Client Fund Segregation & Protection
This criterion assesses the robustness of an organization's practices in safeguarding client funds, ensuring absolute segregation from the organization's own assets. It evaluates the legal and operational measures taken to protect client assets from misuse, commingling, fraud, insolvency, and operational risks. Key elements include the enforceability of trust status via bank acknowledgement letters, the rigor of daily reconciliations, and the strength of cyber-fraud controls (e.g., MFA, maker-checker). The organization must demonstrate a proactive approach to third-party risk management, insurance adequacy based on peak exposure, and comprehensive contingency planning (e.g., CASS Resolution Packs) for the swift return of assets in distress. Transparency is paramount; clients must be fully informed of how funds are held, the Shari’ah contract governing them (e.g., Wadi’ah, Wakalah), and the purification of any impermissible income. This criterion ensures adherence to the Islamic principles of Amanah (trustworthiness), Hifz al-Mal (protection of wealth), and Adl (justice).
| Metric | Client Fund Protection Health Score |
|---|---|
| Target | 100% on all sub-metrics |
| Frequency | Monthly |
| Method | Composite of: (1) % Reconciliations with 0 breaks >5 days, (2) % Peak Exposure Covered by Insurance, (3) % Bank Letters Validated |
| Unit | Composite Score |
Level 1: Initial/Ad-hoc
No proper segregation; funds commingled with operational accounts; significant risk of misuse; no independent oversight; non-compliant with Shari’ah trust principles.
Level 2: Developing
Weak segregation; client funds distinct but controls are manual/informal; lack of dual authorization; frequent reconciliation breaks; outdated or missing bank acknowledgement letters.
Level 3: Established
Adequate segregation and basic policy; separate accounts exist but acknowledgement letters may lack specific 'no set-off' clauses; reconciliations occur but resolution is slow; basic insurance in place.
Level 4: Advanced
Strong segregation with valid acknowledgement letters; daily reconciliations with rare aged items; annual independent audit completed; robust cyber controls (MFA/Maker-Checker) in place.
Level 5: Optimizing
Impeccable segregation with automated real-time monitoring; zero reconciliation breaks >2 days; comprehensive insurance covering >100% peak exposure; tested wind-down plans; and full transparency on Shari’ah purification.
Organisation Types
By Organisation Size
| Size | Applicability | Notes |
|---|---|---|
| Micro | exempt | Disproportionate; highly unlikely to hold formal client funds requiring complex policies and legal bank acknowledgement letters. |
| Small | exempt | Disproportionate; while basic fund separation is good practice, formal legal bank letters and 12-month reconciliation logs are too burdensome. |
| Medium | partial | Must operationally segregate client/restricted funds and maintain basic logs, but legally binding bank acknowledgement letters may still be disproportionate. |
| Large | full | Fully applicable if the charity holds client funds (e.g., care home residents' funds, debt advice client accounts). |
| Major | full | Standard requirement for major charities holding third-party or client funds to ensure strict legal and operational compliance. |
Applicable When
- The organization holds funds on behalf of clients (regulated client money).
- The organization accepts advance fees or deposits that remain client property until services are delivered.
- The organization acts as a custodian or trustee for client assets.
Not Applicable When
- The organization does not handle client funds.
- The organization operates solely on a fee-for-service basis with payment in arrears and no custody of assets.
Related Criteria
Discussion (1)
📋 **Version updated: 1.0.0 → 2.9.7** **Changes:** Updated islamic_references from mizan-297.json
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