FCA Imposes Financial Penalty and Limited Prohibition for Client Money Failures

Posted on 30 August 2018

FCA Imposes Financial Penalty and Limited Prohibition for Client Money Failures

The FCA has prohibited John Lawrence Radford from having responsibility for client money or insurance money and fined him £468,000 (including a stage 1 discount) in respect of his oversight of client money rule compliance whilst a director (CF1) at  One Call Insurance Services Limited ("One Call"). In short, the FCA determined that Radford lacked adequate understanding of the client money rules, failed to ensure that One Call complied with those rules and also failed to put appropriate systems and controls in place.  One Call was separately fined £684,000 (also including a stage 1 discount) in respect of client money failings and restricted from charging certain fees to its customers for 121 days (anticipated to cost the firm around £4.6m).

One Call operates as an insurance intermediary.  Radford was the Chief Executive of One Call and its majority shareholder.  Throughout the Relevant Period (January 2005 to August 2013), Radford was the One Call director responsible for ensuring that the firm complied with all regulatory requirements in respect of client money.   Following a visit by the FCA in December 2013, One Call calculated that it in fact had a deficit of £17.3m in its client money bank account which it was unable to meet on that same day.  Whilst these sums were eventually repaid and there was no consumer prejudice, there had until repayment been a real risk to customers' money.   

Despite his responsibilities for client money over nearly ten years, the FCA found that Radford failed to properly understand regulatory requirements concerning client money, contrary to Principle 6 of the Statements of Principles for Approved Persons (due skill, care and diligence in managing the business of the firm for which he was responsible).  His knowledge was only of historic requirements and he had not taken steps to update his understanding.  This resulted in his misunderstanding that certain funds should have been properly treated as client money and protected accordingly. 

Opportunities for Radford to realise his deficiencies were missed.  On a number of occasions in 2012, One Call's auditor queried its compliance with client money rules and suggested that specific advice should be taken regarding compliance.   Despite these red flags, Radford appears not to have investigated whether his understanding of the client money rules was accurate. Indeed, it was only in August 2013 (the end of the Relevant Period) that he told the FCA that One Call may have misapplied the client money rules.  The FCA also found these failures to react appropriately to warnings to constitute a breach of Principle 6.  

Finally on Principle 6, the FCA determined that Radford had passed responsibility for oversight of client money rule compliance to another One Call director in September 2011, but trained that director to follow the same procedures as he had. The client money rule failings therefore persisted despite the handover.  The FCA determined that this defective handover was also a breach of Principle 6. 

Linked to his failures to exercise due skill care and diligence in respect of his management of client money compliance (contrary to Principle 6), the FCA also found that Radford failed to put in place systems and controls to ensure that One Call complied with regulatory requirements, contrary to Principle 7 of the Statement of Principles for Approved Persons.  In particular, he failed to establish necessary systems and controls to ensure that client money was correctly calculated and defined from time to time and relied instead on his own inaccurate and outdated understanding of the rules.  

Comment

Looking past the particular details of the client money rule breaches in this case (which are particular to the business), the core of the case against Radford was not so much his lack of understanding of the rules per se.  It was instead his failure to realise and address the fact that (like many aspects of FCA regulation) the proper application of the client money rules requires proper on-going focus and attention, including by third party advisers and by having proper internal systems and controls in place.   An approach to compliance which rests on an outdated or simplistic understanding of the rules, without engaging in the possibility that this is erroneous or inadequate in a complicated business environment or in light of subsequent reforms, will not be sufficient.  Indeed, the failings highlighted in the Radford Notice may in other cases suggest a wider competence issue than one simply relating to client money. It could in other circumstances result in a significant influence function prohibition, rather than one restricted to client money.

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