Stockbroking firm Charles Schwab UK has been fined £9 million (€9.9 million) by the UK financial regulator for failing to protect its clients’ assets and “making a false statement” to the authorities.
The Financial Conduct Authority on Monday said the UK subsidiary of the US brokerage was found to have “swept” investors’ money across to a US affiliate, where it was mixed up with cash from non-UK clients and the firm’s own funds.
But the UK business did not at all times have permission to safeguard and administer these “custody assets”, and it failed to notify the FCA of its previous breach of the rules when applying for the correct permission.
In addition, the UK firm then inaccurately told the FCA that its auditors had confirmed that its internal systems and controls were adequate to protect client assets.
Enforcement
Mark Steward, the FCA's executive director of enforcement and market oversight, compared the failings to those at collapsed US bank Lehman Brothers.
“Charles Schwab UK failed to get the correct permissions from the FCA, then failed to be open with us and, finally, failed to put in place the necessary safeguards,” he said. “As we saw with Lehman Brothers and subsequent cases, a lack of client asset protections can easily lead to increased costs to consumers and funds being trapped for long periods of time.”
According to the regulator, the breaches occurred between August 2017 and April 2019, after the UK firm changed its business model. As a result of the change, it moved client money to the US but did not have the right records to identify its UK customers’ assets or adequate arrangements to safeguard them, or return them in case of insolvency.
As a result, the UK firm breached two of the FCA’s Principles for Business, as well as rules in the regulator’s Client Assets Sourcebook, and section 20 of the Financial Services and Markets Act 2000.
Charles Schwab UK said it had co-operated fully with the FCA’s investigation, and had addressed the issues identified.
Assets
“Charles Schwab UK client money and assets were protected at all times in accordance with US rules,” the company said. “Charles Schwab UK maintains the highest standards of service, governance, and security, and although no clients or assets were negatively impacted, we regret the errors and are pleased this matter has been resolved.”
In its announcement of the fine, the FCA noted that the UK firm did take remedial action after discovering the breaches, and there was no actual loss of client assets. By agreeing to settle the case with the FCA, Charles Schwab UK also qualified for a 30 per cent discount on the initially calculated financial penalty of £12.8 million.
Charles Schwab UK stopped holding client assets from January this year. – Copyright The Financial Times Limited 2020
