The FCA has fined and banned two Directors of a stockbroking and wealth management firm (Pritchard Stockbroking Ltd) for serious failings in relation to the protection of client money.
The FCA has also censured the firm for recklessly failing to protect client money and committing a number of specific breaches of the FCA’s client money (CASS) rules.
The firm entered Special Administration on 9 March 2012 and, were it not for its financial position, the FCA would have imposed a fine on it of £4,932,600.
Tracey McDermott, FCA Director of the Enforcement and Financial Crime Division said:
“Ensuring that client money is properly protected is a basic, but fundamental, regulatory requirement. [The Directors’] conduct fell far short of our standards. Their recklessness contributed to a shortfall of £3 million of client money and resulted in significant consumer detriment.”
Under the FCA’s CASS rules, client money should be held in a segregated client bank account. The rules are intended to protect client money if a firm becomes insolvent.
The firm and Directors in question recklessly relied upon the existence of an undocumented and opaque offshore facility in order to correct a deficit that had arisen in the firm’s client money.
The offshore facility was wrongfully included as an available client money resource when reconciling the amount of client money that needed to be segregated by the firm.
As a consequence of these reckless failings:
1. Client money was wrongly used to pay business expenses
2. The firm failed routinely to pay sufficient funds into its client bank account
to cover shortfalls in client money;
3. The firm placed reliance upon the offshore facility as a client money
resource despite the fact that such a facility was not permitted to be
4. The FCA was not informed when a shortfall in client money occurred.
This behaviour resulted in significant consumer detriment including contributing to a loss of approximately £3 million of client money by the time the firm entered into Special Administration.
The Managing Director has accepted ultimate responsibility for the failings to protect the firm’s client money.
He also had the primary contact with the overseas company providing the offshore facility and assured the firm’s Finance Director of the existence of the offshore facility.
The Finance Director failed to verify or confirm the existence of the offshore facility, instead relying on the assurances of the Managing Director.
In addition to being banned from the financial services industry, the Directors have been fined £10,500 and £14,000 respectively.
They both provided verifiable evidence of serious financial hardship.
Had it not been for this reduction and a discount for agreeing settlement of their cases, their penalties would have been £144,000 and £72,000.
Whilst this action relates to a specialist IFA firm, it is important for all firms to take note, particularly with regard to points 1, 2 and 4 above.
These are situations the industry has seen too often over the years and the FCA will take substantial action against any firm that is found to be in breach of client money rules, no matter what sector it transacts business in.
With new client money rules on the way (PS to CP12/20), it is important that firms have robust client and insurer money procedures which comply with the rules and that the new rules, whatever they may look like, can be incorporated into existing procedures without too much trouble.