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FCA fines State Street for TM failings
03 February 2014
State Street UK’s transition management business overcharged clients $20,169,603
The UK regulator has fined State Street UK £22.9m for its failings in managing transitions for clients including pension funds.
The Financial Conduct Authority (FCA) found that between June 2010 and September 2011 the bank’s transition management business overcharged six clients a total of $20,169,603. That figure accounted for more than a quarter of the business’s revenue.
In its ruling, the FCA said the business had “developed and executed a deliberate strategy to charge clients substantial mark-ups on certain transitions”, in addition to the agreed management fee or commission. These mark-ups had not been agreed by the clients and were hidden from them.
State Street UK’s clients include large investment management firms and pension funds.
Tracey McDermott, director of enforcement and financial crime, said: “The findings we publish today are another example of a firm that has acted with complete disregard for the interests of its customers. State Street UK allowed a culture to develop in the UK TM business which prioritised revenue generation over the interests of its customers.
"State Street UK’s significant failings in culture and controls allowed deliberate overcharging to take place and to continue undetected. Their conduct has fallen far short of our expectations. Firms should be in no doubt that the spotlight will remain on wholesale conduct.”
The FCA judged that the bank had breached three of the regulator’s Principles of Business. It failed to treat its customers fairly; it failed to communicate with clients in a way that was clear, fair and not misleading; and it failed to take reasonable care to organise and control its affairs responsibly, with adequate risk systems.
The FCA said the bank’s failings were at the most serious end of the spectrum.
The overcharging only came to light once a client told staff it had noticed mark-ups on certain trades that had not been agreed, according to the regulator.
“Those responsible then incorrectly claimed both to the client and later to State Street UK’s compliance department that the charging was an inadvertent error, and arranged for a substantial rebate to be paid on that false basis. They deliberately failed to disclose the existence of further mark-ups on other trades conducted as part of the same transition.”
Once senior management became aware of the issue State Street UK took action to investigate the misconduct and to implement a comprehensive programme to improve the business controls and bolster control functions, governance and culture across its UK businesses.
In 2011 the bank dismissed certain individuals that were centrally involved in the overcharging.
In a statement State Street said: “Today brings to a conclusion the FCA’s inquiry into the overcharging of six Emea-based transition management clients in 2010 and 2011 that we self-reported in 2011. We deeply regret this matter. Over the past several years, we have worked hard to enhance our controls to address this unacceptable situation.
"The FCA in its notice is critical of our business controls within the UK transition management business and our control functions in the UK at that time. We acknowledge these as historical problems and have undertaken extensive efforts to address both, including strengthening the controls, procedures and governance within our UK transition management business.
“In 2011, we dismissed individuals centrally involved in the overcharging of transition management clients. Their behavior was unacceptable and a significant departure from the high standards of conduct and transparency that we expect and certainly not consistent with the manner in which our employees act on behalf of clients every day.
“Also in 2011, we notified all transition management clients about the overcharging, only six of whom were directly affected. We continue to have an open and transparent dialogue with our transition management clients to ensure they are aware of the actions we have taken over the past several years to strengthen our controls.
“We believe we now have industry leading controls within our transition management business and have bolstered our control functions in the UK, broadening the depth of talent that oversees our businesses.
“We have fully cooperated with the FCA during their investigation and appreciate that the FCA’s notice acknowledges the overcharging identified in the settlement relates only to our UK transition management business, that we have implemented a comprehensive remediation program in relation to the controls around the UK TM business, and that we have bolstered our control functions, governance and culture across all of our UK businesses.
“We are confident that we have addressed the weaknesses highlighted in the FCA’s notice and as a result, have emerged as a stronger organisation.”
State Street UK agreed to settle at an early stage of the FCA’s investigation and has therefore qualified for a 30% discount. Were it not for this discount, the FCA would have imposed a financial penalty of £32,692,800 on State Street UK.