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UK FSA’s Risk Head Dewar Sends Out Second Warning on Client Assets; Three Strikes and You’re Out…

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As part of its tougher stance towards the market and in a follow up to a related “Dear CEO” letter sent out in January, the UK Financial Services Authority’s (FSA) managing director of risk Sally Dewar has sent out another letter warning firms to respond to its request for information on their management of client assets. The letter is aimed at those insurance brokers and investment firms that have thus far failed to reply to its previous appeal for these firms to improve the way they protect client assets, including record keeping considerations, and declare their intentions in writing.

Dewar refers to the letter sent out in January and reminds firms of their “obligation” to respond to the request therein by the 30 June. “This obligation falls under Principle 11 to deal with the FSA in an open and cooperative way, which includes responding to requests for information and relevant confirmations from the FSA in a full and timely manner,” she warns.

To keep out of trouble, these firms have a month to provide the regulator with confirmation that they have “properly considered the content of the letter dated 19 January 2010 and its accompanying report” (exactly how this is to be determined is anyone’s guess). Firms must also indicate whether or not they are in compliance with their obligations for client money and assets and provide the name and contact details of the person the firm who has overall responsibility for its compliance with the FSA’s client money and assets requirements in the client money and custody requirements (CASS) part of the FSA’s Handbook.

This endeavour is a response to the findings of the regulator’s report last year into firms’ compliance with FSA Principle 10, which states that a firm must arrange adequate protection for clients’ assets when it is responsible for them. The report is itself a follow up to the FSA’s “Dear Compliance Officer” letter, issued back in March last year, in which it warned firms of the impending research into their client asset management practices.

The study indicated that many of the 50 firms it surveyed during the six month research period were found wanting in terms of their control of client assets, including their recordkeeping and data management around the storage of these assets. The FSA is therefore hoping for firms to invest in their compliance systems and controls in order to fill these gaps, including adding an extra level of data scrutiny with regards to providing an audit trail for the storage of these client assets.

Dewar signs the letter off with the customary threat of punishment: “If you fail to respond with the confirmation requested by 30 June 2010, you may be subject to follow up action by the FSA. This could include us exercising our powers under the Financial Services and Markets Act 2000, including for example under Section 165 to require you to provide information or under section 166 to require you to appoint a skilled person to provide a report to us. It could also result in enforcement action against both the firm and individuals.”

Truly a warning that the Sword of Damocles is permanently suspended over the heads of those on the FSA’s hit list. Get your data in order, or else.

The full letter is available to view here.

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