By Marcus Leach
The Financial Services Authority (FSA) has fined Integrated Financial Arrangements plc (Integrated Financial) for failings in relation to its protection of client money.
Integrated Financial offers one of the UK’s largest wrap platforms, Transact.
Under the FSA’s client money rules, firms are required to keep client money separate from the firm's money in client bank accounts with trust status. Firms that undertake client transactions and hold client money should perform daily client money calculations (referred to in the CASS rules as internal reconciliations) to check that the amount in the client bank accounts matches the firms records.
The primary purpose of this reconciliation is to safeguard the client money so that in the event of the firm's insolvency client money is returned to clients as quickly and easily as possible.
The FSA visited Integrated Financial in May 2010 and found that although it had segregated client money from its own money upon receipt it had failed to comply with client money rules between 1 December 2001 and 30 June 2010. The amount of client money held by Integrated Financial during the period averaged £508m.
Specifically, 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.
Integrated Financial also failed to put in place adequate trust documentation for three of its 28 client bank accounts which also put client money at risk in the event of the firm’s insolvency.
Furthermore, Integrated Financial failed to put in place adequate risk management systems in relation to client money.
“Integrated Financial has committed a serious breach by failing to comply with our client money rules for a significant period of time. The FSA has repeatedly emphasised the importance of ensuring that client money is adequately protected and in the past year has taken enforcement action against firms of all sizes for breaches of its client money rules," Tracey McDermott, acting director of enforcement and financial crime, said.
“Adhering to these rules not only ensures greater protection of clients but is also important to maintain confidence in the financial markets. Firms that hold client assets can expect to receive more regulatory attention and should ensure they continue to strengthen their management, oversight and controls in this area. 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 agreed to settle at an early stage and in doing so it qualified for a 30% discount. Without the settlement discount the fine would have been £5 million.
The FSA required Integrated Financial to appoint a skilled person under Section 166 to review its client asset processes, and Integrated Financial has agreed to comply with the skilled person’s recommendations. No clients of Integrated Financial have suffered any losses as a consequence of the breaches identified.
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