The Financial Services Authority (FSA) has fined a small independent financial adviser firm, CFS Independent Ltd, £25,000 for serious systems & controls, risk management and compliance failures.
CFS Independent Ltd expanded its IFA business in November 2002 by taking on discretionary investment management activity, at which time it had 50 clients with an estimated £8 million under management.
Despite assurances given by the Firm, the FSA found that its senior management lacked the necessary knowledge and expertise to ensure that it could comply with key regulatory requirements designed to safeguard client money and client assets. CFS had a poor risk management strategy, relied heavily on third parties to comply with regulatory requirements, and was not aware of key obligations when a firm is entrusted with client money and client assets.
CFS did not make sure that there was proper segregation of safe custody investments from its own designated investments. It did not ensure that a custodian agreement was in place which complied with FSA rules. It was unaware of the requirement to carry out a reconciliation of clients’ unit trusts and investments in open-ended investment companies, until the FSA drew the requirement to its attention and asked it to undertake such reconciliations.
It failed to ensure that it had in place an adequate written policy for the allocation of investments when it aggregated a customer order with one of its own account orders, and did not maintain appropriate records of its allocations of investments in relation to aggregated orders. The firm failed to carry out a reconciliation of its client accounts within the prescribed time period until the FSA asked it to do so, and did not perform a proper reconciliation of each bank account with its own ledger details.
It also failed to take reasonable steps to ensure that its senior management received prompt notification of employees’ personal account transactions in designated investments, or that it maintained records so it could identify these transactions.
Mike Lord, Head of Investments in the FSA’s Small Firms Division, said:
“This case shows the importance of knowing and understanding the relevant rules when a firm wishes to extend the scope of its business. A firm cannot simply rely on a third party to discharge its risk management and compliance functions. Whatever the size of the regulated business, senior management must accept overall responsibility for their firms’ ability to comply with regulatory requirements.
"Risk management failures are viewed as serious, even where there is no actual consumer detriment, because they expose customers to the risk of loss. Our client money and client asset rules are designed to help protect customers, and small firms are not exempt from them.
"We accept that CFS has made considerable efforts to improve its compliance position since the failures were identified and we welcome the additional resources the firm has introduced to review its systems and controls. The fine imposed by the FSA is likely to have been far higher had CFS not taken these positive steps to address the issues that we uncovered.”
Background
- The full text of the Final Notice issued by the FSA, which includes the background to the case, the relevant statutory provisions, regulatory requirements contravened and the factors taken into account by the RDC when setting the level of the fine may be found on the FSA website.
- The FSA uses its power to impose financial penalties on small firms as appropriate and in accordance with its stated policy on financial penalties in Chapter 13 of the Enforcement Manual (part of the FSA handbook). The FSA regards this power as a valuable tool to help increase the level of compliance with regulatory requirements and to improve the behaviour of previously non-compliant firms.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the appropriate degree of protection for consumers; and fighting financial crime.
- The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.
