FIRST SUPERVISORY NOTICE

_______________________________________________________________

To:


CFS Management Ltd

1.1
For the reasons given in this First Supervisory Notice, and pursuant to section
55L(3)(a) of the Financial Services and Markets Act 2000 (“the Act”), the Financial
Conduct Authority (“the Authority”) has decided to impose the following requirements
(“the Requirements”) on CFS Management Ltd (“Firm”) with immediate effect.

Business Requirements


1. CFS must not accept any new client money or new custody assets, whether from
existing or new clients, in any of its business areas.

2. Paragraph 1 above does not apply to the acceptance of new monies or custody
assets from existing clients and/or third parties by CFS as a result of or in relation to
the following:

a.
receipt of dividends or coupons;

b.
rights issues;

c.
corporate actions including maturing bonds; and

d.
settlement of trades instructed but not yet settled as at the date of the
Requirements.

3. CFS must not, without the prior written consent of the Authority, and save as
provided for in paragraph 2 above or 4 below, in any way dispose of, withdraw,
transfer, deal with or diminish the value of any of its own assets, and any client money
and custody assets it holds for clients (whether in the United Kingdom or
elsewhere). For the avoidance of doubt, this requirement includes any custodian
accounts, client transaction accounts or any other account operated by or held with
third parties on CFS’s behalf.

4. Paragraph 3 does not apply to:

a.
monetary payments made by CFS of its own monies, in the ordinary

b.
course of business, amounting to no more than £5,000 whether as a
single transaction or as a combination of related transactions; or

c.
payment of legal fees in relation to this Notice.

5. For the avoidance of doubt paragraphs 3 and 4 above are an assets requirement
within the meaning of section 55P(4)(a) of the Act.


CASS Arrangements


6. By 5pm on 30 March 2023 the Firm must:

a.
put in place appropriate client bank account segregation arrangements,

with each account having the necessary acknowledgement letter in place; and
b.
provide evidence to the Authority that the appropriate client bank

account arrangements are in place, including providing copies of the necessary
acknowledgment letters.

7. By 5pm on 23 March 2023 the Firm must submit to the Authority a plan (“the
Plan”), to be approved by the Authority, that clearly explains how it will return all client
money and custody assets held for its clients in the event that the Firm is unable to
meet the Requirement set out in paragraph 6. This will include:

a.
the process it will use to determine the amount due back to each
client;

b.
a statement as to whether client consent is required in order for client
money and assets to be returned;

c.
an explanation of how the Firm will hold client money and assets for
clients in the event that client consent, as detailed in paragraph 6(b) is
not forthcoming;

d.
a timescale for the return of client money and assets.

8. Where the Firm has identified within the Plan, in accordance with paragraph 7(b)
that client consent is required in order to return client money and assets, it must seek
consent from those clients to which this applies and provide to the Authority by 5pm on
30 March 2023:

a.
a list of all clients from whom it has obtained consent, or

b.
for those clients for whom consent has not yet been obtained, an
explanation of the steps taken by the Firm to seek to obtain consent
together with a copy of any communications sent by the Firm to those
clients.

9. If the Firm fails to satisfy the Authority by 5pm on 30 March 2023 that it has met
the requirements contained within paragraph 6, the Authority will provide confirmation
(“the confirmation”) to the Firm whether the Firm must follow the steps laid out within
the Plan. Once the Firm has received the confirmation, the Firm must:

a.
for those clients who have provided consent, return client money and / or
assets within two business days of the confirmation;

b.
for those clients who have not provided consent, hold the client money
and / or assets in accordance with the steps set out within the plan;

c.
submit to the Authority, within three business days of the confirmation, a
table containing the following information:

i.the clients to whom funds have been returned, including details of

the amounts returned to those clients; and

3

ii.the clients to whom funds have not been returned, including

details of the amounts still held for those clients and the account
details of the accounts the funds are held in.


10. By 5pm on 20 March 2023, CFS must provide the Authority for approval a draft
notification to be set to its clients, custodians, sub-custodians and to be placed on its
websites setting out the terms and effects of these Requirements.

11. By 5pm 2 business days from receiving the Authority’s approval of the
communications (required by paragraph 10) CFS must notify in writing:

a.
all its clients;

b.
the custodians of all assets held or managed by CFS (including, for the
avoidance of doubt, its own funds); and

c.
the sub-custodians of all assets held or managed by CFS (including for
the avoidance of doubt, its own funds);

of the terms and effects of these Requirements.


12. By 5pm 2 business days from receiving the Authority’s approval of the
communications (required by paragraph 10) CFS must publish a notice in a prominent
place on all of its websites setting out the terms and effects of these Requirements.

13. Once the notifications referred to in paragraphs 11 and 12 have been made, CFS
must provide to the Authority:

a.
copies of the template notification sent to all clients, custodians and sub-
custodians;

b.
a list of all parties, with their contact details, to whom notifications have
been sent pursuant to paragraph 11; and

c.
confirmation that, to the best of its knowledge, CFS has sent notifications
pursuant to paragraph 11 to all relevant parties.

14. CFS must secure all books and records and preserve information and systems
relating to regulated activities carried on by it and must retain these in a form and at a
location, to be notified to the Authority in writing no later than 7 days after the coming
into effect of these Requirements, such that they can be provided to the Authority, or to
a person named by the Authority, promptly on its request.

15. The SMF3 and SMF16 of CFS Management Ltd shall send to the Authority by email
by 12 noon every Tuesday and Friday, until such time as it is notified otherwise in
writing by the Authority:

a.
written confirmation that CFS is acting in compliance with the
Requirements at paragraphs 3 and 5;

b.
daily bank statements for all CFS firm and client bank accounts;

c.
daily account statements from all custodians or sub-custodians holding
custody assets on behalf of CFS; and

d.
a list of holdings per client

1.2
These Requirements shall take immediate effect and remain in force unless and until
varied or cancelled by the Authority (either on the application of the Firm or of the
Authority’s own volition).

2.
REASONS FOR ACTION

2.1
The Authority has concluded, on the basis of the facts and matters described below
that, in respect of the Firm, it is necessary to exercise its power under section
55L(3)(a) of the Act to impose the Requirements on the Firm because it is failing, or is
likely to fail, to satisfy the Threshold Conditions and it is desirable in order to advance
one or more of the Authority’s operational objectives, which includes securing an
appropriate degree of protection for consumers and protecting and enhancing the
integrity of the UK financial system.

2.2
The Authority has serious concerns relating to the Firm’s business and its compliance
with the Authority’s Principles for Businesses (“PRIN”) and the rules in the Authority’s
Client Assets Sourcebook (“CASS”). In particular, the Authority is concerned that:

a.
The Firm has failed to ensure that client money is held in a properly
segregated client money account in breach of the rules in CASS 7.13.3R,
7.13.6R and 7.13.12R.

b.
The Firm has acknowledged that at present firm money and client money
may be held in the same accounts, in breach of the rules in CASS
7.13.12R.

c.
The Firm has failed to obtain appropriate acknowledgment letters for
client bank accounts where client money is held, in breach of the rules in
CASS 7.18.2R and 17.18.6R. For example, the Firm had merged the
templates in CASS 7 Annex 2 and 3 and amended the prescribed contents
of the client bank account letter and client transaction account letter in a
way that is not permitted by CASS.

d.
The Firm has failed to appropriately remediate the CASS failings identified
in the feedback letter of March 2022 and has failed to take steps to
mitigate the risks that such a failure to remediate poses to client assets
and money.

e.
The Firm has failed to put appropriate resources and systems in place to
manage the risks created by its breach of the CASS rules.

f.
The Firm may be in breach of Principle 3 of PRIN, requiring it to take
reasonable care to organise and control its affairs responsibly and
effectively and ensure that it has adequate risk management systems to
effectively manage risks with its business.

g.
The Firm may be in breach of Principle 10 of PRIN, requiring it to arrange
adequate protection for clients’ assets when it is responsible for them.

2.3
The Authority considers that imposition of the Requirements should take immediate
effect because the matters set out in this First Supervisory Notice demonstrate that the
Firm is unable to manage its affairs in a sound and prudent manner and is putting
consumers at risk.

3.
DEFINITIONS

3.1
The definitions below are used in this First Supervisory Notice:

“the Act” means the Financial Services and Markets Act 2000;

“AIF” means an alternative investment fund;

“the Authority” means the Financial Conduct Authority;

“CASS” means the Client Assets Sourcebook rules, contained with the Handbook;

“CMAR Return” means Client money and assets reporting return made to the Authority;

“the Firm” or “CFS” means CFS Management Ltd;

“FRC” means the Financial Reporting Council;

“P2P” means peer to peer;


“H2” means the second half of the fiscal year from October through to the following
March;

“Handbook” means the Authority’s online handbook of rules and guidance (as in force
from time to time);

“PRIN” means the Authority’s Principles for Business, contained with the Handbook;

“Requirements” means the terms imposed on the Firm by this First Supervisory Notice
as outline in section 1 above;

“SUP” means the Supervision Sourcebook, contained the in Handbook; and

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

4.
FACTS AND MATTERS

4.1
CFS is an authorised Wealth Manager and Retail Investment Broker. The Firm has been
authorised since 1 December 2011 and currently has permission to conduct the
following investment-related regulated activities:

a.
Safeguarding and administration of assets

b.
Arranging safeguarding and administration of assets

c.
Advising on investments (ex-pension transfer/opt outs)

d.
Managing investments

e.
Dealing in investments as agent

f.
Arranging deals in investments

g.
Making arrangements with a view to transactions in investments

h.
Managing an unauthorised AIF

i.
Advising on P2P arrangements

4.2
The Firm has traded as CFS Management Ltd since January 2018, previously trading as
CFS Portfolio Management Ltd. The Chief Executive (CEO) has been an approved person
at the Firm since from 19 September 2019: first as CF3 (Chief Executive), then from 8
December 2019 as SMF1 (Chief Executive). The CEO has been SMF17 (Money
Laundering Reporting Officer) at the Firm since 10 May 2020. The CEO assumed control
of the Firm on 25 June 2021.

4.3
The Firm have not had an SMF16 (Compliance Oversight Function Holder) since 13
January 2020. An application for approval of an SMF16 was received from the Firm by
the Authority on 17 November 2021. This application remains under consideration. The
SMF16 applicant is referred to as Head of Compliance on the Firm’s organogram, and
appears to have been working for the Firm in this role since May 2021.

4.4
As at 7 March 2023, the Firm had 91 active clients, to whom it provides execution-only
services. The Firm has categorised 90 of these clients as professional clients and one as
a professional counterparty. The Firm has two custody clients. Of the 91 clients, 45 are
individuals and 46 and corporate entities.

4.5
The Firm’s client money has reduced significantly since the start of 2023. The Firm
reported that it held £13.8m client money on 31 January 2023. This was reduced to
£10,087,517 as at the end of February 2023. By 10 March 2023, this had reduced to
£2,437,290. The Firm informed the Authority that as 13 March 2023 the client money
of £1.4m remaining within one its bank accounts has been withdrawn. The Firm did not
specify where it had been withdrawn to. If it has been returned to clients, this would
take the total client money held by CFS as at 13 March 2023 to under £1m.

4.6
The Firm has one appointed representative (“AR”), which had a net equity of £7,703 for
the year ended 30 June 2022.

Failings and risks identified

Rules and Guidance applicable to CASS firms

4.7
The rules in CASS provide important protections for client money and assets, including
keeping these safe if a firm fails and/or exits the market. The purpose of CASS is to
ensure that an appropriate level of protection is provided for those assets over which a
client gives a firm certain rights. CASS 7 contains the client money rules. These
include:

7

a.
CASS 7.13, segregation of client money: A firm using the normal approach to
client money must ensure that all client money it receives is paid directly into a
client bank account (CASS 7.13.3R, CASS 7.13.6R). A firm must take necessary
steps to ensure that the client money is held in an account identified as a
separate account to that used to hold firm money (CASS 7.13.12R).

b.
CASS 7.15, records, accounts and reconciliations: A firm must keep records and
accounts 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 7.15.2R) and allow them to be used as an audit trail (CASS
7.15.3R). Internal client money reconciliations must be performed each business
day (CASS 7.15.15R).

c.
CASS 7.18, acknowledgment letters: For each client bank account, a firm must
obtain a countersigned acknowledgement letter from the bank agreeing the
terms and clearly identifying the client bank account. A firm must not hold or
receive client money into a client bank account unless it has received the
countersigned acknowledgement letter, which must be in compliance with the
template (CASS 17.18.2R, CASS 17.18.6R). The purpose of this is to put the
bank on notice that client money has been deposited, to ensure that the client
bank account has been opened in the correct form and is distinguished from any
account containing money held by the firm, and to ensure that the bank agrees
that it will not have any right against the client money (CASS 7.18.1G).

4.8
A “Dear CEO Letter” dated 30 September 2020 was sent to CASS firms (including the
Firm), reminding firms that it was “imperative that the firm continues to maintain
adequate arrangements that safeguard the client money and/or custody assets it holds
for customers”. Firms were asked to discuss the contents of the Dear CEO Letter with
their boards and agree what further action was necessary to ensure that adequate
arrangements were in place, in particular in relation to, amongst other things,
governance and oversight, adequate records and reconciliations, and acknowledgement
letters for all client money accounts.

4.9
A CASS firm is responsible for appointing an external auditor (Rules 3.1.1R, 3.3.2R of
the Supervision Sourcebook (“SUP”)). SUP 3.2.1G clarifies that the purpose of requiring
auditor reports from CASS firms is that “Auditors act as a source of information for the
appropriate regulator in its supervision. They report, where required, on the financial
resources of the firm, the accuracy of its reports to the appropriate regulator and its
compliance with particular rules such as client asset rules”. CASS auditors are subject
to specific rules as set out within SUP 3.10.

CASS Concerns

4.10
On 30 October 2020, the Authority commenced a remote desk-based assessment of the
Firm’s CASS arrangements (“the assessment”). This was undertaken because the Firm
had not had previous CASS contact, as it was new to the CASS regime in 2019, and the
Authority had identified the Firm was loss making in the previous two reporting periods
which can place client money at an enhanced risk.

4.11
As a result of the assessment, the CASS team identified several concerns in relation to
the Firm’s CASS compliance. On 23 February 2022, CASS held a telephone call with the

Firm during which it outlined the key findings from its assessment. During that call, the
Firm provided some initial indications of the actions it would take to address the CASS
team’s findings.

4.12
On 28 March 2022, a feedback letter (“the feedback letter”) was sent to the Firm,
setting out the Authority’s concerns in relation to the Firm’s CASS compliance, and the
steps which the Firm was required to take to remediate these concerns. The feedback
letter stated that the Authority’s “findings indicate significant weaknesses in the Firm’s
CASS risk framework and its systems, governance, and controls”. Key feedback
provided in the feedback letter is set out in the table below:

Feedback
Action for Firm and deadline to achieve
action

Records and reconciliations

The Firm’s amended internal and
external client money reconciliation
procedures had not been adequately
assessed to ensure full CASS 7
compliance.

Engage external resources to commence a
review of its CASS arrangement.

To confirm to the Authority by 29 April 2022
who the Firm has engaged and the scope of
this review.

Segregation of client money: acknowledgment letters

The Firm does not have appropriate
client bank account and client
transaction account arrangements in
place. “We have raised this issue
with the industry before via our
‘Dear CEO Letter and therefore
deem your inability to comply with
our requirements to be a significant
failing of the CASS and SYSC rules”.

The two acknowledgment letters
provided for client transaction
accounts were not compliant.

No acknowledgement letters were
provided for the two client money
bank accounts.

Immediately review client bank accounts and
the client transaction account to ensure client
money
is
held
with
compliant

acknowledgement letters and update any that
require amendment or are missing.

Provide a client money bank account and
transaction
list,
client
money
bank

statements,
and
copies
of
all

acknowledgement letters (if the Firm does
not have acknowledgement letters for any
client money accounts, it must provide
evidence demonstrating that it is in the
process of obtaining them) within 5 days of
receipt of the feedback letter

Outstanding CASS audit

Failure to obtain a CASS audit for
the period ending 31 March 2021

Provide contact details for the external
auditor to discuss the outstanding 2021 client
assets report.

Be fully compliant with its obligation to
ensure that its client assets report for 2022 is
received within four months of its period-end
date.

Firm put on notice that if there was any
further delay in the Authority receiving the
Firm’s 2021 client assets report past 29 April
2022, the Authority may consider the use of
further regulatory tools against the Firm.

Governance and oversight

Financial Reporting Council (FRC)
CASS Assurance Standard (FRC rule
mapping)

All firms are required to have
completed FRC rule mapping.

The FRC rule allows the Firm to
identify and record where CASS
rules are and are not applicable to
the Firm and to map the CASS risks
and controls to each CASS rule.

Confirm if FRC rule mapping has been
completed. If the Firm has not yet completed
its FRC rule mapping the Firm should seek to
do so immediately.

Resources

During the initial assessment in
2021 the Authority identified that
the Firm was operating with
resourcing deficiencies

Implement robust knowledge and training
procedures to ensure its staff have and retain
an appropriate level of CASS knowledge.

Review its previous analysis and the contents
of the feedback letter to ensure that all areas
that required improvements/amendments are
appropriately remediated.

4.13
Following the feedback letter being sent, the Authority continued to engage with the
Firm in relation to actions required by the feedback letter:

Action
Response from Firm

28 March 2022: Feedback letter sent
to Firm with due date for response of
29 April 2022

12 April 2022: Firm acknowledges
receipt of the feedback letter.

The items requested to be provided by
the Firm within five days receipt of the
feedback letter were not provided (nor
were they provided at a later date).

The Firm’s CEO states that Bank A had
agreed to open a segregated client
account for the Firm and that he would
share the CASS 7 acknowledgment
letter once received.

12 April 2022: Authority confirmed
receipt of the Firm’s email and
reminded the Firm that a full response

Firm fails to respond to feedback letter
by due date of 29 April 2022.

was due by 29 April 2022.

21 December 2022: Authority email
to the CEO chasing for 29 April 2022
response and the late CASS Audit for
2022, providing a deadline of 30
December 2022 for a response.

Firm does not respond by deadline of
30 December 2022.

-
6 January 2023: Firm’s CASS audit
report for the period ending 31 March
2021,
due
on
31
July
2021
and

requested in 21 December 2022 email,
was received by the Authority.

17 January 2023: Call to CFS
chasing for response to 21 December
email.

17 January 2023: Firm emails asking
for email of 21 December 2022 to be
resent as not received.

18 January 2023: Authority resends
email of 21 December 2022, with a
new deadline of 1 February 2023.

1 February 2023: Firm response to
the Authority

4.14
The email received from the Firm on 1 February 2023 included the following key points:

a.
The Firm acknowledged that the deadlines for the 2021 and 2022 CASS audit
reports
had
been
missed.
The
Firm
stated
that
this
was
due
to

“misrepresentations” from the respective auditors and that “CFS foresee that the
delay is shortening in a rapid manner thus making 2023 report to be submitted
on time” [sic].

b.
Reconciliation training took place on 26 May 2022. The team at the Firm looking
after CASS matters consisted of four people. Some changes had been made to
the Firm’s documents to reflect recommendations from the Firm’s auditors on
reconciliations.

c.
An application for approval of the SMF16 had been submitted to the Authority.

d.
Segregated client accounts were set-up with Bank A on 15 September 2022. A
professional client account was opened with a separate bank on 15 December
2022. The Firm was awaiting a revised acknowledgment letter (the current
version was attached). The Firm had initiated onboarding with two other banks
to obtain segregated client accounts, one European (for EUR) and one a British
bank (for GBP). The Firm believed that this combination of actions would “be
sufficient to cover any and all requirements for proper segregation of client
money and assets supported by CASS 7 Acknowledgment Letters”.

4.15
On 22 February 2023, in response to a request from the Authority, the Firm stated that
the Firm’s client numbers had increased from 31 in February 2021 to 97 at the end of
January 2023.

4.16
On 28 February 2023, the Authority held a meeting (“the February meeting”) with the
Firm to discuss its business model and CASS arrangements. During the February
meeting, the Firm provided the following comments on CASS issues which had been
raised in the feedback letter:

a.
Issue raised in the feedback letter: Firm does not have separate client bank
account, does not segregate client money appropriately, and acknowledgement
letters are non-compliant. The Firm responded that:

(i)
Bank A “hadn’t progressed to the level they wanted” and the Firm had not
started operating this account. The Firm said it was waiting for [an
acknowledgment] letter from Bank A and that it would send this [to the
Authority]. This letter had been signed and the Firm was in the position to
move funds to client accounts. It was “waiting for [Bank A] to segregate
the money”.

(ii)
It was “being transparent” and that it “is struggling with client accounts”.

(iii)
The accounts held were not segregated client money accounts. One of
these held $13.1m.

(iv)
In relation to the accounts shown on the Firm’s CMAR return, “the
accounts may hold both firm and client money.”

b.
Issue raised in the feedback letter: Firm unable to demonstrate how client
money reconciliations were performed, and to engage external resources to
commence a review of its CASS arrangements.

(i)
The Firm responded during the February meeting that the third-party
CASS review has not been completed.

c.
Issue raised in the feedback letter: Firm was to confirm if FRC rule mapping had
been completed.

(i)
The Firm responded in the February meeting that this was “ongoing but
not complete.”

4.17
On 6 March 2023 the Firm responded to a further information request from the
Authority, stating that:

a.
client money held at the end of February 2023 was £10,087,517.28 and that this
is the figure that the Firm expected to report on their CMAR;

b.
the Firm was progressing communications with a compliance for an external
review of CASS (and wider regulatory) compliance;

c.
it was planning to contact clients about withdrawing their funds from the Firm
until the Firm completed the process of putting in place new CASS 7 compliant
client money acknowledgment letters, remediating existing acknowledgment
letters from Bank A, and reviewing the accounts held with two other institutions.

4.18
On 13 March 2023, the Firm provided copies of the Exante and Saxo acknowledgment
letters. These have been reviewed CASS: both are for client transaction accounts, and
should not be used for the holding of client money.

4.19
The Firm’s CASS audit report for the period ending 31 March 2022, which was due by
31 July 2022, remains outstanding as at 10 March 2023.

“First mover advantage”

4.20
Where a firm does not have appropriate segregated client bank accounts with
acknowledgment letters in place, client money is not properly protected. This means
that if there is a client money shortfall (i.e. the client money reconciliation identifies a
client money deficit), and the firm cannot remediate it as it does not have enough firm
funds to do so, then the firm is insolvent and under the CASS rules this creates a
“pooling event” as the firm enters insolvency. This means that the resulting shortfall
should be apportioned equally across all clients.

4.21
Supervision is concerned about the risk that if the Firm pays out client money in the
interim, this may create “first mover advantage,” whereby those clients who are paid
first may receive all their money, whereas those clients paid later may receive less as
the “pool of assets” becomes smaller (as the costs associated with an insolvency would
also be paid for from the pool).

4.22
In a call on 9 March 2023, the Authority asked the Firm not to seek to return any client
monies to clients while the CASS issues were being resolved.

4.23
On 13 March 2023, the Firm informed the Authority that its client money holdings as of
10 March 2023 were £2,437,290 (down from £10,087,517 as at 23 February 2023).
The CEO stated that the decrease in client funds “was mainly to the fact of my initial
discussion with clients in relation to their funds withdrawal. the discussion took place
prior to our call last Thursday [9 March 2023], so I was not able to stop them
withdrawing their funds as discussed with you”.

4.24
The Authority has serious concerns that the Firm appears to have returned more than
£7.5m of client monies between 23 February and 10 March 2023, with the CEO
indicating by email on 13 March 2023 that this was after the 9 March call (when the
Firm was asked not to seek to return funds). The Authority therefore has concerns that
the risk of “first mover advantage” and dissipation of client monies is active and
ongoing.

4.25
The Authority’s has identified that several of the Firm’s clients appear to have links to
the Firm or the Firm’s CEO (the “connected clients”). The CEO is himself also a client of
the Firm. The value of each client’s assets with the Firm is unknown and has not been
requested from the Firm at this stage. However, this compounds the Authority’s
concerned in relation to “first mover advantage” as funds may be paid to the connected
clients in advance of others.

Risk and control framework Not Commensurate with Growth

4.26
The feedback letter identified that the Firm was operating with resourcing deficiencies.
The Firm has not had an approved SMF16 (Compliance Oversight Function Holder) in
the role since 13 January 2020.

4.27
The Firm’s revenue increased significantly over this period from £65,121 for the year
ended 31 March 2020, to £1,279,697 for the year ended 31 March 2021. Its total
revenue for the year ended 31 March 2022 was £770,000, with the reduction reflecting
the cessation of a relationship with one large client. The revenue remains significantly
higher than pre-31 March 2020.

4.28
The Firm’s growth in revenue and trading volume has not been mirrored by
development in its risk and compliance framework including a growth in risk and
compliance resource.

4.29
During the February meeting, the CEO stated that the Head of Compliance was
responsible for compliance, that two other individuals were responsible for
reconciliations, and that there are currently eight employees. This appears to be
inconsistent with the information provided by the Firm in its data survey response and
its Companies House accounts for four consecutive years from the year ended 31 March
2018 to the year ended 31 March 2021, which show the Firm as having five employees.

5.
CONCLUSION

5.1
The regulatory provisions relevant to this First Supervisory Notice are set out in the
Annex.

Analysis of failings and risks

5.2
The Authority considers that the Firm is failing, or is likely to fail, to satisfy the
Suitability Threshold Condition (paragraph 2E of Schedule 6 of the Act) on the basis
that the Firm does not appear to be a fit and proper person having regard to all the
circumstances including:

a.
The Firm may be in breach of Principle 3 of PRIN, requiring it to take reasonable
care to organise and control its affairs responsibly and effectively and ensure that it
has adequate risk management systems to effectively manage risks with its
business.

b.
The Firm may be in breach of Principle 10 of PRIN, requiring it to arrange adequate
protection for clients’ assets when it is responsible for them

c.
The Firm has failed to ensure that client money is held in a properly segregated
client money account in breach of the rules in CASS 7.13.3R, 7.13.6R and
7.13.12R.

d.
The Firm has acknowledged that at present firm money and client money may be
held in the same accounts, in breach of the rules in CASS 7.13.12R.

e.
The Firm has failed to obtain appropriate acknowledgment letters for client bank
accounts where client money is held, in breach of the rules in CASS 7.18.2R and
17.18.6R. For example, the Firm had merged the templates in CASS 7 Annex 2
and 3 and amended the prescribed contents of the client bank account letter and
client transaction account letter in a way that is not permitted by CASS.

f.
The Firm has failed to appropriately remediate the CASS failings identified in the
feedback letter of March 2022, and has failed to take steps to mitigate the risks
that such a failure to remediate poses to client assets and money.

g.
The Firm has failed to put appropriate resources and systems in place to manage
the risks created by its breach of the CASS rules.

5.3
The Authority considers that imposition of the proposed requirements is also desirable
to secure and appropriate degree of protection for consumers (section 1C of the Act)
and to protect and enhance the integrity of the UK financial system (section 1D of the
Act).

5.4
The loss to clients could be considerable in the event of the Firm’s insolvency: while
client funds are held in a non-CASS unprotected environment these funds would be
considered part of the Firm’s general estate. This would mean that if the Firm failed,
client funds would not be ring-fenced from that of the firm and would not be protected.
The Firm’s categorisation of its clients as elective professionals rather than retail clients
exposes those clients to greater risk since elective professionals are afforded a reduced
level of consumer protection.

5.5
The Authority has concluded, in light of the matters set out above, that it is necessary
to exercise its own-initiative power under section 55L(3)(a) of the Act by imposing the
Requirements to stop the Firm accepting any new client money or new custody assets,
stop the firm dissipating any client money that it currently holds without prior approval
of the Authority and undertake certain actions to ensure compliance with CASS.

5.6
The Authority considers that the Requirements are a proportionate and appropriate
means to address the current and immediate risks and are desirable in order to
advance the Authority’s operational objectives of consumer protection and protecting
and enhancing the integrity of the UK financial system.

Timing and duration of the Requirements

5.7
It is necessary to impose the Requirements on an urgent basis given the seriousness of
the risks and the need to protect client money and assets.

5.8
The Authority considers that it is necessary for the Requirements to continue unless and
until varied or cancelled by the Authority (either on the application of the Firm or of the
Authority’s own volition).

5.9
The regulatory provisions relevant to this First Supervisory Notice are set out in the
Annex.

6. PROCEDURAL MATTERS

Decision-maker

6.1
The decision which gave rise to the obligation to give this First Supervisory Notice was
made by an Authority staff member under executive procedures according to DEPP
2.5.7G and DEPP 4.1.7G.

6.2
This First Supervisory Notice is given under section 55Y(4) and in accordance with
section 55Y(5) of the Act.

6.3
The following statutory rights are important.

Representations

6.4
The Firm has the right to make written representations to the Authority (whether or not
it refers this matter to the Tribunal). The Firm may also request to make oral
representations but the Authority will only consider this in exceptional circumstances
according to DEPP 2.3.1AG. The deadline for providing written representations and
notifying the Authority that the Firm wishes to make oral representations is 14 days by
30 March 2023 or such later date as may be permitted by the Authority. Any
notification or representations should be sent to:

Supervision, Policy and Competition Decision Making Secretariat
The Financial Conduct Authority
12 Endeavour Square
London
E20 1JN
Email: SPCDecisionMakingSecretariat@fca.org.uk and lynn.duffy@fca.org.uk

The Tribunal

6.5
The Firm has the right to refer the matter to which this First Supervisory Notice relates
to the Tribunal. The Tax and Chancery Chamber is part of the Tribunal which, amongst
other things, hears references arising from decisions of the Authority. Under paragraph
2(2) of Schedule 3 of the Tribunal Procedure (Upper Tribunal) Rules 2008, the Firm has
28 days from the date on which this First Supervisory Notice is given to it to refer the
matter to the Tribunal.

6.6
A reference to the Tribunal can be made by way of a reference notice (Form FTC3)
signed by or on behalf of the Firm and filed with a copy of this First Supervisory Notice.
The Tribunal’s contact details are: The Upper Tribunal, Tax and Chancery Chamber, 5th
Floor, Rolls Building, Fetter Lane, London EC4A 1NL (telephone: 020 7612 9730; email:
uttc@hmcts.gsi.gov.uk).

6.7
Further information on the Tribunal, including guidance and the relevant forms to
complete, can be found on the HM Courts and Tribunal Service website:
http://www.justice.gov.uk/forms/hmcts/tax-and-chancery-upper-tribunal

6.8
The Firm should note that a copy of the reference notice (Form FTC3) must also be sent
to the Authority at the same time as a reference is filed with the Tribunal. A copy of the
reference notice should be sent to [Supervision Manager] (insert email address) and the
SPC Decision Making Secretariat (SPCDecisionMakingSecretariat@fca.org.uk).

Confidentiality and publicity

6.9
The Firm should note that this First Supervisory Notice may contain confidential
information and should not be disclosed to a third party (except for the purpose of
obtaining legal advice on its contents).

6.10
The Firm should note that section 391(5) of the Act requires the Authority, when the
First Supervisory Notice takes effect, to publish such information about the matter to
which the notice relates as it considers appropriate.

Authority contacts

6.11
Any questions regarding the executive procedures decision-making process should be
directed
to
the
SPC
Decision
Making
Secretariat

(SPCDecisionMakingSecretariat@fca.org.uk).

Annex

RELEVANT STATUTORY PROVISIONS

1.
The Authority’s operational objectives established in section 1B of the Act include
securing an appropriate degree of protection for consumers, and protecting and
enhancing the integrity of the UK financial system.

2.
Section 55L of the Act allows the Authority to impose a new requirement on an
authorised person if it appears to the Authority that the authorised person is failing, or
likely to fail to satisfy the Threshold Conditions (section 55L(2)(a)), or it is desirable to
exercise the power in order to advance one or more of the Authority’s operational
objectives (section 55L(2)(c)).

3.
Section 55N of the Act allows a requirement to be imposed under section 55L of the Act
so as to require the person concerned to take specified action (section 55N(1)(a)), or to
refrain from taking specified action (section 55N(1)(b)).

4.
Section 55P of the Act allows a requirement to be imposed under section 55L of the Act
prohibiting the disposal of, or other dealing with, any of an authorised person’s assets
(whether in the UK or elsewhere), or restricting such disposals or dealings.

5.
Section 55Y(3) of the Act allows a requirement to take effect immediately (or on a
specified date) if the Authority, having regard to the ground on which it is exercising its
own-initiative power, reasonably considers that it is necessary for the requirement to
take effect immediately (or on that date).

6.
Section 391 of the Act provides that:

“[…]

(5) When a supervisory notice takes effect, the Authority must publish such

information about the matter to which the notice relates as it considers
appropriate.

(6) But the Authority may not publish information under this section if in its

opinion, publication of the information would, be unfair to the person with
respect to whom the action was taken or proposed to be taken [or] prejudicial
to the interests of consumers or detrimental to the stability of the UK financial
system.

(7) Information is to be published under this section in such manner as

the Authority considers appropriate.”

RELEVANT REGULATORY PROVISIONS

The Enforcement Guide

7.
The Authority's approach in relation to its enforcement powers is set out in Chapter 8 of
the Enforcement Guide (EG), certain provisions of which are summarised below.

8.
EG 8.1.1 reflects the provisions of section 55L of the Act by stating that the Authority
may use its own-initiative power to impose requirements on an authorised person
where, amongst other factors, the person is failing or is likely to fail to satisfy the
threshold conditions for which the Authority is responsible (EG 8.1.1(1)), or it is
desirable to exercise the power in order to advance one or more of its operational
objectives (EG 8.1.1(3)).

9.
EG 8.2.1 states that when the Authority considers how it should deal with a concern about
a firm, it will have regard to its statutory objectives and the range of regulatory tools
that are available to it. It will also have regard to the principle that a restriction
imposed on a firm should be proportionate to the objectives the Authority is seeking to
achieve (EG 8.2.1(2)).

10.
EG 8.2.3 states that in the course of its supervision and monitoring of a firm or as part
of an enforcement action, the Authority may make it clear that it expects the firm to
take certain steps to meet regulatory requirements. In the vast majority of cases the
Authority will seek to agree with a firm those steps the firm must take to address the
Authority’s concerns. However, where the Authority considers it appropriate to do so, it
will exercise its formal powers under section 55L of the Act to impose a requirement to
ensure such requirements are met. This may include where, amongst other factors, the
Authority has serious concerns about a firm, or about the way its business is being or
has been conducted (EG 8.2.3(1)), or is concerned that the consequences of a firm not
taking the desired steps may be serious (EG 8.2.3(2)).

11.
EG 8.3.1 states that the Authority may impose a requirement so that it takes effect
immediately or on a specified date if it reasonably considers it necessary for the
requirement to take effect immediately (or on the date specified), having regard to the
ground on which it is exercising its own-initiative powers.

12.
EG 8.3.2 states that the Authority will consider exercising its own-initiative power as a
matter of urgency where: 1) the information available to it indicates serious concerns

about the firm or its business that need to be addressed immediately; and 2)
circumstances indicate that it is appropriate to use statutory powers immediately to
require and/or prohibit certain actions by the firm in order to ensure the firm addresses
these concerns.

13.
EG 8.3.3 states that it is not possible to provide an exhaustive list of the situations that
will give rise to such serious concerns, but they are likely to include one or more of four
listed characteristics, these include: 1) information indicating significant loss, risk of
loss or other adverse effects for consumers, where action is necessary to protect their
interests; 2) information indicating that a firm’s conduct has put it at risk of being used
for the purposes of financial crime, or of being otherwise involved in crime; 3) evidence
that the firm has submitted to the Authority inaccurate or misleading information so
that the Authority becomes seriously concerned about the firm’s ability to meet its
regulatory obligations; 4) circumstances suggesting a serious problem within a firm or
with a firm’s controllers that calls into question the firm’s ability to continue to meet the
threshold conditions.

14.
EG 8.3.4 states that the Authority will consider the full circumstances of each case
when it decides whether an imposition of a requirement is appropriate and sets out a
non-exhaustive list of factors the Authority may consider, these include:

15.
The extent of any loss, or risk of loss, or other adverse effect on consumers (EG
8.3.4(1));

16.
Under EG 8.3.4, factors that may be considered by the Authority include:

(1) The extent of any loss, or risk of loss, or other adverse effect on consumers

(2) The extent to which customer assets appear to be at risk

(4) The seriousness of any suspected breach of the requirements of the
legislation or the rules and the steps that need to be taken to correct that
breach

(7) The risk that the firm’s conduct or business presents to the financial system
and confidence in the financial system

17.
EG 8.3.4(9) includes the impact that use of the Authority’s own-initiative powers will
have on the firm's business and on its customers. The Authority will need to be satisfied
that the impact of any use of the own-initiative power is likely to be proportionate to
the concerns being addressed, in the context of the overall aim of achieving its
statutory objectives.

PRIN

18.
The purpose of the Principles for Businesses is set out at PRIN 1.1.2. PRIN is a general
statement of the fundamental obligations of firms and the other persons to whom they
apply under the regulatory system.

19.
Principle 3 of PRIN requires a firm to take reasonable care to organise and control its
affairs responsibly and effectively and ensure that it has adequate risk management
systems to effectively manage risks with its business.

20.
Principle 10 of PRIN, requires a firm to arrange adequate protection for clients’ assets
when it is responsible for them.

CASS

21.
CASS 7 – client money rules; in particular:

22.
CASS 7.13 - the segregation of client moneys for protection;

23.
CASS 7.15 - the requirements on a firm to record, accounts for and provide
reconciliations in order to ensure adequate protection of clients moneys;

24.
CASS 7.18 - the requirement to have acknowledgment letters to ensure parties are on
notice that moneys held are client moneys.