State Street UK has been fined £22,885,000 by the Financial Conduct Authority (FCA). State Street UK’s Transitions Management (TM) 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 concealed from them.
TM is a service provided to clients to support structural changes to asset portfolios with the intention of managing risk and increasing returns. TM services may be required when a client needs a large portfolio of securities to be restructured, or when a client decides to remove or replace asset managers.
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.”
Between June 2010 and September 2011 the FCA found that State Street UK’s TM business deliberately overcharged six clients a total of $20,169,603. State Street UK’s clients include large investment management firms and pension funds holding the funds and savings of retail investors.
The systemic weaknesses in State Street UK’s business practices and control environment around the UK TM business were so serious that the overcharging only came to light after a client notified staff that it had identified mark-ups on certain trades that had not been agreed. 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.
The FCA views State Street UK’s failings to be at the most serious end of the spectrum. State Street UK acted as an agent to its TM clients and held itself out as being a trusted advisor. Accordingly, it breached a position of trust. Further, the overcharging accounted for over a quarter of its TM revenue.
When the failings were uncovered, State Street UK was found to have breached three of the FCA’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.
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 UK TM business controls and bolster control functions, governance and culture across its UK businesses.
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.
Notes for editors
- State Street UK means State Street Bank Europe Limited and State Street Global Markets International Limited.
- The Final Notice for State Street UK
- The three relevant Principles of Business are:
- Management and Control: Principle three
A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
- Customers’ interests: Principle six
A firm must pay due regard to the interests of its customers and treat them fairly
- Communication with clients: Principle seven
A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.
- Management and Control: Principle three
- Over £165 billion of assets invested in pensions and other large funds are transferred between investment managers, markets and products every year – potentially affecting the returns enjoyed by millions of consumers on their pensions and other investments.
TM is a service provided to clients to support structural changes to asset portfolios with the intention of managing risk and increasing portfolio returns.
TM services may be required when a client needs a large portfolio of securities to be restructured, or when a client decides to remove or replace asset managers. For example, a typical pension fund trustee may decide to change the general type of assets (such as equities and fixed income bonds) that the pension fund should be invested in. Where the change is large and complex, the pension fund trustee may appoint a transition manager to project manage and effect the transition.
A transition manager can charge fees and generate revenue in a number of different ways. It can charge commissions on equities and futures trades, mark-ups on bonds, and/or it can charge a project management fee (which can either be a fixed fee, or a fee based on a percentage of the overall portfolio).
- On the 1 April 2013 the Financial Conduct Authority (FCA) became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
- The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
- Find out more information about the FCA.