The Financial Services Authority, the UK regulator, today said it has fined Credit Suisse (UK) £5.95 million ($9.5 million) for “systems and control failings” at the private banking arm, confirming months of speculation that the Swiss firm was to be hit with a big fine.
The failings related to “sales by its private bank of structured capital at risk products (SCARPs)”, the FSA said in a statement.“The FSA is making good on its promises. Their focus on private wealth managers, the suitability of advice, the FSA’s warnings to chief executives, its concerns over product design and the use of leverage to sell retail products are all played out in this enforcement action. A case like this will embolden the regulator’s pursuit of its more interventionist strategy," Jon Wilson, director for project consulting at The IMS Group, a firm advising companies on regulatory issues, said of the Credit Suisse case.
For months, this publication, along with many other media groups, had been aware that Credit Suisse was the subject of a major FSA investigation and that some form of severe punishment, including a large fine, was due. However, the bank and the regulator repeatedly declined to comment on the matter when questioned by WealthBriefing.
In a statement today, Credit Suisse said: "We deeply regret the failings of systems and controls in the period 2007 – 2009 around the provision of advice to UK private banking clients on structured capital at risk products. We have made significant improvements to our processes and controls since 2009 and we are confident that we currently comply with our regulatory obligations. We fully cooperated with the FSA and are pleased to put this matter behind us."
In its statement, the FSA said that SCARPs are “complex financial products that provide income to customers but also expose them to the risk that they lose all or part of their initial capital”.
Between January 2007 and December 2009, Credit Suisse UK customers invested over £1 billion in SCARPs. However, during that period there were a number of serious failings in the systems and controls in respect of those sales, the FSA said in its statement. The failing included:
-- Inadequate systems and controls in relation to assessing customers’ attitudes to risk;
-- Failing to take reasonable care to properly evidence the suitability of SCARPs for customers;
-- Failing to monitor staff effectively to ensure that they took reasonable care when giving advice.
The FSA said it identified problems in a supervisory visit to the firm, leading to an investigation.
“The FSA has found that Credit Suisse UK had poor systems and controls in place and failed to maintain adequate records regarding its advice on these products,” it said.
“Since the discovery of these failings, Credit Suisse UK has made a significant number of changes to its advisory processes and has enhanced the systems and controls in place to ensure the suitability of its advice to its customers,” it continued.
“Credit Suisse UK has also agreed to carry out a past business review, overseen by an independent third party, in relation to SCARP purchases during the period identified. If a customer is found to have been advised to purchase an unsuitable product, redress will be paid to the customer by Credit Suisse UK to ensure that they have not suffered financially as a result,” it said.
By settling the matter at an early stage, Credit Suisse UK is entitled to a 30 per cent discount in its fine, the FSA said.
“We have seen all too frequently the consequences of financial services firms failing to implement proper systems and controls to ensure their customers invest in suitable products. A proper assessment of customers’ individual needs and circumstances is even more critical where firms are selling complex products like SCARPs,” Tracey McDermott, acting director of enforcement and financial crime, said.
“Credit Suisse UK’s systems were not up to the level we, and their customers, are entitled to expect. Our recent ‘Dear CEO’ letter to the wealth management industry made it clear that significant and widespread failings exist in this area and standards need to improve. This penalty should leave firms in no doubt about our determination to make that happen,” McDermott said.
In June, the FSA sent a ‘Dear CEO’ letter to the wealth management industry, following a review of the suitability of client portfolios in a sample of firms in the sector. The watchdog identified what it called “significant, widespread failings”.
“The FSA considers suitability – and the ability to demonstrate it – a key area of risk in the wealth management industry and firms in this sector are seeing, and will continue to see, an ongoing and increasing focus on these issues,” it added.
The regulator, which is losing some of its powers to the Bank of England, has been flexing its muscles. In January this year, the FSA fined Barclays Bank £7.7 million for failures in relation to the sale of two funds.
The IMS Group added that the current tough economic climate had exposed problems with some financial products.
"It takes the low tide of an economic downturn and loss making investments to reveal instances of inadequate client records. Firms’ systems and controls need to ensure that detailed client records are gathered and maintained at all times. Standards can sometimes slip, perhaps during boom times when markets are rising, new business inflows are healthy and minds aren’t sufficiently focused on what happens should clients become dissatisfies or disgruntled, or even a regulator becoming so upon an inspection visit as appears to have occurred in this case. The target standard should meet regulatory obligations and also equip the firm to defend itself against a subsequent accusation of negligence," Peter Moore, head of regulation, told this publication.
"The lesson from this case is that not only must firms meet the necessary regulatory standard, but the firm must have complete and credible records to prove it. In regulatory parlance, if it’s not in writing (for example, in this area, the client fact-find and related documentation), it didn’t happen," Moore said.
"The case is also a very timely signpost to the future. While it is seeking to influence the strategy and remit of its successor the Financial Conduct Authority, the FSA has provided a very colourful example of why a regulator should have the ability and power to intervene in relation to a financial product at an earlier stage, perhaps even at its design stage. The FSA’s rationale for moving in his direction is the history of mis-selling financial products (HIPS, SPLITS, PPIS etc), here in the UK, a lexicon to which SCARPS needs to be added," Moore added.