BlackRock Investment Management (UK) Ltd (BIM) was subject to a massive penalty of more than £9.5m (after the traditional 30% discount) for client money failings.
The failings were fairly basic: the absence of the trust status letters that are required under CASS 7.8.1.
Under this rule a firm must ensure that when client money is deposited with a bank, the latter must be made aware – and must duly acknowledge the fact – that the firm is holding the money as trustee and that in the event of a default of the firm, the bank is not entitled to e.g. exercise any right of set-off or counterclaim in respect of any amount owed to it. The Final Notice informs us that the FSA approached four of the counterparty banks used by BIM where no acknowledgement of trust status existed. The ‘majority’ of the banks stated that in the event of BIM becoming insolvent they would indeed have exercised the right of set-off or would have delayed returning the funds until instructions were received from the liquidator which would obviously be to the detriment of those clients whose money it belonged to.
The client money problems with the firm arose following its acquisition in 2006 (when it was Merrill Lynch Investment Managers Ltd) by BlackRock Group and the subsequent operational changes including loss of experienced staff and the disbanding of the Credit Control Committee. As commented by Tracey McDermott, FSA Director of Enforcement and Financial Crime, “this is not the first time we have seen the impact on client money overlooked as part of a re-organisation”.
Firms holding client money should consider carrying out a review of their compliance with the trust status letter requirement, with special attention given to whether general client money procedures might have been impacted as a result of any organisational restructuring, change of business model etc. that may have occurred in recent times.
In the FSA’s Annual Report (see article in Regulatory Roundup 42), the regulator advises that it has increased its interest in the protection of client money and client assets. To quote from the FSA BIM press release “Identifying and protecting client money should be at the top of every firm’s agenda”.
Links are provided to recent ‘Dear CEO’ letters on the subject of client money, which in turn references the FSA Client Money & Asset Report.