The
recent case of Pritchard Stockbrokers using client money for
its own expenses highlights the severity with which the FSA is now dealing with
organisations that are breaching regulations.
The
FSA issued a first supervisory notice to Pritchard, preventing it from taking
part in further regulated activities, after being found guilty of using client
money for its own expenses. In addition to breaching the golden rule of ring
fencing client monies this also put client monies at risk – the firm’s assets
were also frozen and clients were informed that Pritchard was no longer working
for them.
The
regulator said that it had come to the decision as it had ‘serious concerns’ –
specifically that Pritchard had failed to arrange ‘adequate protection’ for
client’s assets when it was responsible for them.
The impact for
Pritchard’s is severe - all retail clients’ stock assets transferred to W. H.
Ireland and cash assets to Reyker Securities plc, whilst Pritchards itself has now
entered administration. W. H . Ireland’s £500,000
investment secures 8,000 new clients with non-cash assets of £400 million. This
increases its private-client stockbroking client numbers by c.50% and total
assets under management by c.25%. The cost of compliance cannot be
under-estimated, nor, perhaps the potential benefits.
Pritchard’s actions raise several questions –
not least how the stockbroker could go unnoticed using client money for internal expenses. This
highlights the necessity for internal systems and processes which would record
or flag abnormal activities regarding the movement of funds and fraudulent
activity.
It
also highlights how businesses at risk of legislation and compliance need to
remain on ‘their toes’. Legislation doesn't generally go away; if anything the
trend is for increased regulation and
firms must ensure they have sufficient processes in place to establish and
maintain compliance. Failure to do so will inevitably result in warnings, as highlighted
in the case of Pritchard’s, that have the potential to evolve into fatal
penalties.
