Charles Schwab UK to pay £8.96 million fine for safeguarding and compliance failures

The UK Financial Conduct Authority (FCA) has fined Charles Schwab UK Ltd (CSUK) £8.96 million for failing to adequately protect client assets, carrying out a regulated activity without permission and making a false statement to the FCA.

The affected by the breaches were all retail customers, who need greatest level of protection.

Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, commented:

Charles Schwab UK failed to get the correct permissions from the FCA; then failed to be open with us and, finally, failed to put in place the necessary safeguards to ensure, if required, there could be an orderly return of client assets.

As we saw with Lehman Brothers and subsequent cases, a lack of client asset protections can easily lead to increased costs to consumers and funds being trapped for long periods of time.

Firms, including newly-established businesses or firms coming into the UK from overseas, are responsible for ensuring they comply with our rules, and are expected to make sure they have the right protections in place.

The UK watchdog found that the breaches occurred between August 2017 and April 2019, after CSUK changed its business model. Client assets was transfered from CSUK to its US-based affiliate Charles Schwab & Co., Inc. (CS&C).

FCA fine

CS&C’s general pool held firm and client money for both UK and non-UK clients.

The FCA determined that the CSUK failed to arrange adequate protection for its clients’ assets under UK rules including:

  • The firm did not have the right records and accounts to identify its customers’ client assets
  • The firm did not undertake internal or external reconciliations for its customers’ client assets
  • The firm did not have adequate organisational arrangements to safeguard client assets
  • The firm did not maintain a resolution pack, which would help to ensure a timely return of client assets in an insolvency.

CSUK conducted a regulated activity without permission. The firm did not have permission to safeguard and administer custody assets at all times and failed to notify the FCA of the breach. CSUK also made a false statement to the UK regulator. Without making adequate enquiries into whether this was correct, the firm inaccurately informed the FCA that its auditors had confirmed that it had adequate systems and controls in place to protect client assets.

After discovering the breaches, CSUK took remedial action at various. There was no actual loss of client assets and the firm stopped holding client assets from 1 January 2020.

CSUK agreed to settle the case and qualified for a 30% discount of the fine. Otherwise, the financial penalty would otherwise have been £12,804,600.

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