Supervisory Notice
On , the Financial Conduct Authority issued a Supervisory Notice to IBP Markets Limited
FIRST SUPERVISORY NOTICE
1.
ACTION
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 IBP Markets Limited (“the Firm”) with
immediate effect.
Restriction on activities
(1)
The Firm must not, save as expressly permitted in paragraphs 2 to 5
below, without the prior written consent of the Authority, carry on any
regulated activities for which it has a Part 4A permission.
(2)
The Firm may continue to execute and transmit (as relevant) instructions
from an existing client to liquidate any existing position held by the client,
or held on their behalf. Any sums payable to an existing client as a result
of any instruction described in this paragraph shall not be transmitted or
released to the Firm or any Connected Persons.
(3)
The Firm may continue to liquidate any existing position it holds on its own
account. Any sums payable to the Firm as a result of any transaction
described in this paragraph shall not be transmitted or released to the Firm
or any Connected Persons.
(4)
The Firm may continue to hold client money and safeguard and administer
custody assets held at the date of these Requirements, or which the Firm
has accepted or segregated in accordance with paragraph 5 below.
(5)
Paragraph 1 does not apply to the receipt of new client money or custody
assets from, or on behalf of, existing clients by the Firm because of or in
relation to the following:
(a)
Receipt of dividends or coupons.
(b)
Rights issues.
(c)
Corporate actions including maturing bonds.
(d)
Settlement of trades instructed but not settled as at the date of
these Requirements.
(e)
The execution of an instruction from an existing client, as described
in paragraph 2.
(6)
Save as set out in paragraph 5, the Firm must not accept any new client
money, custody assets or funds subject to Title Transfer Collateral
Arrangements (“TTCA”) whether from existing or new clients in any of its
business areas. For the avoidance of doubt, this includes funds held under
‘Model A’ or ‘Model B’ arrangements.
(7)
The Firm must not, without the prior written consent of the Authority,
recommence any regulated activities.
Assets requirement
(8)
Save as set out in sub-paragraph (5)(d) and (5)(e), paragraph 9 and
paragraph 10 the Firm must not take any action which has, or may have,
the effect of disposing of, withdrawing, transferring, dealing with or
diminishing the value of any of its own assets, or assets held for or on
behalf of others, including client money or custody assets.
(9)
The Firm may continue dealing with or disposing of any of its own assets
(whether in the UK or elsewhere) in the ordinary and proper course of
business. For the avoidance of doubt, the following would not be in the
ordinary and proper course of business for these purposes:
(a)
The disposal, transfer, or sale in whole or in part of the Firm’s
assets, including its client base.
(b)
The making of any distribution to shareholders whether by way of
capital distribution, dividends, or any other payments.
(c)
Any payment exceeding £2,000, whether as a single transaction or
a combination of related transactions, to Connected Persons made
without the Authority’s express consent.
(d)
The making of any gift or loan by the Firm to any party.
(e)
The entry into any financial reconstruction or reorganisation
(10)
The Firm may also spend, from its own assets, a reasonable amount on
reasonable legal expenses.
(11)
For the avoidance of doubt any payment exceeding £2,000 whether as a
single transaction or a combination of related transactions, to Connected
Persons must not be made without the Authority’s express consent.
(12)
The Firm must segregate £720,000 in cash in an account(s) at an
authorised UK bank or credit institution(s) that is held in the Firm’s own
name and is controlled solely by the Firm (the "Segregated Amount").
Such sums being used for the sole purpose of funding the wind down of
the business if there is a requirement to do so. The Firm must continue to
hold no less than £720,000 in this way and for this purpose, unless
otherwise expressly agreed by the Authority.
(13)
The Segregated Amount referred to in paragraph 12 must not be subject
to the rights or interest of any other person (for example any form of
security, lien, netting arrangement, right of set-off or preferred creditor
arrangement), save where such rights arise due to the terms and
conditions routinely applied to such accounts by the relevant credit
institution.
(14)
Paragraphs 8 and 12 are assets requirements within the meaning of
section 55P(4)(a) of the Act.
Retention and notification requirements
(15)
The Firm must secure all books and records and preserve all information
and systems in relation to regulated activities carried on by it, and must
retain these in a firm and at a location within the UK, to be notified to the
Authority in writing within 7 days of the date the Requirements come in to
force, such that they (or, so as not to hinder the Firm’s performance of its
business activities, true copies of them) can be provided to the Authority,
or to a person named by the Authority, promptly on its request.
(16)
By close of business on the day that is 7 days after the Requirements
come into force, the Firm must notify in writing:
(a)
all its clients; and
(b)
the banks and custodians the Firm uses to hold its own money and
assets, as well as its clients’ money and custody assets and TTCA
money and assets;
of the terms and effects of these Requirements. This must be in a
form to be agreed in advance with the Authority.
(17)
By close of business on the day that is 2 days after the Requirements
come into force, the Firm must publish in a prominent place on its website
a notice, the placement and wording of which will need to be agreed in
advance with the Authority, setting out the terms and effect of these
Requirements.
(18)
Once the notifications referred to in paragraph 16 have been made, and in
any event by close of business on the day that is 10 days after the
Requirements come into force, the Firm must provide to the Authority:
(a)
Copies of the template notifications sent to all recipients referred to
in paragraph 16.
(b)
A list of all parties to whom notifications have been sent pursuant to
paragraph 16.
(c)
Confirmation that, to the best of its knowledge, the Firm has sent
notifications pursuant to paragraph 16 to all relevant parties.
(19)
A person approved to perform a senior management function (“SMF”) at
the Firm must send to the Authority by email by 12 noon every Friday (or
the next business day should the Friday fall on a Bank Holiday), until such
time as it is notified otherwise in writing by the Authority:
(a)
written confirmation that the Firm is in compliance with these
Requirements; and
(b)
copies of up-to-date statements of all accounts held by the Firm
with financial institutions, whether in the UK or elsewhere, and
whether in respect of its own assets, client assets or both, showing
at least all transactions in the previous week and the balances of
the accounts.
1.2.
In this First Supervisory Notice the term “Connected Person” means a person
(including a body of persons corporate or unincorporate) who has or has had the
following relationships with the Firm. The person is:
(1)
A member of the Firm’s group.
(2)
A shareholder in the Firm or a member of the Firm’s group.
(3)
A controller of the Firm or a member of the Firm’s group.
(4)
An employee of the Firm or a member of the Firm’s Group.
(5)
A director, officer, manager or agent of the Firm or a member of the Firm’s
group.
1.3.
These Requirements replace all other requirements imposed on the Firm pursuant
to section 55L(5)(a) of the Act.
1.4.
These Requirements 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:
(1)
it is failing, or is likely to fail, to satisfy the Effective Suitability Threshold
Condition pursuant to Paragraph 2C of Schedule 6 to the Act;
(2)
it is failing, or is likely to fail, to satisfy the Suitability Threshold Condition
pursuant to Paragraph 2E of Schedule 6 of the Act; and
(3)
it is desirable in order to advance one or more of the Authority’s
operational objectives, in particular the Authority’s consumer protection
objective (as defined in Section 1C of the Act).
2.2.
The Authority has serious concerns that:
(1)
The Firm may not have appropriate systems and controls in place to
ensure adequate protection for client money and assets. In particular, by
its own admission the Firm has lost confidence in its books and records
and therefore whether it can demonstrate that the client money and assets
it holds are whole.
(2)
The Firm’s business may have been used for a purpose connected with
financial crime. In particular, that an individual with close links to the Firm
and who is also a client of the Firm may have falsified his own trading
statements.
3.
DEFINITIONS
3.1.
The definitions below are used in this First Supervisory Notice:
“the Act” means the Financial Services and Markets Act 2000;
“Suitability Threshold Condition” means the condition set out in Paragraph 2E of
Schedule 6 of the Act and COND 2.5;
“the Authority” means the Financial Conduct Authority;
“the Firm” means IBP Markets Limited;
“FSN” means a First Supervisory Notice;
“Handbook” means the Authority’s online handbook of rules and guidance (as in
force from time to time);
“Part 4A permission” means permission to conduct regulated activities, granted
by the Authority under Part 4A of the Act;
“Requirements” means the terms imposed on the Firm by this First Supervisory
Notice as outline in section 1 above; and
“Tribunal” means the Upper Tribunal (Tax and Chancery Chamber).
4.
FACTS AND MATTERS - Background
4.1.
The Firm is a wholesale broker providing custody services and access to equity
and fixed income securities for non-retail clients. The Firm’s services are split
between a “model A” and “model B” offering. The Firm defines the model A
business as the provision of execution and custody services to approximately fifty
active wholesale clients directly, and the model B business as the provision of
custody and execution service to currently 2 wholesale clients, both retail wealth
managers, through a user interface platform offered by ‘Service Provider A’. For
the model A business, the Firm undertakes these activities in-house. According to
the Firm, Model A makes up approximately 60% and Model B the remaining 40%
of the Firm’s revenues.
4.2.
For the model B business, the Firm also purchases back-office support services
from ‘Service Provider A’, including the generation of trading statements, trade
processing and CASS reconciliations.
4.3.
According to the latest set of management accounts the Firm shared with the
Authority in June, its revenues for the year ended 31st December 2022 were
£10.17mm, profits after tax £1.08mm and net assets of £1.94mm. The Firm’s
latest audited accounts from year end 31st December 20214 show it made
revenues of £7.7mm (2020: £2.4mm); profit after tax of c£39k (2020: -£1k);
and had net assets of c£859k (2020: £341k). The Firm’s latest CMAR (01/07/23-
31/07/23) states the Firm holds £40.5mm of client money and £560.5mm of
custody assets.
4.4.
The Firm has been authorised by the Authority since 13 September 2010 to
conduct investment business. It has the following Part 4A Permissions:
a.
Advising on investments (except on Pension Transfers and Pension
Opt Outs).
b.
Arranging (bringing about) deals in investments.
c.
Dealing in investments as agent.
d.
Dealing in investments as principal.
e.
Making arrangements with a view to transactions in investments.
f.
Safeguarding and administration of assets (without arranging).
g.
Agreeing to carry on a regulated activity.
4.5.
From December 2022 the Authority started to have concerns about the Firm.
Following engagement between the Authority and the Firm in relation to these
matters, the Firm agreed to a set of voluntary requirements which took effect
from 24 May 2023 (the “VREQ”). The requirements stop the Firm from making
payments to connected parties and from onboarding new clients. However, they
allow the Firm to continue conducting regulated activities for existing clients,
including providing trading and custody services.
4.6.
Since the VREQ was agreed, the Authority has continued to engage with the Firm
about its concerns that:
(1)
the Firm may not have appropriate systems and controls in place to ensure
adequate protection for client money and assets; and
(2)
the Firm’s business may have been used for a purpose connected with
financial crime.
Systems and controls to ensure adequate protection for client money and
assets
4.7.
Money that a firm receives or holds for, or on behalf of, a client in the course of,
or in connection with, its designated investment business or otherwise, is client
money for the purposes of the Authority’s client money assets sourcebook
(“CASS”) rules. The Firm has the permissions to hold and control client money
and therefore is expected to comply with all relevant chapters in CASS 7. The
Firm also has the permission for safeguarding and administration of assets
(without arranging), therefore enabling the Firm to hold custody assets within the
scope of CASS 6 and again expected to comply with all relevant provisions of
CASS 6.
4.8.
A title transfer collateral arrangement (“TTCA” in CASS 7) is an arrangement by
which a client transfers full ownership of money to a firm for the purpose of
securing or otherwise covering present or future, actual, contingent or
prospective obligations. CASS 7.11.1R(3)(a) states that a firm must not enter
into a TTCA in respect of money belonging to a retail client and CASS 7.11.1R(4)
states that such money does not amount to client money provided that it is not
with a retail client.
4.9.
The purpose of CASS rules is to keep client money and assets safe, particularly
but not exclusively in the event of a firm failure. One of the fundamental
requirements of CASS rules is that client money must be segregated from the
Firm’s money, which ensures it is ring-fenced in the event of an insolvency.
4.10. The Authority has identified a number concerns with the Firm’s compliance with
both CASS 6 and 7. To date the Firm has been unable to demonstrate to the
Authority it has a compliant CASS environment. There are material concerns over
the accuracy of the Firm’s books and records and whether these are sufficiently
robust to allow it to perform a compliant client money reconciliation in order for
the Firm to establish an appropriate client money position. The failure to do this
results in client money being put at risk. The key concern over the Firm’s books
and records is due to the Firm’s reliance on its outsourced service provider –
“Service Provider A” – to perform client money reconciliations using inaccurate or
potentially falsified data. This is described in more detail below.
4.11. One of the key principles of CASS is that a firm must have accurate books and
records so it can determine the amount of CASS assets it holds for each of its
clients. Crucial to achieving this is the firm performing daily internal and external
reconciliations as per CASS 6 and 7 using reliable and precise data. Without the
underlying data being accurate there is a high risk of the firm operating with an
unidentified CASS shortfall and, more importantly, in the event of firm failure, of
CASS assets not being returned whole.
4.12. As the Firm has been unable to satisfy the Authority as to the accuracy of its
books and records, it follows that the Firm does not have a compliant client
money reconciliation process which clearly articulates the Firm’s CASS position,
and therefore puts client assets at risk.
4.13. Furthermore, a large volume of CASS controls predicates on the use of accurate
and timely data, and without that fundamental underpinning, compliance – and
ultimately the safety of the assets – cannot be satisfied to any meaningful
degree.
Concerns over the accuracy of source data used for reconciliations
4.14. As described above, “Service Provider A” provides back-office services to the
Firm. These services to the Firm include generating trading statements, trade
processing and CASS reconciliations. “Individual A” is controller and CEO of
“Service provider A”. “Individual A” is also a minority shareholder and client of
the Firm. As set out in the section headed ‘firm used as a vehicle for potential
financial crime’ below, the Authority has significant concerns about “Individual
A’s” involvement in the Firm and therefore the accuracy of the underlying data
received from “Service Provider A" in order for the Firm to perform the client
money reconciliation.
4.15. This is because the firm has identified that “Individual A” appears to have falsified
their trading statements thought the Firm with the records building a picture of
highly profitable trading activity which the Firm is unable to reconcile with its own
records. The Firm has transferred to “Individual A” over £11m on the basis of the
balances shown in their statements. While the Firm continues to assert their view
that no client money has gone missing as a result, they are unable to verify this
or whether client money in the Firm is whole as a result of the activity.
4.16. The Firm’s client money reconciliations rely on data from “Service Provider A”,
however the Firm has stated to the Authority that it currently cannot rely on any
data from “Service Provider A” and that as a result of this uncertainty it cannot
confirm how much it owes and holds money and assets for clients before a
forensic audit reconciling the Firm’s CASS position has concluded.
4.17. If inaccurate client money data has formed the basis of any client money
reconciliations the Firm has carried out, it would be unable to produce an
accurate and up-to-date picture of its CASS position. Accurate and up-to-date
books and records are a central tenet to a compliant CASS environment. If the
Firm is unable to rely on or validate the data which forms the basis of its CASS
reconciliations, the Authority cannot be confident that the Firm is providing an
appropriate degree of protection for its client assets.
Client money reconciliations
4.18. The Firm has not been able to adequately demonstrate it has systems and
controls in place to perform compliant internal client money reconciliation or,
more fundamentally and as above, that the accuracy of data feeding into the
reconciliations is accurate and up to date.
4.19. The Authority requested reconciliation data from the Firm on 31 August 2023
which included reconciliation front coversheets. The Firm responded on the same
day, as requested, but did not include the coversheets and only provided the
coversheets following a second request. The Firm explained the cover sheets
were delayed due to the following:
“compiling the information into a central file and the formatting of the uniformed
front sheets for your ease of reference. I also understand that the key
stakeholders for CASS in our Operations and Finance team are on annual leave
and/or working remotely today due to rail strikes.”
4.20. The Authority expects that a Firm would have an internal client money
reconciliation coversheet which clearly articulates Client Money Resource and
Requirement on a daily basis without the need to format or produce these
coversheets specifically at our request.
4.21. The Authority has queried with the Firm entries “MM amount” which showed
£11.5m. The Firm stated, in an email dated 12 September 2023, that this amount
was “…excess TTCA cash is reported as CASS balance in RBC under excess ISIN:
IE00BZ163M45, in the case of margin requirements the differentials are brought
back under TTCA and this is reflected under the ‘MM amount’ as 11,500,000”.
This would indicate that the Firm are including TTCA monies in their client money
resource. TTCA monies do not come under CASS and should not be reflected on
the reconciliation.
4.22. The reconciliation information provided by the Firm does not fully articulate how
the Firm has calculated the Client Money Resource and Requirement figure, which
ultimately determines whether the Firm has a client money shortfall or surplus,
nor is it clear how or whether the Firm has followed the evidential requirements
laid out in the FCA Handbook. If the Firm is basing the reconciliation on
inaccurate data, the Firm could potentially be operating with an unknown shortfall
or removing too much - or not enough - client money in the event of a client
money surplus. In the event of an insolvency, the Authority is concerned that an
Insolvency Practitioner may not be able to identify which funds belongs to whom,
potentially resulting in losses. As such, undertaking compliant client money
reconciliations is a fundamental CASS process, which the Authority is concerned
the Firm may not be carrying out correctly.
4.23. The reconciliation spreadsheet dated 29 August 2023 which the Authority
reviewed from the Firm includes entries for a model B client of the Firm in various
currencies. Some of these are negative balances and they reduce the amount that
needs to be segregated inappropriately by USD – 4,239,849.10, EUR – 2,630.70
and GBP - 1,250,607.10. According to the spreadsheet, these negative balances
relate to funded liquidations,” warehoused positions,” unallocated trades and
error trades. This results in the Firm effectively operating with a client money
shortfall because the Firm has included negative client balances in its internal
reconciliation when they are only allowed to include positive balances in the
reconciliation.
4.24. Furthermore, based on earlier reconciliations the Firm provided on 3 May 2023, it
does not appear that the Firm is performing a compliant internal client money
reconciliation. For example, initially there was no cover sheet provided, and there
was no clear articulation of the Client Money Resource and Requirement, as per
CASS 7.16.8R and 7.16.10R, nor was there evidence of the evidential calculations
per CASS 7.16.22E. Either the Firm did not have these items or did not submit
them when initially requested by the Authority. The Firm has not clearly
demonstrated that it is using only internal sources of information to perform its
internal client money reconciliations as per CASS 7.16.16 (1)).
Client Transaction Account
4.25. The Authority has identified concerns about the way in which the Firm has used a
CTA which is held in the name of a separate and connected firm. A CTA is an
account with an Intermediate Broker used for transactions that are due to occur
or settle. The Authority would not expect there to be any excess balances held in
a CTA.
4.26. As part of the information provided to the Authority on 2 May 2023, the Firm
stated that clients deposit money directly into this CTA, with the Firm moving any
monies deposited there into the Firm’s client bank account through daily sweeps.
The Authority highlighted the approach is not consistent with the Authority’s
expectations. The Firm stated that “in practice...any client money promptly ends
up in a client bank account.” This approach is in contravention of CASS 7.13.6R,
which requires client money to be paid directly into a client bank account and
only those sums required for trading obligations, or which are required to keep
the transaction account open should be held in transactions accounts, as per
CASS 7.14.4G. The Authority has highlighted to the Firm that it considers that
their use of the Client Transaction Account (“CTA”) may not have been in line
with CASS 7.14.2R.
4.27. In an email from the Firm’s dated 12 July 2023, it stated” Please note, our client
has already asked its Model B firms (and the underlying clients) to stop making
any payments of client money into this account. The account having daily sweeps
means, in practice, that any client money promptly ends up in a client bank
account.” This comment is indicative of a lack of knowledge on behalf of the firm
as a Client Transaction Account should only receive client money in relation to a
transaction, and not for the receipt of client money to then be swept into another
account.
4.28. The Firm currently doesn’t have confidence in its books and records. In response
to the concerns raised by the Authority, the Firm instructed an independent
auditor to provide a forensic examination of '' ‘Individual A’s’ trades and whether
client money in the Firm is whole.
4.29. The Firm states that it can only have full certainty about whether there is a CASS
shortfall once the forensic auditors have concluded their exercise. The Authority
understands that following a stage 1 data sourcing exercise, the auditors will
undertake a stage 2 analytical exercise with a view to reconcile and verify
whether client assets in the firm are whole.
4.30. In line with the Firm’s earlier indications, the Authority initially expected the
auditors to conclude their stage 2 work by the end of August. However, the Firm
was not ready to start the work before 18 August. It then asked for the
Authority’s view on the stage 2 for the work- as previously agreed with the
Authority.
4.31. The Authority reviewed the formal proposed scope for the audit and raised
concern that the scope of work was not as comprehensive as the Firm had led the
Authority to believe. The proposed scope also makes clear that the usefulness of
the exercise will be limited by it relying on data from “Service Provider A” and by
the fact the report will not be commenting on the processes and controls in place
at the Firm to ensure CASS compliance. The forensic auditors also provided a side
letter stating that the Authority could not place any reliance on the findings or
use it as a basis for any regulatory action. Furthermore, once commenced, the
reconciliations would take a further nine weeks to conclude- meaning the exercise
would not complete before November at the earliest.
4.32. Given the Authority’s concerns over the scope of the forensic audit not being as
robust as the Authority had expected and its outputs being reliant on accurate
source data from “Service Provider A”, combined with delays in commencing the
work, the Authority is concerned that client money and assets in the Firm
continue to be subject to significant risk until robust, independent verification of
its CASS position is obtained. The work currently being scoped by the Firm does
not appear to be able to provide this.
Firm used as a vehicle for potential financial crime
4.33. ‘Individual A’ has a number of close connections to the Firm. Until 31 May 2023
'Individual A’ was a client of the Firm and executed trades for themselves through
a personal trading account held at the Firm.
4.34. The Firm opened a trading account for 'Individual A’ in June 2021. According to
account opening paperwork from 21 June 2021, 'Individual A’ requested to be
categorised as an Elective Professional client due to his knowledge and experience
of trading. 'Individual A’ stated that he had had approximately 6 years of trading
experience, had traded a portfolio of approximately £250 million in this period,
had an income of £250k per annum. The Authority considered that the due
diligence performed as part of the onboarding process was insufficient as there
was no documentation confirming income, trading history or bank accounts
confirming assets.
4.35. 'Individual A’s trading account shows trades and cash transactions from January
2021. The Firm has not been able to explain how 'Individual A’ opened an account
almost 6 months prior to carrying out KYC (Know Your Customer) checks on them
and formally opening his trading account.
4.36. To explore the concerns, the Authority asked for the Firm to send it the trading
statements for ''Individual A’ on various occasions from April 2023. The Firm
provided a trading statement for 'Individual A’ on the 2 May and the 11 of May. It
was noted at the time the limited period covered by both statements did not
match each other.
4.37. The Firm noted that it was not easy to produce ‘Individual A’s’ trading statement.
According to the statements, Individual A’s trading activity was highly profitable
with total aggregate investment of £1.2m generating profits of c.£12m between
January 2021 and May 2023. The Firm subsequently stated to the Authority that
they had transferred to ‘Individual A’ in total £10.8m as a result of the profits
recorded in their trading statement.
4.38. The Firm did not initially raise concerns about the statements, and they
maintained the view ‘Individual A’ appeared to have legitimately created the
significant trading profits on his account. However, the Firm eventually stated
that they could not be confident in the statements being correct.
4.39. The Firm, in a letter dated 1 June 2023, stated that “[the Firm] has serious
concerns with regarding ‘Individual A’ and his trading”. Later in the letter, it
states that there have been “identified discrepancies between the reported trades
in ‘Individual A’s’ trading statements provided.”
4.40. The Firm stated that it appears ‘Individual A’ falsified the trading statements,
including in them numerous trades for which ‘Individual A’ placed no orders
through the Firm, and which according to the Firm’s own records have been
undertaken for other clients of the Firm instead. The Firm also stated that the
statements appeared to exclude trades which the Firm could verify had been
executed for ‘Individual A’s’ account.
4.41. The Firm stated that while they believed client monies remained whole despite
‘Individual A’s’ activity, they could not be fully confident that all the funds
transferred to ‘Individual A’ from the Firm’s CASS accounts based on the c£12mm
balance on their trading account belonged to them or that client money was
indeed whole. These statements contradict and despite several requests from the
Authority, the Firm has not been able to provide evidence showing that all funds
transferred to “Individual A” have belonged to them. Subsequently, the Firm
instructed an independent auditor to provide a forensic examination of ‘Individual
A’’s trades and whether client money in the firm is whole.
4.42. As the Authority has identified that ‘Individual A’ may have falsified their trading
statements, the Authority is concerned that the Firm’s business may have been
used for a purpose connected with financial crime.
4.43. Based on the Firm’s letter of 1 June, the Firm itself identified concerns with the
data provided to them by ‘Service Provider A’ and by extension ‘Individual A’.
Therefore, according to the Firm, the same could be said for the data provided by
‘Service Provider A’ to the Firm to perform the Internal and External Client money
and Custody Asset reconciliations because ‘Individual A’s’ trading account formed
part of these reconciliations.
4.44. Given the statements made by the Firm, the Authority is also concerned that data
provided by ‘Service Provider A’ may have been manipulated to mask a possible
shortfall and/or to mask 'Individual A’s’ trading activity. Due to material concerns
with the data source, the Authority is unable to verify the CASS position of the
firm. The circumstances which the firm has identified also suggest the firm lacked
appropriate controls and oversight over ‘Service Provider A’, and that more
directly, their books and records were not and are still not accurate and up to
date.
4.45. The regulatory provisions relevant to this First Supervisory Notice are set out in
the Annex.
Analysis of failings and risks
4.46. The FCA’s Threshold Conditions represent the minimum conditions which a firm is
required to satisfy, and continue to satisfy, to be given and to retain permission
to carry on regulated activities.
4.47. The ‘Suitability’ Threshold Condition requires the Firm to be a fit and proper
person having regard to all the circumstances.
4.48. The Principles set out the fundamental obligations of firms under the regulatory
(1)
Principle 2 requires the Firm to conduct its business with due skill, care,
and diligence.
(2)
Principle 3 requires the Firm to take reasonable care to organise and
control its affairs responsibly and effectively, with adequate risk
management systems.
(3)
Principle 10 requires the Firm to arrange adequate protection for clients’
assets when it is responsible for them.
4.49. Chapter 7 of CASS 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 its investment
business. Chapter 7.15 of CASS sets out the requirements a firm must meet
when keeping records and accounts of the client money it holds. Chapter 7.16 of
CASS sets out the methods of client money reconciliation that are appropriate to
meet the requirements of Chapter 7.15 of CASS.
4.50. The Authority has concluded, considering 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. The Authority considers that the Requirements
are a proportionate and appropriate means to address the current risks.
Timing and duration of the Requirements
4.51. It is necessary to impose the Requirements to take immediate effect given the
seriousness of the risks to new investors and given the Authority’s view of the
scale of remedial work required to bring the Firm’s client money and custody
environment into compliance with the requirements of the regulatory regime.
4.52. The Authority considers that it is necessary for the Requirements to remain in
place until varied or cancelled by the Authority (either on the application of the
Firm or of the Authority’s own volition).
5.
PROCEDURAL MATTERS
Decision-maker
5.1.
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 2.3.7G and DEPP 4.1.7G.
5.2.
This First Supervisory Notice is given under section 55Y (4) and in accordance
with section 55Y (5) of the Act.
5.3.
The following statutory rights are important.
Representations
5.4.
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. 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 FSN is given to refer the matter to the Tribunal. Any
notification or representations should be sent to (FCAActions@fca.org.uk) and the
SPC Decision Making Secretariat (SPCDecisionMakingSecretariat@fca.org.uk).
The Tribunal
5.5.
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.
5.6.
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).
5.7.
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.
5.8.
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 (FCAActions@fca.org.uk) and the
SPC Decision Making Secretariat (SPCDecisionMakingSecretariat@fca.org.uk).
Confidentiality and publicity
5.9.
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).
5.10. 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
5.11. For more information concerning this matter, contact (FCAActions@fca.org.uk).
5.12. Any questions regarding this matter generally or the executive procedures
decision-making process should be directed to the SPC Decision Making
Secretariat (SPCDecisionMakingSecretariat@fca.org.uk).
Director, The Authority
ANNEX
RELEVANT STATUTORY PROVISIONS
1.
The Authority’s operational objectives established in section 1C of the Act include
securing an appropriate degree of protection for consumers.
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 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 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).
5.
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 Threshold Conditions
6.
The section of the Handbook entitled “Threshold Conditions” (COND) gives
guidance on the Threshold Conditions. COND 1.2.3G provides that the Authority
may exercise its own-initiative powers under section 55L of the Act if, among other
things, a firm is failing to satisfy any of the Threshold Conditions or is likely to do
so.
7.
COND 2.3.1A UK reflects the provisions of the Act (paragraph 2C of Schedule 6) to
the effect that a firm must be capable of being effectively supervised by the
Authority having regard to all the circumstances. The matters which are relevant in
determining whether a firm is a capable of being effectively supervised include the
way in which the firm’s business is organised.
8.
COND 2.5.1A UK reflects the provisions of the Act (paragraph 2E of Schedule 6) to
the effect that a firm must be a fit and proper person having regard to all the
circumstances. The matters which are relevant in determining whether a firm is a
fit and proper person include the need to ensure the firm’s affairs are conducted in
an appropriate manner (having regard in particular to the interests of consumers
and the integrity of the UK financial system) and whether the firm’s business is
being, or is to be, managed in such a way as to ensure that its affairs will be
conducted in a sound and prudent manner.
The Enforcement Guide
9.
The Authority's approach in relation to its own-initiative powers is set out in
Chapter 8 of the Enforcement Guide (EG), certain provisions of which are
summarised below.
10.
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)).
11.
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)).
12.
EG 8.2.3 states that 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 ensure a firm meets its regulatory
requirements. 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 or is concerned that the consequences of a firm not taking the desired
steps may be serious.
13.
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.
14.
EG 8.3.2 states that the Authority will consider exercising its own-initiative power
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.
15.
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 information indicating significant loss,
risk of loss or other adverse effects for consumers, where action is necessary to
protect their interests.
16.
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.
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.
Decision Procedure and Penalties Manual (“DEPP”)
18.
DEPP 2.5.7G provides that an Authority staff under executive procedures will take
the decision to give a supervisory notice exercising the Authority’s own-initiative
powers (by removing a regulated activity, by imposing a limitation or requirement
or by specifying a narrower description of regulated activity), including where the
action involves a fundamental variation or requirement.
Principles for Businesses (“PRIN”)
18.
PRIN sets out the fundamental obligations of firms under the regulatory system:
•
Principle 2 requires the Firm to conduct its business with due skill, care, and
diligence.
•
Principle 3 requires the Firm to take reasonable care to organise and control
its affairs responsibly and effectively, with adequate risk management
systems.
•
Principle 10 requires the Firm to arrange adequate protection for clients’
assets when it is responsible for them.
Client Assets (CASS)
19.
Chapter 7 of CASS 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 its investment
business. Chapter 7.15 of CASS sets out the requirements a firm must meet
when keeping records and accounts of the client money it holds. Chapter 7.16 of
CASS sets out the methods of client money reconciliation that are appropriate to
meet the requirements of Chapter 7.15 of CASS.
1.
ACTION
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 IBP Markets Limited (“the Firm”) with
immediate effect.
Restriction on activities
(1)
The Firm must not, save as expressly permitted in paragraphs 2 to 5
below, without the prior written consent of the Authority, carry on any
regulated activities for which it has a Part 4A permission.
(2)
The Firm may continue to execute and transmit (as relevant) instructions
from an existing client to liquidate any existing position held by the client,
or held on their behalf. Any sums payable to an existing client as a result
of any instruction described in this paragraph shall not be transmitted or
released to the Firm or any Connected Persons.
(3)
The Firm may continue to liquidate any existing position it holds on its own
account. Any sums payable to the Firm as a result of any transaction
described in this paragraph shall not be transmitted or released to the Firm
or any Connected Persons.
(4)
The Firm may continue to hold client money and safeguard and administer
custody assets held at the date of these Requirements, or which the Firm
has accepted or segregated in accordance with paragraph 5 below.
(5)
Paragraph 1 does not apply to the receipt of new client money or custody
assets from, or on behalf of, existing clients by the Firm because of or in
relation to the following:
(a)
Receipt of dividends or coupons.
(b)
Rights issues.
(c)
Corporate actions including maturing bonds.
(d)
Settlement of trades instructed but not settled as at the date of
these Requirements.
(e)
The execution of an instruction from an existing client, as described
in paragraph 2.
(6)
Save as set out in paragraph 5, the Firm must not accept any new client
money, custody assets or funds subject to Title Transfer Collateral
Arrangements (“TTCA”) whether from existing or new clients in any of its
business areas. For the avoidance of doubt, this includes funds held under
‘Model A’ or ‘Model B’ arrangements.
(7)
The Firm must not, without the prior written consent of the Authority,
recommence any regulated activities.
Assets requirement
(8)
Save as set out in sub-paragraph (5)(d) and (5)(e), paragraph 9 and
paragraph 10 the Firm must not take any action which has, or may have,
the effect of disposing of, withdrawing, transferring, dealing with or
diminishing the value of any of its own assets, or assets held for or on
behalf of others, including client money or custody assets.
(9)
The Firm may continue dealing with or disposing of any of its own assets
(whether in the UK or elsewhere) in the ordinary and proper course of
business. For the avoidance of doubt, the following would not be in the
ordinary and proper course of business for these purposes:
(a)
The disposal, transfer, or sale in whole or in part of the Firm’s
assets, including its client base.
(b)
The making of any distribution to shareholders whether by way of
capital distribution, dividends, or any other payments.
(c)
Any payment exceeding £2,000, whether as a single transaction or
a combination of related transactions, to Connected Persons made
without the Authority’s express consent.
(d)
The making of any gift or loan by the Firm to any party.
(e)
The entry into any financial reconstruction or reorganisation
(10)
The Firm may also spend, from its own assets, a reasonable amount on
reasonable legal expenses.
(11)
For the avoidance of doubt any payment exceeding £2,000 whether as a
single transaction or a combination of related transactions, to Connected
Persons must not be made without the Authority’s express consent.
(12)
The Firm must segregate £720,000 in cash in an account(s) at an
authorised UK bank or credit institution(s) that is held in the Firm’s own
name and is controlled solely by the Firm (the "Segregated Amount").
Such sums being used for the sole purpose of funding the wind down of
the business if there is a requirement to do so. The Firm must continue to
hold no less than £720,000 in this way and for this purpose, unless
otherwise expressly agreed by the Authority.
(13)
The Segregated Amount referred to in paragraph 12 must not be subject
to the rights or interest of any other person (for example any form of
security, lien, netting arrangement, right of set-off or preferred creditor
arrangement), save where such rights arise due to the terms and
conditions routinely applied to such accounts by the relevant credit
institution.
(14)
Paragraphs 8 and 12 are assets requirements within the meaning of
section 55P(4)(a) of the Act.
Retention and notification requirements
(15)
The Firm must secure all books and records and preserve all information
and systems in relation to regulated activities carried on by it, and must
retain these in a firm and at a location within the UK, to be notified to the
Authority in writing within 7 days of the date the Requirements come in to
force, such that they (or, so as not to hinder the Firm’s performance of its
business activities, true copies of them) can be provided to the Authority,
or to a person named by the Authority, promptly on its request.
(16)
By close of business on the day that is 7 days after the Requirements
come into force, the Firm must notify in writing:
(a)
all its clients; and
(b)
the banks and custodians the Firm uses to hold its own money and
assets, as well as its clients’ money and custody assets and TTCA
money and assets;
of the terms and effects of these Requirements. This must be in a
form to be agreed in advance with the Authority.
(17)
By close of business on the day that is 2 days after the Requirements
come into force, the Firm must publish in a prominent place on its website
a notice, the placement and wording of which will need to be agreed in
advance with the Authority, setting out the terms and effect of these
Requirements.
(18)
Once the notifications referred to in paragraph 16 have been made, and in
any event by close of business on the day that is 10 days after the
Requirements come into force, the Firm must provide to the Authority:
(a)
Copies of the template notifications sent to all recipients referred to
in paragraph 16.
(b)
A list of all parties to whom notifications have been sent pursuant to
paragraph 16.
(c)
Confirmation that, to the best of its knowledge, the Firm has sent
notifications pursuant to paragraph 16 to all relevant parties.
(19)
A person approved to perform a senior management function (“SMF”) at
the Firm must send to the Authority by email by 12 noon every Friday (or
the next business day should the Friday fall on a Bank Holiday), until such
time as it is notified otherwise in writing by the Authority:
(a)
written confirmation that the Firm is in compliance with these
Requirements; and
(b)
copies of up-to-date statements of all accounts held by the Firm
with financial institutions, whether in the UK or elsewhere, and
whether in respect of its own assets, client assets or both, showing
at least all transactions in the previous week and the balances of
the accounts.
1.2.
In this First Supervisory Notice the term “Connected Person” means a person
(including a body of persons corporate or unincorporate) who has or has had the
following relationships with the Firm. The person is:
(1)
A member of the Firm’s group.
(2)
A shareholder in the Firm or a member of the Firm’s group.
(3)
A controller of the Firm or a member of the Firm’s group.
(4)
An employee of the Firm or a member of the Firm’s Group.
(5)
A director, officer, manager or agent of the Firm or a member of the Firm’s
group.
1.3.
These Requirements replace all other requirements imposed on the Firm pursuant
to section 55L(5)(a) of the Act.
1.4.
These Requirements 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:
(1)
it is failing, or is likely to fail, to satisfy the Effective Suitability Threshold
Condition pursuant to Paragraph 2C of Schedule 6 to the Act;
(2)
it is failing, or is likely to fail, to satisfy the Suitability Threshold Condition
pursuant to Paragraph 2E of Schedule 6 of the Act; and
(3)
it is desirable in order to advance one or more of the Authority’s
operational objectives, in particular the Authority’s consumer protection
objective (as defined in Section 1C of the Act).
2.2.
The Authority has serious concerns that:
(1)
The Firm may not have appropriate systems and controls in place to
ensure adequate protection for client money and assets. In particular, by
its own admission the Firm has lost confidence in its books and records
and therefore whether it can demonstrate that the client money and assets
it holds are whole.
(2)
The Firm’s business may have been used for a purpose connected with
financial crime. In particular, that an individual with close links to the Firm
and who is also a client of the Firm may have falsified his own trading
statements.
3.
DEFINITIONS
3.1.
The definitions below are used in this First Supervisory Notice:
“the Act” means the Financial Services and Markets Act 2000;
“Suitability Threshold Condition” means the condition set out in Paragraph 2E of
Schedule 6 of the Act and COND 2.5;
“the Authority” means the Financial Conduct Authority;
“the Firm” means IBP Markets Limited;
“FSN” means a First Supervisory Notice;
“Handbook” means the Authority’s online handbook of rules and guidance (as in
force from time to time);
“Part 4A permission” means permission to conduct regulated activities, granted
by the Authority under Part 4A of the Act;
“Requirements” means the terms imposed on the Firm by this First Supervisory
Notice as outline in section 1 above; and
“Tribunal” means the Upper Tribunal (Tax and Chancery Chamber).
4.
FACTS AND MATTERS - Background
4.1.
The Firm is a wholesale broker providing custody services and access to equity
and fixed income securities for non-retail clients. The Firm’s services are split
between a “model A” and “model B” offering. The Firm defines the model A
business as the provision of execution and custody services to approximately fifty
active wholesale clients directly, and the model B business as the provision of
custody and execution service to currently 2 wholesale clients, both retail wealth
managers, through a user interface platform offered by ‘Service Provider A’. For
the model A business, the Firm undertakes these activities in-house. According to
the Firm, Model A makes up approximately 60% and Model B the remaining 40%
of the Firm’s revenues.
4.2.
For the model B business, the Firm also purchases back-office support services
from ‘Service Provider A’, including the generation of trading statements, trade
processing and CASS reconciliations.
4.3.
According to the latest set of management accounts the Firm shared with the
Authority in June, its revenues for the year ended 31st December 2022 were
£10.17mm, profits after tax £1.08mm and net assets of £1.94mm. The Firm’s
latest audited accounts from year end 31st December 20214 show it made
revenues of £7.7mm (2020: £2.4mm); profit after tax of c£39k (2020: -£1k);
and had net assets of c£859k (2020: £341k). The Firm’s latest CMAR (01/07/23-
31/07/23) states the Firm holds £40.5mm of client money and £560.5mm of
custody assets.
4.4.
The Firm has been authorised by the Authority since 13 September 2010 to
conduct investment business. It has the following Part 4A Permissions:
a.
Advising on investments (except on Pension Transfers and Pension
Opt Outs).
b.
Arranging (bringing about) deals in investments.
c.
Dealing in investments as agent.
d.
Dealing in investments as principal.
e.
Making arrangements with a view to transactions in investments.
f.
Safeguarding and administration of assets (without arranging).
g.
Agreeing to carry on a regulated activity.
4.5.
From December 2022 the Authority started to have concerns about the Firm.
Following engagement between the Authority and the Firm in relation to these
matters, the Firm agreed to a set of voluntary requirements which took effect
from 24 May 2023 (the “VREQ”). The requirements stop the Firm from making
payments to connected parties and from onboarding new clients. However, they
allow the Firm to continue conducting regulated activities for existing clients,
including providing trading and custody services.
4.6.
Since the VREQ was agreed, the Authority has continued to engage with the Firm
about its concerns that:
(1)
the Firm may not have appropriate systems and controls in place to ensure
adequate protection for client money and assets; and
(2)
the Firm’s business may have been used for a purpose connected with
financial crime.
Systems and controls to ensure adequate protection for client money and
assets
4.7.
Money that a firm receives or holds for, or on behalf of, a client in the course of,
or in connection with, its designated investment business or otherwise, is client
money for the purposes of the Authority’s client money assets sourcebook
(“CASS”) rules. The Firm has the permissions to hold and control client money
and therefore is expected to comply with all relevant chapters in CASS 7. The
Firm also has the permission for safeguarding and administration of assets
(without arranging), therefore enabling the Firm to hold custody assets within the
scope of CASS 6 and again expected to comply with all relevant provisions of
CASS 6.
4.8.
A title transfer collateral arrangement (“TTCA” in CASS 7) is an arrangement by
which a client transfers full ownership of money to a firm for the purpose of
securing or otherwise covering present or future, actual, contingent or
prospective obligations. CASS 7.11.1R(3)(a) states that a firm must not enter
into a TTCA in respect of money belonging to a retail client and CASS 7.11.1R(4)
states that such money does not amount to client money provided that it is not
with a retail client.
4.9.
The purpose of CASS rules is to keep client money and assets safe, particularly
but not exclusively in the event of a firm failure. One of the fundamental
requirements of CASS rules is that client money must be segregated from the
Firm’s money, which ensures it is ring-fenced in the event of an insolvency.
4.10. The Authority has identified a number concerns with the Firm’s compliance with
both CASS 6 and 7. To date the Firm has been unable to demonstrate to the
Authority it has a compliant CASS environment. There are material concerns over
the accuracy of the Firm’s books and records and whether these are sufficiently
robust to allow it to perform a compliant client money reconciliation in order for
the Firm to establish an appropriate client money position. The failure to do this
results in client money being put at risk. The key concern over the Firm’s books
and records is due to the Firm’s reliance on its outsourced service provider –
“Service Provider A” – to perform client money reconciliations using inaccurate or
potentially falsified data. This is described in more detail below.
4.11. One of the key principles of CASS is that a firm must have accurate books and
records so it can determine the amount of CASS assets it holds for each of its
clients. Crucial to achieving this is the firm performing daily internal and external
reconciliations as per CASS 6 and 7 using reliable and precise data. Without the
underlying data being accurate there is a high risk of the firm operating with an
unidentified CASS shortfall and, more importantly, in the event of firm failure, of
CASS assets not being returned whole.
4.12. As the Firm has been unable to satisfy the Authority as to the accuracy of its
books and records, it follows that the Firm does not have a compliant client
money reconciliation process which clearly articulates the Firm’s CASS position,
and therefore puts client assets at risk.
4.13. Furthermore, a large volume of CASS controls predicates on the use of accurate
and timely data, and without that fundamental underpinning, compliance – and
ultimately the safety of the assets – cannot be satisfied to any meaningful
degree.
Concerns over the accuracy of source data used for reconciliations
4.14. As described above, “Service Provider A” provides back-office services to the
Firm. These services to the Firm include generating trading statements, trade
processing and CASS reconciliations. “Individual A” is controller and CEO of
“Service provider A”. “Individual A” is also a minority shareholder and client of
the Firm. As set out in the section headed ‘firm used as a vehicle for potential
financial crime’ below, the Authority has significant concerns about “Individual
A’s” involvement in the Firm and therefore the accuracy of the underlying data
received from “Service Provider A" in order for the Firm to perform the client
money reconciliation.
4.15. This is because the firm has identified that “Individual A” appears to have falsified
their trading statements thought the Firm with the records building a picture of
highly profitable trading activity which the Firm is unable to reconcile with its own
records. The Firm has transferred to “Individual A” over £11m on the basis of the
balances shown in their statements. While the Firm continues to assert their view
that no client money has gone missing as a result, they are unable to verify this
or whether client money in the Firm is whole as a result of the activity.
4.16. The Firm’s client money reconciliations rely on data from “Service Provider A”,
however the Firm has stated to the Authority that it currently cannot rely on any
data from “Service Provider A” and that as a result of this uncertainty it cannot
confirm how much it owes and holds money and assets for clients before a
forensic audit reconciling the Firm’s CASS position has concluded.
4.17. If inaccurate client money data has formed the basis of any client money
reconciliations the Firm has carried out, it would be unable to produce an
accurate and up-to-date picture of its CASS position. Accurate and up-to-date
books and records are a central tenet to a compliant CASS environment. If the
Firm is unable to rely on or validate the data which forms the basis of its CASS
reconciliations, the Authority cannot be confident that the Firm is providing an
appropriate degree of protection for its client assets.
Client money reconciliations
4.18. The Firm has not been able to adequately demonstrate it has systems and
controls in place to perform compliant internal client money reconciliation or,
more fundamentally and as above, that the accuracy of data feeding into the
reconciliations is accurate and up to date.
4.19. The Authority requested reconciliation data from the Firm on 31 August 2023
which included reconciliation front coversheets. The Firm responded on the same
day, as requested, but did not include the coversheets and only provided the
coversheets following a second request. The Firm explained the cover sheets
were delayed due to the following:
“compiling the information into a central file and the formatting of the uniformed
front sheets for your ease of reference. I also understand that the key
stakeholders for CASS in our Operations and Finance team are on annual leave
and/or working remotely today due to rail strikes.”
4.20. The Authority expects that a Firm would have an internal client money
reconciliation coversheet which clearly articulates Client Money Resource and
Requirement on a daily basis without the need to format or produce these
coversheets specifically at our request.
4.21. The Authority has queried with the Firm entries “MM amount” which showed
£11.5m. The Firm stated, in an email dated 12 September 2023, that this amount
was “…excess TTCA cash is reported as CASS balance in RBC under excess ISIN:
IE00BZ163M45, in the case of margin requirements the differentials are brought
back under TTCA and this is reflected under the ‘MM amount’ as 11,500,000”.
This would indicate that the Firm are including TTCA monies in their client money
resource. TTCA monies do not come under CASS and should not be reflected on
the reconciliation.
4.22. The reconciliation information provided by the Firm does not fully articulate how
the Firm has calculated the Client Money Resource and Requirement figure, which
ultimately determines whether the Firm has a client money shortfall or surplus,
nor is it clear how or whether the Firm has followed the evidential requirements
laid out in the FCA Handbook. If the Firm is basing the reconciliation on
inaccurate data, the Firm could potentially be operating with an unknown shortfall
or removing too much - or not enough - client money in the event of a client
money surplus. In the event of an insolvency, the Authority is concerned that an
Insolvency Practitioner may not be able to identify which funds belongs to whom,
potentially resulting in losses. As such, undertaking compliant client money
reconciliations is a fundamental CASS process, which the Authority is concerned
the Firm may not be carrying out correctly.
4.23. The reconciliation spreadsheet dated 29 August 2023 which the Authority
reviewed from the Firm includes entries for a model B client of the Firm in various
currencies. Some of these are negative balances and they reduce the amount that
needs to be segregated inappropriately by USD – 4,239,849.10, EUR – 2,630.70
and GBP - 1,250,607.10. According to the spreadsheet, these negative balances
relate to funded liquidations,” warehoused positions,” unallocated trades and
error trades. This results in the Firm effectively operating with a client money
shortfall because the Firm has included negative client balances in its internal
reconciliation when they are only allowed to include positive balances in the
reconciliation.
4.24. Furthermore, based on earlier reconciliations the Firm provided on 3 May 2023, it
does not appear that the Firm is performing a compliant internal client money
reconciliation. For example, initially there was no cover sheet provided, and there
was no clear articulation of the Client Money Resource and Requirement, as per
CASS 7.16.8R and 7.16.10R, nor was there evidence of the evidential calculations
per CASS 7.16.22E. Either the Firm did not have these items or did not submit
them when initially requested by the Authority. The Firm has not clearly
demonstrated that it is using only internal sources of information to perform its
internal client money reconciliations as per CASS 7.16.16 (1)).
Client Transaction Account
4.25. The Authority has identified concerns about the way in which the Firm has used a
CTA which is held in the name of a separate and connected firm. A CTA is an
account with an Intermediate Broker used for transactions that are due to occur
or settle. The Authority would not expect there to be any excess balances held in
a CTA.
4.26. As part of the information provided to the Authority on 2 May 2023, the Firm
stated that clients deposit money directly into this CTA, with the Firm moving any
monies deposited there into the Firm’s client bank account through daily sweeps.
The Authority highlighted the approach is not consistent with the Authority’s
expectations. The Firm stated that “in practice...any client money promptly ends
up in a client bank account.” This approach is in contravention of CASS 7.13.6R,
which requires client money to be paid directly into a client bank account and
only those sums required for trading obligations, or which are required to keep
the transaction account open should be held in transactions accounts, as per
CASS 7.14.4G. The Authority has highlighted to the Firm that it considers that
their use of the Client Transaction Account (“CTA”) may not have been in line
with CASS 7.14.2R.
4.27. In an email from the Firm’s dated 12 July 2023, it stated” Please note, our client
has already asked its Model B firms (and the underlying clients) to stop making
any payments of client money into this account. The account having daily sweeps
means, in practice, that any client money promptly ends up in a client bank
account.” This comment is indicative of a lack of knowledge on behalf of the firm
as a Client Transaction Account should only receive client money in relation to a
transaction, and not for the receipt of client money to then be swept into another
account.
4.28. The Firm currently doesn’t have confidence in its books and records. In response
to the concerns raised by the Authority, the Firm instructed an independent
auditor to provide a forensic examination of '' ‘Individual A’s’ trades and whether
client money in the Firm is whole.
4.29. The Firm states that it can only have full certainty about whether there is a CASS
shortfall once the forensic auditors have concluded their exercise. The Authority
understands that following a stage 1 data sourcing exercise, the auditors will
undertake a stage 2 analytical exercise with a view to reconcile and verify
whether client assets in the firm are whole.
4.30. In line with the Firm’s earlier indications, the Authority initially expected the
auditors to conclude their stage 2 work by the end of August. However, the Firm
was not ready to start the work before 18 August. It then asked for the
Authority’s view on the stage 2 for the work- as previously agreed with the
Authority.
4.31. The Authority reviewed the formal proposed scope for the audit and raised
concern that the scope of work was not as comprehensive as the Firm had led the
Authority to believe. The proposed scope also makes clear that the usefulness of
the exercise will be limited by it relying on data from “Service Provider A” and by
the fact the report will not be commenting on the processes and controls in place
at the Firm to ensure CASS compliance. The forensic auditors also provided a side
letter stating that the Authority could not place any reliance on the findings or
use it as a basis for any regulatory action. Furthermore, once commenced, the
reconciliations would take a further nine weeks to conclude- meaning the exercise
would not complete before November at the earliest.
4.32. Given the Authority’s concerns over the scope of the forensic audit not being as
robust as the Authority had expected and its outputs being reliant on accurate
source data from “Service Provider A”, combined with delays in commencing the
work, the Authority is concerned that client money and assets in the Firm
continue to be subject to significant risk until robust, independent verification of
its CASS position is obtained. The work currently being scoped by the Firm does
not appear to be able to provide this.
Firm used as a vehicle for potential financial crime
4.33. ‘Individual A’ has a number of close connections to the Firm. Until 31 May 2023
'Individual A’ was a client of the Firm and executed trades for themselves through
a personal trading account held at the Firm.
4.34. The Firm opened a trading account for 'Individual A’ in June 2021. According to
account opening paperwork from 21 June 2021, 'Individual A’ requested to be
categorised as an Elective Professional client due to his knowledge and experience
of trading. 'Individual A’ stated that he had had approximately 6 years of trading
experience, had traded a portfolio of approximately £250 million in this period,
had an income of £250k per annum. The Authority considered that the due
diligence performed as part of the onboarding process was insufficient as there
was no documentation confirming income, trading history or bank accounts
confirming assets.
4.35. 'Individual A’s trading account shows trades and cash transactions from January
2021. The Firm has not been able to explain how 'Individual A’ opened an account
almost 6 months prior to carrying out KYC (Know Your Customer) checks on them
and formally opening his trading account.
4.36. To explore the concerns, the Authority asked for the Firm to send it the trading
statements for ''Individual A’ on various occasions from April 2023. The Firm
provided a trading statement for 'Individual A’ on the 2 May and the 11 of May. It
was noted at the time the limited period covered by both statements did not
match each other.
4.37. The Firm noted that it was not easy to produce ‘Individual A’s’ trading statement.
According to the statements, Individual A’s trading activity was highly profitable
with total aggregate investment of £1.2m generating profits of c.£12m between
January 2021 and May 2023. The Firm subsequently stated to the Authority that
they had transferred to ‘Individual A’ in total £10.8m as a result of the profits
recorded in their trading statement.
4.38. The Firm did not initially raise concerns about the statements, and they
maintained the view ‘Individual A’ appeared to have legitimately created the
significant trading profits on his account. However, the Firm eventually stated
that they could not be confident in the statements being correct.
4.39. The Firm, in a letter dated 1 June 2023, stated that “[the Firm] has serious
concerns with regarding ‘Individual A’ and his trading”. Later in the letter, it
states that there have been “identified discrepancies between the reported trades
in ‘Individual A’s’ trading statements provided.”
4.40. The Firm stated that it appears ‘Individual A’ falsified the trading statements,
including in them numerous trades for which ‘Individual A’ placed no orders
through the Firm, and which according to the Firm’s own records have been
undertaken for other clients of the Firm instead. The Firm also stated that the
statements appeared to exclude trades which the Firm could verify had been
executed for ‘Individual A’s’ account.
4.41. The Firm stated that while they believed client monies remained whole despite
‘Individual A’s’ activity, they could not be fully confident that all the funds
transferred to ‘Individual A’ from the Firm’s CASS accounts based on the c£12mm
balance on their trading account belonged to them or that client money was
indeed whole. These statements contradict and despite several requests from the
Authority, the Firm has not been able to provide evidence showing that all funds
transferred to “Individual A” have belonged to them. Subsequently, the Firm
instructed an independent auditor to provide a forensic examination of ‘Individual
A’’s trades and whether client money in the firm is whole.
4.42. As the Authority has identified that ‘Individual A’ may have falsified their trading
statements, the Authority is concerned that the Firm’s business may have been
used for a purpose connected with financial crime.
4.43. Based on the Firm’s letter of 1 June, the Firm itself identified concerns with the
data provided to them by ‘Service Provider A’ and by extension ‘Individual A’.
Therefore, according to the Firm, the same could be said for the data provided by
‘Service Provider A’ to the Firm to perform the Internal and External Client money
and Custody Asset reconciliations because ‘Individual A’s’ trading account formed
part of these reconciliations.
4.44. Given the statements made by the Firm, the Authority is also concerned that data
provided by ‘Service Provider A’ may have been manipulated to mask a possible
shortfall and/or to mask 'Individual A’s’ trading activity. Due to material concerns
with the data source, the Authority is unable to verify the CASS position of the
firm. The circumstances which the firm has identified also suggest the firm lacked
appropriate controls and oversight over ‘Service Provider A’, and that more
directly, their books and records were not and are still not accurate and up to
date.
4.45. The regulatory provisions relevant to this First Supervisory Notice are set out in
the Annex.
Analysis of failings and risks
4.46. The FCA’s Threshold Conditions represent the minimum conditions which a firm is
required to satisfy, and continue to satisfy, to be given and to retain permission
to carry on regulated activities.
4.47. The ‘Suitability’ Threshold Condition requires the Firm to be a fit and proper
person having regard to all the circumstances.
4.48. The Principles set out the fundamental obligations of firms under the regulatory
(1)
Principle 2 requires the Firm to conduct its business with due skill, care,
and diligence.
(2)
Principle 3 requires the Firm to take reasonable care to organise and
control its affairs responsibly and effectively, with adequate risk
management systems.
(3)
Principle 10 requires the Firm to arrange adequate protection for clients’
assets when it is responsible for them.
4.49. Chapter 7 of CASS 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 its investment
business. Chapter 7.15 of CASS sets out the requirements a firm must meet
when keeping records and accounts of the client money it holds. Chapter 7.16 of
CASS sets out the methods of client money reconciliation that are appropriate to
meet the requirements of Chapter 7.15 of CASS.
4.50. The Authority has concluded, considering 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. The Authority considers that the Requirements
are a proportionate and appropriate means to address the current risks.
Timing and duration of the Requirements
4.51. It is necessary to impose the Requirements to take immediate effect given the
seriousness of the risks to new investors and given the Authority’s view of the
scale of remedial work required to bring the Firm’s client money and custody
environment into compliance with the requirements of the regulatory regime.
4.52. The Authority considers that it is necessary for the Requirements to remain in
place until varied or cancelled by the Authority (either on the application of the
Firm or of the Authority’s own volition).
5.
PROCEDURAL MATTERS
Decision-maker
5.1.
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 2.3.7G and DEPP 4.1.7G.
5.2.
This First Supervisory Notice is given under section 55Y (4) and in accordance
with section 55Y (5) of the Act.
5.3.
The following statutory rights are important.
Representations
5.4.
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. 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 FSN is given to refer the matter to the Tribunal. Any
notification or representations should be sent to (FCAActions@fca.org.uk) and the
SPC Decision Making Secretariat (SPCDecisionMakingSecretariat@fca.org.uk).
The Tribunal
5.5.
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.
5.6.
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).
5.7.
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.
5.8.
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 (FCAActions@fca.org.uk) and the
SPC Decision Making Secretariat (SPCDecisionMakingSecretariat@fca.org.uk).
Confidentiality and publicity
5.9.
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).
5.10. 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
5.11. For more information concerning this matter, contact (FCAActions@fca.org.uk).
5.12. Any questions regarding this matter generally or the executive procedures
decision-making process should be directed to the SPC Decision Making
Secretariat (SPCDecisionMakingSecretariat@fca.org.uk).
Director, The Authority
ANNEX
RELEVANT STATUTORY PROVISIONS
1.
The Authority’s operational objectives established in section 1C of the Act include
securing an appropriate degree of protection for consumers.
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 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 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).
5.
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 Threshold Conditions
6.
The section of the Handbook entitled “Threshold Conditions” (COND) gives
guidance on the Threshold Conditions. COND 1.2.3G provides that the Authority
may exercise its own-initiative powers under section 55L of the Act if, among other
things, a firm is failing to satisfy any of the Threshold Conditions or is likely to do
so.
7.
COND 2.3.1A UK reflects the provisions of the Act (paragraph 2C of Schedule 6) to
the effect that a firm must be capable of being effectively supervised by the
Authority having regard to all the circumstances. The matters which are relevant in
determining whether a firm is a capable of being effectively supervised include the
way in which the firm’s business is organised.
8.
COND 2.5.1A UK reflects the provisions of the Act (paragraph 2E of Schedule 6) to
the effect that a firm must be a fit and proper person having regard to all the
circumstances. The matters which are relevant in determining whether a firm is a
fit and proper person include the need to ensure the firm’s affairs are conducted in
an appropriate manner (having regard in particular to the interests of consumers
and the integrity of the UK financial system) and whether the firm’s business is
being, or is to be, managed in such a way as to ensure that its affairs will be
conducted in a sound and prudent manner.
The Enforcement Guide
9.
The Authority's approach in relation to its own-initiative powers is set out in
Chapter 8 of the Enforcement Guide (EG), certain provisions of which are
summarised below.
10.
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)).
11.
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)).
12.
EG 8.2.3 states that 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 ensure a firm meets its regulatory
requirements. 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 or is concerned that the consequences of a firm not taking the desired
steps may be serious.
13.
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.
14.
EG 8.3.2 states that the Authority will consider exercising its own-initiative power
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.
15.
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 information indicating significant loss,
risk of loss or other adverse effects for consumers, where action is necessary to
protect their interests.
16.
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.
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.
Decision Procedure and Penalties Manual (“DEPP”)
18.
DEPP 2.5.7G provides that an Authority staff under executive procedures will take
the decision to give a supervisory notice exercising the Authority’s own-initiative
powers (by removing a regulated activity, by imposing a limitation or requirement
or by specifying a narrower description of regulated activity), including where the
action involves a fundamental variation or requirement.
Principles for Businesses (“PRIN”)
18.
PRIN sets out the fundamental obligations of firms under the regulatory system:
•
Principle 2 requires the Firm to conduct its business with due skill, care, and
diligence.
•
Principle 3 requires the Firm to take reasonable care to organise and control
its affairs responsibly and effectively, with adequate risk management
systems.
•
Principle 10 requires the Firm to arrange adequate protection for clients’
assets when it is responsible for them.
Client Assets (CASS)
19.
Chapter 7 of CASS 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 its investment
business. Chapter 7.15 of CASS sets out the requirements a firm must meet
when keeping records and accounts of the client money it holds. Chapter 7.16 of
CASS sets out the methods of client money reconciliation that are appropriate to
meet the requirements of Chapter 7.15 of CASS.