Under FSA rules, firms are required to keep client money separate from firm’s money in segregated accounts with trust status.

Firms must have a trust letter from the bank holding its client money to ensure that client money is clearly identifiable and ring-fenced from the firm’s own assets.

McInroy and Wood, based in East Lothian, was fined for failing to obtain trust letters for 22 off-shore client bank accounts.

These accounts contained an average balance of £666,000.

The failures would have been especially risky if the firm had entered into insolvency.

The failures of McInroy and Wood remained undetected for four years, between May 2006 and August 2010, despite repeated communication between the two parties.

Richard Sutcliffe, head of the client assets unit at 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.”

The firm agreed to early settlement which qualified for a 30 per cent discount. Without the early settlement discount, the fine would have been £21,500.