Held apart
Segregation is the most common protection condition and the most widely misunderstood. It is a rule about which account money sits in and what the operator may do with it. It is not a rule about how much money is in there.
Three elements, and all three must be present
A working segregation arrangement has a designated account, a purpose restriction and a reconciliation. Remove any one of the three and what is left is an ordinary bank account with a hopeful label on it.
- A designated account. One or more accounts identified as holding customer money, usually named so that the purpose is visible to the bank itself. If customer money and company money run through the same account, there is nothing to segregate.
- A purpose restriction. A rule - imposed by the licence condition, the bank mandate or the terms - that the account may be used to pay customer claims and to receive customer money, and not to fund the operator's own costs, wages or marketing.
- A reconciliation. A regular comparison of the total in the account against the total owed to customers. This is the element most often missing in practice, and it is the only element that produces evidence: without it, nobody knows whether the account is short until the failure.
The shortfall problem
Segregation is a rule about a container, not a rule about a quantity. The container can be correct in every respect and still hold less than the claims against it, for the ordinary reasons a business runs out of money: an operator that has paid bonuses it should not have paid, or has lost more than it collected, will find its customer account short at the moment of failure, and the reconciliation is usually the document that reveals it.
That is why the strongest funds rules do not stop at segregation. They add a top-up duty, a guarantee, an insurance policy or an outright prohibition on using customer money for anything at all. Each of those is aimed squarely at the shortfall that a plain separate account permits.
| Arrangement | What it prevents | What it still permits |
|---|---|---|
| No separation | Nothing | Customer money funded the business and is gone with it |
| Separate account | The money funding the operator's own spending, and access by general creditors | A shortfall, if the account holds less than the balances |
| Separate account + reconciliation and top-up duty | That shortfall, because the operator must restore the account when the check finds a gap | A shortfall created and discovered between two checks, and a failure to comply with the duty |
| Separate account + insurance or guarantee | The shortfall itself, up to whatever the cover states - and only up to that | Anything above the cover, and any gap between the cover's own conditions and the actual event |
Read the table downwards and the pattern is unmistakable: each grade answers the risk the grade above it leaves open. That is why an operator's terms can honestly say "customer funds are segregated" while offering no answer to a shortfall at all.
The three questions a segregation clause has to answer
- Which account? A named or designated account, or a vague statement of intent? "Held in accounts designated for that purpose" is a mechanism; "held securely" is not.
- Who checks, and how often? A reconciliation performed by the operator, a report to a regulator, or an audited statement - the frequency and the audience are the evidence.
- What happens on a gap? Is there a duty to top up, a deadline, and a consequence for missing it? Without that, a reconciliation is just a measurement of a problem.
the reconciliation shows a gap of 4,000,000 - 3,780,000 = 220,000, or 5.5%
if the regime imposes a top-up duty: 220,000 must be moved in, and the account is whole again
if the regime does not: the gap travels into the insolvency unchanged
a 500 balance in a 4,000,000 pool short by 5.5% pays 500 x 0.945 = 472.50
the same 500 with no separation at all pays from the general estate, after the costs and the claims above it
Nothing in that block is a prediction about any operator. It is the arithmetic that separates the four grades in the table above, and it is the reason the words page exists.
This page is a disclosed sponsored link away from a partner operator. Whether any segregation arrangement applies to your own account is stated in that operator's terms and in its licence condition - not here, and not in any headline.
Open the partner accountWhere to go next
- The words - the four labels and who defines them.
- The condition in the licence - how a funds rule is actually written.
- The custody check - where to find the clause for your own operator.
Account · restriction · reconciliation No grade answers everything Cover answers the shortfall