The Financial Services Authority (FSA) has fined BlackRock Investment Management (UK) Limited (BIM) £9,533,100 for failing to protect client money adequately by not putting trust letters in place for certain money market deposits, and for failing to take reasonable care to organise and control its affairs responsibly in relation to the identification and protection of client money.
The FSA’s client money rules are designed to protect client money in the event of a firm’s insolvency. A firm must have a trust letter from any bank holding its client money to ensure that, in the event of the firm’s insolvency, client money is clearly identifiable and is ring-fenced from the firm’s own assets so that it can be promptly returned.
BlackRock’s share price is currently trading at $176.72 1.11(0.62%) on the NYSE.
Between 1 October 2006 and 31 March 2010, BIM failed to obtain such letters in relation to some of the money market deposits it placed with third party banks. The error occurred as a result of systems changes that followed on from BlackRock group’s acquisition of BIM, which had previously been known as Merrill Lynch Investment Managers Limited. These changes rendered BIM’s procedures for setting up trust letters ineffective. The average daily balance affected by this failure was over £1.36 billion. Had the firm become insolvent at any time during this period, clients would have suffered delay in securing the return of their funds and may not have recovered their money in full.
Tracey McDermott, FSA director of enforcement and financial crime, said:
“Identifying and protecting client money should be at the top of every firm’s agenda. We have repeatedly emphasised to firms that their systems and controls for ensuring this is the case must be robust and well designed and updated as circumstances change. Despite being part of one of the largest asset managers in the world, BIM’s systems were simply not adequate, and the basic step of notifying banks that the money was held on trust for clients was not done.
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“This is not the first time we have seen the impact on client money overlooked as part of a re-organisation. The fine imposed today should remind all firms of the critical importance we place on ensuring proper protection of client money at all times.”
In determining the penalty the FSA took into account that the misconduct was not deliberate, and that the firm reported the issue to the FSA and has since remedied the situation and put in place robust systems and controls relating to client money protection. No clients suffered any losses as a result of the error. The firm agreed to settle with the FSA at an early stage. In doing so it qualified for a 30% discount on the financial penalty. Had it not been for this discount the penalty would have been £13,618,800.
BlackRock offers fund management services to institutional clients, its second quarter 2012 net income totaled $554 million compared with $572 million in first quarter 2012 and $619 million from a year ago. Operating income for second quarter 2012 totaled $829 million with operating margin of 37.2%.
BlackRock’s UK team includes former Swiss Central Bank head Philipp Hilderbrand.
The protection of client money and custody assets (client assets) is a regulatory priority. Since the financial crisis the FSA has established the Client Assets Unit to lead specialist and intensive supervision of clients assets and improve compliance with the aim of ensuring that firms have robust systems in place to ensure the swift return of client assets and money in the event of insolvency.
In January 2010 the FSA published a Dear CEO letter and a Client Money and Assets reports for all firms that have the permission to hold client money and assets. This was followed up by a further Dear CEO letter on 20 May 2010.