An IFA has hit out at the Financial Services Authority after a £25,000 fine for what the regulatory body describes as "serious systems & controls, risk management and compliance failures".
The FSA has fined CFS Independent for a catalogue of compliance failings but, more specifically, says its senior management lacked the necessary knowledge and expertise to ensure the company could comply with key regulatory requirements designed to safeguard money and client assets.
The regulator adds CFS - which has FSA permission to carry out discretionary investment management – relied heavily on a third-party compliance services to manage its regulatory requirements and had a poor risk management strategy as a result.
Moreover, management was not aware of key obligations the firm had to adhere to when entrusted with client money and assets, according to the FSA, as it says CFS did not ensure there was a proper segregation of safe custody investments from its own designated investments.
But, Andrew Harwood, managing director at CFS Independent, alleges his firm has been found guilty of several charges despite no evidence being produced by the FSA enforcement team to back those charges up.
Harwood has questioned whether the FSA’s handling of his case was fair as the Regulatory Decisions Committee - which decides what regulatory action should be taken – is said to have reduced the fine imposed on his firm significantly from £40,000 at the time of the hearing to £25,000, while, alleges Harwood, the FSA had originally wanted to impose a fine of £50,000 despite acknowledging none of CFS Independent’s clients had suffered any financial loss.
David Whitley, a spokesman for the FSA, refused to comment on specifics of the allegations made by Harwood stating: “The enforcement process which began for CFS two years ago always provided the opportunity for the firm to put forward its case in response to our findings. Our case has not materially changed from that moment. All along, CFS had the chance to contribute to that process and raise concerns or issues. If they did have concerns, they had the option to do so through the Financial Services and Markets Tribunal.”
Harwood alleges the RDC had to insist the enforcement team provide CFS and its compliance partner CCL with details of its case and reasons for the fine it wished to impose on CFS, ahead of the hearing.
However, this information was only provided the day before the hearing, giving CFS no time to prepare for the hearing or mount an adequate response to the charges levelled against it suggests Harwood.
A letter received by Harwood from the FSA’s enforcement division in May 2005 in states the FSA is only, “obliged to submit documents [to the RDC) which the Authority considers relevant to its case. Consequently the documents submitted were those considered relevant to the Authority’s case.”
He further claims the RDC hearing alone has cost his firm £40,000 in legal and compliance fees and that he was later advised not to go to the Financial Services and Markets Tribunal as his appeal would cost around £100,000 and the best he could hope for in financial compensation against the cost of the whole process, were his company to win its case, would be £200,000.
Among the specific charges set out by the FSA, it is suggested CFS did not have a proper process in place for data reconciliation of client monies and viewed this as a serious failing of management.
Harwood points out it was his company which first informed the FSA enforcement team it had incorrectly misplaced client money and taken action to rectify the situation, by righting the matter and paying the client interest as compensation for the error.
David Whitley has defended the position of the enforcement team saying: “The way in which financial penalties are worked out relates to relevancy. There may be a situation where a firm identifies an error and its systems and controls have resolved that but this is a situation where this was an error among several. So it is difficult for us to take certain things in isolation when they are part of a larger number of problems.”
The City watchdog also alleges CFS obtained bank statements and then simply entered details of account movements onto its own ledger, and in doing so failed to perform a reconciliation of each bank account in accordance with COB 9.3.126, adding CFS did not respond to this charge.
But Harwood claims such an allegation is absurd.“To imagine that we waited to enter changes in cash or recording information until we received the bank statement defies belief. We could not possibly have functioned in that way without making numerous omissions. The FSA cannot possibly back up this assertion with factual evidence and has not attempted to do so,” he says.
Harwood also describes as “nonsense” the FSA enforcement team’s assertion CFS did not carry out a reconciliation of its client accounts every 25 business days - as required under COB 9.1.123.
“This is simply not factual. I have checked our records and reconciliations were carried out on time and recorded. I suggest the FSA never requested the information and assumed we did not record it in the same way as it stated: that staff did not sign a personal dealing form when each member of staff had done so,” says Harwood.
He adds reconciliations were not carried out according to the FSA’s procedural requirements but were effective nevertheless and that the firm changed its procedures when asked.IFAonline
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