Client money is held on statutory trust, which means it is not the firm's asset in an insolvency. Firms must perform internal and external reconciliations, make up any shortfall from their own money the same day, and appoint someone responsible for the regime.
Diversification across banks is expected for large balances, because a bank failure would otherwise hit all clients at once. Title transfer arrangements, where a professional client agrees that money becomes the firm's, remove the protection entirely and are restricted for retail clients.
In a failure the pooled client money is distributed pro rata, with any shortfall potentially covered by fscs-protection up to the limit. Distribution can take a long time even where the money is intact.
Related: fscs-protection, fca, customer-segregated-funds, rule-15c3-3, client-categorisation