FINAL NOTICE

To:

Aberdeen Asset Managers Limited and


Aberdeen Fund Management Limited





(together “Aberdeen”)

FCA Reference
Numbers:
121891 and 119303

1.
ACTION

1.1.
For the reasons given in this notice, the Financial Conduct Authority (“the

Authority”) hereby imposes on Aberdeen a financial penalty of £7,192,500 in

accordance with section 206 of the Financial Services and Markets Act 2000.

1.2.
Aberdeen agreed to settle at an early stage of the Authority’s investigation.

Aberdeen 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 £10,275,000 on Aberdeen.

2.
SUMMARY OF REASONS

2.1.
In the period from 31 August 2008 to 31 August 2011 (“the Relevant Period”)

Aberdeen breached Principles 3 and 10 of the Authority’s Principles for Businesses

in failing to recognise that monies it placed on behalf of its clients in Money

Market Deposits (“MMDs”) were subject to Chapter 7 of the Client Assets

Sourcebook (“Client Money Rules”). As a consequence Aberdeen breached rules

7.3.1R and 7.3.2R, 7.6.1R and 7.6.2R and 7.8.1R.

2.2.
In particular, Aberdeen:

a) failed to take reasonable care to organise and control its client money

placed on behalf of clients in MMDs such that it failed to ensure there were

adequate risk management systems in place (Principle 3); and

b) failed to arrange adequate protection for certain of its clients’ assets for

which it was responsible (Principle 10).

2.3.
The client money regime is designed to ensure protection of client money and

assets in the event of firm failure. To achieve this, firms are required to ensure

that both operational and actual arrangements comply with CASS.

2.4.
Aberdeen’s breaches arose from its failure to recognise that the monies it placed

on behalf of its clients in MMDs with third party banks were governed by the

Client Money Rules. As it did not take direct receipt of the money in question and

by virtue of the process it had established for the placing of client money in

MMDs, Aberdeen had incorrectly determined that the MMDs were outside the

CASS regime.

2.5.
As a result, Aberdeen did not provide appropriate trust letter notifications to the

banks and did not seek or obtain acknowledgements from those banks confirming

the trust status of the deposited monies. Aberdeen also employed inconsistent

account naming conventions frequently using its own name, albeit often including

an alphanumeric code which enabled Aberdeen to identify the underlying client

internally. As part of the Authority’s investigation, certain third party banks were

approached. These enquiries suggested that some of the banks considered

Aberdeen to be the legal owner of the MMDs and that there was a lack of clarity at

the banks as to the identity of the beneficial owner of the monies in the accounts.

2.6.
As a consequence of trust letters not being in place for the MMD accounts, client

money in those accounts was not properly protected. In an insolvency situation,

these monies were not ring-fenced for clients as required by the rules in CASS

which could have led to complications and delay in the return of client money.

Had debts been owed by Aberdeen to the banks, client money was at risk of set-

off and an insolvency practitioner may have incurred costs in resolving such

competing claims prior to any distribution resulting in a diminution of client

money.

2.7.
The Authority understands that no debts were owed by Aberdeen to the banks

into which MMDs were placed throughout the Relevant Period, although the risk of

set-off could have occurred at any time if such debts were owed.

2.8.
The average daily balance of the MMDs during the Relevant Period was £685

million.

2.9.
The Authority considers Aberdeen’s failings to be serious for the following

a) Aberdeen is a leading asset management firm with significant operations

in the UK and globally;

b) the breaches of Principles and of Client Money Rules took place over a

period of three years;

c) had Aberdeen become insolvent, these failings could have led to

complications and delay in distribution, and placed client money at risk of

set-off and consequential diminution;

d) Aberdeen failed to give proper prompt consideration to whether the Client

Money Rules applied to the MMDs. Even though questions were raised in

2009 and 2010 by new employees joining Aberdeen following acquisitions,

it was not until 2011, when a third party bank queried Aberdeen’s

arrangements, that it sought external advice on the issue, reported it to

the Authority and took steps to rectify the situation; and

e) there was a high level of awareness in the financial services industry at the

time of the importance of handling client money properly given the

collapse of Lehman Brothers on 15 September 2008. The Authority had

sent letters to Compliance Officers of regulated firms in March 2009 and to

Chief Executive Officers of regulated firms in January 2010 highlighting

concerns about client money failings. The letter to Chief Executive Officers

required them to confirm that the firm complied with CASS. Aberdeen

provided such confirmation.

2.10. Whilst the Authority considers the failings to be serious, there was no actual loss

of client money. Aberdeen also self-reported the issue to the Authority and fully

cooperated with the Authority during its investigation. Aberdeen has also revised

its client money arrangements so that they are governed by the CASS 8 regime

which applies to firms that control clients’ money under mandates.

3.
DEFINITIONS

3.1.
The definitions below are used in this Final Notice.

“Aberdeen” means Aberdeen Asset Managers Limited and Aberdeen Fund

Management Limited. On 1 March 2012, Aberdeen Fund Management Ltd merged

with Aberdeen Asset Managers Ltd;

“the Act” means the Financial Services and Markets Act 2000 (as amended);

“the Authority” means the body corporate previously known as the Financial
Services Authority and renamed on 1 April 2013 as the Financial Conduct
Authority;

“CASS” means the Client Assets Sourcebook contained in the Authority’s
Handbook;

“Client Money Rules” means Chapter 7 of CASS (as defined above);

“Custodian” means the custodian appointed by a client of Aberdeen;

“DEPP” means the Authority’s Decision Procedure & Penalties Manual;

“EG” means the Authority’s Enforcement Guide;

“IMA” means Investment Management Agreement;

“Lehman Brothers” means Lehman Brothers International (Europe) (in
administration);

“MMD” means Money Market Deposit;

“Relevant Period” means 31 August 2008 to 31 August 2011;

“the Tribunal” means the Upper Tribunal (Tax and Chancery Chamber); and

“trust letter” means the written acknowledgement of the status of client money
deposited with third parties required by CASS 7.8.1R.

4.
FACTS AND MATTERS

4.1.
Aberdeen is an investment management firm which was founded in 1983 in

Aberdeen, Scotland, and has grown both through acquisitions and expanding its

own business. It is now an international investment management group with

£169.9 billion under management as at 2011.

4.2.
During the Relevant Period, both of the Firms had permission to hold and control

client money.

4.3.
Aberdeen provided discretionary investment management services to its

institutional clients in accordance with the terms of IMAs entered into with each

client.

4.4.
The IMAs gave Aberdeen a broad discretion to manage, invest, realise or reinvest

the assets of clients under its management.

4.5.
Each client was required by its IMA to maintain a custody account with a third

party Custodian. The Custodian held the client’s assets and money and the client

gave Aberdeen authority to instruct the Custodian, on the client’s behalf, to

enable Aberdeen to provide portfolio management services.

4.6.
An MMD is a term deposit made to obtain a return on the uninvested cash in a

client’s investment portfolio.

4.7.
Where a client’s portfolio included significant cash balances, Aberdeen would often

invest this cash in MMDs in order to achieve a better rate of return on that money

than was available from leaving the money on deposit with the Custodian and for

risk diversification purposes. MMDs were placed with particular counterparty

banks either for a fixed term, or alternatively so as to be available on call.

4.8.
When arranging to place an MMD, the first step Aberdeen took was to create a

form of account with the relevant third party bank. Aberdeen’s usual practice was

to open these accounts in its own name, also including in the name of the account

an alphanumeric code which enabled Aberdeen to identify the underlying client for

whom the account was being opened. Although the majority of the MMDs were

named using this convention there were variances in its application.

4.9.
Having created the account, Aberdeen would then instruct the Custodian to make

payments of money from a client’s custody account to the third party bank to be

placed into an MMD. This was done with the use of Standard Settlement

Instructions, being documents which provided instructions for the Custodian to

pay the client’s funds to the third party bank, and which told the third party bank

to return the money to the Custodian when the MMD matured.

Client money

4.10. Aberdeen’s approach to MMD accounts created a presumption that Aberdeen was

the legal owner of the accounts and uncertainty as to the beneficial owner of the

monies. This introduced a risk to clients that, in the event of insolvency, the

deposit banks might consider Aberdeen, rather than the client, to be the owner of

the monies. In this regard, the question of who the counterparty banks

understood to be the legal owner of the monies is a relevant indicator of

ownership. As part of the Authority’s investigation, certain third party banks were

approached. These enquiries suggested that some of the banks considered

Aberdeen to be the legal owner of the MMDs and that there was a lack of clarity at

the banks as to the identity of the beneficial owner of the monies in the accounts.

4.11. By placing itself in the position of having legal ownership of the MMD monies by

virtue of the naming convention used for those accounts, Aberdeen should have

held the monies as client money. When holding client money Aberdeen was

required to comply with the relevant rules in Chapter 7 of CASS in relation to this

money. Aberdeen was also required to comply with its overriding obligations

under Principles 3 and 10.

Identification of the issue

4.12. For the greater part of the Relevant Period, Aberdeen did not recognise that the

money held in MMDs was client money for which it was responsible. Therefore, it

did not take steps to comply with the rules in CASS 7 in relation to this money,

including the requirement to obtain trust letters from the third party banks.

4.13. On 20 March 2009, Aberdeen received an industry-wide Dear Compliance Officer

letter from the Authority. This letter flagged to senior management the Authority’s

concerns about firms’ CASS compliance and set out the Authority’s expectations

of firms when arranging adequate protection of clients’ assets and money. The

letter emphasised, among other points, that when opening client bank accounts,

firms needed to ensure that written notice of trust status was sent to the bank

and acknowledged by that bank.

4.14. On 28 May 2009 there was a CASS thematic visit by the Authority to Aberdeen

during which Aberdeen was advised by the Authority to ensure that it obtained

trust letters for all client bank accounts.

4.15. In 2009, Aberdeen acquired part of Credit Suisse. This led to a significant increase

in the number of new MMDs being opened. Staff taken on from Credit Suisse

queried the naming convention used by Aberdeen for the MMDs and questioned

whether trust letters should be in place for these accounts. Aberdeen considered

this internally but reached the incorrect conclusion that trust letters were not

required.

7


4.16. In early 2010 Aberdeen acquired part of the business of RBS and became aware

that RBS also followed a practice of having trust letters in place for MMD

accounts. Again Aberdeen considered it internally but the incorrect conclusion

was reached that trust letters were not required.

4.17. On 19 January 2010, Aberdeen received an industry-wide Dear Chief Executive

Officer letter from the Authority. This letter emphasised Principle 10 obligations in

relation to client money and stated that “a higher priority is being given to

achieving compliance with client asset requirements because we are concerned

that firms are not always achieving an adequate level of protection.” The letter

enclosed a Client Money and Asset Report which noted that the Authority

considered compliance with the Client Money Rules to be poor across the financial

services industry.

4.18. The Authority’s letter required Aberdeen to consider this report at a senior level

and for the CEO to confirm to the Authority that it was in compliance with its

obligations regarding the protection of client money and assets.

4.19. On 31 March 2010, Aberdeen replied to the Dear Chief Executive Officer letter,

stating that the content of the letter and Report had been considered by the

relevant boards within Aberdeen and “we are in compliance with the CASS

regulations”.

4.20. In late March 2011, Aberdeen decided to open a number of MMD accounts with a

third party bank. That bank informed Aberdeen that trust letters would be

required as it considered the account monies to be client money. The issue was

considered and escalated internally within Aberdeen during April and May 2011.

Aberdeen management’s view remained that this was not client money. However,

due to the contrasting view of the third party bank this issue was re-considered.

4.21. Aberdeen first reported the matter to the Authority in late June 2011. On 5 July

2011, Aberdeen wrote to the Authority to seek clarification of whether its

procedures for placing MMDs for institutional clients were acceptable to the

Authority.

4.22. On 22 July 2011, the Authority responded to Aberdeen explaining that it

considered that Aberdeen held legal title to the money in the MMDs and was

therefore required to comply with CASS 7 in relation to this money. The Authority

stated that Aberdeen must correct the situation as a matter of urgency.

Changes to the management of client money

4.23. After Aberdeen identified the issue and notified it to the Authority, it took steps to

consider and resolve the problem. Aberdeen has revised its client money

arrangements for the MMDs and has now adopted a CASS 8 regime where it

controls clients’ money under mandates.

5.
FAILINGS

5.1.
The statutory and regulatory provisions relevant to this Final Notice are referred

to in Annex A.

Breach of Principle 10, CASS 7.6.1R, 7.6.2R and CASS 7.8.1R

5.2.
Principle 10 requires a firm to arrange adequate protection for clients’ assets it is

responsible for. The CASS section of the Authority’s Handbook sets out the

detailed requirements placed on firms to ensure that such adequate protection is

in place for client money and assets.

5.3.
CASS 7.6.1R requires that a firm keep such records and accounts as are

necessary to enable it at any time and without delay to distinguish client money

held for one client, from client money held for any other client, and from its own

money.

5.4.
CASS 7.6.2R requires that a firm maintains its records and accounts in a way that

ensures their accuracy, and in particular their correspondence to the client money

held for clients.

5.5.
CASS 7.8.1R requires a firm that opens a client bank account (i) to request the

bank to acknowledge in writing the trust status of the money in the account and

(ii) in the case of a client bank account in the UK to withdraw all money from the

account if such acknowledgment is not received from the bank within 20 business

days. This is a key requirement for ensuring that client money is adequately

protected.

5.6.
Aberdeen did not give adequate and timely consideration as to whether the

money of its clients placed in MMDs was client money for which it was responsible

and should have held in accordance with CASS 7. As a result, Aberdeen failed to

perform internal calculations and external reconciliations of this client money, as

required by CASS 7.6.1R and 7.6.2R and Annex 1 of CASS 7. It did not properly

and consistently name the accounts and most importantly, did not obtain trust

letters. Consequently, there was a risk of delay and complication in distribution of

those funds. Had debts been owed by Aberdeen to the banks, client money was

at risk of set off and an insolvency practitioner may have needed to resolve

competing claims over client money prior to any distribution. This may have

resulted in incurring costs with the risk of a diminution of client money.

Breach of Principle 3 and CASS 7.3.1R and 7.3.2R

5.7.
Principle 3 requires a firm to take reasonable steps to ensure that it has organised

its affairs responsibly and effectively, with adequate risk management systems.

5.8.
CASS 7.3.1R requires a firm, when holding client money, to make adequate

arrangements to safeguard the client’s rights and prevent the use of client money

for its own account.

5.9.
CASS 7.3.2R requires a firm to introduce adequate organisational arrangements

to minimise the risk of the loss or diminution of client money, or of rights in

connection with client money, as a result of misuse of client money, fraud, poor

administration, inadequate record keeping or negligence.

5.10. The Authority’s investigation has identified certain systems and control failings

during the Relevant Period, principally relating to Aberdeen’s failure to:

a) employ consistent naming conventions, frequently using its own name,

(albeit often including a client alphanumeric code) which may have led

third party banks to conclude that the money belonged solely to Aberdeen;

b) identify that the money held in MMDs was client money for which it was

responsible and should have held in accordance with CASS 7. This

occurred despite queries raised by staff joining Aberdeen from other

organisations which should have caused it carefully to consider this issue;

and

c) ensure that the operational processes and the way money was held were

undertaken in a consistent manner.

5.11. The following events (as set out above at paragraphs 4.12 to 4.22) should have

prompted Aberdeen to undertake a proper review of the client money status and

protections relating to money:

a) the Authority’s Dear Compliance Officer letter of 20 March 2009 which

outlined the Authority’s concerns about firms’ CASS compliance and

emphasised the need to ensure that written notice of trust arrangements

was provided to, and acknowledged by, a bank where client money was

placed;

b) the Authority’s CASS thematic visit on 28 May 2009 during which

Aberdeen was advised to ensure that it obtained trust letters for all client

money bank accounts;

c) the queries raised by staff taken on from Credit Suisse during 2009.

Incoming staff queried the naming convention used by Aberdeen for the

MMDs, and questioned whether trust letters should be in place for those

accounts;

d) the Authority’s Dear Chief Executive Officer letter of January 2010

expressing concerns that firms were not always achieving an adequate

level of protection of client money, and requiring firms to consider the

Authority’s Client Money and Asset Report at a senior level and confirm it

was compliant with CASS. Aberdeen replied in March 2010 stating that it

was in compliance with the CASS regulations; and

e) following the acquisition of part of the business of RBS in 2010 Aberdeen

became aware that RBS also followed the practice of having trust letters in

place for MMD accounts.

5.12. It was not until late March 2011, when a third party bank informed Aberdeen that

trust letters would be required as the MMD monies were client money that

Aberdeen sought further advice.

6.
SANCTION

6.1.
The FCA’s policy on the imposition of financial penalties is set out in the

Authority’s Decision Procedure & Penalties Manual. In determining the financial

penalty, the Authority has had regard to this guidance.

6.2.
The principal purpose of a financial penalty is to promote high standards of

regulatory conduct by deterring firms who have breached regulatory requirements

from committing further contraventions, helping to deter other firms from

committing contraventions and demonstrating generally to firms the benefits of

compliant behaviour.

6.3.
For the reasons set out above, the Authority considers that Aberdeen breached

CASS rules 7.3.1R and 7.3.2R, 7.6.1R and 7.6.2R and 7.8.1R and failed to comply

with Principles 3 and 10. In determining that a financial penalty is appropriate

and proportionate in this case, the Authority has considered all the relevant

circumstances.

6.4.
The conduct at issue took place both before and after 6 March 2010. As set out at

paragraph 2.7 of the Authority’s Policy Statement 10/4, when calculating a

financial penalty where the conduct straddles penalty regimes, the Authority must

have regard to both the penalty regime which was effective before 6 March 2010

(the “old penalty regime”) and the penalty regime which was effective after 6

March 2010 (the “current penalty regime”).

6.5.
The Authority:

a) calculated the financial penalty for Aberdeen’s misconduct from 31 August

2008 to 5 March 2010 by applying the old penalty regime to that

misconduct;

b) calculated the financial penalty for Aberdeen’s misconduct from 6 March

2010 to 31 August 2011 by applying the current penalty regime to that

misconduct; and

c) added the penalties calculated under (a) and (b) to produce the total

penalty.

Financial penalty under the old regime

Deterrence (DEPP 6.5.2G(1))

6.6.
The Authority views compliance with the Client Money Rules to be of significant

importance. The Authority considers there to be a continuing need to send a

strong message to the industry that firms must handle client money in a way that

is consistent with the Principles and Client Money Rules.

6.7.
The principal objectives of the CASS rules to which this notice relates are to

ensure that client monies are clearly identified as such and are ring-fenced from

the firm’s assets in the case of insolvency. The requirement to ensure that trust

status is acknowledged and that trust letters are in place is intended to assist with

achieving that important protection for a firm’s clients.

6.8.
Failure to organise properly client money affairs and to ensure adequate

protections are in place significantly increases the risk that, in the event of

insolvency, delivery up of client money will be delayed and that the funds

properly owing to clients will be diminished. It also exposes client monies to the

risk of set-off from banks and/or to the claims of competing creditors.

6.9.
The Authority considers that a significant financial penalty is an appropriate

sanction given the serious nature of the breaches and the risk to certain of

Aberdeen’s clients.

Nature, seriousness and impact of the breach (DEPP 6.5.2(2)).

6.10. The Authority considers Aberdeen’s breach of CASS Rules 7.3.1R and 7.3.2R,

7.6.1R and 7.6.2R and 7.8.1R and Principles 3 and 10 to be serious for the

following reasons:

a) the risk to client money caused by Aberdeen’s failure to take protective

measures continued undetected for a prolonged period;

b) the average daily amount of client monies at risk throughout the Relevant

Period was £685,000,000;

c) the protection of clients’ money and assets is of critical importance to

Aberdeen as an investment manager;

d) prior to 6 March 2010, Aberdeen received internal warnings from new staff

members which should have alerted it to the fact that the procedures it

followed for the placement of MMDs were not CASS compliant; and

e) Aberdeen received two key industry-wide communications from the

Authority about the importance of client money protection and rule

compliance.

The extent to which the breach was deliberate or reckless (DEPP
6.5.2(3))

6.11. Although the Authority has concerns that a number of internal warnings about the

approach to MMDs were not sufficiently heeded, the Authority does not consider

that Aberdeen committed the breaches deliberately or recklessly.

The size, financial resources and other circumstances of the firm (DEPP
6.5.2(5))

6.12. In deciding on the level of penalty, the Authority has had regard to the size of the

financial resources of Aberdeen.

6.13. The Authority has no evidence to suggest that Aberdeen is unable to pay the

financial penalty.

The amount of profits accrued or the loss avoided (DEPP 6.5.2(6))

6.14. Aberdeen did not profit from the breaches or avoid any loss.

Conduct following the breach (DEPP 6.5.2(8))

6.15. For almost all of the Relevant Period, Aberdeen failed to identify or act upon the

failings set out in this Notice.

6.16. After Aberdeen identified the issue and notified it to the Authority, it took steps to

consider and resolve the problem. Aberdeen has revised its client money

arrangements and has now adopted a CASS 8 regime where it controls clients’

money under mandates.

Disciplinary record and compliance history (DEPP 6.5.2(9))

6.17. Aberdeen has not previously been the subject of an adverse finding by the

Authority.

Other action taken by the Authority (DEPP 6.5.2(10))

6.18. The Authority has had regard to previous cases involving the failure to protect

adequately client money.

Conclusions in relation to the old penalty regime

6.19. The Authority considers that the seriousness of Aberdeen’s failings merit a

substantial financial penalty. In determining the financial penalty, the Authority

has considered the need to send a clear message to the industry of the need to

ensure that client money is properly protected in accordance with the Client

Money Rules. Failure to ensure that appropriate measures are in place to protect

client money, including acknowledgements of trust being in place in respect of all

client bank accounts, will result in severe consequences.

6.20. The Authority therefore imposes a total financial penalty under the old penalty

regime of £2,397,500 (£3,425,000 pre-discount) on Aberdeen for its breach of

CASS Rules 7.3.1R and 7.3.2R, 7.6.1R and 7.6.2R and 7.8.1R and of Principles 3

and 10. This amount is approximately 1% of the average client money balances

held over the Relevant Period (these balances averaging £685,000,000) after

adjustment to take into account that half of the Relevant Period was before 6

March 2010.

Financial penalty under the current regime

6.21. All references to DEPP from this section are references to the version of DEPP

implemented as of 6 March 2010 and currently in force. Under the current

penalty regime, the Authority applies a five-step framework to determine the

appropriate level of financial penalty. DEPP 6.5A sets out the details of the five-

step framework that applies to financial penalties imposed on firms.

Step 1: disgorgement

6.22. DEPP 6.5A.1G provides that at Step 1, the Authority will deprive a firm of the

financial benefit derived directly from the breach.

6.23. The Authority has not identified any financial benefit that Aberdeen derived as a

result of the breaches. The Step 1 figure is therefore £0.

Step 2: the seriousness of the breach

6.24. DEPP 6.5A.2G(1) provides that at Step 2 the Authority determines a figure that

reflects the seriousness of the breach. Although DEPP 6.5A.2G(1) indicates that

in many cases the amount of revenue generated by a firm from a particular

business area is indicative of the harm that the breach may cause, it also

recognises that revenue may not be an appropriate indicator of the harm the

breach may cause. In those cases the Authority will use an appropriate

alternative.

6.25. The Authority considers that in cases that involve breaches of Principle 10, an

appropriate alternative is to base the Step 2 figure on the average client money

balances held by the firm over the Relevant Period as an appropriate indicator of

the harm that the breach may cause.

6.26. In this case the average client money balances referable to the current penalty

regime period are £685,000,000.

6.27. In deciding on the percentage of the average client money balances that forms

the basis of the step 2 figure, the Authority considers the seriousness of the

breach and chooses a percentage between 0% and 4%. This range is divided into

five fixed levels which increase with the seriousness of the breach, and vary

according to whether the breaches relate to client money or client assets. The

five levels are:

Level 1 – 0% for both client money and client assets

Level 2 – 1% for client money and 0.2% for client assets

Level 3 – 2% for client money and 0.4% for client assets

Level 4 – 3% for client money and 0.6% for client assets

Level 5 – 4% for client money and 0.8% for client assets

6.28. To assess the seriousness level, the Authority takes into account various factors

which reflect the impact and nature of the breach, and considers whether the firm

committed the breach deliberately or recklessly. DEPP 6.5A.2G(12) lists factors

likely to be considered ‘level 1 factors’, ‘level 2 factors’ or ‘level 3 factors’. The

following factors are relevant to the Authority’s assessment:

a) no profits were made or losses avoided as a result of the breach; and

b) the breach was not committed deliberately or recklessly.

6.29. The Authority also considers that the following factors are relevant:

a) the breaches continued for 18 months after the current penalty policy was

introduced, having already been continuing for 18 months before this

time;

b) during the last 8 months of the Relevant Period, the client money balances

increased significantly above the average client money balance; and

c) the breaches impacted the majority of Aberdeen’s client monies.

6.30. The Authority has taken these factors into account, identified the overall

seriousness of the breach as level 3, and applied the level 3 seriousness

percentage (2%) to the average client money balances over the Relevant Period.

The average client money balance for the Relevant Period was £685,000,000 and

this has been adjusted to take account of the fact that half of the Relevant Period

was after 6 March 2010. The relevant proportion of the average client money

balances is therefore £342,500,000.

6.31. This results in a step 2 figure of £6,850,000.

Step 3: mitigating and aggravating factors

6.32. DEPP 6.5A.3G provides that at Step 3 the Authority may increase or decrease the

amount of the financial penalty arrived at after Step 2 to take into account factors

which aggravate or mitigate the breach. Having considered aggravating and

mitigating factors, there is no change to the Step 2 figure. The Step 3 figure is

therefore £6,850,000.

Step 4: adjustment for deterrence.

6.33. DEPP 6.5A.4G provides that if the Authority considers that the Step 3 figure is

insufficient to deter the firm who committed the breach, or others, from

committing further or similar breaches, the Authority may increase the penalty.

6.34. There are no relevant factors that justify a change to the Step 3 figure. The

figure at Step 4 remains £6,850,000.

Step 5: settlement discount

6.35. DEPP 6.7.2G allows for settlement discounts for early settlement. DEPP 6.7.3G

identifies the four stages at which agreement may be reached. Aberdeen has

agreed to settle at Stage 1 and therefore qualifies for a 30% discount and the

Step 5 figure is therefore £4,795,000.

Conclusion on financial penalty

6.36. The Authority therefore imposes on Aberdeen a financial penalty of £7,192,500

(£10,275,000 pre-Stage 1 discount).

7.
PROCEDURAL MATTERS

Decision maker

7.1.
The decision which gave rise to the obligation to give this Notice was made by the

Settlement Decision Makers.

This Final Notice is given under, and in accordance with, section 390 of the Act.

Manner and time for Payment

7.2.
The financial penalty must be paid in full by Aberdeen to the Authority by no later

than 16 September 2013, 14 days from the date of the Final Notice.

If the financial penalty is not paid

7.3.
If all or any of the financial penalty is outstanding on 17 September 2013, the

Authority may recover the outstanding amount as a debt owed by Aberdeen and

due to the Authority.

7.4.
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of

information about the matter to which this notice relates. Under those provisions,

the Authority must publish such information about the matter to which this notice

relates as the Authority considers appropriate. The information may be published

in such manner as the Authority considers appropriate. However, the Authority

may not publish information if such publication would, in the opinion of the

Authority, be unfair to Aberdeen or prejudicial to the interests of consumers or

detrimental to the stability of the UK financial system.

7.5.
The Authority intends to publish such information about the matter to which this

Final Notice relates as it considers appropriate.

Authority contacts

7.6.
For more information concerning this matter generally, contact Anthony

Monaghan of the Enforcement and Financial Crime Division of the Authority

(direct line: 020 7066 6772/fax: 020 7066 6773).

Enforcement and Financial Crime Division

ANNEX A

STATUTORY AND REGULATORY PROVISIONS

The Authority is authorised, pursuant to section 206 of the Act, if it considers that an

authorised person has contravened a requirement imposed on it by or under FSMA, to

impose on such person a penalty in respect of the contravention of such amount as it

considers appropriate in the circumstances.

Pursuant to sections 1B(1) and 1C(1) of the Act, one of the Authority’s operational

objectives is to secure an appropriate degree of protection for consumers.

A firm must take reasonable care to organise and control its affairs responsibly and

effectively, with adequate risk management systems.

A firm must arrange adequate protection for clients’ assets when it is responsible for

them.

Client Money Rules

CASS 7.1.1R

During the early part of the Relevant Period, (31 August 2008 - 31 December 2008)

CASS 7.1.1R provided as follows:

This chapter (the client money rules) applies to:
(1) a MIFID investment firm:
(a) that holds client money; or
(b) that opts to comply with this chapter in accordance with CASS
7.1.3R(1) (Opt-in to the MIFID client money rules); and
(2) a third country investment firm that opts to comply with this chapter in
accordance with CASS 7.1.3R(1) (Opt-in to the MIFID client money rules);
Unless otherwise specified in this section.


During the latter part of the Relevant Period, (1 January 2009 -31 August 2011) CASS

7.1.1R provided as follows:

“This chapter (the client money rules) applies to a firm that receives money from
or holds money for, or on behalf of, a client in the course of, or in connection with:
(1) [deleted]
(a) [deleted]
(b) [deleted]
(2) [deleted]
(3) its MiFID business; and/or

(4) its designated investment business, that is not MiFID business in respect of
any investment agreement entered into, or to be entered into, with or for a client;
unless otherwise specified in this section.”


CASS 7.3.1R

CASS 7.3.1R, in force throughout the relevant period, provides that

“A firm must, when holding client money, make adequate arrangements to
safeguard the client's rights and prevent the use of client money for its own
account.”


CASS 7.3.2R

CASS 7.3.2R, in force throughout the Relevant Period, provides that

“a firm must introduce adequate organisational arrangements to minimise the risk
of the loss or diminution of client money, or of rights in connection with client
money, as a result of misuse of client money, fraud, poor administration,
inadequate record-keeping or negligence.”


CASS 7.6.1R

CASS 7.6.1R, in force throughout the Relevant Period, provides that

“A firm must keep such records and accounts as are necessary to enable it, at any
time and without delay, to distinguish client money held for one client from client
money held for any other client, and from its own money.”


CASS 7.6.2R

CASS 7.6.2R, in force throughout the Relevant Period, provides that

“A firm must maintain its records and accounts in a way that ensures their
accuracy, and in particular their correspondence to the client money held for
clients”.


CASS 7.8.1R

CASS 7.8.1R, in force throughout the Relevant Period, provides that:

“(1) When a firm opens a client bank account, the firm must give or have given
written notice to the bank requesting the bank to acknowledge to it in writing
that:
(a) all money standing to the credit of the account is held by the firm as
trustee (or if relevant, as agent) and that the bank is not entitled to
combine the account with any other account or to exercise any right of set-
off or counterclaim against money in that account in respect of any sum
owed to it on any other account of the firm; and
(b) the title of the account sufficiently distinguishes that account from any
account containing money that belongs to the firm, and is in the form
requested by the firm.
(2) In the case of a client bank account in the United Kingdom, if the bank does
not provide the required acknowledgement within 20 business days after the firm
dispatched the notice, the firm must withdraw all money standing to the credit of
the account and deposit it in a client bank account with another bank as soon as
possible.”



A client bank account is defined, for the purposes of CASS 7, as:

“(a) an account at a bank which:
(i) holds the money of one or more clients;
(ii) is in the name of the firm; and
(iii) is a current or a deposit account; or
(b) a money market deposit account of client money which is identified as being
client money.”


Client money is defined, for the purposes of CASS 7, as

“money of any currency:
(a) that a firm receives or holds for, or on behalf of, a client in the course of, or in
connection with, its MiFID business; and/or
(b) which, in the course of carrying on designated investment business that is not
MiFID business, a firm holds in respect of any investment agreement entered into,
or to be entered into, with or for a client, or which a firm treats as client money in
accordance with the client money rules.”