Charles Schwab UK, the broker, has been fined by the UK financial regulator for safeguarding and compliance failures.
The Financial Conduct Authority (FCA) fined Charles Schwab UK £8.96 million and said customers affected by the breaches were all retail customers
There was no loss of client assets, but the FCA said retail customers required the “greatest level of protection”.
Between August 2017 and April 2019, after Charles Schwab UK changed its business model, client money was swept across from the UK business to its affiliate Charles Schwab & Co Inc in the US.
The client assets, which were subject to UK rules, were held in a pool of assets in the US, which contained both firm and client money and which was held for both UK and non-UK clients.
Charles Schwab UK failed to arrange adequate protection for its clients’ assets under UK rules. Specific charges were that the firm did not have the right records and accounts to identify its customers’ client assets and did not undertake internal or external reconciliations for its customers’ client assets.
The firm also did not have adequate organisational arrangements to safeguard client assets and did not maintain a “resolution pack”, which would help to ensure a timely return of client assets in an insolvency
Charles Schwab UK carried out a regulated activity without permission, the FCA said. The firm did not at all times have permission to safeguard and administer custody assets and failed to notify the FCA of the breach when applying for the correct permission.
Further, the UK firm made a false statement to the FCA when it inaccurately informed the regulator that Charles Schwab UK auditors had confirmed there were adequate systems and controls in place to protect client assets.
The firm took remedial action at various points after discovering the breaches and Charles Schwab UK stopped holding client assets from January 1, 2020.
By settling the case early, the firm for a 30% discount, otherwise the fine would have been £12,804,600. Charles Schwab’s revenue for the full year 2018 was £7,178,039.
Mark Steward, executive director of enforcement and market oversight at the FCA, said: “Charles Schwab UK failed to get the correct permissions from the FCA; then failed to be open with us and, finally, failed to put in place the necessary safeguards to ensure, if required, there could be an orderly return of client assets.
“As we saw with Lehman Brothers and subsequent cases, a lack of client asset protections can easily lead to increased costs to consumers and funds being trapped for long periods of time.”
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