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On appeal from:  [2010] EWCA Civ 917

The facts of this appeal arose from the insolvency and subsequent administration of the Lehman Brothers group of companies, and the ownership of a pool of client funds that are subject to a statutory trust. The provisions governing client money in this case are namely chapter 7 of the Client’s Assets Sourcebook issued by the FSA (“CASS 7”) made under the Financial Services and Markets Act 2000.

Problems with applying the CASS scheme included that Lehman Brothers International (Europe) (“LBIE”) failed to identify and segregate large sums of client money, and that a significant amount of client funds had been deposited with a LBIE affiliate which had also gone into administration.

The issues for the Supreme Court to determine were: when did the statutory trust over client funds created by CASS 7.7.2R arise (ie on receipt of client money or on segregation of the funds); do the primary pooling arrangements apply to client money held in house accounts; and is participation in the notional client money pool dependant on actual segregation of client money?

The Supreme Court dismissed the appeal by a majority, with Lords Walker and Hope dissenting on the second and third issues.

It was held that the statutory trust arose on receipt of client money rather than at the time of segregation of funds, as it would be unnatural and contrary to the primary purpose of client protection for money to cease to be the client’s property on receipt and for it (or its substitute) to then become their property again at segregation.

In deciding whether the primary pooling arrangements applied to client money in house accounts it was necessary to decide whether 7.9.6(1)R required all identifiable client money to be treated as pooled, or only client money held in the firm’s segregated client accounts. It was held the correct interpretation was the one that best promoted the purpose of CASS 7 as a whole, which was to provide a high level of protection for client money, so to exclude identifiable client money in house accounts would be contrary to this policy.

Whether participation in the client pool was dependent on the segregation of client money did not depend on a consideration of general principles of trust law; the general scheme of CASS 7 was that all client money is subject to a trust that arose upon receipt of the money and so where there is a choice of possible interpretations the Court should adopt the one which afforded a high degree of protection for clients.

For the Court’s press summary, please download: Press Summary
For judgment, please download: [2012] UKSC 6
For a non-PDF version of the judgment, please visit: BAILII