The Financial Conduct Authority (FCA) has fined and banned David Gillespie, managing director, and David Welsby, finance director, of bankrupted stockbroking and wealth management firm Pritchard Stockbrokers for serious failings in relation to the protection of client money. The collapse of Pritchard sent shockwaves through the UK structured products market as the firm acted as custodian for the structured products division of the now defunct Merchant Capital.
The FCA has also censured Pritchard for "recklessly failing to protect client money and committing a number of specific breaches of the FCA's client money (CASS) rules". Pritchard entered special administration in March 2012 and, were it not for its financial position, the FCA would have imposed a fine on it of £4.9m.
"Ensuring that client money is properly protected is a basic, but fundamental, regulatory requirement," said Tracey McDermott, FCA director of the enforcement and financial crime division. "Gillespie's and Welsby's conduct fell far short of our standards. Their recklessness contributed to a shortfall of £3m of client money and resulted in significant consumer detriment."
McDermott said that under the FCA's CASS rules, client money should be held in a segregated client bank account. "The rules are intended to protect client money if a firm becomes insolvent," she added. "Pritchard, Gillespie and Welsby failed to protect client monies for which they were responsible."
According to the FCA, Pritchard, Gillespie and Welsby "recklessly" relied upon the existence of an undocumented and opaque offshore facility in order to correct a deficit which had arisen in Pritchard's client money. The offshore facility, said the FCA, was wrongfully included as an available client money resource when reconciling the amount of client money that needed to be segregated by Pritchard.
Merchant Capital
Structured products provider Merchant Capital went out of business following a year of uncertainty after its umbrella company Merchant House Group (MHG) got into financial problems after the collapse of Pritchard at the beginning of 2012.
Merchant had moved the custody of its plans to Reyker Securities, but the bankruptcy of the custodian was a major blow to the business as it was unable to do business for some time and it ran out of income to continue in the market.
Shortly after, Reyker Securities angered Merchant Capital clients by setting a "one-off fee" as the only way to complete the migration of assets in an orderly way to the new custodian and receive their delayed income payments following an agreement with the then Financial Services Authority (FSA) to take control of monitoring the plans; dealing with queries from advisers; arranging counterparty bank redemptions; and managing valuation and early redemption requests.
Reyker Securities' decision to charge 12,000 clients between £15 and £25 per investment for safe custody and administration services for Merchant Capital products was also criticised by Ian Lowes, managing director of Lowes Financial Management as investors were left with no real option but to sign up to Reyker's terms and collectively pay it administration fees totalling well in excess of £250,000.
In March 2013, Reyker Securities, which had some £350m of structured product investments belonging to Merchant Capital's clients, started selling structured products to retail investors through professional advisers in the UK, and sued MHG for Merchant Capital's structured products liabilities.
Failings
The FCA said that as a consequence of Pritchard, Gillespie and Welsby's reckless failings client money was wrongly used to pay business expenses; Pritchard failed routinely to pay sufficient funds into its client bank account to cover shortfalls in client money; Pritchard placed reliance upon the offshore facility as a client money resource despite the fact that such a facility was not permitted to be included; and the FCA was not informed when a shortfall in client money occurred.
This behaviour resulted in significant consumer detriment, including contributing to a loss of approximately £3m of client money by the time Pritchard entered into special administration.
In addition to being banned from the financial services industry, Gillespie and Welsby have been fined £10,500 and £14,000 respectively. They both provided verifiable evidence of serious financial hardship. Had it not been for a reduction on these grounds and a discount for agreeing settlement of their cases, their penalties would have been £144,000 and £72,000, respectively.