The FCA has fined Towergate Underwriting Group Limited £2,632,000; and Timothy Duncan Philip, a former director of, and the client money officer for, TUGL, £60,000. It has also prohibited Mr Philip from having any direct responsibility for client or insurer money in future.
Towergate Underwriting Group Limited (TUGL)
TUGL is an insurance intermediary. Between 2007 and 2013, TUGL acquired 70 other insurance intermediaries, and allowed them to operate as separate business units within the TUGL legal entity. If a business unit arranged an insurance policy, it received a payment from its client. Payments were usually received and accounted for in 2 or 3 parts: (i) TUGL commission; (ii) client money; and/or (ii) insurer money. Every business unit operated its own client money, insurer money and office bank accounts; and maintained its own internal ledgers. However, for cash management reasons, the business units’ client money and insurer money accounts were swept into central client money and insurer money accounts, every day.
The FCA’s client money rules required insurance intermediaries to:
- (at least once in every 25 business days), calculate the amount of client money they should have had, before comparing it to the amount of client money they actually had in their client money bank accounts, before rectifying any shortfall or removing any excess from their bank account the same day. TUGL didn’t do this effectively because every business unit worked out how much client money it had using the nominal sweep account balance shown in its ledgers, instead of relying on an actual cash balance, because the money had been swept into the central account(s) so there was nothing for them to check; and
- (within 10 business days of carrying out the calculations in (1)), reconcile their client money bank account balances by comparing their ledgers with the banks statements. TUGL didn’t do this effectively, because every business unit compared its ledger balance to the balance on a swept client money bank account, when the sweep arrangements meant that each would usually show £nil. TUGL didn’t reconcile the aggregated business unit ledger balances with the money in the central sweep accounts either.
In May 2013, TUGL identified a shortfall of more than £9m of client and/or insurer money in its central sweep accounts. In September 2013, an internal investigation discovered that the shortfall had arisen, at least in part, because £10.5m had been incorrectly identified as commission and transferred out of those accounts; and £1.45m of interest had been incorrectly received into them, and not removed. External consultants were instructed to verify the findings of the internal investigation, and determine whether the FCA’s client money rules had been breached. On 28 October 2013, the consultants confirmed the results of TUGL’s internal investigations, and TUGL self-reported the issues to the FCA. On 31 October 2013, TUGL rectified the shortfall in its central sweep accounts. Subsequent investigations identified an additional shortfall of £3.6m, and this was rectified on 8 November 2013.
For these and other reasons, the FCA concluded that TUGL had breached Principle 3 (Management and control) and Principle 10 (Clients’ assets) of its Principles for Business, as well as CASS 5.5.3R, CASS 5.5.63(1)R, CASS 5.5.63(4)R, CASS 5.5.76R and CASS 5.5.84R). Having done so, it imposed a financial penalty on TUGL of £3,760,000, before reducing it to £2,632,000 because TUGL agreed to settle at an early stage.
Timothy Duncan Philip
Mr Philip, a chartered accountant, was a director of TUGL, the finance director of an intermediate parent, and TUGL’s client money officer. He was also responsible for the day to day management of TUGL’s credit finance department, and for managing its short term cash resources. However, he was not responsible for the design or development of TUGL’s risk management framework.
A year after Mr Philip left TUGL, it embarked on a client money improvement programme. The programme began with a review of the existing control environment, and during that review, a potential shortfall of client and insurer money was identified. According to the FCA:
- the bulk of this shortfall was caused by transfers from TUGL’s central sweep accounts into the office account of an intermediate parent, where it was used to meet business expenses;
- these transfers were based on an aggregated client money calculation and analysis carried out by Mr Philip, or by TUGL’s staff using a template he’d created;
- TUGL’s staff accounted for these transfers in accordance with Mr Philip’s instructions;
- the relevant funds were transferred as commission due and owed to TUGL;
- TUGL’s client money processes didn’t make provision for, or envisage, aggregated calculations or central withdrawals;
- The transfer were not allocated back to the relevant business units, or reflected in future calculations;
- these errors eventually meant that TUGL’s calculations over-stated its client and insurer money resources by £5m and £5.5m respectively.
In the FCA’s view, it was Mr Philip who took the decision to depart from established processes; who failed to recognize the need to reflect the relevant transfers in future calculations, and who failed to take appropriate steps to address the CASS compliance risks his decisions created. This was not “deliberate or reckless, but it was negligent“. Mr Philip did not profit from this, or avoid a loss as a result of it. But “his actions exposed insurers to the risk of loss in the event of TUGL becoming insolvent [and] caused TUGL to breach regulatory requirements and standards…”
According to the FCA, Mr Philip breached Principle 6 of its Statements of Principle for Approved Persons, because he failed to exercise due skill, care and diligence in managing the business of the firm for which he was responsible, and for this it decided to impose (a) a finance penalty of £85,817.97, which it reduced to £60,000, because Mr Philip agreed to settle at an early stage; and (b) a prohibition order.
In its press release, the FCA notes that “Senior management are ultimately responsible for ensuring that firms are following our rules and it is very clear that Mr Philip failed in that regard, falling well below the standards we require“.