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FSA fines advisers for Lehman-backed structured product sales

The FSA has handed out three fines to advisers for failings related to Lehman-backed structured product sales.

Dundee based law firm Thorntons Law, which provides investment advice to customers under the brand Thorntons Investment Services, has been fined £35,000, with a separate fine of £10,500 for one of its partners, Michael Royden.

A third fine of £28,000 has been given to Robert Peter Yarr, at McClelland Yarr Financial Services, an IFA firm based in Belfast.

This enforcement action comes following an FSA review of the marketing and distribution of structured products, particularly those backed by Lehman Brothers, concluded in October 2009. 

The regulator found that the firms improperly advised clients to invest in structured products backed by Lehman Brothers between November 2007 and August 2008. In particular, it says Thorntons made recommendations to customers to invest in structured products when those customers could not afford to lose money and it also recommended that a high concentration of customers’ savings and investment portfolios be placed in structured products.

The FSA says that in one case, Thorntons advised a customer to place 45 per cent of his wealth in a single structured product.

The advisers also used misleading phrases to describe structured products in letters to customers such as “absolutely no risk to capital”. It found that Royden, the partner at Thorntons responsible for compliance oversight, had no financial services experience prior to taking responsibility for Thorntons Investment Services.

The FSA has also find Yarr, who was found that have not fully understood and warn customers of the counterparty risk associated with structured products, as well as failing to keep adequate records, conduct product research and ensure sufficient compliance oversight.

FSA managing director of enforcement and financial crime Margaret Cole says: “Firms and individuals giving investment advice must properly assess their clients’ needs and make suitable recommendations. Where we find evidence that firms are giving unsuitable advice to investors relating to complicated investments such as structured products we will not hesitate to take action.”

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. On the evidence of what we see here, these guys shouldn’t be giving people financial advice because they clearly don’t understand the products they’re selling….but the banks sell these things on this basis ALL THE TIME!

    Words fail me……

  2. FSCS will say no to Keydata? Doesn’t look good for those who recommended structured products to people who couln’t afford to lose money, but then again who can? Coutts next? Frank Skinner and Jeremy Clarkson couldn’t afford to lose £millions.

    And:

    “the partner at Thorntons responsible for compliance oversight, had no financial services experience”

    Wait a minute, is it a fact that even post RDR there will be no requirement for those with compliance oversight to have any qualifications? Nor will FSA staff, officers and directors?

  3. But where was the FSA guidance on these products prior to, let alone at the time, they were being sold?

  4. Chris Taylor, Managing Director, Incapital Europe 22nd September 2010 at 2:58 pm

    The issues reported here are self evidently just as much about advice as they are about structured products. In fact, specifically, the issues reported here are purely about advice.

    The structured investment industry is making significant advances in the way that it operates, focusing on education and investment integrity, and the fact that in the intermediary channel high calibre investments, developed with client-centric investment ‘integrity’ must work hand-in-hand with objective, knowledgable, client-centric investment advice.

    Which brings me to Evan. Evan, I notice numerous comments from you online, exactly as you have done above, seemingly enthusiasticallylinking structured product issues to Keydata, whenever you can. You are 100% misguided in making this link – and are therefore misleading other people reading your comments.

    Keydata’s demise had NOTHING to do with structured products whatsoever. Their problems relate to Life Settlement investments (which are not structured products, even when the provider might be thought of as a structured product provider). You need to understand this and stop such comments. I will be happy to explain the pertinent facts to you, if helpful.

    Chris Taylor
    Managing Director
    Incapital Europe Limited

  5. Is the FSA going to fine itself for authorising these products in the first place?

    When Thalidomide failed it was not the pharmacist or GP that was held responsible it was the drug agency that regulated the sale of the drug!

  6. I completely agree with Simom, there was nothing in the FSA guidelines at that time making any reference to counterparty risk associated with Structured Products. The FSA should be fined for their role in allowing this to happen. They are just shouldering the blame on the IFA again.

  7. Margaret Cole says that where they find evidence of firms giving unsuitable advice ‘they will not hesitate to act’.
    Margaret you have a mountain of evidence of banks giving ‘unsuitable advice’ but if you do occasionally act it is with a fine on the bank that is clearly from a different scale than the one used for small firms of IFA’s, despite the fact that banks are much more likely to affect markets than even a large IFA firm. Furthermore I am not aware of managers in banks being fined but management at an IFA will almost always be so penalised for their staffs failings.
    One rule for banks another much harsher regime for the small firms! This is not right Margaret and I am sure you are intelligent enough to know this.

  8. Chaps

    I’m sorry, but the statement that: ‘there was nothing in the FSA guidelines at that time making any reference to counterparty risk associated with Structured Products.’ is complete drivel!

    Advising a client on a product and not discussing the risks is pure bad advice. The biggest risk to capital with SP’s is of course CP risk.

    If you don’t understand CP risk, and by definition the product or even the concept of the product then you should not be flogging it to clients.

    This is not FSA fault, the tooth fairy’s fault, or the sandman’s fault….its the IFAs [salesman’s] fault!

    There is a view in senior compliance circles that if Joe public was advised to buy a SP by an IFA is virtually always an accident waiting to happen, and that if a complaint goes to the FOS then given the myriad of complexities of a SP the complaint will nearly always be upheld…. as FOS’s view is that Joe cannot be expected to understand CP risk, CDS, rating agencies etc and therefore cannot understand what he is buying.

    Not a view I personally adhere to, but the people I talked with about this over a beer were senior compliance staff (ex FSA and interestingly ex IFAs) with decades of experience in the business……

    I once wrote a SL for a particular SP, and the IFA edited out all the ‘nasty risk stuff’ as it might worry the client! …..says it all really 🙁

  9. Balanced View – Anond does make a fair point that there was no specific guidance from the FSA as to counterparty risk NOR and perhaps more importantly any warninsg about inaccuracy of ratings agencies until counterpartties started to fail, however Paul’s implication that counterparty risk should have been covered in detail with a client before Lehman’s collapsed is a little unfair. Arranging a structured product with an A rating for a relatively small proportion of a client’s portfolio would not have historically warranted spending much if anytime talking about counterparty risk. A large exposure to one counterparty should eitehr not have occured or at least been discussed in detail with a client.
    Now we would always explain counterparty risk, whatever the rating of the counterparty as I no longer trust anybody. We also recorded all client meetings as MP3 sound files so at least we have the evidence that counterparty risk has not only be explaiend to the client, they have been asked questions to ensure their understanding and so on. Whether that would stand up with the FOS, who knows, but at least my consience would be clear.
    Editing out all the “nasty stuff” is wrong, but then overemphasising disadvantages over advnatages can be equally as wrong as it can result in innaction of a client which results in losses of a different nature.

  10. The reason that the IFA is generally the one to get punished is because of what we do. In the wide gambit of FSA oversight (for want of a better adjective) what we do is relatively simple and relatively easy to understand, monitor and fine.

    The FSA does not have numbers of staff with the level of expertise and experience to do the same with banks and other institutions with more complex compliance issues. If they were smart enough, they would be working for said bank, and not at the FSA. Herein lies the problem, in that the decent employees at the FSA almost always get recruited by the large banks. Fact.

    In short, you are asking a mouse to chase the cat and it is hard work. Far easier to monitor the IFA sector for regular and small wins.

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