Currency trading: hardly a Crown in the UK's financial markets

in April 2010, the Financial Services Authority withdrew the authorisation (they use the baby language of "cancel the permission") of Crown Realty Estate Agents (sic) to carry on regulated activities.

In June, the FSA issued a warning about an unauthorised business known as "The Crown Group" but which was not the same business as The Crown Group trading from 18, Station Parade, Uxbridge Road, London W5 which was more than a little upset to find its name being used by a fraudulent outfit.

In July 2010, the FSA's warning list included the following:

Crown Fidelity
Crown ING Group
Crown Lancaster Equities
Crown Point Mergers & Acquisitions Limited

But all of these are small beer compared to Crown Currency Exchange - which was registered by the FSA under the Payment Service Regulations 2009, registered with HM Revenue and Customs under the Money Laundering Regulations.

Crown Currency Exchange (CCE) operated from Cornwall in the South West of England but its main business was undertaken over the internet. CCE is a subsidiary of Crown Holdings (London) Ltd which has also been placed into administration.

CCE promoted "excellent foreign exchange rates" and "free home delivery." That put them in direct competition with the UK's Post Offices.

The closure of the company came not as a result of any FSA action but because the company's bankers, Barclays, froze their accounts. The reasons for this have not been made public.

But what has been learned is that CCE customers are owed approximately GBP million. The administrators say that this includes moneys that were due for payment prior to 4th October when they were appointed and for future delivery.

For customers of CCE, the reason that they will see (at least from the company's assets) something less than 10% of their losses (administrators' and liquidators' fees will eat into the assets) is that CCE did not operate a clients' or trust account.

Clients' money was commingled with the company's own money: this, readers will recall, was the reason for the large fine imposed in June this year by the FSA upon JP Morgan. But there is a material difference: JPM is required to maintain separate client accounts: the "registered" as distinct from "authorised" CCE was not.

And that lack of authorisation has a knock-on effect: it means that CCE and businesses like it are outside the Financial Services Compensation Scheme. It also means that CCE was, largely, outside the FSA's inspection regime. Indeed, it is more likely that HM Revenue and Customs would inspect under the Money Laundering Regulations.

To complicate the regulatory point, the only reason that CCE was required to be "registered" with the FSA is because it provided "payment services." Under the payment Services Directive, CCE would qualify as a "small payment institution" if it did less than euro3 million in business each month. And those that do qualify and register under this class do not gain the protections (for themselves or their customers) afforded to authorised institutions.

The definitions of Payment Services can be found at

http://fsahandbook.info/FSA/html/handbook/PERG/15/Annex2

So, CCE has done nothing wrong in not reserving its clients' money outside its own accounts - and therefore exposing it to loss.

But there are a couple of factors that raise questions: Barclays froze the accounts when they had a very small amount of money in them. Of the GBP3 million handed to administrators, some GBP2 million was cash in hand in the company's offices.

That raises the simple question as to how a company, hundreds of miles away from the major currency market in London, was doing its business if it was not doing all or the vast majority of it through banking channels. This was not a local bureau de change where cash-in-hand is part of the equation.