer. Where formal safeguarding or client-money rules apply, opening a second bank account is only one part of the control system; where they do not, separation can still prevent costly accounting and refund errors.
Do not assume every customer deposit is regulated “client money”, and do not assume a bank account called “client account” creates legal protection by itself. First identify the rules that apply to your sector, then build the account, records, reconciliation and approval process around those rules.
Identify whether money is yours, a client's or held for a purpose
A £2,000 advance from a customer for work you will perform next month, a solicitor holding completion money, and an investment firm holding money for a client may all involve money received from someone else, but the legal and regulatory treatment can be very different. The phrase “client money” has specific meanings in regulated sectors, including parts of financial services, legal services, property and other professions.
Before designing the bank-account structure, write down why the business holds the money, who beneficially owns it at each stage, when it becomes the business’s own money and what sector rules apply. If the answer depends on professional regulation, get guidance from the relevant regulator or professional body. A bank account name is not a substitute for that analysis.
For firms within the FCA client-money rules, the framework goes far beyond keeping a separate balance. CASS requires records that distinguish client money from the firm’s own money and from money held for other clients. It also imposes reconciliation requirements and detailed rules about the way client bank accounts are operated. The precise duties depend on the business and the applicable CASS provisions.
Consider a simple illustration: the ledger says Client A has £8,200 and Client B has £5,600, so the firm should be holding £13,800 for those two clients. If the bank account shows £13,250, the problem is not solved by saying the account is “separate”; the £550 discrepancy must be identified and handled under the applicable rules. Good segregation means the records and bank balance can be reconciled, not merely that there are two sort codes.
A useful first step is to put four facts on one line: whose money it is, why you hold it, what contract or regulation governs it and who is authorised to move it. That small record prevents the most common mistake in this situation, which is acting on an assumption before the current status is clear. Use the provider's live information for anything that can change, and keep the figures you actually relied on.
Use separate banking and clear authority controls
Even where no formal client-money regime applies, a business may hold amounts that are refundable, restricted for a project or economically belong to someone else until an event occurs. Mixing those amounts into the everyday operating account can make the cash position look healthier than it really is.
For example, imagine an events business receives £30,000 of customer deposits six months before an event. If £18,000 of that money may need to be refunded if the event is cancelled, treating the whole £30,000 as free working capital can create a serious cash-flow problem. A separate reserve account, clear ledger categories and a monthly reconciliation can make the restriction visible even where the money is not “client money” in a regulatory sense.
A second bank account becomes meaningful only when someone can explain the balance. Build a schedule showing the opening balance, money received for each customer or matter, authorised payments, refunds and the closing amount. The bank balance should be checked against that schedule on a defined timetable appropriate to the risk and the rules that apply.
This is also where unexplained receipts matter. If £1,250 arrives with no usable reference, do not simply allocate it to the oldest invoice to make the books balance. Identify the payer and purpose first. The goal is that another competent person can look at the records and understand whose money is represented by the cash in the account.
A worked scenario makes the risk easier to see. a business receives £8,000 to pay third-party costs for a client. If that £8,000 sits in the same operating balance as payroll and supplier money, an ordinary cash-flow payment can accidentally spend funds that were not economically available to the business. Separation makes that mistake visible. The important point is the sequence, not the exact number. Use your own amount and dates, then leave enough margin for a delay, a verification check or a posting difference instead of planning to the last pound or the last minute.
Reconcile balances so separation works in practice
Separation can fail if every staff member who can pay ordinary suppliers can also transfer money out of the protected account. Use permissions, dual approval where appropriate and clear payment narratives. A transfer from a client-money or restricted-funds account to the operating account should have a reason that can be traced to the contract, invoice or rule that makes the money due to the business.
For a small firm, the process can still be simple: one person prepares the payment, a second person checks the underlying record, and the accounting system records the customer or matter reference. The important point is that the bank movement and the ledger entry are tied together.
Moving a client or restricted-money account to another bank can affect account naming, acknowledgements, payment instructions, standing authorities and reconciliation records. Do not empty the old account on Friday and hope the new structure can be documented on Monday. Map the required approvals and records before the transfer.
If formal regulation applies, confirm the exact rules for opening, designating and moving the account before acting. If no specialist regime applies, still preserve a clean audit trail: closing statement for the old account, opening statement for the new account, the transfer reference and a reconciliation proving that every customer balance moved correctly.
Build a small audit trail: client ledgers, bank statements, reconciliation records, payment approvals and the terms explaining why the money is held. You do not need a large dossier, but you do need enough to show what was expected, what actually happened and when you contacted the provider. That distinction is especially important when an automated status, pending item or verbal assurance later changes.
Treat provider changes and shortfalls as controlled events
Is every customer deposit “client money”?
No. The legal meaning depends on the sector, contract and regulatory regime. A refundable customer deposit can still deserve careful separation even where formal client-money rules do not apply.
Can I just open a second business account and call it a client account?
Not safely. A second account can help operationally, but regulated client-money duties may require specific account wording, acknowledgements, records, reconciliations and controls.
Why separate customer funds if no specific rule requires it?
Because it reduces the risk of spending money that may need to be refunded or used for a defined purpose, and it makes bookkeeping, cash-flow planning and dispute resolution clearer.
Where a regulated client-money regime applies, follow that regime rather than treating this as ordinary bookkeeping. Even outside a formal regime, investigate any reconciliation shortfall immediately and document how it was corrected before more money is moved. Close the loop by checking the next statement, confirmation or account status after the action. If the expected result does not appear, contact the provider with the evidence already assembled rather than starting the explanation from zero.
Final verification for keeping client money separate from business money: before you treat this step as complete, compare the provider's confirmation with the next real account event. This keeps the follow-up focused on the unresolved fact under "Treat provider changes and shortfalls as controlled events" rather than reopening every part of the issue.
Sources and verification
Oliver Grant - Markets & Regulation Writer
I would begin this topic by refusing to use “client money” as a loose synonym for any money a customer sends. In regulated sectors the term can trigger detailed safeguarding duties, while an ordinary trading business may simply be receiving revenue or a refundable deposit. That legal classification needs to be settled before choosing the banking structure. Where a formal regime applies, I would follow that regime exactly and treat the bank account, ledger and reconciliation process as one control system. Where it does not, I still like clear separation when the business holds money that is not yet economically its own. The management question is simple: if the business failed tomorrow, could someone looking at the books identify which part of the cash belongs to whom? I would reconcile such balances frequently and investigate differences immediately. I would also be careful when switching banks or changing account type, because moving safeguarded funds can require more than moving an ordinary current account. The bank can provide product information, but it cannot replace sector-specific legal or compliance advice. The safest structure is the one that makes ownership, permitted use and reconciliation unambiguous.
MyBankAnswers uses official provider and UK regulatory sources wherever practical. Information is general and does not constitute financial advice.