FCA thematic review puts dark pool trading in the spotlight
On 21 July 2016, the FCA published a report on its thematic review of the UK equity marketplace, focusing on dark pools and broker crossing networks ("BCNs").
Published 3 August 2016
Towergate Underwriting Group Limited ("Towergate") is an insurance intermediary which holds both client and insurer money. This month the FCA fined Towergate £2,632,000 for failings in relation to its protection of client and insurer money.
In summary, the FCA found that Towergate accumulated a £12.6m shortfall of client and insurer account monies which, due to weaknesses in systems and controls, remained undetected for an 8 year period. Towergate's former Client Money Officer and director, Timothy Philip, also received a fine of £60,000 and has been banned from having any future direct responsibility for client and insurer money.
Both Towergate and Mr Philip received a 30% discount on their respective fines for settling the matter at an early stage in the FCA's investigation.
The FCA found that Towergate had breached the CASS Rules and Principles 3 and 10 of the FCA's Principles of Business. Principle 3 requires firms to take reasonable care to organise and control their affairs responsibly and effectively and with adequate risk management systems. Principle 10 requires firms to arrange adequate protection for clients' assets when it is responsible for them.
The specific failings identified by the FCA are as follows:
Towergate first identified there was a shortfall in its client and insurer accounts in May 2013. It made good the shortfall within around 6 months, but was criticised for failing to report this shortfall to the FCA immediately and for not complying with CASS Rules which require any shortfall to be corrected on the day the firm performs its money calculation.
The level of fine is low compared with other fines imposed by the FCA in relation to failures to protect client assets (see our article on the £126m FCA fine against Bank of New York Mellon last year). The comparatively low level of fine may reflect the amount of money potentially at risk and the lack of criteria, as in the BNYM decision, which made the case more serious, including the fact that the BNY Mellon Group is the world’s largest global custody bank by custody assets. In a statement given by Towergate's chairman, John Tiner, he commented that: "this issue is historic, isolated, and had no financial impact on any clients or insurer partners".
That said, there can be no suggestion that the regulator is going soft. The fine (before the 30% settlement reduction) equates to a penalty of more than one quarter of the shortfall. In addition, the FCA expressly took into account the fact that had the firm become insolvent during the period when the shortfall existed, insurers were at risk of losing money and may have experienced complications in recovering their money. Therefore this must be seen as another decision which reinforces the importance the regulator places on protection of client money and compliance with the related rules.