FCA Clamp Down: Complying with Client Money Rules

The Financial Conduct Authority (FCA) recently fined Aberdeen Asset Management £7.2m for breaching its client money rules. The case highlights the regulator’s renewed sense of purpose.

Aberdeen Asset Management’s fine was levied for failing to correctly identify client money placed in Money Market Deposits (MMDs) with third party banks from the period May 2008 to September 2011. The lack of clear identification meant that client money was not protected properly, with funds affected totalling an average daily balance of £683m.

In the event of financial collapse or bankruptcy of a fund, client funds should not be exposed to the manager’s losses.

Despite breaching the FCA’s rules, Aberdeen moved to reassure investors that no money was lost.

Background to Aberdeen Asset Management’s Fine

The client money rules are designed so that in the event of the failure of an investment fund, money held on behalf of clients for investment can be identified and swiftly returned.

As a consequence of incorrectly determining that the money was not subject to the above FCA client money rules, Aberdeen failed to obtain the correct documentation from third party banks when creating the affected accounts. Moreover the use of inconsistent naming conventions when setting up the accounts generated uncertainty over the true ownership of the funds, putting client money at risk if it transpired that Aberdeen were indebted to the third party banks.

Given Aberdeen’s full cooperation with the FCA’s investigation and its agreement to settle at an early stage, it qualified for a 30% discount of its fine reducing it from £10.3m to £7.2m.

Background to the Client Money Rules and FCA Enforcement

The FCA’s client money rules exist to bolster its broad objective of protecting and enhancing the sound functioning of financial markets and that the integrity of the financial system.

The regulator considers the safeguarding of client assets a priority and intends to continue to drive up industry standards by supervising firms and instituting prudent policy. This emphasis on a more interventionist approach to compliance and regulation may mean that asset managers in the industry are more likely to fall foul of increasingly stringent FCA rules.

While some firms have tackled the client money issue by bringing in regulatory experts, others have taken inadequate steps to ensure compliance. Consequently specialists in the field predict that the FCA will be issuing more punitive fines in the coming years.

Indeed in the last three years the FCA and its predecessor the Financial Services Authority (FSA) have levied more than £55m in fines for firms’ breach of client money rules, including a £33.3m fine to the Investment Bank JP Morgan in May 2010 and £9.5m to BlackRock Investment Management in September 2012, despite the fact that no client money was actually lost.

For specialist compliance advice please contact James Crighton jcrighton@rollingsons.co.uk or telephone 0207 611 4848.