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Why the FCA rewrote the rules: The biggest fines for client money breaches

The FCA estimates 1,500 firms will fall under the regime of its new client money rules, ranging from large investment banks to financial advisers.

Earlier this month the regulator finalised its client money rules following industry consultation. These include a rewrite of the client money rules for investment firms, as well as material amendments to custody rules in the client assets sourcebook.

The regulator says firms’ processes and safety controls for segregation, record keeping and client asset risks will be strengthened by the changes.

The rules will be phased in, with the full implementation timetabled for 1 June 2015.

Here we set out the five biggest fines for client money breaches, and the reasons behind them.

1. JP Morgan

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The FSA handed out its largest ever fine to a financial services firm in June 2010 after JP Morgan Securities was found to have failed to segregate billions of dollars of client money from money held by JP Morgan Chase bank. The FSA said this error remained undetected for seven years.

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. But between November 2002 and July 2009, JP Morgan Securities failed to do this and allowed its futures and options business to hold between $1.9bn and $23bn of client money.

The FSA says if JP Morgan Securities had become insolvent during this time the money could have been lost.

2. BlackRock

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The FSA fined BlackRock Investment Management more than £9.5m in September 2012 for failing to protect client money adequately between October 2006 and March 2010.

The fine was levied against the firm “for not putting trust letters in place for certain money market deposits and for failing to take reasonable care to organise and control its affairs responsibly in relation to the identification and protection of client money”.

A firm must have a trust letter from any 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, according to the FSA.

The regulator claimed the errors came as a result of BlackRock’s acquisition of BlackRock Investment Managers, previously known as Merrill Lynch Investment Managers.

The FSA said the average daily balance affected by this error was approximately £1.4bn.

3. Aberdeen

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The FCA fined Aberdeen Asset Managers and Aberdeen Fund Management £7.2m in September 2013 for failing to protect client money.

The failings related to money held in money market deposits. Clients can hold funds in money market deposits where they have large cash balances in their investment portfolios, in order to generate a return over a fixed period.

Aberdeen failed to identify that client money placed in money market deposits with third party banks between September 2008 and August 2011 was subject to client money rules.

The average daily balance affected by this failure was £685m.

Aberdeen did not obtain the correct documentation from third-party banks when setting up the affected accounts and used inconsistent naming conventions when setting up the funds, creating uncertainty over fund ownership.

The FCA said Aberdeen’s failures meant clients were at risk of delays in having their money returned if Aberdeen became insolvent.

4. Transact

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Integrated Financial Arrangements, the firm behind Transact, was fined £3.5m in December 2011.

A final notice , issued by the FSA stated 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 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 firm also failed 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 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 lost money as a result of the breaches, but the FSA made the firm appoint a skilled person to review its client asset processes.

5. Barclays

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The FSA fined Barclays Capital £1.12m in January 2011 for failing to protect and segregate client money held in sterling money market deposits.

Under the regulator’s rules, companies are required to keep client money separate from the firm’s money in segregated accounts with trust status. This helps to safeguard and ringfence the client money in the event of the firm’s insolvency.

For over eight years, between December 1, 2001, and December 29, 2009, Barclays Capital failed to segregate client money maturing from its sterling money market deposits on an intra-day basis.

Such client monies were segregated overnight but matured into a proprietary bank account and were mixed on a daily basis with Barclays Capital’s own funds, typically for between five and seven hours within each trading day.

The average daily amount of client money which was not segregated increased from £6m in 2002 to £387m in 2009.

The highest amount held in the account and at risk at any one time was £752m.

Had the firm become insolvent within the five to seven hours each day in which the funds were unsegregated, this client money would have been at risk of loss.

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