FINAL NOTICE

1.
ACTION

1.1.
For the reasons given in this notice, the Authority has decided to impose on

Towergate Underwriting Group Limited (“TUGL”) a financial penalty of

£2,632,000 in relation to conduct during the period 29 June 2005 to 31

December 2013 (the “Relevant Period”).

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

therefore qualified for a 30% (stage 1) discount under the Authority’s executive

settlement procedures. Were it not for this discount, the Authority would have

imposed a financial penalty of £3,760,000 on TUGL.

2.
SUMMARY OF REASONS

2.1.
TUGL is an insurance intermediary and during its normal business operations

holds both client and insurer money. TUGL accumulated a shortfall of £12.6

million in its client and insurer money accounts, which due to significant systems

and control weaknesses went undetected for several years.

2.2.
The Authority has decided to take action for breaches of Principles 3

(Management and Control) and 10 (Clients’ Assets) as well as rules contained in

the Client Assets Sourcebook (“CASS Rules”) during the Relevant Period.

2.3.
Specifically, TUGL failed during the Relevant Period to comply with requirements

a)
take reasonable care to organise and control its affairs responsibly and

effectively with adequate risk management systems in relation to the

management of its client and insurer money accounts; and

b)
arrange adequate protection for clients’ assets when it was responsible for

them.

2.4.
In addition, TUGL breached the CASS Rules, specifically CASS 5.5.3R,

5.5.63(1)R, 5.5.63(4)R, 5.5.76R and 5.5.84R, which required TUGL to:

a)
ensure that client money was properly segregated from its own money;

b)
carry out accurate client money calculations and reconciliations;

c)
immediately correct any client money shortfall upon becoming aware that

a shortfall might exist;

d)
immediately notify the Authority of its failure to perform required client

money calculations;

e)
have adequate processes in place to identify interest accruing on its client

money accounts in error and to then remove that interest to TUGL’s office

account; and

f)
ensure that it accurately maintained its records to ensure correspondence

to the actual client money held in its bank accounts.

2.5.
Although TUGL breached the CASS Rules as described, there was no actual loss

of client or insurer money and TUGL rectified the shortfall once it had been

identified in the course of 2013. Nonetheless these failings placed insurer money

at risk of loss and may have led to complications and delays in distribution of

insurer money had TUGL become insolvent during the Relevant Period.

2.6.
The principal objective of the CASS Rules is to ensure that client money is

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adequately protected in the event of a firm’s failure. To achieve this, firms are

required to ensure that their arrangements for client money comply with the

CASS Rules. A fundamental requirement of the CASS Rules is that firms must

keep client money separate from firm money in segregated client money

accounts. This ensures that client money is ring-fenced, in the event of the

insolvency of the firm.

2.7.
TUGL did not detect that it was in breach of the Authority’s rules for over eight

years. During this period, the Authority repeatedly stressed in its publications,

including Final Notices, the importance of protecting client assets and complying

with the CASS Rules.

2.8.
As a consequence, the Authority has concluded that TUGL failed to arrange its

affairs responsibly and effectively with adequate risk management systems and

failed to arrange adequate protection for client and insurer money for which it

was responsible.

2.9.
The Authority considers TUGL’s failings to be serious for the following reasons:

a)
several failings were found in TUGL’s client and insurer money processes,

indicating that TUGL’s client and insurer money arrangements were

inadequate;

b)
the breaches of the CASS Rules took place over a period of eight years;

c)
the failings took place during a period of significant expansion of TUGL’s

business; and

d)
these failings placed insurer money at risk of loss and may have led to

complications and delays in distribution of insurer money had TUGL

become insolvent.

2.10.
The Authority recognises that TUGL has co-operated during the course of the

investigation, has effected material changes to its systems and controls and has

restructured its operating model.

2.11.
The Authority has further taken into account that:

a)
after identifying client and insurer money deficits following a review of its

client and insurer money processes, TUGL subsequently self-reported the

breaches and failings to the Authority and remedied the situation by

rectifying the deficits in the client and insurer money accounts;

b)
TUGL has co-operated and worked constructively with the Authority during

its investigation and accepted the failings set out in this Final Notice;

c)
TUGL has devoted significant resources to investigating the extent of the

failings and to identifying and remediating the control weaknesses which

led to them; and

d)
although insurer money was at risk for an extended period, there were no

actual losses of any insurer money.

2.12.
The Authority therefore has decided to impose a financial penalty on TUGL in the

amount of £2,632,000 pursuant to section 206 of the Financial Services and

Markets Act 2000 (the “Act”).

2.13.
The action supports the Authority’s operational objectives of securing an

appropriate degree of protection for consumers and protecting and enhancing

the integrity of the UK financial system.

3.
DEFINITIONS

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

“Business Units” means insurance intermediary firms acquired by TUGL;

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

“the Authority” means the body corporate previously known as the Financial

Services Authority and renamed on 1 April 2013 as the Financial Conduct

Authority;

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

Handbook;

“CASS Rules” means the rules contained in CASS;

“Central Finance Department” means TUGL’s central finance function consisting

of sub teams including the treasury team and finance team;

“Central Sweep Accounts” means the five central client and insurer money

sweep accounts operated by TUGL and referred to in paragraph 5.2 below;

“Central Transfers” means eight transfers from Central Sweep Accounts made

between August 2010 and January 2011;

“Client Money Manual” means the Group Finance and Operations Policy and its

Client Money Procedures Manual, which together detailed the client money

policies and procedures applicable to TUGL during the Relevant Period;

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

“ENF” means the Authority’s Enforcement Manual;

“Handbook” means the Authority’s Handbook of Rules and Guidance;

“Principles” means the Authority’s Principles for Businesses;

“Relevant Period” means the period between 29 June 2005 and 31 December

2013;

“TOBA” means TUGL’s Terms of Business Agreements with insurers;

“Towergate Group” means the Towergate group of companies;

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

“TUGL” means Towergate Underwriting Group Limited.

4.
FACTS AND MATTERS

4.1.
TUGL is an insurance intermediary and was incorporated on 31 July 2000. It

has been authorised and regulated by the Authority since 14 January 2005 and

is permitted to hold and control client money.

4.2.
TUGL is part of the Towergate group of companies (the “Towergate Group”),

which is one of the largest general insurance networks in the UK and managed

gross written premiums of £3.07 billion in 2013. The Towergate Group includes

a large number of regulated and unregulated entities in a relatively complex

legal structure. Its growth to the current position in the market has

predominantly come through the acquisition of other insurance intermediary

firms with over 200 acquisitions since incorporation.

4.3.
TUGL itself has experienced a period of rapid growth since 2007. For example, in

2007 it acquired 13 insurance intermediary firms whose businesses were

merged into TUGL (“Business Units”). The following year, in 2008, TUGL

acquired 16 more Business Units. In total between January 2007 and December

2013 TUGL acquired 70 Business Units.

4.4.
The principal activities of TUGL in the Relevant Period were the provision of

insurance intermediary services. In the course of its business, TUGL arranged

insurance cover for clients and received a payment in respect of each policy. A

portion of the payment received was retained by TUGL as commission for its role

in the transaction whilst the remaining portion was payable to the insurer

underwriting the relevant policy, as a premium. TUGL held payments received

from clients either as client or insurer money, depending on the underlying

contract in place with the insurer underwriting the policy.

4.5.
Where TUGL held money as agent of an insurer, the monies could be held as

insurer money in a separate account or held with client money provided that the

insurer agreed their funds be co-mingled with those of clients and that any claim

on that money would be subordinated to claims by a client. This meant that in

the event of the insolvency of the firm any claims by clients for the funds held in

the client non-statutory trust accounts would be dealt with ahead of claims from

insurers in respect of those same accounts. In the Relevant Period, TUGL held a

substantial majority of payments received from clients as agent of an insurer, a

proportion of which was held in insurer trust accounts and the remaining

proportion held with client money in client non-statutory trust accounts. Insurer

money that was held with client money was subject to the same rules as for

client money.

4.6.
As TUGL acquired new Business Units, it permitted them to remain as separate

Business Units, all forming part of the same legal entity but each operating their

own client money bank account and/or insurer bank account and office bank

account and each conducting their individual client and/or insurer money

monthly calculations.

TUGL’s client and insurer money systems and processes

4.7.
Following the classification of insurance mediation as a regulated activity from

14 January 2005, TUGL was required to comply with the CASS Rules, and

specifically those contained in Chapter 5 of the CASS Rules which apply to firms

that receive or hold client money in the course of, or in connection with,

insurance mediation activity. TUGL was also required to comply with Principle 10

of the Authority’s Principles for Businesses which require firms to arrange

adequate protection for clients’ assets for which they are responsible and with

Principle 3 which requires firms to take reasonable care to organise and control

their affairs responsibly and effectively and with adequate risk management

systems.

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Banking (sweep) arrangements

4.8.
TUGL’s client money processes and procedures had been designed around its

business model. To facilitate cash management, TUGL had in place an

automated daily process, performed by the bank, whereby cleared funds in the

client and insurer money bank accounts of the Business Units were transferred,

or “swept”, into central client and insurer money bank accounts (“Central Sweep

Accounts”). At the relevant time, TUGL operated five Central Sweep Accounts.

4.9.
The sweep arrangement meant that although client and insurer money

calculations were performed by the individual Business Units, in accordance with

the processes and procedures set out in the Client Money Manual, the majority

of client, insurer and office money was in fact held centrally in separate client,

insurer and office accounts following the daily sweep process.

4.10.
Below is an illustration of how TUGL’s sweep process operated. In this

illustration there are two example Business Units, Branch A and Branch B. The

central sweep account is referred to as the TUGL ‘C’ Bank Account. The bank

account for each Business Unit is referred to as the Individual Brokerage

Account (“IBA”) cash account.

Client money calculations

4.11.
The CASS Rules require an insurance intermediary firm to perform client money

calculations at least every 25 business days by checking whether its client

money resource (the amount of client money segregated in appropriate

accounts) was at least equal to the client money requirement (the amount of

money the Business Unit had to segregate to meet its obligations to clients).

Any shortfall identified from the client money calculation is required to be paid

into a client bank account by the close of business on the day the client money

calculation is performed. Likewise, any excess identified is required to be

withdrawn within the same time period (subject to certain exceptions).

4.12.
In practice, TUGL Business Units performed client money calculations on the first

working day of each month using a prescribed template. The client money

calculation worked out the Business Unit’s client money resource and the client

money requirement and then compared the two amounts. When calculating its

client money resource, a Business Unit principally relied on the nominal sweep

account balance shown in its ledger. The Business Unit did not rely on the actual

cash balance as this amount was held centrally by TUGL, having been swept into

the Central Sweep Accounts.

4.13.
On a monthly basis, Business Units sent their client money calculations to

TUGL’s Central Finance Department which then reviewed Business Units’

compliance with prescribed processes, including checking that reconciliations

were performed as required and identify potential issues when they arose. The

Central Finance Department collated all the client money calculations received

from the Business Units on a central spreadsheet.

Reconciliation

4.14.
As required by the CASS Rules, an insurance intermediary firm must, within 10

days of performing the client money calculation, reconcile the balance on each

client bank account as recorded by the firm with the balance on that account as

set out in the statement or other form of confirmation used by the bank with

which that money is held. During the Relevant Period this reconciliation was

performed at Business Unit level. It compared the relevant Business Unit’s

ledger balance against the balance in the Business Unit’s client money account

as shown on the bank statement for that account. Because of the sweep

arrangement, both would typically show nil when the reconciliation was

performed.

4.15.
TUGL’s client money process did not include an effective reconciliation which

was necessary to ensure overall compliance with the CASS Rules. In this regard,

one significant system weakness was that TUGL did not perform an effective

reconciliation between the aggregated Business Unit ledger balances, in which

the Business Units recorded their entitlement to the funds held in the Central

Sweep Accounts, and the cash actually held in those Central Sweep Accounts.

Insurer money

4.16.
Whilst insurer money held in an insurer trust account is not subject to the

provisions of the CASS Rules, Principle 3 of the Principles for Businesses

requires firms to take reasonable care to organise and control their affairs

responsibly and effectively, with adequate risk management systems. The

systems and controls established by TUGL required Business Units handling

insurer money to follow processes, which effectively mirrored the client money

processes described above.

Mid-month calculations

4.17.
On occasion, in addition to the calculations carried out on the first working day

of the month, TUGL would carry out mid-month client and insurer money

calculations in order to meet business expenses. This was done to identify

whether it was possible to withdraw commission due to TUGL mid-month rather

than on the first working day of the month. During the Relevant Period the

process in place for mid-month calculations was in essence the same as the

process carried out on the first working day of the month: the Central Finance

Department would request individual Business Units within TUGL to prepare a

client or insurer money calculation and transfer any surplus identified to its own

local office account, which, where attached to a sweep account, would then be

swept to the Central Sweep Accounts overnight.

TUGL’s knowledge of the Authority’s concerns over client money

protection at TUGL

4.18.
On 19 January 2010, the Authority sent letters to the Chief Executive Officers of

all firms with permission to hold client money, including TUGL. This letter

emphasised that the Authority was giving a higher priority to achieving

compliance with client asset requirements because it was concerned that firms

were not always achieving an adequate level of protection. The letter enclosed a

report, which noted that the Authority considered compliance with the CASS

Rules to be poor across the financial services industry. It also required

confirmation that the contents of the letter and report had been properly

considered and that TUGL was in compliance with its obligations regarding the

protection of client money and assets. TUGL responded to the Authority on 25

January 2010 confirming that the contents of the letter had been noted and that

TUGL was “in compliance with its obligations … for protecting client money”.

4.19.
TUGL was also the subject of heightened scrutiny from the Authority’s

Supervision Division between January 2010 and December 2013 in relation to

various issues including the protection of client money. Consequently, from at

least January 2010 onwards, TUGL should have had a heightened awareness of

the importance of affording adequate protection to client money and the

concerns of the Authority in this respect.

Reconciliation differences

4.20.
In May 2013, TUGL undertook an internal review of its control environment with

a view to enhancing its client and insurer money controls. As a result TUGL

identified a shortfall of approximately £9.04 million in its Central Sweep

Accounts.

4.21.
In September 2013, TUGL carried out an internal investigation to determine how

the shortfall had arisen. The investigation concluded that the shortfall consisted

of a number of transactions which included, amongst other things, the transfer

out of the Central Sweep Accounts of a total of £10.5 million incorrectly

identified as commission due to TUGL and £1.45 million of interest incorrectly

received in client money accounts and not removed.

4.22.
After work to verify the findings of its internal investigation in September 2013,

on 18 October 2013, TUGL instructed external consultants to undertake an

independent forensic investigation to determine whether there had been a

breach of the CASS Rules. On 28 October 2013, the external consultants

produced a report of their preliminary findings, which confirmed TUGL’s findings.

On the same day TUGL self-reported the issue to the Authority and on 31

October 2013 transferred approximately £9.04 million into its client and insurer

money accounts to correct the shortfall.

4.23.
There was a delay of approximately four months between the identification of

the shortfall by TUGL and the time it made good the shortfall. TUGL therefore

failed to make good the shortfall as soon as it became aware that it might exist

in May 2013 following its internal review. It also failed to immediately notify the

Authority that it was unable to perform the client money calculations required by

the CASS Rules in order to ensure the accuracy of its client money records.

4.24.
Subsequent investigations identified an additional shortfall of approximately

£3.6 million in TUGL’s insurer money account which was corrected by 8

November 2013.

4.25.
The reconciliation differences that produced the client and insurer money

shortfall of approximately £12.6 million consisted of the following elements:

a)
accrued interest of £1.45 million which TUGL had failed to hold separate

from client money;

b)
eight transfers from the Central Sweep Accounts of client and insurer

money totalling £10.5 million to TUGL’s parent company’s office account;

c)
a £2.13 million duplicate transfer made from a client money account into

an insurer trust account;

d)
an alteration of the basis on which commission was removed from insurer

money accounts in breach of its arrangements with insurers, resulting in a

£3.6 million deficit in its insurer money accounts; and

e)
some smaller items which have not been separately considered in this

Interest

4.26.
TUGL’s agreements with its clients permit it to retain interest earned on

balances held on client money accounts. Accordingly, any interest earned on

client money account balances is TUGL’s money and should be held separately

from client and insurer funds. Although the client money sweep accounts were

set up in such a way that no interest should have accrued on them, interest did

in fact accrue on them on a number of occasions from 29 June 2005, but was

not in all instances identified and removed by TUGL. TUGL failed to adequately

and clearly allocate responsibility for the:

a)
monitoring of all transactions in the client money sweep accounts; and

b)
removing interest credited to client money sweep accounts in error.

4.27.
This resulted in a total of £1.45 million of interest accruing on client money

sweep accounts between June 2005 and October 2011 which was not removed

from those accounts until October 2013.

The Central Transfers

4.28.
On four separate occasions in August 2010, November 2010, December 2010

and January 2011, round sums totalling £10.5 million were transferred from

TUGL’s Central Sweep Accounts to the office account of an intermediate parent

company of TUGL for the purpose of meeting business expenses. Details of

these Central Transfers are set out in the table below:

Date
Client money transfer
Insurer money transfer

24/08/2010
£1,500,000
£1,500,000

22/11/2010
£1,000,000
£1,000,000

22/12/2010
£1,000,000
£1,500,000

20/01/2011
£1,500,000
£1,500,000

Total
£5,000,000
£5,500,000

4.29.
The Central Transfers were based on an analysis of all the Business Units’ client

and insurer money calculations on an aggregated basis. On an aggregated basis,

the analysis indicated that whilst Business Units had removed commission from

the Central Sweep Accounts to the extent that cash was available, some had

been unable to transfer the full amount specified by the client and insurer

money calculations at the time they were performed. The analysis of the

individual TUGL Business Units’ client and insurer money calculations therefore

indicated perceived surpluses that had not been removed which, when looked at

on an aggregated basis, could be removed from the Central Sweep Accounts as

commission belonging to TUGL.

4.30.
TUGL’s client money processes and procedures did not make provision for, or

envisage, either an aggregated calculation or central transfers. Central transfers

based on an aggregated calculation represented a significant departure from

TUGL’s established processes and procedures.

4.31.
Notwithstanding the fact that existing processes and procedures provided for the

client and insurer money calculations and transfer of commission due to TUGL to

be performed at Business Unit level, round sums were withdrawn from the

Central Sweep Accounts on the four occasions identified above. Following each

of the Central Transfers, the sums removed from the Central Sweep Accounts

were not allocated back to individual Business Units, neither were the Business

Units informed of the Central Transfers. As a result, those Business Units whose

perceived client and insurer money surplus cash had been withdrawn were not

aware of the Central Transfers and as a consequence subsequent monthly client

and insurer money calculations prepared by these individual Business Units did

not recognise that surpluses had been previously withdrawn from the Central

Sweep Accounts. Likewise, as the aggregated calculations did not reflect these

transfers, TUGL consequently overstated the funds available in the Central

Sweep Accounts for subsequent Central Transfers.

4.32.
This departure from TUGL’s existing processes and procedures, coupled with the

failure to properly consider the potential implications of the Central Transfers

and take appropriate steps to mitigate the risks so created, resulted in a deficit

of £5 million accruing in TUGL’s client money accounts and a deficit of £5.5

million accruing in its insurer money accounts.

4.33.
Additionally, TUGL, in the course of carrying out its general reconciliation work,

did not recognise the significance, for overall compliance with CASS Rules, of

differences identified from the reconciliation between the cash actually held in

the Central Sweep Accounts and the total aggregated expectation of the

individual Business Units to the amounts held in these accounts as recorded in

the Business Unit ledgers. The significance of the reconciliation differences was

not recognised until May 2013.

Duplicate transfer

4.34.
On 25 October 2007, TUGL transferred the sum of £2.13 million from a client

money sweep account to an insurer money sweep account following the re-

designation of a particular Business Unit’s client money account to an insurer

money account. The transfer was not reflected accurately in TUGL’s accounting

records which resulted in the same sum being transferred again in January 2009

creating a £2.13 million shortfall in its client money sweep account and an

equivalent surplus on the insurer money account.

4.35.
As TUGL did not perform an effective reconciliation between the cash actually

held in the Central Sweep Accounts and the total aggregated expectation of the

Business Units to those funds as recorded in the Business Unit ledgers, this

shortfall was not detected until May 2013 when an aggregated bank

reconciliation was first performed.

Commission drawdown adjustment

4.36.
The Terms of Business Agreements between TUGL and the relevant insurers

(“TOBAs”) set out when TUGL was entitled to withdraw the commission due. The

standard provision agreed between TUGL and the insurers was to withdraw

commission on “receipt of premium”.

4.37.
From 1 December 2008, however, the majority of TUGL’s Business Units that

operated insurer money accounts began to withdraw commission from these

accounts on an “inception of policy” basis, that is to say prior to the premium

being received from the client, in breach of the TOBAs.

4.38.
The issue was discovered by TUGL in July 2013 during a review of its TOBA

compliance. The impact on the aggregated insurer money balance held across

all the TUGL Business Units that had used the incorrect basis to withdraw

commission from the insurer money accounts (calculated as at 1 November

2013) was a £3.62 million shortfall compared to the balance had the correct

receipt of premium basis been used. The shortfall was corrected across the

affected Business Units between 1 November 2013 and 8 November 2013 and

the process for insurer money drawdowns was adjusted accordingly to ensure

compliance with TOBAs.

4.39.
During the Relevant Period there was no single individual or team responsible

for the ongoing monitoring of TUGL’s compliance with its TOBAs. Responsibility

for different aspects of such compliance was divided and the interplay between

these different aspects was not sufficiently well understood across TUGL to

ensure compliance.

Governance and control framework

4.40.
During the Relevant Period TUGL implemented a three lines of defence model

risk control framework as set out below:

a)
first line: Local line management and risk management were responsible

for the day to day risk management activities as part of TUGL’s processes

and procedures;

b)
second line: the compliance monitoring function provided oversight

monitoring and challenged the effectiveness of the risk and internal control

framework. This served to provide assurance to TUGL’s board of directors

and senior management that business risks regarding regulatory matters

were effectively managed; and

c)
third line: internal audit had responsibility for assessing the scope of the

systems established by management to identify, assess, manage and

monitor financial and non-financial risks and give assurance that the

systems in place were correct and suitable to TUGL’s business model.

4.41.
In spite of the above, in relation to client and insurer money processes, TUGL

only implemented this risk control framework at Business Unit level such that

the client and insurer money processes within TUGL’s Central Finance

Department fell outside the scope of its second and third lines of defence risk

control framework. Consequently, neither TUGL’s compliance monitoring nor

internal audit functions reviewed the operation of the Central Sweep Accounts.

TUGL’s internal audit function did not review the suitability of the processes and

systems for dealing with client and insurer money within TUGL’s Central Finance

Department.

4.42.
TUGL also relied on its external auditors as a key control despite the fact that in

January 2010 the Authority had raised an industry wide concern on firms’

overreliance on CASS audit reports rather than performing their own assurance

checks.

Improvements to client money controls at TUGL

4.43.
In 2013, TUGL embarked on a comprehensive client money improvement

programme to improve the effectiveness of its systems. As part of the

programme, client money processes and procedures were reviewed and

overhauled, extensive staff training rolled out and TUGL moved to a centralised

non-fragmented client money model with amended processes. Client money

processes within TUGL’s central finance function were made subject to regular

internal audit and compliance monitoring reviews.

5.
FAILINGS

5.1.
Based on the facts and matters described above, the Authority considers that

TUGL has breached Principle 3 and Principle 10 and associated CASS Rules. The

statutory and regulatory provisions relevant to this Final Notice are set out in

the Annex to this Final Notice.

5.2.
Specifically, during the Relevant Period, TUGL breached Principle 3 by failing to

take reasonable care to organise and control its affairs responsibly and

effectively, with adequate risk management systems. Specifically, TUGL failed

to:

a)
ensure that it accurately maintained all of its records to ensure

correspondence to the actual insurer money held in its bank accounts;

b)
follow its own documented procedures by making repeated transfers from

the Central Sweep Accounts and failed to identify and control the resulting

risks adequately;

c)
perform adequate client and insurer money reconciliations and as a result

TUGL failed to identify accurately surpluses and shortfalls;

d)
ensure that responsibility for the monitoring of TUGL’s compliance with

TOBAs was adequately and sufficiently allocated; and

e)
ensure that TUGL’s risk framework adequately monitored and reviewed the

suitability of the processes and systems in place for dealing with client and

insurer money within its Central Finance Department.

5.3.
TUGL also breached Principle 10 and the CASS Rules (CASS 5.5.3R, 5.5.63(1)R,

5.5.63(4)R, 5.5.76R and 5.5.84R), by failing to:

a)
ensure that client money was properly segregated from TUGL’s money;

b)
carry out accurate client money calculations and reconciliations;

c)
immediately correct the client money shortfall when it became aware that

a shortfall might have existed;

d)
immediately notify the Authority of its failure to perform required client

money calculations;

e)
have adequate processes in place to identify interest accruing on its client

money accounts in error and to then remove that interest to TUGL’s office

account; and

f)
ensure that it accurately maintained all of its records to ensure

correspondence to the actual client money held in its bank accounts.

5.4.
Having regard to the issues above, the Authority considers it appropriate and

proportionate in all the circumstances to take disciplinary action against TUGL

for its breaches of the Principles and the CASS Rules during the Relevant Period.

5.5.
It is recognised that TUGL eventually self-reported the reconciliation differences

to the Authority. However, the weaknesses in TUGL’s client and insurer money

arrangements as set out above meant that clients and insurers were not

adequately protected for a prolonged period of time. Had TUGL become

insolvent during this period, these failings would have placed insurer money at

risk of loss. Insurers could have faced difficulties and/or delay in recovering their

money.

6.
SANCTION

6.1.
The Authority has considered the disciplinary and other options available to it

and has concluded that a financial penalty is the appropriate sanction in the

circumstances of this particular case.

6.2.
The Authority’s policy in relation to the imposition of financial penalties or public

censures is set out in Chapter 6 of the Authority’s Decision Procedures &

Penalties Manual (“DEPP”) which forms part of the Authority’s Handbook. In

determining the financial penalty, the Authority has had regard to this guidance.

6.3.
The principal purpose of a financial penalty is to promote high standards of

regulatory
conduct by deterring firms who have breached regulatory

requirements from committing further contraventions, helping to deter other

firms from committing contraventions and demonstrating generally to firms the

benefits of compliant behaviour.

Financial penalty

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

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

financial penalty where the conduct straddles penalty regimes, the Authority

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

2010 (the “old penalty regime”) and the penalty regime which was effective

after 6 March 2010 (the “new penalty regime”).

6.5.
The Authority adopted the following approach:

a)
calculated the financial penalty for TUGL’s misconduct from 29 June 2005

to 5 March 2010 by applying the old penalty regime to this misconduct;

b)
calculated the financial penalty for TUGL’s misconduct from 6 March 2010

to 31 December 2013 by applying the new penalty regime to this

misconduct; and

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

financial penalty.

Financial penalty under the old regime

6.6.
The Authority’s policy on the imposition of a financial penalty relevant to the

misconduct prior to 6 March 2010 is set out in Chapter 6 of DEPP that was in

force from 27 March 2007 to 5 March 2010. All references to DEPP in

paragraphs 6.7 to 6.17 are references to that version.

6.7.
The Authority has also had regard to the corresponding provisions of Chapter 7

of the Authority’s Enforcement Guide in force at the time and the relevant

sections of the Enforcement Manual (“ENF”), which applied to the period

Deterrence (DEPP 6.5.2(1))

6.8.
The penalty will help demonstrate to TUGL and others in the industry, not

limited to insurance intermediary firms, the importance of having adequate

systems and controls in place for client and insurer money processes. This case

will send an important message to the insurance intermediary industry about

the importance of having appropriate controls around client money. The penalty

will also help demonstrate to TUGL and others in the insurance intermediary

industry, the importance of acting in compliance with their terms of business

agreements with insurers and having appropriate systems and controls in place

to ensure that these agreements are properly adhered to. This case will also

highlight to the industry that the Authority will take action in respect of insurer

money failings to promote good market conduct and ensure that market

integrity is maintained.

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

sanction given the serious nature of the breaches and the risks.

The nature, seriousness and impact of the breach (DEPP 6.5.2(2))

6.10.
The Authority considers TUGL’s breach of Principles 3 and 10 and the CASS

Rules to be serious for the following additional reasons:

a)
several failings were found in TUGL’s client and insurer money processes;

b)
the breaches took place over a period of eight years (of which four years

and eight months fell under the old penalty regime);

c)
the failings took place during a period of significant expansion of TUGL’s

business;

d)
these failings placed insurer money at risk of loss and may have led to

complications and delays in distribution of insurer money had TUGL

become insolvent;

e)
as TUGL is part of the Towergate Group of companies, one of the United

Kingdom’s largest insurance intermediaries, an insolvency event could

have an impact on the UK insurance market; and

f)
during the Relevant Period there was a high level of awareness in the

financial services industry of the importance of adequately protecting client

money.

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

6.11.
The Authority does not consider TUGL to have committed the breaches

deliberately or recklessly.

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

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

the financial resources of TUGL. The Authority has no evidence to suggest that

TUGL is unable to pay the financial penalty.

The benefit gained or loss avoided (DEPP 6.5.2(6))

6.13.
TUGL did not profit from the breaches or avoid any loss.

Conduct following the breach (DEPP 6.5.2(8))

6.14.
TUGL has cooperated fully with the Authority’s investigation and has taken

action to remedy the failings identified.

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

6.15.
TUGL has not previously been the subject of an adverse finding by the

Authority.

Conclusions in relation to old penalty regime

6.16.
The Authority considers that the seriousness of TUGL’s failings merit a financial

penalty. In determining the financial penalty, the Authority has considered the

need to send a clear message to the industry of the need to ensure that firms

organise and control their affairs responsibly and effectively with adequate risk

management systems in place in relation to client and insurer monies and

arrange adequate protection for client money.

6.17.
The Authority therefore has decided to impose a financial penalty for TUGL’s

breaches under the old penalty regime of £280,000 (£400,000 before

application of a 30% settlement discount).

Financial Penalty under the new regime

6.18.
All references to DEPP in paragraphs 6.18 to 6.34 are references to the version

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

regime, from 6 March 2010 the Authority applies a five-step framework to

determine the appropriate level of financial penalty. DEPP 6.5A sets out the

details of the five-step framework that applies in respect of financial penalties

imposed on firms.

6.19.
Pursuant to DEPP 6.5A.1G, at Step 1 the Authority seeks to deprive a firm of the

financial benefit derived directly from the breach where it is practicable to

quantify this.

6.20.
The Authority has not identified any financial benefit that TUGL derived as a

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

Step 2: Seriousness of breach

6.21.
DEPP 6.5A.2G(1) provides that at Step 2 the Authority determines a figure that

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

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

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

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

those cases, the Authority will use an appropriate alternative.

6.22.
The Authority does not consider revenue to be an appropriate indicator of harm

in this case. This is because whilst revenue generated by TUGL can increase or

decrease, which will in turn have an impact on the amount of client and insurer

monies held, this does not alter the risk of harm or potential harm caused by its

breaches.

6.23.
As revenue is not the appropriate metric, to arrive at Step 2 figure, the

Authority has adopted the approach set out in DEPP 6.5A.2G(13) and has taken

into account those factors which are relevant to an assessment of the level of

seriousness of the breach.

6.24.
The Authority assesses the level of seriousness on a sliding scale between levels

1 and 5, with level 5 representing the most serious breaches and level 1

representing the least serious. These factors also reflect the impact and nature

of the breach, and whether it was committed deliberately or recklessly.

6.25.
The Authority considers that the following factors are relevant:

a)
the breaches ultimately created a total shortfall of £12.60 million in TUGL’s

client and insurer money accounts;

b)
there was a risk of loss to market users, such as insurance firms who bore

the risk of loss in the event of insolvency;

c)
TUGL committed multiple on-going breaches;

d)
TUGL’s breaches collectively exposed serious weaknesses in its systems

and controls;

e)
the breaches were neither deliberate nor reckless; and

f)
the financial penalty needs to act as a credible deterrent.

6.26.
Taking all of these factors into account, the Authority considers the seriousness

of TUGL’s breach to be level 3 and the Step 2 figure is therefore £2,800,000.

Step 3: mitigating and aggravating factors

6.27.
Pursuant to DEPP 6.5A.3G(2), at Step 3 the Authority may increase or decrease

the amount of the financial penalty arrived at after Step 2 (but not including any

amount disgorged at Step 1) to take into account factors which aggravate or

mitigate the breach.

6.28.
The following factors aggravate the breach:

a)
during
the
Relevant
Period
TUGL
received
a
key
industry-wide

communication from the Authority about the importance of client money

protection and rule compliance; and

b)
during the Relevant Period TUGL was the subject of heightened scrutiny

from the Authority’s Supervision Division in relation to various issues

including the protection of client money.

6.29.
There are no factors that mitigate the breach.

6.30.
Having taken these matters into account the Authority considers that a 20%

uplift at Step 3 is appropriate.

6.31.
The Step 3 figure is therefore £3,360,000.

Step 4: adjustment for deterrence

6.32.
Pursuant to DEPP 6.5A.4G, if the Authority considers that the Step 3 figure is

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

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

6.33.
There are no relevant factors that justify a change to the Step 3 figure. The

figure at Step 4 remains £3,360,000.

Step 5: settlement discount

6.34.
Pursuant to DEPP 6.7.2G, settlement discounts may be applied for early

settlement. DEPP 6.7.3G identifies the four stages at which agreement may be

reached. TUGL agreed to settle at Stage 1 and therefore qualifies for a 30%

discount and the Step 5 figure is therefore £2,352,000.

Conclusions in relation to new penalty regime

6.35.
The Authority has therefore decided to impose a financial penalty under the new

penalty regime of £2,352,000 (£3,360,000 before Stage 1 discount).

Conclusion as to financial penalty

6.36.
The Authority has therefore decided to impose on TUGL a total combined

financial penalty for its breaches spanning both the old and new penalty regimes

of £2,632,000 (£3,760,000 before Stage 1 discount).

7.
PROCEDURAL MATTERS

Decision maker

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

the Settlement Decision Makers.

7.2.
This Final Notice is given under and in accordance with section 390 of the Act.

Manner of and time for Payment

7.3.
The financial penalty must be paid in full by TUGL to the Authority by no later

than 28 July 2016.

If the financial penalty is not paid

7.4.
If all or any of the financial penalty is outstanding on 29 July 2016, the Authority

may recover the outstanding debt as a debt owed by TUGL to the Authority.

7.5.
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of

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

provisions, the Authority must publish such information about the matter to

which this notice relates as the Authority considers appropriate. The

information may be published in such manner as the Authority considers

appropriate. However, the Authority may not publish information if such

publication would, in the opinion of the Authority, be unfair to you or prejudicial

to the interests of consumers or detrimental to the stability of the UK financial

system.

7.6.
The Authority intends to publish such information about the matter to which this

Final Notice relates as it considers appropriate.

Authority contacts

7.7.
For more information concerning this matter generally, contact Steve Page

(direct line: 020 7066 1420/ email: steve.page@fca.org.uk) of the Enforcement

and Market Oversight Division of the Authority.

Rebecca Irving
Financial Conduct Authority
Enforcement and Market Oversight Division

RELEVANT STATUTORY AND REGULATORY PROVISIONS

1. STATUTORY PROVISIONS

Statutory objectives

1.
The Authority’s strategic objective, set out in section 1B(2) of the Act, is to ensure

that the relevant markets function well.

2.
The Authority’s operational objectives, set out in sections 1B to 1H of the Act, are

as follows:

a)
securing an appropriate degree of protection for consumers (the “consumer

protection objective”);

b)
protecting and enhancing the integrity of the UK financial system (the

“integrity objective”); and

c)
promoting effective competition in the interests of consumers (the

“competition objective”).

Imposition of a financial penalty

3.
Section 206 of the Act provides that the Authority may impose a penalty on an

authorised person, of such amount as it considers appropriate, if it considers that it

has contravened a relevant requirement imposed on it.

4.
TUGL is an authorised person for the purposes of section 206 of the Act. The

requirements imposed on authorised persons include those set out in the

Authority’s rules and made under section 137A of the Act.

2. REGULATORY GUIDANCE AND POLICY

Principles for Businesses (the “Principles”)

5.
The Principles are a general statement of the fundamental obligations of firms

under the regulatory system and are set out in the Authority’s Handbook. They

derive their authority from the Authority’s rule-making powers set out in the Act,

reflect the Authority’s regulatory objectives and apply with respect to the carrying

out of regulated activities. The relevant Principles are as follows.

6.
Principle 3 (Management and Control) which states that:

“A firm must take reasonable care to organise and control its affairs responsibly
and effectively, with adequate risk management systems.”

7.
Principle 10 (Clients’ Assets) which states that:

“A firm must arrange adequate protection for clients’ assets when it is responsible
for them.”

Client Assets Sourcebook (“CASS”) Rules

8.
CASS is the part of the Authority’s Handbook which sets out the Authority’s

requirements in relation to holding client money assets and client money. In

respect of all the rules within Chapter 5 of CASS (“CASS 5”) set out below, they

were in force throughout the Relevant Period unless otherwise made clear.

9.
CASS Rule 5.5.3 provides:

“A firm must, except to the extent permitted by CASS 5.5, hold client money
separate from the firm’s money.”

10.
CASS Rule 5.5.63(1) provides:

“A firm must, as often as is necessary to ensure the accuracy of its records and at
least at intervals of not more than 25 business days:

(a) check whether its client money resource, as determined by CASS 5.5.65R on
the previous business day, was at least equal to the client money requirement, as
determined by CASS 5.5.66R or CASS 5.5.68R as at the close of business on that
day; and

(b) ensure that: (i) any shortfall is paid into a client money bank account by the
close of business on the day the calculation is performed; or (ii) any excess is
withdrawn within the same time period unless CASS 5.5.9R or CASS 5.5.10R
applies to the extent that the firm is satisfied on reasonable grounds that it is
prudent to maintain a positive margin to ensure the calculation in (a) is satisfied
having regard to any unreconciled items in its business ledgers as at the date on
which the calculations are performed; and

(c) …”

11.
CASS Rule 5.5.63(2) provides:

“A firm must within ten business days of the calculation in (a) reconcile the balance
on each client money bank account as recorded by the firm with the balance on
that account as set out in the statement or other form of confirmation used by the
bank with which that account is held.”

12.
CASS Rule 5.5.63(3) provides:

“When any discrepancy arises as a result of the reconciliation carried out in (2), the
firm must identify the reason for the discrepancy and correct it as soon as possible,
unless the discrepancy arises solely as a result of timing differences between the
accounting systems of the party providing the statement or confirmation and those
of the firm.

13.
CASS Rule 5.5.63(4) provides:

“While a firm is unable to resolve a difference arising from a reconciliation, and one
record or a set of records examined by the firm during its reconciliation indicates
that there is a need to have a greater amount of client money than is in fact the
case, the firm must assume, until the matter is finally resolved, that the record or
set of records is accurate and either pay its own money into a relevant account or
make a withdrawal of any excess.”

14.
CASS Rule 5.5.65 provides:

“The client money resource, for the purposes of CASS 5.5.63R(1)(a) is (1) the
aggregate of the balances on the firm’s client money bank accounts, as at the close
of business on the previous business day …”

15.
CASS Rule 5.5.76 provides:

“A firm must notify the FCA immediately if it is unable to, or does not, perform the
calculation required by CASS 5.5.63 R (1)2.”

16.
CASS Rule 5.5.84 provides:

“A firm must ensure that proper records, sufficient to show and explain the firm's
transactions and commitments in respect of its client money, are made and
retained for a period of three years after they were made.”

Decision Procedure and Penalties Manual (“DEPP”)

17.
Guidance on the imposition and amount of penalties is set out in Chapter 6 of

DEPP, which forms part of the Authority’s Handbook.

18.
The relevant sections of DEPP are set out in the main body of this Notice.

Enforcement Guide (“EG”)

19.
The Enforcement Guide sets out the Authority’s approach to exercising its main

enforcement powers under the Act.

20.
Chapter 7 of the Enforcement Guide sets out the Authority’s approach to exercising

its power to impose a financial penalty.