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CASS – FSA can't see the Wood for the trees?

18 November 2011

The FSA is hammering home its CASS message so hard that I am running out of CASS blog titles!

In its latest Final Notice (published on Tuesday), the FSA punished a small firm in respect of a technical breach relating to a small number of clients who did not suffer any actual harm.

The FSA fined McInroy & Wood Limited (MWL), a discretionary investment management firm based in East Lothian, £15,050 for breaching Principle 10 and the FSA's client money rules between 31 May 2006 and 17 August 2010 by failing to ensure adequate protection of client money during this period.

Specifically, 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. Despite several opportunities to review its client money arrangements, MWL failed to identify the missing trust letter which apparently placed clients' monies held in those 22 accounts at risk of being included within the pool of assets available to general unsecured creditors in the event of MWL's insolvency, rather than in a pool of protected client money.

Despite MWL having no other accounts with the bank during the relevant period which could have been co-mingled with client money, and the CASS rules on segregated client accounts recognising that a trust relationship between the bank and MWL's clients is imposed by law, the FSA still decided to fine MWL - even though it is difficult to see how its clients could have suffered any loss.

This Final Notice provides a good example of the FSA's desire to clamp down on breaches of its client money rules (of whatever nature), regardless of the size of the firm in question, to reinforce its deterrence message. Moreover, it is inconsistent and seems rather unfair that the level of fine (even without the settlement discount) is significantly more than 1% of the average amount of client money held during the relevant period - the approach adopted by the FSA for large firms such as JP Morgan and Barclays Capital.