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Transact fined £3.5m for client money breaches

Integrated Financial Arrangements, the firm behind Transact, has been fined £3.5m for failings in the protection of client money.

A final notice, issued by the FSA today states the wrap did not perform daily client money calculations to check amounts in client bank accounts matched the firm’s records. As a consequence it failed to identify or fund any shortfalls in its client money bank accounts that may have occurred from buying and selling instructions occurring at different times.

This meant that money belonging to one client was used to cross fund other clients and resulted in clients’ money being at risk if Integrated Financial became insolvent. The firm should have funded any possible shortfalls from its corporate account.

The second breach relates to a failure to have adequate trust documentation in place for three of its 28 client bank accounts also putting client money at risk in the event of insolvency.

The failure was noticed as part of an FSA visit to IFA in May 2010 when it was noticed the firm had failed to carry out the calculations between 1 December 2001 and 30 June 2010. The amount of money held during that period averaged £508m. The FSA fine is calculated as a percentage of this £508m average.

The fine would have been £5m but it agreed to settle at an early stage, entitling it to a 30 per cent discount.

No Transact clients have lost money as a result of the breaches, but the FSA has made the firm appoint a skilled person to review its client asset processes.

The FSA notice says: “Integrated Financial did not perform any client money calculations between 2001 and 2010 and as a consequence failed to identify or fund any shortfalls in its client money bank accounts. This meant that money belonging to one client was used to cross fund other clients and resulted in clients’ money being at risk if Integrated Financial became insolvent.”

FSA acting director of enforcement and financial crime Tracey McDermott says: “We will continue to take steps to rectify procedures at firms that have fallen short of our client asset requirements and action will be taken against non-compliant firms.”

Integrated Financial Arrangements chief executive Ian Taylor says: ‘The essential point to make is that no client has suffered any detriment or loss as a result of the breaches. Nevertheless we are chastened. Achieving the highest standards in regulatory compliance is of central importance to our business, we will work tirelessly to reassure our clients, shareholders, staff and business partners that the problem is in the past and we are now fully compliant.”

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Comments

There are 16 comments at the moment, we would love to hear your opinion too.

  1. It took the regulator 9 YEARS to find this out? What exactly are we paying them for?

  2. Why is this not on the front page? What is MM agenda here – always positive news on wraps so this buried?

    String and sellotape behind the scenes.

  3. What is important here, in the FSA’s own words, is that “clients have not suffered any loss or detriment as a result of the issues raised in this Notice” and “Integrated Financial maintained records in respect of client money, recorded all client money transactions and matched these to the bank statements”. This said, we are chastened and we have worked assiduously, since the breach was discovered, to rectify the situation. It is now fixed and has been checked by our auditors. The size of the fine is based on a formula that has been applied by the FSA to 5 other organisations in respect of client money breaches. Unfortunately, our fine is large because our wrap is large. We will pay the fine from our own pocket, so it will have no effect at all on the value of client investments. We now aim to put it behind us and continue to provide the same high quality service that has made Transact a £10 billion wrap.

    Ian Taylor

  4. the question really is why did it take till 2010 a problem that was there since 2001 ( 9yrs) I can only guess the FSA werent doing there job also they have been too busy living it up in the towers of London and their expence accounts

  5. What is important here, in the FSA’s own words, is that “clients have not suffered any loss or detriment as a result of the issues raised in this Notice”

    No. what is important here is that it went on so long undiscovered. Why? Poor systems, poor controls or both. Very worrying.

    What else is there undiscovered? More sellotape required.

  6. WRAPs are certainly coming under greater regulatory scrutiny. About time.

    £3.5m will buys lots of party hats and wine for the staff at ‘In Hindsight’ halls.

    Transact will not gain great publicity from this even though no client has lost out.

    I do think the FSA should look further into the reasons why so many investors/customers/clients are being placed on WRAPS with 1% pa advisory charges.

    Certain Professional Body magazines appear to be funded by WRAP and SIPP providers when you read the number of articles on both.

    Thematic review??

  7. Not happy one little bit about this.

    All of this makes me wonder how much this has cost Transact/Integrated Financial Arrangements over the past 18 months to fix, how many more problems like this are still in the woodwork and if they have the financial strength to continue to fix major faults in their systems.

  8. @ Anonymous,are you a Transact user?

  9. Notwithstanding, Ian Taylor’s comments above regarding the size of the fine in relation to the size of the wrap, the amount of this fine is totally disproportionate to the offence. This is after all a purely technical breach. Transact’s business model is as plain vanilla as it’s possible to be – there is no proprietary trading, no derivative counterparty risk etc. (i.e.no possibility of a Lehman’s situation) and as this breach would only have become problematical in the event of an insolvency event, the actual risk of substantial loss of client money over the period in question was purely theoretical: an insolvency event would have been well flagged many months in advance as given the business s model it could only have resulted from a substantial and sustained decrease in revenue.

    It is curious, though, that this was not detected by the firm’s own auditors or by the FSA earlier. Given that the FSA are ultimately responsible for ensuring regulatory compliance, would it not seem appropriate to now fine them too for a complete failure to do so – in this case for as many as 9 full years? It seems that when a regulated firm makes an unintentional error it is “fleeced” but when the regulator makes an error nothing happens at all. Go figure.

  10. I have been spending a lot of time doing full due diligence on a number of WRAPs/Platform before selecting a chosen one/few and it makes me angry that something like this is not mentioned anywhere in documentation. How am I supposed to select a WRAP or WRAPs when I cannot find things like this out?
    To answer your question Vincent: No I won’t be.

  11. the problem is now in the past” well that depends on if the reference is to the procedural problem of not reconciling the cash balance, or a cultural problem of not following the rules.. and then not following them after the Lehmans, Icebank etc.. collapses. Daft given the FSA wrote to all companies that they would be closely monitoring that aspect.

    There may not have been a risk of Transact failing, but there is always a risk of fraud if the money is not segregated and there has been rather a lot of that being uncovered since 2008 too. Trading on uncleared customer assets (cheques) is what was also going on here, all very basic no no’s.

  12. INTERESTED PARTY 8th December 2011 at 8:46 pm

    Not quite sure how accurate the FSA report is, Transact must of undertaken client money internal reconciliations otherwise this would of been detected long ago. Do not agree with the view that nobody lost out, if trust letter are not in place or if the firm do not protect the right amount the client is baring the risk of insolvency which is not as the product was advertised. Interesting point on how trades are pre funded, will HMRC take an interest in this in light of the ISA rules.

    Think there will be a lot of CEO’s making phone calls to check their procedures after this.

  13. Ian Taylor is missing the point. If the FSA were not aware of this for 9 years surely his team must be? It makes me wonder if there is more they are hiding and how much it cost them to rectify

  14. this is horrible on so many levels

  15. @Anthony Farrell – “purely a technical breach” – if you believe that I fear for your clients. The bottom line here is that all the reassuring words advisers give their clients about ring fenced assets/secure custody etc was in Transact’s case simply not true. Luckily clients didnt lose – but they could have done through inferior non compliant processes – I cant see them recovering from this now.

  16. We should stop using these incompetent life offices….oh wait.

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