The Financial Conduct Authority (FCA) has fined SEI Investments (Europe), a provider of asset management and wealth management services, £900,200 for failings in relation to its protection of client money.

The UK's [tag|FCA|]Financial Conduct Authority[/tag] has fined SEI Investments (Europe), a provider of asset management and wealth management services, £900,200 ($1.455.17 million) for failings in relation to its protection of client money.

Under the FCA’s client money rules, firms are required to keep client money separate from the firm's money in client bank accounts with trust status. Firms that undertake client transactions and hold client money should perform daily client money calculations (referred to in the FCA Client Asset Sourcebook (CASS) rules as internal reconciliations) to check that they are segregating the correct amount of client money so that in the event of the firm's insolvency, client money is returned to clients as quickly and easily as possible, the FCA said in a statement.

“SEI has committed a serious breach by failing to comply with our client money rules for over five years. We have repeatedly emphasised the importance of ensuring that client money is adequately protected and we have taken a number of enforcement actions against firms of all sizes for breaches of our rules in recent years,” said Tracey McDermott, director of enforcement and financial crime.

“Firms that hold client assets should ensure they continue to strengthen their management, oversight and controls in this area. We will continue to take action to ensure that procedures at firms meet our client asset requirements and action will be taken against firms that fall short,” McDermott added.

Between November 2007 and October 2012, SEI failed on several occasions to perform its internal reconciliations, failed on several occasions to ensure that any shortfall or excess identified in its internal reconciliation of client money was paid into or withdrawn from the client bank account by close of business on the day of the internal reconciliation, and failed to appreciate that it was using a non-standard method of internal reconciliation. SEI therefore failed to ensure that it maintained its records and accounts in a way that ensured their accuracy.

Failings were found throughout SEI’s client money processes, indicating that SEI’s client money arrangements were inadequate. SEI failed to train employees with operational oversight and responsibility for client money. On one occasion, an SEI employee who had not received any CASS training manually adjusted SEI’s client money requirement from the £14 million calculated using the internal client money reconciliation to £932,000, on the basis of his assumption that the £14 million shortfall was of an unprecedented amount and was therefore inaccurate.

Had SEI become insolvent, these failings could have led to complications and delay in distribution and placed client money at risk. The average daily balance of the client money accounts during the relevant period was approximately £84.3m.

Whilst the FCA considers the failings to be serious, there was no actual loss of client money in this instance. However, the rules are designed to be preventative. Had SEI suffered an insolvency event during this period, customers could have suffered loss due to SEI’s non-compliance with the Client Money Rules.

SEI has cooperated with the FCA during its investigation, invested in external consultants, and has restructured its operational model.

SEI agreed to settle at an early stage and in doing so it qualified for a 30 per cent discount. Without the settlement discount, the fine would have been £1,286,000.

In response to the fine, SEI Investments (Europe) confirmed that it has resolved an historic and technical issue relating to the FCA’s Client Assets Sourcebook (CASS), which involves a settlement payment of £900,200.

Whilst SEI regrets that this situation arose, at no time was any loss or detriment caused to any of SEI’s customers. All client money was fully segregated from SEI assets at all times, with appropriate trust protection, SEI said in a response statement.

SEI Investments said that despite using a client money calculation that had been certified annually since 2007 by SEI’s CASS auditors as compliant; in 2012 the FCA determined that the calculation varied from its standard methodology. During the relevant period, SEI and its external auditors were not aware of any reason why the calculation model used did not offer at least as much protection as the FCA standard calculation.

"The FCA’s latest fine is a clear signal that protecting client money is an imperative for all financial institutions.The FCA is committed to deploying a huge increase in resources to detect non-compliance, so firms holding client assets need to strengthen financial controls and conduct rigorous reviews of governance processes to ensure immediate adherence to not only the rules but also best practice," said Jim Muir, director of AutoRek.

"Coupled with a warning that asset management firms need to be more rigorous in their supervision of outsourcers, it is clear that this latest fine is going to trigger a series of related inspections. Far too many firms have corruptible, unauditable and unsustainable manual reconciliations and calculations. Organisations must invest the time in ensuring they can prove compliance. Introducing measures, such as automated client money reconciliations, calculations and reporting, improving record keeping and the segregation of duties, will help minimise the risk of those severe penalties and – arguably much more long-lasting – the danger of personal and corporate reputational damage," added Muir.