Brokerage goes into administration after FCA imposes restrictions

Brokerage goes into administration after FCA imposes restrictions

On 15th September 2023 the Financial Conduct Authority (“FCA”) announced that it had imposed restrictions on wholesale brokerage IBP Markets Limited (“IBP”). IBP was active in the wholesale space, offering Model A and Model B services in fixed income and equity products. The purpose of this short article is to summarise the key findings referred to in the FCA’s First Supervisory Notice and outline their implications for other firms that are active in this space.

What restrictions did the FCA impose on IBP?

Acting on its own initiative under section 55Y of the Financial Services and Markets Act 2000 (“FSMA”), the FCA imposed restrictions on IBP to prevent it from:

  • carrying out any regulated activities;
  • reducing the value of any client money or client assets it holds without the FCA’s prior consent; and
  • disposing of its assets, including its client book, paying dividends or arranging for the sale or reorganisation of the firm itself.

Additionally, the FCA mandated that IBP:

  • segregate £720k to fund an orderly wind down;
  • seek their prior consent before making any single transactions or combinations of transactions over £2,000;
  • secure all books and records;
  • publish a notice on its website within two days of the publication of the First Supervisory Notice summarising its key provisions;
  • similarly, notify its clients, banks and custodians within seven business days of the restrictions being imposed;
  • provide, on a weekly basis:
    • an attestation of compliance with the restrictions to the FCA (to be provided by a person holding a senior management function (“SMF”); and
    • up to date statements of account showing transactions from the previous week and balances.

Owing to these restrictions, the directors of IBP decided that the firm was no longer viable and placed the firm into special administration.

The imposition of these restrictions followed the application of voluntary restrictions on 25th May 2023 to prevent the firm from onboarding any new clients or making payments to any connected parties.

What concerns led the FCA to impose these restrictions?

To summarise, the FCA was concerned that:

  • IBP did not operate effective systems and controls to protect client assets:
    • client money reconciliations were incomplete;
    • accordingly, the firm could have been running a shortfall in client money and/or assets; and
    • the firm was receiving client funds directly into a client transaction account held with a separate, but connected, firm. The firm claimed that this money was being “swept” into a client bank account every day. This was in breach of Client Assets Sourcebook (“CASS”) 7.13.6R which requires that firms receive funds directly into a client bank account;
  • IBP could have been used for a purpose connected with financial crime:
    • it is alleged that an individual with close links to the firm could have falsified his own personal account dealing statements when transacting through an account held with the firm;
    • individual was the Chief Executive Officer of “Service Provider A” and a minority shareholder of IBP;
    • the firm had sent the individual more than £11 million but could not easily produce a statement of the individual’s trading, with mismatches between different records;
    • the funds had been sent upon the basis of statements provided by Service Provider A, but the FCA expressed concern that these may have been manipulated to conceal a possible client money shortfall associated with the individual’s activities;
    • the firm could not therefore be confident that funds transferred to the individual from its client money bank accounts were legitimately owed to him; and
    • the individual was apparently able to open an account with IBP circa 6 months before the firm had completed know-your-customer (“KYC”) checks on him. Furthermore, the FCA stated that there was no evidence that the firm had sought to independently verify information the individual had provided to become an elective professional client.

In short, the FCA decided to act to protect the interests of customers. The regulator deemed that IBP was failing, or likely to fail, to satisfy the Threshold Conditions to remain authorised. In particular, the FCA considered IBP to be in breach of Principles 2, 3 and 10 and various provisions of CASS.

My firm is engaged in similar business to IBP, what implications does this have for us?

Several, using this case as a learning tool, consider whether your firm:

  • receives client monies directly into a client bank account;
  • ensures that its client transaction accounts held with third parties are only used to receive client monies posted to support particular transactions;
  • works to complete any remedial action promptly when it has identified shortcomings in its systems and controls;
  • independently verifies the following information provided by clients who are seeking to become elective professional clients:
    • income;
    • trading history;
    • statement of assets, e.g. in a bank account; and
  • ensures that any conflicts of interest between the firm and its service providers have been identified and mitigated to the furthest possible extent.

Need help?

Our consultants have extensive experience in the brokerage space. Please contact us if you have any questions about the contents of this circular.

References

  1. Restrictions placed on IBP Markets Limited and the firm enters special administration. Financial Conduct Authority, available at: https://www.fca.org.uk/news/news-stories/restrictions-placed-ibp-markets-limited-and-firm-enters-special-administration (last accessed 17th October 2023)

 

Alexander Culley

Alexander Culley

Alexander Culley

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