The East Lothian-based firm failed to obtain a trust letter from the bank holding its client money and so was not in adherence of FSA regulation.
Under the watchdog’s client money rules firms are required to keep client money separate from the firm’s money in segregated accounts with trust status.
A firm must have a trust letter from the bank to ensure that in the event of its insolvency, client money is clearly identifiable and is ring-fenced from the firm’s own assets so it can be promptly returned.
MWL failed to follow this procedure in respect of 22 segregated offshore retail client bank accounts, which had an average balance of £666,000.
The FSA said it has issued several communications to firms on the rules for protecting client money, so firms should be aware it is a high profile issue.
In January 2010 the FSA published a “Dear CEO letter” and a “Client Money and Assets report” to all firms with permission to hold client money and assets. Then on 20 May another “Dear CEO letter” was sent out.
The FSA added that MWL had missed several opportunities to review its client money arrangements and so the error had remained undetected for over four years, between May 2006 and August 2010.
Richard Sutcliffe, head of client assets unit for the FSA, said: "McInroy & Wood’s failure to check whether it had a trust letter in place for these 22 accounts exposed its clients to risk in the event of insolvency.
"There is no substitute for a trust letter as it confirms client money is ring-fenced from the firm’s own assets, readily identifiable and aids the prompt return to clients.
"The FSA has repeatedly emphasised the importance of ensuring that client money is adequately protected and firms of all sizes must ensure client money is segregated and that this is acknowledged with a trust letter in accordance with FSA rules."
MWL did not enter into insolvency and promptly rectified its failing, so no clients suffered any loss as a consequence of its breach.
The firm also worked constructively with the FSA and agreed to settle at an early stage and so qualified for a 30% discount on the financial penalty, which would otherwise have been £21,500.
