Pritchard's - A Lesson in Compliance

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. 

Could Churchill & Direct Line’s £2.17m FSA fine have been avoided with better systems? Oh yes…

 ‘FSA imposes £2.17 million fine for failure by Direct Line and Churchill to conduct their businesses with due skill, care and diligence’
http://www.fsa.gov.uk/pages/Library/Communication/PR/2012/003.shtml

The Financial Services Authority (FSA) has imposed a fine of £2.17 million for failings by Direct Line Insurance Plc and Churchill Insurance Company to prevent files that the FSA had requested from being improperly altered.

In collecting the 50 complaint files for review, the FSA found 27 of the files were altered before submission, due to the firms failing to act with due skill, care and diligence. 

The failing for which these insurance firms are being penalised is clearly inappropriately enabling staff to alter files. This kind of alteration can largely only occur when files are stored without sufficient versioning control. In itself, this is a huge downfall, more so when an audit trail is required. For legally admissibility purposes document and content management applications make this impossible. 

Manually archived documents are not afforded the same security as those which are electronically available. For a long time, we have been professing that a document management system provides an indisputable record for files and as such a key element, and typical requirement, of this system is immutability – once an item is entered into the system it cannot be altered under any circumstance, and it seems that those within Direct Line and Churchill would have done well to have implemented such a system. 

Working with previous clients in the Financial Services arena has given us a full appreciation of the variety of needs that such organisations have. The main requirement is usually the ability to provide a clear audit trail of every single document – essential in order to comply with FSA requirements. Through using a document management system, the software enables all of the business content to be rigorously controlled and yet also easily shared, with the ability to administer security controls of various strength determined by the document itself. 

The main point associated with it is that once in the system, documents simply cannot be altered. This in itself that would have saved these two insurers a lot of trouble, and cash.