• Concern over handling of assets first surfaced after Lehman Brothers' collapse
City firms are being warned by the Financial Services Authority that they face fines and public reprimands unless they comply with its request to name the individuals responsible for ensuring clients' money is kept separate from overall funds.
A letter from Sally Dewar, managing director of risk at the FSA, warns that the regulator could go as far as to demand that a company appoints a "skilled person" – an expert from outside the firm – to conduct the necessary work to provide a report to the regulator.
She gives firms until 30 June to respond to a request first made in January, when the regulator found "significant weaknesses" in the ways that client funds were being handled by companies providing investment banking services.
Client funds are those that are held by banks for pension funds, hedge funds and other professional firms, and should be kept separately from the deposit base of the bank where savers' cash is pooled. The issue was highlighted by the collapse of Lehman Brothers, when the authorities found that the bank had not kept client funds separate, which caused problems when the bank filed for bankruptcy protection.
Dewar wants evidence from the firms to prove they have complied with the rules, including the name and contact details of individuals responsible for this back office role. She warns that failure to provide the information "could result in enforcement action against both the firm and individuals".
Firms regulated by the FSA are required to behave in an "open and co-operative way" and must respond to requests for information made by the regulator.
The FSA began to take a close look at client assets after the Lehman collapse, amid concerns that more broking firms might become insolvent because of the turbulent market conditions. The letter sent by Dewar is a follow-up to one sent in January, when she told firms that she had concerns about the way they were handling client money and assets.
The FSA warned the industry that it was making the issue one of its priorities for 2010 at the start of the year, and said that it would run spot-checks to enforce its rules, after finding that compliance was currently "poor". The regulator admitted in January that "nearly all" of its visits had resulted in companies needing to take steps to improve their adherence to the rules.
The collapse of Lehman Brothers
and the taxpayer bailout of the banking system prompted regulators around the world to toughen their stance in an effort to avoid a repeat of the crisis. The FSA has been keen to show that it can no longer be considered to be operating with a "light touch", and has taken a more proactive approach to its oversight of the City. The stance taken by Dewar – warning of fines, penalties and the draconian imposition of a "skilled person" – is a sign of this more interventionist policy.In December, Mr Justice Briggs told a London court that Lehman had failed to segregate "vast sums" of client money. The judge made his ruling to help PricewaterhouseCoopers, administrator to Lehman, handle money held by the bank before its collapse.
sourced from the Guardian
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