FCA takes tough stance on CASS breaches

What lessons can be learnt from the recent fining of Aberdeen Asset Managers? Alison McHaffie, Partner in the Financial Services team at CMS Cameron McKenna, believes this is indicative of the Financial Conduct Authority's (FCA) tough new approach.

Aberdeen Asset Managers Limited and Aberdeen Fund Management Limited (Aberdeen) has been fined nearly £7.2m by the FCA for failing to identify and properly protect client money placed in Money Market Deposits (MMDs) with third party banks between September 2008 and August 2011.

What is the background to this fine?

Client money has been a key focus for the FCA since the collapse of Lehmans and it is taking an almost zero tolerance approach to any failings in Client Asset Sourcebook (CASS) procedures. The Aberdeen fine is an example of this tough approach for client money breaches and of the higher penalties that the FCA now imposes for these type of breaches.

What were the key facts in this case?

In this case, the risk to client money was very low and involved institutional clients only. Aberdeen placed the clients' money in money market deposits in order to get a better return for its clients and for risk diversification purposes. However, it did not obtain trust documentation from the banks with which it placed these deposits, confirming that the money held in these accounts was client money, as required by the CASS rules. This was an inadvertent breach as Aberdeen considered, at the time, that these accounts were not covered by the CASS regime on the basis that:

•  it did not receive the money itself, and
• it considered that the arrangements for placing money made it clear to the banks that it was the client's money

Once Aberdeen identified the issue, it reported it to the FCA itself and took the appropriate steps to ensure full compliance. There was no client loss and the monies were not mixed with Aberdeen's own money. If Aberdeen had become insolvent the only risk was that there may have been a delay in the return of the money while the relevant banks categorically established that it was client money. There was also no risk of set off by the banks as Aberdeen did not have any borrowings with the relevant banks.

Has anything changed since the events leading to this fine?

The client money requirements have not changed but the penalties for breaches are steeper. The Xcap case for breach of client money rules introduced a new regime for client money fines for breaches committed after March 2010 (see Press Release: FCA fines Xcap Securities plc £120,900 for client asset failings and applies new penalty regime).

Previously firms were fined 1% of average client balances--under the new regime, for breaches such as this one, the FCA will apply a 2% levy and can apply as much as 4% for the most serious breaches. Firms should take heed and ensure they are in full compliance with the CASS rules or face similar action and heavy penalties. Other firms have faced higher penalties in the past for more extensive failings or in respect of higher client balances (see JP Morgan (JP Morgan Given Record £33m Fine for Failing to Protect Clients' Funds) and Blackrock (Press Release: FSA fines BlackRock Investment Management (UK) Ltd £9.5m for client money breaches) both of which predated the new fines regime.

Alison McHaffie specialises in advising financial institutions on all types of contentious matters including FSA investigations and enforcement actions and handling commercial disputes and large scale litigation arising out of the provision of financial services.

This was first published as a News Analysis piece in LexisPSL Financial Services. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.