UK FSA Fines Towry Investment Management Over Client Money Failures
FSA fines Towry Investment Management Ltd £494,900 for providing incorrect information to the FSA and client money failures – Financial Services Authority Press Release FSA/PN/082/2011 of 29 September 2011; Final Notice to Towry Investment Management Ltd – Financial Services Authority, 14 September 2011
Towry Investment Management Limited, a discretionary investment manager, has become the latest firm to be fined by the Financial Services Authority (FSA) for client money failings. In contrast, however, to previous disciplinary cases, the focus is on contraventions of the FSA’s high level Principles for Businesses (PRIN) and, in that respect, the misleading reassurance Towry gave to the UK regulator over its compliance with client money rules. In publicising the imposition of a £707,000 financial penalty, reduced to £494,000 for early settlement, the FSA emphasises the fundamental importance of providing up to date and accurate information.
Client Assets & Funds
The protection of client assets and funds is governed by European framework legislation, Directive 2004/39/EC on markets in financial instruments (MiFID), which is implemented in the UK through the FSA’s Client Asset Sourcebook (CASS). Since the recent financial crisis and the collapse of Lehman Brothers, there has been a process of strengthening these rules and at the same time supervision of the regime has been strengthened.
— Dear CEO Letter & Report
As part of this initiative, the FSA issued a Dear Compliance Officer Letter on 20 March 2009 and the following year, on 25 January 2010, a Dear CEO Letterto the industry accompanied by a Client Money & Asset Report (Report). These set out the standards it expected the industry to meet.
In particular, the Dear CEO Letter asked chief executive officers to:
- Make arrangements for their boards and risk committees to see the Report;
- Ensure the Report was considered by the board, the risk committee and compliance function; and
- Confirm that the Dear CEO Letter and Report had been considered and that the firm was complying with client money rules.
The Report, in turn, highlighted various aspects of the client money regime which required improvement by firms, for example:
- Inadequate senior management oversight and control;
- Breaches of CASS reconciliation rules; and
- Deficient oversight of outsourcing arrangements.
Despite the FSA’s request, the Report went unseen and unconsidered by Towry’s board and risk committee. Nor it appears was the CEO, the addressee, made aware. Rather, only four business days later, the regulator received a response from Towry’s compliance function to the effect that both the Dear CEO Letter and the Report had been reviewed and that the investment management firm was meeting its regulatory obligations. It was explained that the letter and report would be brought to the attention of the firm’s risk committee and board when they next met in February 2010. In the event, the risk committee saw neither document, nor was it made aware of compliance’s response to the FSA. Only in July, did the board see them together with other board papers (less the response), and even then, according to the FSA, the firm’s governing body failed to query if a response had been sent.
In November 2010, the FSA conducted a thematic visit to assess the firm’s compliance with CASS. A number of breaches were identified:
- Failures to carry out adequate internal reconciliations to match the amount recorded as held for each client with the money actually held by the firm. These were not performed accurately or in a timely fashion.
- Failures by the third party administrator to whom the holding and control of client money was outsourced. The entity did not provide the information needed to allow reconciliation and client money calculations to be undertaken. This led to Towry paying too much firm money into client money accounts.
As a consequence of these findings, Towry withdrew its response to the Dear CEO Letter and in February 2011 informed the FSA of the remedial steps it was taking. These included details of reporting lines and protocols in respect of a new CASS Oversight Committee.
Principles for Businesses
While the FSA considered that there had been breaches of CASS, it chose to discipline the firm for breaches of Principle 10: “A firm must arrange adequate protection for clients’ assets when it is responsible for them” and Principle 11: “A firm must deal with its regulators in an open and cooperative way, and must disclose to the FSA appropriately anything relating to the firm of which the FSA would reasonably expect notice.” According to PRIN 1.1.2 G: “the Principles are a general statement of the fundamental obligations of firms under the regulatory system,” the contravention of which makes a firm liable to disciplinary sanctions.
The FSA found that the weaknesses in the firm’s processes for the reconciliation and calculation of client money meant it could not calculate, quickly and accurately, how much money it held for any one client, nor remove excess money from client money accounts to its own. A ramification of this was its inability to properly segregate client money from its own. If the business had become insolvent these failings might have exposed clients to “the risk of loss, diminution or delay”1 in the return of their money. On this basis there had been a breach of Principle 10.
In respect of Principle 11, the firm was held not to have dealt with the FSA in an open and co-operative manner. It had failed to carry out sufficient due diligence before responding to the Dear CEO Letter and, therefore, failed to disclose its breaches of CASS. The Final Notice is clear that there was no intention to deliberately mislead.
In considering the appropriate level of sanction to impose, as the majority of the misconduct took place before the entry into force of the regulator’s tougher, new penalty regime, in the Decision Procedure and Penalty Manual (DEPP) at DEPP 6,2 the previous rules were applied.3 The conduct was viewed seriously for the following reasons:
- Client money rule breaches had taken place since 2001;
- If Towry had become insolvent clients would have been exposed to the risk of loss;
- The failure to disclose rule breaches that were discovered only after the FSA thematic visit;
- Heightened industry awareness of client money requirements; and
- Insufficient care was taken when responding to the Dear CEO Letter.
Since 2001 Towry had held client money on a daily basis of between £14.7 million and £187.9 million. An element of the fine imposed represented 1 percent of the average of these client balances.
This action for breach of client money requirements demonstrates the priority given by the FSA and its specialist client asset unit to the improvement of standards. Despite the absence of actual client loss, the regulator has sanctioned both the failure to have adequate processes and the giving of what was an inaccurate response to its Dear CEO Letter.
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