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Q&A with Transact: why the FSA hit us with a £3.5m fine
by Iain Martin on Dec 08, 2011 at 11:59
Transact has published the following question and answer session between marketing director Malcolm Murray and chairman and founder Mike Howard after its £3.5 million fine from the Financial Services Authority (FSA) due to breaches of client money rules. Here is the interview in full.
Malcolm Murray: Mike, the FSA has fined Integrated Financial Arrangements plc, the provider of Transact. What did we do wrong?
Mike Howard: There are two core issues, Malcolm. One relates to how, in the past, we managed customer trades. And the other to documents that we must hold in respect of client money accounts.
On trading, our operational process is to place buy orders for clients as soon as we know that they will have enough cash to pay for them. Sometimes, a client does not actually have the cash on hand when we place the order but we do know that the cash will be there when the time comes to pay because, for example, the proceeds of a sale are due or a cheque is clearing at the bank.
However, sometimes we have to settle the buy trade before the in transit cash arrives. In that circumstance, what we should have been doing is putting our money, corporate money, into the client money pool temporarily to fund the trade in the short term. A similar situation arises when a customer has deposited a cheque which has not yet cleared or has an overdrawn position on their account. That's what the [FSA] notice means when it says 'failed to fund any shortfall'.
I'm afraid that we misapplied the rules and, although we conducted reconciliations,we allowed those positions to unwind in the normal course of operations – by waiting a few days for the expected sales proceeds to arrive or for the cheques to clear. This is not compliant as we were not using our own money to cover these timing differences. However, we have since taken steps to ensure we have funded any such shortfalls on a daily basis.
On documentation, client money must be segregated from corporate money and held in trust. Documents confirming that segregation must be obtained from the banks where the money is deposited within 20 days of the account being opened and must conform to certain wording.
We have 28 client money bank accounts and, although all client money has always been held in different bank accounts from corporate money, in one instance, we took 29 days to obtain documentation and in two other cases, the trust documents obtained did not conform to the required wording. Of course, I must emphasise the very important point that no client suffered any loss or detriment. The FSA makes this clear in its notice. It also states that we maintained records in respect of client money, recorded all client money transactions and matched those to bank statements.
In other words, the notice does not indicate that we failed to account for client money but that we failed to account for it in full compliance with the client money regulations.
Malcolm Murray: OK, that makes things clearer. We failed to follow some rules about accounting and documentation, but no clients lost any money. So why then have the FSA fined us £3.5m?
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15 comments so far. Why not have your say?
Shavian
Dec 08, 2011 at 16:00
Brilliant response, chaps. Job done.
report thisKeith Cobby
Dec 08, 2011 at 16:06
You were the largest wrap service in the UK
report thisPaul Barnard
Dec 08, 2011 at 16:08
We are still very happy with Transact - the fine seems OTT to me, given that no-one has been disadvantaged here.
report thisAn Alternative View
Dec 08, 2011 at 16:18
I 'think' the issue is trades were being settled before the money arrived hence being settled with another client's money from one of the pooled accounts rather than corporate monies.
My interpretation may be wrong though.
If I am correct a number of companies have been given considerable fines around this area of practice?
report thisRobin Clarke
Dec 08, 2011 at 16:19
I have always thought that the processes behind Transact were a bit steam driven - hence no buyer has come forward yet. This FSA fine reflects the fact that those processes were not all that they should have been. These are pretty serious failings which Transact have acknowledged.
Will Transact be compensating advisers for the extra work created by calls from worried clients?
report thisAlways Compliant
Dec 08, 2011 at 16:25
Transact were unfortunate to have fallen under the FSA CASS team's gaze, who have been enthusiastically pursuing the doctrine of "credible deterrence". The size of the fine is intended to scare all other wrap providers into not making the same mistake. It's notable that all of the other large fines were also levied on institutions big enough to take it on the chin, e.g. JP Morgan and Barclays Wealth (for overnight/intra day segregation breaches respectively).
Also purely coincidental that the larger firms only have firm-level enforcement action, whilst the scapegoats at smaller firms (like the ex-Compliance Officer at Activtrade) get individually sanctioned and fined (the level of which is based on personal wealth, including property etc).
A few heads on sticks are intended to terrify the rest of us into falling into line, and I do sympathise with those unlucky enough to be getting made an example of (particularly those at an individual level)!
report thismark
Dec 08, 2011 at 16:36
Yes the issue was that other clients' money was effectively used to settle trades in some circumstances, where the company should have settled them themselves.
Also some of the client accounts were not correctly idetified as such, so if Transact had gone bust, the client cash could have been treated as corporate cash and used to pay off creditors.
To be fair to Transact, presumably their procedures and processes are fully audited and super-compliant now. The issue is, how many other wraps/fund supermarkets have skeletons in the cupboard??
report thisPhilip Melville
Dec 08, 2011 at 16:45
@ Robin Clarke,
Any sensible adviser would be using the opportunity to improve their client relationships although from the tone of your comments here and elswhere you seem to know evrything and nothing all at the same time.
Post up your e-mail address and I will send you a phone card to compensate you for your time.
report thisKeith Cobby
Dec 08, 2011 at 17:08
Out of which account will the fine be paid?
report thisBob Donaldson
Dec 08, 2011 at 17:20
£3.5m makes your eyes water doesn't it!
report thisPaul Barnard
Dec 08, 2011 at 17:24
Keith, Transact have been perfectly clear regarding where the fine will be paid from and it is not from client assets.
@Robin - how long have you been an active user of Transact then?
report thisvincent thompson
Dec 08, 2011 at 17:25
@ Keith Cobby, I think you will find the fine has been paid already ,and out of Transact's reserves.
report thisRobert Love
Dec 08, 2011 at 18:14
If only all providers meted out this level of disclosure in respect of FSA fines.
report thisThe ssinnic
Dec 08, 2011 at 23:49
I must refer you all to my respose in the other column regarding this ridiculous FSA decision. (NMA)
report thisTerence O'Halloran
Dec 12, 2011 at 14:26
Once again FSA trivial persuits comes out ahead of the FSA tackling the real problems that actually create consumer detriment.
Thanks for a brilliant expose (sorry explanation) Malcolm.
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