The Financial Conduct Authority (FCA) has fined Towergate Underwriting Group £2,632,000 for failings in relation to its protection of client and insurer money.
Towergate, an insurance intermediary which holds both client and insurer money, accumulated a shortfall of £12.6 million in its client and insurer money bank accounts which, due to systems and controls weaknesses, went undetected for a number of years.
The FCA has also fined former Towergate client money officer and CF1 (director) Timothy Philip £60,000 and banned him from having direct responsibility for client and insurer money.
The regulator found that on four occasions in late 2010 and early 2011 Philip instructed or approved withdrawals of money from Towergate’s client and insurer money bank accounts without following processes and procedures which were in place for making such withdrawals. As a result, Towergate did not accurately calculate the levels of monies held and ultimately this led to a shortfall in the client and insurer money resource of £10.5 million.
Philip also failed to adequately identify the risks created by his departure from the established client and insurer money processes and then failed to take adequate steps to ensure, or failed to assure himself, that those risks were properly managed.
The FCA found that Philip failed to meet the minimum regulatory standards in terms of competence and capability and that he is not a fit and proper person to have direct responsibility for either client or insurer money.
Mark Steward, director of enforcement and market oversight at the FCA, said: “We have issued repeated warnings to the industry on the importance of complying with client money rules which are designed to ensure that client money is adequately protected in the event of a firm failing.
“There can be no excuses given these warnings and the stakes involved. In addition, the firm’s failings placed insurer money at risk of loss.
“Senior management are ultimately responsible for ensuring that firms are following our rules and it is very clear that Mr Philip failed in that regard, falling well below the standards we require.”
The FCA found that Towergate failed to comply with CASS Rules and Principles 3 and 10 of the FCA’s Principles of Business. Principle 3 requires firms to take reasonable care to organise and control their affairs responsibly and effectively and with adequate risk management systems. Principle 10 requires firms to arrange adequate protection for clients’ assets when it is responsible for them. The failings by Towergate took place between June 2005 and December 2013.
The weaknesses in Towergate’s controls contributed to several distinct failings, including:
- On four occasions sums totalling £10.5 million were transferred from Towergate’s client money and insurer money bank accounts to the office bank account of an intermediate parent company. However, Towergate failed to properly consider the implications of these transfers which resulted in accumulated deficits of £5 million in the client money bank accounts and £5.5 million in its insurer money bank accounts.
- As part of its arrangements with clients Towergate is permitted to retain all interest on balances held on client money bank accounts. Any interest earned on client money is therefore Towergate’s money and should be removed from client money bank accounts. Towergate’s banking practices should have meant that interest did not accrue on these accounts; however on a number of occasions from June 2005 to October 2011, it did, and this was not identified by the firm until 2013. This resulted in there being a total of £1.45 million of interest belonging to Towergate that was not removed from client money bank accounts.
- In October 2007 the firm transferred £2.13 million from a client money bank account to an insurer money bank account. That transfer was not reflected accurately in the accounting records which led to the sum being transferred again in January 2009 creating a £2.13 million shortfall in its client money bank account.
- From December 2008, in breach of its agreements with insurers, Towergate changed the basis upon which it removed commission owed to it by insurers from its insurer money bank accounts. This resulted in a £3.6 million deficit in Towergate’s insurer money bank accounts.
Towergate first identified there was a shortfall in its client money and insurer money bank accounts in May 2013. However it took until October and November of that year to make good the shortfall despite CASS Rules requiring any shortfall to be corrected on the day the firm performed its client money calculation. Towergate also failed to report the shortfall immediately to the FCA.
Despite the failures there was no actual loss of client or insurer money and Towergate did in time rectify the shortfall. However, had the firm become insolvent during the period when the shortfall existed, insurers were at risk of losing money and may have experienced complications in recovering their money.
Towergate agreed to settle at an early stage of the Authority’s investigation. Towergate therefore qualified for a 30% (stage 1) discount under the Authority’s executive settlement procedures. Were it not for this discount, the Authority would have imposed a financial penalty of £3,760,000on Towergate.