FUNDS house BlackRock, which has a large Edinburgh presence, has been fined £9.5 million for failing to protect client deposits.
This was the largest fine ever handed down to an asset manager by the Financial Services Authority.
The problems arose after BlackRock's purchase in 2006 of BIM, previously called Merrill Lynch Investment Managers.
Under FSA rules, a firm must have a trust letter from any bank holding its client money to ensure that, if it becomes insolvent, client money is ring-fenced from the firm's own assets.
But systems changes after BIM moved to BlackRock meant that between October 1, 2006, and March 31, 2010, BIM did not obtain such letters in relation to some of the deposits.
The regulator found that the average daily balance affected by this failure was over £1.36 billion.
Had BlackRock become insolvent at any time during this period, clients would have suffered delay in securing the return of their funds and may not have recovered their money in full.
Tracey McDermott, FSA director of enforcement and financial crime, said: "Despite being part of one of the largest asset man-agers in the world, BIM's systems were simply not adequate, and the basic step of notifying banks that the money was held on trust for clients was not done."
The FSA said BlackRock, which has investment management support functions in Edinburgh, would have been fined £13.6m if it had not agreed to settle with the FSA at an early stage.
New York-headquartered BlackRock said it had reported the error to the FSA after identifying the issue through an internal review. It has since taken steps to ensure it has robust controls in place.
"As the FSA itself noted, the situation that led to this settlement was not deliberate and no clients suffered any losses as a result of the error," BlackRock said.
A number of investment managers have been fined this year. In May, US and British regulators fined Edinburgh-based asset manager Martin Currie £8.6m for failing to manage a conflict of interest between two of its clients.
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