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FCA fines Aberdeen for failing to adequately protect client funds

On 3 September 2013, the Financial Conduct Authority (the “FCA”) announced that it had fined Aberdeen Asset Managers and Aberdeen Fund Management (“Aberdeen”) £7,192,500 for failure to adequately protect client funds placed in Money Market Deposit (MMD) accounts.

Aberdeen was fined by the FCA for improperly protecting clients’ money in the MMD accounts. MMDs are savings accounts that offer competitive interest rates, but require large deposits. They are typically used by investment managers to hold client funds when the managers are maintaining large cash positions within their portfolios.

There were several failures in process cited by the FCA including failure to properly and consistently name the accounts (e.g. use of Ltd and Limited interchangeably) and the failure to obtain trust letters. According to the FCA, these failures created uncertainty over who actually owned the funds. Aberdeen also frequently used its own name in setting up accounts (although often including a client alphanumeric code) which may have led third party banks to conclude that the money belonged solely to Aberdeen, not their clients. This left Aberdeen’s clients at risk of delays in having their money returned if Aberdeen became insolvent.

At risk was a daily average of £685 million of client money over a period of almost three years.  Importantly, there had been warnings by the FSA and opportunities to fix the cash management processes, however these were all ignored. Following a review in May 2009, in the wake of the Lehman Brothers insolvency in 2008, the FSA (the FCA’s predecessor) had asked Aberdeen to ensure they had the correct documentation for their clients. In 2010, Aberdeen confirmed they were fully compliant with the relevant rules. Also during 2009, queries were raised by new staff taken on from Credit Suisse, however Aberdeen still wrongly concluded that they did not need to put in place formal “trust letters” to protect their clients.

In response to the FCAs fine, Aberdeen commented: “We regret that the situation arose, have co-operated fully with the FCA in the course of its investigation and have amended our UK procedures”. They also noted that the breaches did not result in any client suffering a loss, and that client funds were never mixed with Aberdeen’s own money.

At around £7.2 million, the penalty is far higher than it would have been under the previous FSA regime. Though the Financial Times claims that this is still “little more than pocket money for Aberdeen”.

In response to the FCAs fine, Aberdeen commented: “We regret that the situation arose, have co-operated fully with the FCA in the course of its investigation and have amended our UK procedures”. They also noted that the breaches did not result in any client suffering a loss, and that client funds were never mixed with Aberdeen’s own money.

At around £7.2 million, the penalty is far higher than it would have been under the previous FSA regime. Though the Financial Times claims that this is still “little more than pocket money for Aberdeen”.

In response to Aberdeen’s breach, Petra Hollis, Laven Partners’ Managing Director, commented: “We encourage firms holding client money to go over their regulatory processes to ensure that they are fully compliant by checking even the finer details of their policies, such as consistent naming of accounts”.

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Jerome Lussan

Jérôme de Lavenère Lussan is the CEO and founder of Laven. Jérôme’s background includes acting as a COO of a hedge fund and as a financial lawyer at Jones Day.

Jérôme has a broad degree of expertise in the hedge fund and fund management industry and is an advisor to many international financial services firms specialising in operations, legal and regulatory matters. He is a member of the Law Society of England and Wales, the International Tax Planning Association and of the CFA Society of the UK. Jérôme holds an LLB from University of Edinburgh.

In 2010 and 2011, Jérôme was named by Financial News as one of its 100 Rising Stars, and in 2011 and 2012 one of its 40 under 40 Rising Stars in Hedge Funds. He is the author of the FT Guide to Investing in Funds.

Website: www.lavenpartners.com

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