The Financial Services Authority has fined Leopold Joseph & Sons £85,000 for serious failings in its system for monitoring adherence to credit limits. The weakness was first identified in 1999.
Andrew Procter, director of enforcement of the FSA, says: “A firm's senior management must ensure that appropriate systems and controls are in place to allow it to monitor the risks that the firm is exposed to. The ability to monitor credit exposures is a fundamental control for banks.
“LJSL's failure over a three-year period to rectify this weakness, despite senior management being made aware of the issue by both the FSA and its internal auditors, exposed the firm to an increased risk of unexpected losses.”
In February 1999 LJSL was informed by the FSA that it should improve its monitoring of credit limits by introducing a review of the reports used to identify breaches of credit limits.
LJSL agreed to implement an additional control in March 1999 but, in September 1999, LJSL's internal auditors found there was no evidence that the reviews agreed with the FSA had been undertaken.
An internal audit report of October 2001 also found that the reviews required had not occurred for a number of months prior to the audit. Not withstanding this second report, the firm failed to take action to ensure that the control was implemented or to introduce an alternative control.
The failure to maintain the control agreed with the FSA was highlighted by a number of breaches of credit limits and a material loss on a discretionary foreign exchange dealing arrangement for a client.
Between May 2001 and July 2002, the credit limit for foreign exchange transactions for the client's discretionary trading account was exceeded a number of times and on occasions by more than five times the limit. In July 2002 the client had incurred a material foreign exchange
trading loss, of which neither the client nor LJSL's senior management was aware.
The credit excesses were unauthorised and the loss was borne by the client.
The failure to introduce an effective control on the monitoring of adherence to credit limits increased materially the possibility of LJSL being exposed to unauthorised and unacceptable credit risk.
This has the potential to reduce the ability of regulated firms to repay depositors, thereby threatening both market confidence and the interests of consumers.
A further internal audit report of September 2002, undertaken following the discovery of losses and credit limit breaches on the discretionary dealing account, was unable to verify whether the original control agreed with the FSA in March 1999 had been carried out.
Once LJSL senior management became aware of the trading loss and credit breaches they reported this promptly to the FSA. LJSL says it has taken the remedial steps recommended by its internal auditors to rectify the weaknesses in its systems.