Client money and FSCS protection: when protection can look through to the underlying beneficiary

Money held in a client or nominee account can sometimes receive deposit protection based on the underlying beneficiary rather than only the named account holder. The result depends on legal ownership, eligibility and how the account is structured, so firms holding money for others need records that identify exactly whose money is in the bank.

The current FSCS deposit limit is £120,000 per eligible person or entity per authorised banking group

FSCS says the current deposit-compensation limit is £120,000 per eligible person or entity per authorised bank, building society or credit union. Where someone already holds their own deposits with the same banking group, those deposits can affect the amount available for money held for them through a client arrangement.

The limit applies to the authorised firm, not necessarily each trading brand. A client-money firm should therefore identify which banking licence sits behind the account and avoid describing every separate brand as a fresh £120,000 of protection unless the authorisations genuinely differ.

Bare-trust client arrangements can allow FSCS to look through to beneficiaries

FSCS guidance says that where deposits are held through a client account or nominee structure under a bare trust, FSCS may be able to look through the named account holder and treat each eligible underlying beneficiary as having a separate claim up to the applicable limit.

This is potentially valuable where a professional firm holds money for many clients in one pooled account. But the protection depends on the legal structure and the records. A ledger saying "client money" is not enough if the firm cannot show who beneficially owns each balance when a bank fails.

Non-bare trust arrangements can produce a very different limit

FSCS says that for a non-bare trust arrangement, the treatment can be different and a maximum of £120,000 may apply irrespective of the number of eligible beneficiaries or separate accounts. The trust structure therefore matters as much as the account label.

Do not promise clients individual £120,000 protection unless the legal basis supports that statement. Firms should take legal or regulatory advice where their client-money arrangement is complex and should use the wording provided by FSCS rather than creating marketing claims from assumptions.

The firm needs accurate beneficiary records at the point of bank failure

Maintain a client ledger that reconciles to the pooled bank account and shows each beneficiary's balance. Keep names, legal status and other information required to establish eligibility. If the bank fails, FSCS may need evidence showing that the named account holder was acting for underlying clients.

Reconcile the bank to the sum of individual client balances regularly. An unexplained £20,000 difference is not only an accounting problem; it can also make it harder to establish the correct beneficial ownership of money during an insolvency event.

Ask clients whether they already bank with the same banking group where this matters

FSCS notes that a beneficiary's own deposits with the same banking group can affect their total eligible compensation. A client with £100,000 personally at the bank and £50,000 beneficially represented in a protected bare-trust client account may not receive two independent £120,000 limits.

A professional firm may not know every client's personal banking position, and it should not pretend to calculate individual compensation with certainty. Instead, explain the banking group used and the general FSCS treatment so clients can consider their wider exposure.

Review where client money is placed, not only how the client account is named

For firms holding material pooled balances, treasury policy should consider bank authorisation, concentration risk, liquidity and regulatory client-money rules. Splitting money across institutions can reduce concentration, but only if each arrangement is legally and operationally suitable.

Do not move client funds simply to chase higher interest without checking the profession's client-account requirements. Deposit protection is one part of client-money risk. The firm still needs the correct mandate, segregation, withdrawal controls and regulatory compliance for the sector in which it operates.

For a pooled client account, produce a monthly protection schedule showing the bank, authorised banking group, total pooled balance and the ledger total by beneficial owner. The schedule will not guarantee the amount FSCS would pay after a failure, but it forces the firm to maintain the ownership data that FSCS may need. It also exposes excessive concentration at one banking group before a crisis.

Explain protection conservatively in client-facing documents. Wording such as "funds may be eligible for FSCS protection depending on legal structure and the beneficiary's other deposits with the same banking group" is safer than promising a fixed amount to every client. The actual outcome can depend on eligibility, trust type, account records and the status of the failed institution at the time of failure.