October 30th, 2012 / Insight posted in

FSA fines for client money and asset failings continue to make the headlines

In the last two years alone the FSA has issued fines totalling over £120million, of which over a quarter were in respect of client money. The headcount in their client asset unit has been increased too, and they have taken steps to make sure the FSA becomes the leader in the regulation of client assets. But it’s not only the regulated firms being tackled; the FSA is fast losing patience with their auditors too. Having seen serious failings in relation to auditors’ client asset reports, the FSA has referred a number of auditors to their relevant auditing bodies over the past year and is currently considering referring several other cases.

In recent months, the FSA has made it increasingly clear just how disappointed it is with the quality of auditors’ reports reviewed. Having conducted a complete review of audit reports, the FSA’s specialist client asset unit identified a number of serious failings including: auditors providing ‘clean’ reports despite firms committing serious breaches of client asset rules; auditors’ reports covering the wrong chapters of the client asset sourcebook; and auditors failing to provide adequate details on issues and exceptions identified in their report. This contributed to the steps the FSA has taken to improve the quality of auditors’ client asset reports.

In September 2010, the FSA went on the offensive and issued a statement announcing steps to improve the quality and consistency of auditors’ reports on client assets, a more intensive approach to supervision, and an enhanced focus on client assets. By January 2011, the FSA and the Financial Reporting Council (FRC), regulator for corporate reporting and governance, agreed a “memorandum of understanding” to enable a greater degree of co-operation and information exchange between the two regulators. Finally, in March 2011, the FSA published PS11/5 with new rules aimed at improving auditors’ reports on client assets. These rules came into force on 1 June 2011.

Early adoption of the new rules was optional, but periods ending 30 September 2011 must now meet the new requirements. The main changes include:

  • a stipulated template to use for the audit reports;
  • the report now has to be signed in the name of the Senior Statutory Auditor;
  • a ‘breaches’ schedule must be attached to the report detailing:
    • all client asset rule breaches identified, even if immaterial;
    • those breaches notified to the auditor by the firm or another party, e.g. compliance consultants;
    • the frequency of each breach; and
    • the firm’s comments on the breaches identified and the remedial action to be taken.
  • the report must be submitted to the firm’s governing body/Board;
  • auditors must deliver reports, even if a nil return, to the FSA within four months of the period end without fail;
  • simplifying who must obtain an auditors’ report on client assets; and
  • bringing mandate rules back into the scope of the report.

Regulated firms would be well advised to consider carefully which audit firm they are using and scrutinise the robustness of their annual client asset audit report. Appointing a specialist audit firm, such as Kingston Smith, that properly understands the financial services sector, the products, the systems and the rules and regulation is now paramount.

Tom Moore is a Partner within the Financial Services group of Kingston Smith. If you would like to discuss any of these issues in further detail, Tom can be contacted on 020 7566 3817 or email tmoore@mks.co.uk.