Model A vs Model B

When an investment management firm holds or arranges the safeguarding of client assets, the regulatory framework it operates under depends on whether it adopts a Model A or Model B custody arrangement. Understanding the distinction between these two models is fundamental to getting the right FCA permissions, meeting your CASS obligations, and structuring your business appropriately.

What Is a Custody Arrangement?

Under the FCA's regulatory framework, safeguarding and administering investments is a regulated activity which covers both:

• Safeguarding and administration of assets (without arranging): commonly referred to as Model A; and

• Arranging safeguarding and administration of assets: commonly referred to as Model B.

Both fall within the scope of the FCA's Client Assets Sourcebook (CASS), specifically CASS 6 (the custody rules), though the obligations differ significantly depending on which model applies.

It is worth noting that ‘Model A’ and ‘Model B’ are industry shorthand rather than terms formally defined in the FCA Handbook. Nevertheless, they are widely understood by firms, compliance professionals, and the FCA's own Authorisations team.

Model A: Holding Custody Directly

Under a Model A arrangement, the firm itself holds and controls client assets. The firm acts as custodian, taking legal responsibility for safeguarding and administering those assets on behalf of its clients. This model is typically used by:

• Full-service custodians

• Wealth managers with in-house custody capabilities

• Platform operators that hold assets directly

 Key Characteristics

• The firm holds the FCA permission for ‘safeguarding and administration of assets (without arranging)’.

• The firm is directly subject to the full suite of CASS 6 custody rules, including registration and recording of legal title, segregation, reconciliation, and the CASS resolution pack.

• The firm will typically also need the requirement to ‘hold and control client money’, bringing CASS 7 (the client money rules) into scope.

• The firm's Assets Safeguarded and Administered (ASA) will not be zero, meaning it is likely to be classified as a Non-SNI firm under MIFIDPRU with a Permanent Minimum Requirement (PMR) of at least £150,000.

• The firm must complete the annual CASS categorisation questionnaire and, if classified as a medium or large CASS firm, must submit a monthly Client Money and Asset Return (CMAR) and appoint a CASS oversight function holder. 

CASS Obligations

Model A firms bear the full weight of CASS compliance. This includes robust systems and controls for:

• Segregation of client assets from proprietary assets

• Accurate and timely reconciliations

• Proper registration of legal title

• Due diligence on any sub-custodians used

• Maintaining a CASS resolution pack

• Periodic client asset statements

 Model B: Arranging Custody Through a Third Party

Under a Model B arrangement, the firm does not hold client assets itself. Instead, it arranges for a third-party custodian (which is separately FCA-authorised and holds its own safeguarding permissions) to hold and safeguard client assets on behalf of the firm's clients.

This is the more common model for:

• Discretionary investment managers (DIMs)

• Model portfolio service (MPS) providers

• Smaller investment firms that outsource custody to specialists

 Key Characteristics

• The firm holds the FCA permission for ‘arranging safeguarding and administration of assets’.

• The firm does not hold or control client assets directly. The third-party custodian is responsible for safeguarding and administering assets.

• The firm's CASS obligations are significantly reduced compared to Model A. Under CASS 6.1.16J R, only a subset of the custody rules applies to firms that solely arrange safeguarding and administration of assets.

• The firm may control but not hold client money or assets. This distinction is important — firms operating under Model B may still transmit dealing instructions and have operational control over accounts without physically holding the assets.

• The firm's ASA for MIFIDPRU K-factor purposes will typically be zero (since assets are held by the custodian), which may allow it to meet the conditions for SNI classification with a lower PMR of £75,000, subject to the other SNI thresholds being met.

 CASS Obligations

The reduced CASS 6 obligations for a Model B firm are limited to:

• Application rules (CASS 6.1.1 R to CASS 6.1.9 G)

• Arrangers rules (CASS 6.1.16J R)

• Records (CASS 6.6)

• General purpose provisions

• Third-party custody agreements: the firm must have appropriate written agreements in place with the custodian

While the compliance burden is lighter, Model B firms are not exempt from responsibility. They must still conduct appropriate due diligence on their chosen custodian, ensure proper client disclosures about the custody arrangements, and maintain oversight of the custodian's performance and controls. Principle 10 (Clients' Assets) still applies: the firm must arrange adequate protection for clients' assets when it is responsible for them.

Critically, the arrangements must include a direct relationship between the custodian and the customer. The outsourcing custodian must have appropriate CASS permissions of its own and must assume responsibility for CASS compliance in respect of the assets it holds.

Practical Variations Within Model B

While there is only one Model B permission, practical custody arrangements can vary based on the custodian and the commercial structure. The three most common variations are:

1.       Direct Custodian Appointment

The client has a direct contractual relationship with a specialist custodian (such as Pershing, SEI, or Seccl). The investment manager places trades and manages the portfolio, while the custodian holds the assets, processes settlements, and provides client reporting on custody matters. This is a clean separation of investment management from custody.

2.       Platform-Based Custody

The firm uses an investment platform (such as Transact, Quilter, or abrdn Wrap) that provides integrated custody within its platform wrapper. The platform operator acts as the custodian. This model is common among adviser-led discretionary managers, as it combines custody, dealing, reporting, and tax wrapper administration in a single service.

3.       Nominee Structures

Under both above, assets are typically held in the custodian's nominee company name, with the client retaining beneficial ownership. This is standard market practice. However, the specific nominee arrangements—including how assets are pooled or designated and how entitlements are recorded—can vary across providers. Firms should understand and be able to explain the nominee structure to clients as part of their disclosure obligations.

In all three cases, the firm's FCA permission remains the same: arranging safeguarding and administration of assets. The variable is the identity of the custodian and the commercial terms of the custody agreement. 

Practical Considerations for Firms

Choosing the Right Model

For most smaller discretionary investment managers and MPS operators, Model B is the natural choice. It allows the firm to focus on its core competency (investment management) while outsourcing the operational and regulatory burden of custody to a specialist provider. The reduced CASS obligations, lower capital requirements, and simpler operational infrastructure make it an efficient and proportionate structure.

Model A is appropriate when the firm's business model requires it to physically hold and control client assets, for example, when operating a custody platform or providing settlement and clearing services directly.

Due Diligence on Your Custodian

Regardless of the model under which a firm operates, when a third party is involved in holding client assets, the firm must conduct and document appropriate due diligence. This includes assessing the custodian's:

• FCA authorisation status and relevant permissions

• Financial strength and capital adequacy

• Operational resilience and business continuity arrangements

• Segregation and reconciliation practices

• Track record and reputation

• Terms of the custody agreement, including liability provisions

 Custody Agreements

Under both models, written custody agreements must be in place. For Model B firms, the agreement with the third-party custodian should clearly set out:

• The respective responsibilities of the firm and the custodian

• How client assets are to be held, registered, and segregated

• Reporting and reconciliation arrangements

• Provisions for termination and transfer of assets

• Liability and indemnity arrangements

 FCA Applications

When applying for FCA authorisation, firms must ensure they apply for the correct custody permission that reflects their intended business model. Applying for Model A permissions when the firm intends to operate under Model B (or vice versa) will cause delays and questions from the FCA's Authorisations team. The business plan and regulatory business plan should clearly describe the custody arrangements and be consistent with the permissions sought.

Final Thoughts

The distinction between Model A and Model B is not merely a technical labelling exercise; it determines a firm's regulatory permissions, its CASS compliance obligations, its capital requirements under MIFIDPRU, and the operational infrastructure it needs to build and maintain. Getting this right from the outset, particularly at the authorisation stage, ensures the firm is set up on a sound regulatory footing from day one.