McInroy & Wood Limited Breach Client Money

Jack Humphrey, Regulatory journalist
November 15, 2011 /

The Financial Services Authority (FSA) has fined McInroy & Wood Limited (MWL), a discretionary investment management firm based in East Lothian, £15,050 for breaching the FSA’s client money rules.

The protection of client money and custody assets (client assets) is a regulatory priority. The FSA’s response to the financial crisis and the issues it uncovered was to increase the level of resource devoted to the protection of client assets.

The FSA established the Client Asset Unit to lead specialist and intensive supervision of client assets and improve compliance with the aim of ensuring that firms have robust systems in place to ensure the swift return of client assets and money in the event of firm insolvency.

Under the FSA’s client money rules, firms are required to keep client money separate from the firm’s money in segregated accounts with trust status. A firm must have a trust letter from the bank holding its client money to ensure that, in the event of the firm’s insolvency, client money is clearly identifiable and is ring-fenced from the firm’s own assets so that it can be promptly returned.

MWL failed to obtain a trust letter in respect of 22 segregated off-shore retail client bank accounts, which contained an average balance of £666,000, the FSA claimed.

The FSA has issued several communications to firms on the rules for protecting client money, so firms are aware this is a high profile issue. In January 2010 the FSA published a Dear CEO letter and a Client Money and Assets report for all firms that have the permission to hold client money and assets. This was followed up by a further Dear CEO letter on 20 May 2010.

However, MWL missed several opportunities to review its client money arrangements in relation to these 22 off-shore accounts so the error remained undetected by the firm for over four years, between May 2006 and August 2010.

Richard Sutcliffe, head of the client assets unit, said: “McInroy & Wood’s failure to check whether it had a trust letter in place for these 22 accounts exposed its clients to risk in the event of insolvency.

“There is no substitute for a trust letter as it confirms client money is ring-fenced from the firm’s own assets, readily identifiable and aids the prompt return to clients.

“The FSA has repeatedly emphasised the importance of ensuring that client money is adequately protected and firms of all sizes must ensure client money is segregated and that this is acknowledged with a trust letter in accordance with FSA rules.”

MWL did not enter into insolvency, promptly rectified the failing and no clients suffered any losses as a consequence of the breach.

The firm worked constructively with the FSA in the course of its investigation and agreed to settle at an early stage. In doing so it qualified for a 30% discount on the financial penalty. Without the settlement discount the fine would have been £21,500.

 

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