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 agreed to carry out a past business review, overseen by an independent third party, in relation to all customers who remained invested at September 15, 2008 and will compensate those who suffered losses.
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.
UBS, Barclays Wealth and Lloyds TSB are also understood to have recommended the fund to a large number of investors.
AIG suspended withdrawals from the £6bn fund in September 2008 due to a rush of red-emptions triggered by concerns about the company at the height of the financial crisis.
Investors had half their investments returned later that year but were forced to lock the rest of the capital away for up to four years to guarantee it was ret-urned in full. Those wanting to access the rest of their investment in December 2008 had to take a 25 per cent hit on the remaining 50 per cent.
The FSA says there were a number of serious failings in the way Coutts sold the fund.
Coutts told customers 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.
Coutts also failed to have an adequate sales process in place, its sales documentation failed to accurately describe the fund and its risks and advisers were given inadequate training.
The FSA says 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 were advised to invest a large proportion of their overall assets in the fund.
Coutts failed to respond appropriately to the changing market conditions in 2007 and 2008, when there was a greater risk of the fund suspending redemptions and of investor losses.
Coutts then 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 provided a fair explanation of the risks.
FSA acting director of enforcement and financial crime Tracey McDermott says: “It is imperative that firms ensure that clients understand the nature of the product they are buying and the risks it involves.”
Coutts chief executive Rory Tapner says: “We had already implemented enhancements to our investment advice procedures, which provide reassurance that the past failings identified by the FSA will not be repeated.”
UBS, Barclays Wealth and Lloyds declined to comment.