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FSA fines Barclays £7.7m for advice failings

The FSA has fined Barclays £7.7m for failures relating to the sale of the Aviva global balanced income fund and the global cautious income fund, which were first exposed by Money Marketing in April 2009.

The FSA says Barclays is facing a further compensation bill of up to £42m on top of the £17m it has already paid out to investors.

Between July 2006 and November 2008, Barclays sold Aviva’s global balanced income fund and the global cautious income fund to 12,331 people with investments totalling £692m.

Money Marketing revealed that Barclays had advised cautious clients approaching or in retirement to transfer their long-term savings into the global balanced income fund.

The value of the fund plunged by almost 50 per cent in the 12 months to March 2009 and the bank admitted it erroneously categorised the fund as balanced rather than adventurous between July and November 2007.

The FSA says there were a number of serious failings in the way the funds were sold, including a failure to ensure the funds were suitable for customers in view of their investment objectives, financial circumstances, investment knowledge and experience.

Barclays also failed to ensure the training given to sales staff adequately explained the risks associated with the funds, failed to ensure product brochures and other documents given to customers clearly explained the risks involved and could not mislead customers and failed to have adequate procedures for monitoring sales processes and responding promptly when issues were identified.

The FSA’s investigation revealed that even though Barclays had itself identified potentially unsuitable sales as early as June 2008, it did not take appropriate and timely action.

Of the 12,000 or so investors, most of whom were retired or nearing retirement, 1,730 complained about the advice they were given to invest in the funds. This equates to approximately one in seven investors.

During the investigation Barclays continued to carry out a past business review to evaluate the suitability of the sales of both funds. 3,099 sales of the cautious fund, or 51 per cent of all sold, and 3,378 of the balanced fund, or 74 per cent, have been identified as requiring further consideration.  

Barclays has already paid approximately £17m in compensation and the FSA estimates up to an additional £42m could be paid to customers who received unsuitable advice.

The fine is the highest fine imposed by the FSA for retail failings.

FSA managing director of enforcement and financial crime Margaret Cole says: “The FSA requires firms to have robust procedures in place to ensure any advice given to customers is suitable. Therefore, when recommending investment products, firms should take account of a customer’s financial circumstances, their attitude to risk and what they hope to achieve by investing.

“On this occasion however, Barclays failed to do this and thousands of investors, many of whom were seeking to invest their retirement savings, have suffered. To compound matters, Barclays failed to take effective action when it detected the failings at an early stage.

“Because of this, and given Barclays’ position as one of the UK’s major retail banks, we view these breaches as particularly serious and fully deserving of what is a very substantial fine.”

Barclays managing director of insurance and investments Paul McNamara says: “We know that on this occasion we let our customers down and did not do all we could have done to meet the high standards that our customers expect from us and for this we are sorry.

“In relation to these two particular investment products, we failed to give adequate information to some of our customers to help them make the right decision about how to invest their money. As a result, a number of customers may have invested in funds which exposed them to more risk than they were comfortable with and this, coupled with the unprecedented financial crisis, meant that some were adversely affected.  

“We stopped selling these investment products two years ago and since then we have been working hard to ensure this does not happen again.  We have reviewed and made improvements to our sales and advice processes, including the documentation provided to customers, and the level of supervision over advisers.

“Over 12,000 of our customers invested in these two funds. We are now working with a firm of accountants as part of a review to determine how many customers have been affected.”

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Comments

There are 27 comments at the moment, we would love to hear your opinion too.

  1. Incompetent Regulators Awards Team 18th January 2011 at 10:35 am

    Next round of FSA bonused coming up in May.

    They do such a good job!!!!

  2. Let us have more detail on this!

    How many of the sales were down to advisers on targets which were then chased down by sales managers, chased down by regional managers, chased down by area managers, chased down by the “bosses”. Hang on this sounds a bit like those old pyramid games of old…or possibly not so old.
    At least the FSA recognise that it was down to “sales staff” and not advisers which just about sums it up. Finally are we actually getting somewhere.

  3. Why does the governement not force the banks to split their operations into at least two.
    One being the routine High Street “Public” service and the other being the “casino” risky investment operations.
    This should be done first with the “Banks” we the public own. Then we the Public can move our accounts to what will hopefully be a safer and more ethical banking service.

  4. A fine of just over 1% of the investment. How is this designed to stop the banks mis-selling?

    Now, tell me, did they take 7% initial. If so a net profit of 6% of £692M! Oh thats just over £40M…. again why would they stop this in the future?

  5. Goodness Me!!! They still have their FSA permissions.

    Blow me down.

  6. Failures relating to the sale of the Aviva global balanced income fund and the global cautious income fund?

    What about all the other high risk funds they’ve made unsuitable recommendations for?

  7. Does anyone know if Nic Cicutti has seen this?
    Just a thought.

  8. Richard Jenkinson 18th January 2011 at 10:58 am

    Is it surprising for financial advisors to do this given the commission that they gain. I have expressed concern at advising people approaching their 90’s to put money into 5 year plus investments. Perhaps the FSA will do something about that as well.

  9. Richard – the IFA community are one of the bank sale tactics worst critics because we are the people that see the poor advice, admin, etc first hand and often have to clean it up.

    By the time the FSA get around to it the IFA community have been highlighting problems for a couple of years normally.

    I really cannot see things improving until the FSA focus their resources on the problem areas rather than this scatter gun approach and that seems to work on the lowest common denominator theory.

  10. This is at best a token slap on the wrists.

    Barclays are laughing all the way to the ba… oh.

    How many of the mis sales will not be indentified because they have been talked out of complaining by the “branch manager” or sales person who advised them to do it in the first place?

  11. Bank staff mis-selling ? Good Lord who would have thought of such a thing. I wholly support the comments made by John Hutton who obviously understands the sales culture within banks completely. As an ex ‘Rats Nest’ staff member it was a case of ‘hit targets or else we will have to help you with ‘targetted supervision’. which just happened to be phase one of the dismissal proceedure.

  12. So how were the customers compensated This is like a speeding ticket for a hit and run mass murder through the high st.
    Why was nobody sacked or suspended maybe the FSA are too scared to upset thier pals in the banks

  13. What a deterrent ! a fine more or less equal to the topman in the companys annual bonus. Gawd elp us.

  14. Lets just hope the customers are not offered a free ‘account review’ when they deposit their compensation back to where it was in the first place. Ha Ha!

  15. Unfortunately fining banks does no good as they can cover the cost from other ‘operations’. A similar level of fine would close an IFA practice. Until they start removing their permissions to give ‘financial advice’ there is no incentive.

    This highlights the problems of centralised compliance – the boys at the top say its low risk so it must be.

  16. It seems that some people are never satisfied! MM have brought this to the attention of the FSA and they have acted – with a record fine, public humiliation of Barclays and self-righteous IFAs able to say “I told you so”… in practice the fine is not a small sum – I estimate it as 9.6% of the investment – which together with the negative press, stress and costs of changing their own infrastructure is probably a low estimate.

    I wonder how many would cope with a fine of 9.6% and be stupid enough to think of repeating the error. Stop moaning, you got what you wanted. (and yes I am an IFA).

    BTW – the maths is [7.7m+£17m+£42m]/£692m

  17. What more proof is needed to demonstrate the complete incompetance of the banks? Even an MP can understand this and deduce that banks have only one interest – maximise profit and stuff the client.

  18. Dominic I think that the £17m + £42m is the compensation required to put clients back to where they would have been if they hadn’t received the advice in the first place.

    The actualy fine or punishment to Barclays is the £7.7m which is not that much really. If they had been fined the same amount as the compensation that they had to pay, now this would possibly have altered their behavious in the fuutre.

  19. Where does the buck stop? If I had approved these sales – and I check every single case before submission – I do not doubt that my 15 year old IFA practice would be closed down.

    That is why small, directly authorised, firms pose little or no risk to the investing public.

    Someone at Barclays was responsible for this shoddy debacle. Follow the audit trail.

  20. I think I’m more on board with Dominic’s maths on this one – i.e., cost to Barclays’ own resources.

    Actually the cash cost to Barclays is higher than £7.7m becuase of the pseudo-skilled person review; it’ll be interesting to see if their next accounts disclose how much that cost – any Barclays shareholders out there want to pose a question at the AGM?

  21. Ancient Wisdom...is an IFA in N3 18th January 2011 at 2:59 pm

    ..£7m vs £30bn profits – I think Barclays are the ones who are haiving the last laugh.
    As fro the FSA – are they just seemng like parking attendants – its just a parking ticket issued to a car thats licensed but failed an MOT – a quick fine and back on the road, running over padestrians (clients).

  22. Richard Jenkinson 18th January 2011 at 3:11 pm

    Ref Greg Heath 18/1/11 @ 11:14 am

    My comment on financial advisors was referring to those at Barclays. Call them what you will, sales, advisors etc, they all do the same job, and are motivated by commission payments. IFA’s outside of Barclays in my experience also work on the same basis. The” Independent “ factor appears to make no difference.

  23. The World the FSA would love to see.

    A handful of insitutions to audit, fine a few million now and then to keep the peace.

    Then back to the important jobs of getting a bit of bonus, promotion, nicer office plants and seeing what perks are available.

  24. Barclays should have been fined the total they made in commission on that product, have to undertake a 100% review of all cases where that product was sold and pay compensation.

    Only then will the banks clean up their act.

    An IFA would have lost his/her permissions for this. Whilst I can understand that withdrawing permissions for a bank could destabilise the market and thus be undesirable, what is the point of regulation if this isn’t available to a regulator?

    Perhaps the FSA should withdraw permissions to sell specific products until the bank can prive its staff are properly trained and not given targets to sell individual products.

    When we had our TCF telephone interview, the interviewer expressed great interest in how my company remunerates its staff. Pity they don’t appear to do the same for “light regulation touch” banks!

  25. Through all the bitterness that the Banks have brought on themselves it may be worth Advisers looking carefully at some of the ancillary aspects of this affair. I am not referring to the rights or wrongs of the sales progress that Barclays have in place, but what possibly triggered the complaints.
    As I read the reports the main recipients of the advice were pensioners looking to preserve their capital and income. No age range is specified, but someone retiring at 65 has a possible 20 to 25 years to live. Putting the money into a “safe” investment is likely, under normal assumptions, to see the capital value eroded alongside the spending power of the income. A “safe” investment therefore actually becomes high risk.
    The normal assumption is that if one wishes to preserve capital and income there needs to be some exposure to equities.
    I am not familiar with the construction of the Aviva funds but, just looking at the names used, I would have assumed that these two funds would have fallen into the category of being part of a recommendation at least. One is balanced and one is cautious. Whether they are run in that fashion others will need to comment.
    But, on the basis that the funds did what they said on the tin, they look like funds that could be used to preserve capital and income, for people who are likely to be living in excess of 20 years. In other words they could be technically be considered lower risk this those targets in mind.
    Of course, we then have a massive fall in Stockmarkets around the world, which leads to falls in the value of the funds, and a sense by the pensioners of being sold the wrong thing. If the same bonds had been sold to them in 2003 I suspect we would not now have a scandal, but a lot of people praising Barclays and Aviva.
    It could be that too high a proportion of the available funds were put into these funds rather than having a sensible spread, but it still raises the question of what is sensible to recommend to pensioners. Given that the FSA are rather gung-ho in their approach to these matters, and lack any understanding of the advisory process, it may be very useful to review strategies very carefully. The concept of investment risk is a hard one to pin down despite all the baloney that is spoken, and the FSA have shown they do not understand it, but will act anyway.
    The other side of the coin relates to the constrictions that are likely to be caused by RDR. It is inevitable that there will be a reduction in the number of IFAs in the market by 2013; the number is open to debate. But in the main IFAs deal with the wealthy. The less wealthy have needed to rely on the Banks for advice, but this piece of misselling is likely to cause the banks to review the genuine profitability of their adviser divisions. £100m is not chicken feed. And if they believe they are now about to be picked on by the FSA in this area they are likely to review whether the poor relationship may have an adverse effect in other, more profitable areas.
    Will the banks throw more money at the process or will they consider that this is a marginal area and move away. Wholesale money may make far better profits than retail money. The banks reaction is open to debate, but I would be inclined to say that their exposure to the market may be reduced for a year or two.
    In the short term I suspect that there will be a contraction of bank activities in this area, which would be a repeat of the contraction of the direct selling forces of the insurance industry many years ago.
    There are far too few IFAs to step into the breach, even if they wanted to take on lower margin clients.
    So what is going to happen to the advisory market in the next two or three years? I suspect the FSA may just have an unexpected problem on their hands, namely, they have virtually brought the advisory business for the “ordinary man in the street” to a halt by regulating too late and with too heavy a hand.
    The assertion by Hector Sants in the FSA letter date 13 December 2010 to the Treasury Select Committee that the FSA “do not believe that RDR will threaten the availability of good quality advice” seems even more head in the sand than it did then.
    If you beat something into submission the result is less likely that it arises in a better form than it crawls away and dies. I can understand why advisers want to continue in their jobs – I can’t for the life of me understand why new people come in to the industry. If you are going to commit to the level of qualification required, become an accountant, or lawyer, or fund manager. There is a lot more money to be earned per unit of regulation.

  26. Wearing my ‘consumer’ hat I’d say the important point here is that finance professionals ‘in the know’ are unimpressed by banks’ practices and see the fine as too low. FSA (and banks) take note.

  27. Recalling the hammering meted out by the FSA on Charlie Palmer at Financial (the Network) for supervisory failings over pension fund transfer transactions, one wonders why no such measures have been imposed on any individual/s at Barclays. I’d understood that one of the FSA’s recent initiatives was from now on to start holding individuals to account, with fines and other types of sanction for corporate misdemeanours.

    Surely the buck stops somewhere, on somebody’s desk? Surely, responsibility for having approved this programme of mass mis-selling lies with a person as opposed to a faceless institution for which, in the overall scheme of things, the fine and compensation costs are unlikely to cause any significant pain at all? That’s what happens when it’s an IFA firm or a Network, isn’t it? So why not Barclays? Because…………….

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