FCA fines Charles Schwab UK £8.96 million over safeguarding and compliance failures

Customers affected by the breaches were all retail customers, who require the greatest level of protection.

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

‘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 breaches occurred between August 2017 and April 2019, after CSUK changed its business model. Client money was swept across from CSUK to its affiliate Charles Schwab & Co., Inc. (CS&C), a firm based in the United States.

The client assets, which were subject to UK rules, were held in CS&C’s general pool, which contained both firm and client money and which was held for both UK and non-UK clients.

CSUK failed to arrange adequate protection for its clients’ assets under UK rules. Specifically, the firm:

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

CSUK carried out a regulated activity without permission. The firm did not at all times have permission to safeguard and administer custody assets, and failed to notify the FCA of the breach when applying for the correct permission.

CSUK made a false statement to the FCA. Without making adequate enquiries to check 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.

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

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