Does the Penalty fit the “Crime”?

That which was termed “excessive” fines by the local regulatory authorities pale into insignificance when compared with what happened in the UK last week.

The Financial Conduct Authority (FCA) imposed a financial penalty of £12,377,800 on Santander UK plc (“Santander”). The latter, by agreeing to settle at an early stage of the FCA investigation, qualified for a 30% discount. Were it not for this discount, the FCA would have imposed a financial penalty of £17,682,730 on Santander.

The SA Rand equivalent of £17,682,730 is over R311 million, at today’s exchange rate.

Below are extracts from the summary released by FCA:

Santander’s provision of investment advice was subject to examination in 2012 during the Authority’s mystery shopping review of retail investment advice and Phase 2 of the Wealth Management thematic review. These thematic reviews gave rise to significant concerns about the quality of Santander’s advice and communications with its retail investment customers.

The Authority found that there were significant deficiencies in Santander’s processes for ensuring that:

  1. customers received suitable advice;
  2. in relation to its Premium Investments, regular reviews were carried out to check that investments continued to meet customers’ needs and that the service promised to customers was actually provided; and
  3. financial promotions and communications with customers were fair, clear and not misleading.

These deficiencies affected the sales of retail investment products by its Bancassurance business in the period 1 January 2010 to 31 December 2012 and some of its financial promotions and communications with customers in the period 1 April 2004 to 31 December 2012. As a consequence Santander breached Principles 7 (Communications with clients) and 9 (Customers: relationships of trust) of the Authority’s Principles for Businesses and related Rules.

In particular, it breached Principle 7 by failing:

  1. to ensure that, during the investment sales process, appropriate disclosure about Santander, its products and services was provided to customers and that its communications with customers were fair, clear and not misleading; and
  2. to ensure that certain of its financial promotions and communications in relation to its Premium Investments were fair, clear and not misleading.

Santander breached Principle 9 by failing to ensure that:

  1. it had an adequate process in place to ensure that its advisers gathered and took into account all information that was necessary to establish the suitability of investment recommendations;
  2. it had an adequate process in place for establishing the level of risk its customers were willing and able to take;
  3. customers received adequate explanations of why investment recommendations were suitable for them;
  4. there was an adequate process in place, in relation to its Premium Investments, to ensure that regular reviews were carried out to check that investments still met customers’ needs;
  5. it had implemented adequate procedures for monitoring the quality of investment advice and remedial action taken where advice had been found to be unsuitable or unclear, and
  6. new advisers received adequate training before they started to give advice to customers.

Santander’s failures gave rise to a significant risk of customers being recommended, making and remaining in investments that were not suitable for them.

Following discussions with the Authority in relation to the form of that action, Santander proposed and has agreed to:

  1. conduct a customer contact exercise writing to all affected customers highlighting the risks and objectives of their investments and, depending on the investment and whether the customer remains invested or has exited the investment, offering customers the opportunity to withdraw from their investment or have a review of the sale;
  2. conduct a redress exercise for both past and current Premium Investments customers in relation to services promoted and charged for that differed from the services customers received; and

design and implement a new annual review process which complies with all the Authority’s Principles and Rules, for all customers who remain invested in Premium Investments following the customer contact exercise.

Santander has also agreed to compensate any customers who, during these exercises, are found to have suffered losses as a result of any failings on its part. These exercises will be overseen by an independent third party.

The Brits are into their sixth year of Treating Customers Fairly. There is consensus, locally, that the introduction of TCF will bring about a significant change in the way local product houses develop, distribute and monitor products.

The Santander saga will no doubt be studied carefully to avoid the same thing happening here.

Please click here for a copy of the media release by the FCA.

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