The Financial Services Authority (FSA) has fined Towry Investment Management £494,000 for providing misleading information to the regulator and for client money breaches.
Towry wrongly claimed it was compliant with the FSA's rules on treating client money, set out in its Client Asset Sourcebook (CASS).
The firm made its claim in its response to the FSA's Dear CEO letter on complying with the rules.
However the regulator discovered Towry's non-compliance on a CASS visit to the firm in November 2010.
Towry's failure to provide an accurate response to the FSA breached of Principle 11, which requires firms to deal with the FSA in an open and cooperative manner.
The failure of the firm to treat client money in the correct way breached Principle 10.
Towry's CASS breaches could have placed clients' money at risk of potential loss or delay in distribution if the firm had become insolvent because it failed to maintain adequate records, the FSA said. The firm also failed to identify the breaches itself.
In its Final Notice against Towry, the regulator stated: "There has been a high level of awareness of the importance of handling client money properly since the collapse of Lehman Brothers in 2008 and failure to [identify breaches] is not acceptable."
Towry agreed to settle at an early stage entitling it to a 30% discount on its fine.
Tracey McDermott, acting FSA director of enforcement and financial crime, said:"Open and accurate communication with the FSA is of fundamental importance to the functioning of the regulatory system.
"It should go without saying that taking steps to ensure information provided to us is properly considered, up to date and correct is a basic regulatory requirement.
"It is very disappointing that Towry failed to do so particularly in an area of such regulatory importance. Firms should be in no doubt about how seriously we regard such failures."
Andrew Fisher, chief executive of Towry, said: "While I am pleased to confirm that there has been no client detriment or loss of any client money at all, it is regrettable we have made these errors.
"We have co-operated fully with the FSA and have made changes to our processes, working with our auditors, KPMG, to address the problems identified.
"We remain committed to delivering outstanding financial advice and investment management services to all our clients."
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