Crime and Punishment

This article, by Paul Resnik, was published in the April edition of the FinaMetrica newsletter.

UK regulator fine for unsuitable advice

It seems to be inevitable that the past behaviour of banks raises the ire of regulators around the globe. Over recent years, the UK regulator the Financial Conduct Authority (FCA) has been at the forefront by handing down stiff punishments against banks that break laws and regulations protecting investors.

In March, the FCA slapped the UK arm of Santander with a £12.4 million ($22 million) fine for failing to make sure investment advice it provided to retail customers was suitable. It was one of the biggest penalties ever handed down by the FCA for poor investment advice. The huge fine sends a strong message to all advisory businesses that regulators will pounce on organisations that provide unsuitable or misleading investment advice.

At the same time closer to home, it’s worth reflecting on the punishment meted out to Malaysian insurance agent Tee Wei Chiang. He was found guilty in March 2014 of cheating housewife Wong Kok Fong into believing he could help her obtain an insurance policy from Great Eastern. He dishonestly induced Wong to bank into his account 400 thousand ringgit for the alleged insurance premium. Tee was also found guilty of other deceptions. His punishment of five years jail time and six strokes of the cane highlight that courts too will firmly punish dishonest acts.

In the Santander case, as a result of several failures by the huge bank to fully inform customers about their investments, the FCA said that there was a significant risk of customers being recommended, making and remaining in unsuitable investments.

The failures included advisers not fully informing customers about the products in which they were invested, not considering investors’ risk appetite and not taking into account enough information about customers to determine the suitability of investments.

“The thematic reviews conducted by the FCA, along with the reviews conducted by Santander, its external consultants and its internal auditors, all highlighted significant deficiencies in Santander’s investment sales process and its implementation during the period 1 January 2010 to 31 December 2012,” the FCA said in its March 24 decision.

“These deficiencies gave rise to a significant risk of customers being recommended, making and remaining in investments that were not suitable for them,” the FCA said.

The FCA said Santander had inadequate processes to determine the risk appetites of customers, who had an average age of 60 years and who had, according to Santander’s own assessment, ‘very low’ to ‘medium’ risk appetites. They had an average investment per customer of around £24,000.

Those failures included Santander using a risk-profiling questionnaire with significant weaknesses. It had a very limited number of questions that made the test results overly sensitive to customers’ answers to individual questions. Questions were also open to interpretation and too complex for the firm’s customers to understand and answer.

Nor did Santander have adequate processes in place to ensure that its advisers collected the necessary information from customers to establish the suitability of investment recommendations. Nor did the bank take steps to ensure that its advisers provided customers with appropriate disclosure about why investment products and services being recommended to them were suitable.

In some cases, customers were misled. Some advisers made statements to investors that an investment “will likely double” and factual errors such as stating that the FTSE 100 share index was 8,000-9,000 points in 2008, when it fell below 4000. Some customers were told they would not pay any commission on products, when in fact commission on one product was as high as 7.75%.

The FCA said Santander’s failings were serious because they were systemic and related to a large number of customers, including some who may have been “vulnerable due to age, their ability to replace capital, medical or other personal circumstances.”

So bad were the problems that it’s no surprise that Santander stopped giving investment advice from its branches from late 2012 after the FCA raised its concerns. Santander is one of the biggest banks in the Eurozone so should have done much better by its customers. It operates a network of 1,200 branches. Its Bancassurance business provided retail investment advice to approximately 295,000 customers in relation to 349,000 investment products from 1 January 2010 to 31 December 2012.

It’s not altogether surprising then that the FCA announced in its 2014-15 Business Plan that it will “look at whether investment advisers are carrying out appropriate due diligence to ensure that consumers are sold suitable products and services”.

My sense is that many smaller planning firms generally have suitability issues under control. It is larger businesses that are more likely to be vulnerable to putting regulators offside. But that, of course, is a generalisation. It’s up to all businesses and individual advisers to make sure their advice processes are transparent and that investors are recommended products that suit their needs. The wrath of regulators and courts can be fierce and, as illustrated above, they can sometimes be painful.

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