Andrew Procter, FSA's Director of Enforcement, said:
"A firm's senior management must ensure that appropriate systems and controls are in place to allow it to monitor the risks that the firm is exposed to. The ability to monitor credit exposures is a fundamental control for banks."LJSL's failure over a three-year period to rectify this weakness, despite senior management being made aware of the issue by both the FSA and its internal auditors, exposed the firm to an increased risk of unexpected losses."
In February 1999 LJSL was informed by the FSA that it should improve its monitoring of credit limits by introducing a review of the reports used to identify breaches of credit limits. LJSL agreed to implement an additional control in March 1999 but, in September 1999, LJSL's internal auditors found there was no evidence that the reviews agreed with the FSA had been undertaken. An internal audit report of October 2001 also found that the reviews required had not occurred for a number of months prior to the audit. Notwithstanding this second report the firm failed to take action to ensure that the control was implemented or to introduce an alternative control.
The failure to maintain the control agreed with the FSA was highlighted by a number of breaches of credit limits and a material loss on a discretionary foreign exchange dealing arrangement for a client. Between May 2001 and July 2002, the credit limit for foreign exchange transactions for the client's discretionary trading account was exceeded a number of times and on occasions by more than five times the limit. In July 2002 the client had incurred a material foreign exchange trading loss, of which neither the client nor LJSL's senior management was aware. The credit excesses were unauthorised and the loss was borne by the client. The failure to introduce an effective control on the monitoring of adherence to credit limits increased materially the possibility of LJSL being exposed to unauthorised and unacceptable credit risk. This has the potential to reduce the ability of regulated firms to repay depositors, thereby threatening both market confidence and the interests of consumers.
A further internal audit report of September 2002, undertaken following the discovery of losses and credit limit breaches on the discretionary dealing account, was unable to verify whether the original control agreed with the FSA in March 1999 had been carried out.
Once LJSL senior management became aware of the trading loss and credit breaches they reported this promptly to the FSA. LJSL has taken the remedial steps recommended by its internal auditors to rectify the weaknesses in its systems.
Background
- The full text of the Final Notice issued by the Regulatory Decisions Committee, which includes the background to the case, the relevant statutory provisions and regulatory requirements contravened and the factors taken into account by the RDC when setting the level of the fine, can be found here
- LJSL is an authorised deposit-taking institution with some 2,000 depositors and also carries on investment business. LJSL provides private banking and fund management services to private individuals, small pension funds and charities. It also provides treasury services to institutional clients and private clients.
- SYSC rule 3.1.1 states:
"A firm must take reasonable care to establish and maintain such systems and controls as are appropriate to its business."
SYSC rule 3.2.11 states:
"(1) A firm's arrangements should be such as to furnish its governing body with the information it needs to play its part in identifying measuring, managing and controlling risks of a regulatory concern. Three factors will be the relevance, reliability and timeliness of that information.
(2) Risks of a regulatory concern are those risks which relate to the fair treatment of the firm's customers, to the protection of consumers, to confidence in the financial system and to the use of that system in connection with financial crime."
- Financial penalties are not treated as income by the FSA. They are applied for the benefit of authorised persons (or the issuers of securities admitted to the official list) as appropriate, and so given back to the industry in subsequent years.
- 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; securing the appropriate degree of protection for consumers; and fighting financial crime.
- The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.
