FSA fines Coutts £6.3m for misselling enhanced fund

8 November 2011 10:36 am | By Nicole Blackmore

The FSA has fined Coutts & Company £6.3m for a string of failings in connection with the sale of the AIG enhanced variable rate fund.

Coutts has also agreed to carry out a costly past business review, overseen by an independent third party, in relation to all customers who remained invested at 15 September 2008. It will compensate all those customers who have suffered a loss as a result of its failings.

The FSA says between December 3, 2003 and September 15, 2008, Coutts sold the fund to 427 high net worth customers, with investments totaling £1.45bn.

The fund invested in financial and money market instruments but unlike a standard money market fund, it sought to deliver an enhanced return by investing a material proportion of its assets in asset-backed securities and floating rate notes.  

During the financial crisis of 2007 and 2008, the market values of some of the assets in the fund fell below their book values.  

On September 15, 2008, Lehman Brothers applied for Chapter 11 bankruptcy protection in the US and AIG’s share price fell sharply and suddenly.

A large number of investors sought to withdraw their investments and there was a run on the fund. As a result, the fund was suspended, with customers prevented from immediately withdrawing all of their investment.

The FSA says there were a number of serious failings in the way the fund was sold prior to, and after, September 2008.

In particular, Coutts generally informed customers that the fund was a cash fund which invested in money market instruments and could be seen as an alternative to a bank or building society account.

However, a significant proportion of the fund’s assets did not meet this description and customers may have misunderstood the true position about the risks they were assuming.

Coutts also failed to have an adequate sales process in place for the fund and advisers were given inadequate training about the risks and features of the fund.

The FSA says Coutts’ sales documentation failed to accurately or adequately describe the fund and its risks.

It adds that Coutts recommended the fund to some customers even though it may have exposed them to more capital risk than they appeared willing to accept and many customers were advised to invest a large proportion of their overall assets in the fund, without adequate diversification.

Coutts failed to respond appropriately to the changing market conditions in late 2007 and during 2008, when there was a greater risk of the fund suspending redemptions and of customers suffering a loss.

Despite having been aware of these issues affecting the fund, Coutts failed to make the necessary changes to the way in which it sold the fund and did not ensure that advisers who sought to reassure existing customers inquiring about their investment in the fund provided a fair explanation of the risks.

Coutts also failed to properly deal with questions raised from December 2007 around its past sales of the fund, including whether it had explained the fund’s risks to customers adequately and whether their investments were appropriately diversified.

It also failed to undertake an effective compliance review of its sales of the fund after the fund was suspended and customers complained. The review failed to adequately address suitability and disclosure issues and was not completed in a timely manner.

FSA acting director of enforcement and financial crime Tracey McDermott says: “Firms giving investment advice must ensure they make suitable recommendations. It is imperative that firms also ensure that clients understand the nature of the product they are buying and the risks it involves.”

Coutts agreed to settle at an early stage entitling it to a 30 per cent discount on its fine. Were it not for this discount, the FSA would have imposed a financial penalty of £9m on Coutts.  

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