BlackRock Investment Management Ltd (BIM) - a London-based wing
) - was fined £9.5 million or $15.2 million by the UK Financial
Services Authority (FSA) for mishandling clients' money from
2006-2010. This is one of the largest penalties ever charged by the
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The FSA pointed out that BlackRock had put the clients' money in
short-term money-market deposits without obtaining trust letters.
Trust letters would have confirmed that the receiving banks are
aware that they are holding assets of customers rather than that of
BlackRock. This could have resulted in a long drawn legal hassle
for the clients to get back their money if the company went
bankrupt during that time.
The failure to issue trust letters stemmed from the re-organization
efforts following the acquisition of the BIM, previously known as
Merrill Lynch Investment Managers Limited. The error affected
nearly £1.36 billion of client money on a daily basis between
October 2006 and March 2010. However, the FSA as well as BlackRock
clarified that despite erroneous handling of customers' money, none
of the clients suffered a monetary loss.
BlackRock had reported this error to FSA after an internal review
of its activities. Further, the company was allowed a discount on
the fine to be paid as it decided for an early settlement. The
original fine to be levied was nearly £13.6 million.
The crackdown on such unwarranted activities of the banks by the
regulatory authority comes in the wake of the collapse of Lehman
Brothers Holding Inc. The collapse left customers reeling under
substantial losses since Lehman failed to separate client funds
from its own accounts, leaving customers with competing claims that
resulted in years of litigation. Therefore, the FSA intensified its
vigilance to ensure proper protection of the clients' money.
BlackRock is not the only company to face the ire of the FSA.
Earlier in 2010, the FSA penalized
JPMorgan Chase & Co.
). The firm was fined £33.32 million or $49 million, the largest
penalty ever, for failing to effectively protect client money in
the range of $1.9-$23 billion between November 2002 and July 2009.
The average amount of money left unprotected was $8.55 billion.
BlackRock should be acknowledged for standing up and taking
responsibility for its misconduct. However, being one of the
largest asset managers in the world, failure to protect the
customers' money does not send out good signals either to the
investors or the customers.
BlackRock currently retains a Zacks #3 Rank, which translates into
a short-term Hold rating. Considering the fundamentals, we also
maintain a long-term 'Neutral' recommendation on the stock.