On 26 November 2013, the FCA published a final notice and accompanying press release levying a fine of GBP 900,200 on the asset manager SEI Investments (Europe) Limited (SEI) for failing to arrange adequate protection of client money in the period from 1 November 2007 to 4 October 2012.
According to the FCA notice, SEI failed to:
- on several occasions:
- perform internal client money reconciliations; or
- ensure that shortfalls or excesses identified by reconciliations were paid into or withdrawn from the relevant client bank accounts by close of business on the day of the reconciliation;
- obtain auditor sign-off to its use of a non-standard method of internal client money reconciliation;
- make mandatory notification of client money shortfalls and excesses by close of business on the day of the reconciliation;
- submit complete or accurate Client Money and Assets Returns (CMARs) in the period between October 2011 and October 2012;
- adequately train employees with operational and oversight responsibility for client money; and
- ensure that it maintained records in a way that ensured their accuracy.
The FCA considered the above breaches serious, despite the fact that no client money was actually lost. In part, this was due to the fact that SEI failed to identify the breaches through its own compliance monitoring. Rather, they were brought to the attention of SEI by, amongst others, the FCA itself. In addition, the FCA confirmed that it wished to “send a clear message to the industry of the need to ensure that client money is properly protected” and that failure to do so would “result in severe consequences”. The resulting fine of GBP 900,200 was reduced by 30% from GBP 1,286,000 for early settlement. Broadly, it was quantified on the basis of 1% of SEI’s average client money balance (of GBP 84,300,000) for the period prior to 6 March 2010 (when a previous penalty regime applied) and 2% of SEI’s average client money balance for the period after 6 March 2010.
The enforcement action against SEI dates back to FSA visits carried out in November 2011, prior to the introduction of the CASS Resolution Pack (CASS RP) regime in October 2012. In many respects, a CASS RP represents a ‘smoking gun’ as to the history and current state of a firm’s CASS compliance. As such, going forward, firms should expect it to be the first thing which they are asked to produce during any FCA visit. Fortunately, the CASS RP requirements are a door that swings both ways. A well-designed and semi-automated CASS RP which incorporates only a modicum of reporting functionality would have assisted SEI in avoiding many of the issues which led to this enforcement action. It would have highlighted the absence of any documentation, such as client money reconciliations, that are often symptomatic of more general weaknesses in a firm’s client money processes. It would also have been capable of generating much of the aggregated data required in order to submit an accurate CMAR, including:
- information regarding the segregation of client money and safe custody assets (CMA), including:
- identification of Institutions where CMA is held;
- the country of incorporation of those institutions; and
- whether those institutions are group companies;
- frequency with which client money reconciliations are actually taking place;
- whether an alternative approach to reconciliation has been approved by the firm’s auditors in accordance with CASS 7.6.8R;
- information regarding record keeping and breaches, including:
- number of accounts held at the beginning of the period;
- number of accounts opened and closed during the period;
- number of trust status letters/acknowledgements in place; and
- an indication as to the reason for any discrepancies;
- whether the firm is generating a documentation trail which suggests that it is in compliance with its obligations to keep records and accounts pursuant to CASS 6.5 and CASS 7.6; and
- outsourced CASS operations and the entities to which such operations are outsourced.
As importantly, in an environment where transparency and reporting are becoming paramount, it would have demonstrated to the FCA, through a full audit trail and reporting functionality, the seriousness with which the firm approaches client money issues more generally.
They key to success in dealing with client money issues lies in understanding the data requirements and, to the extent possible, automating the processes for acquiring, analysing and delivering relevant data. The real cost to SEI, in terms of damage to reputation and loss of future business, far exceeds the fine levied by the FCA in this matter. The regret is that, with a clear objective and only a moderate level of effort, enforcement actions such as this could have been avoided.