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FSA fines IFA £700,000 for Lehman failings

The FSA has fined RSM Tenon Financial Services Limited £700,000 for failings in its advice and sales processes for Lehman-backed structured products and also for failing to prevent unsuitable advice on structured product and pension switching.

Tenon will also have to buy back any products from customers who who received unsuitable advice and reimburse them for the amount originally invested plus interest.

This is the first enforcement action resulting from the FSA’s review of the marketing and distribution of structured products concluded in October 2009.

The FSA found that, in relation to its sales of Lehman-backed structured products between November 2007 and August 2008, Tenon failed to treat some of its customers fairly.

The FSA found Tenon failed to fully assess the risks of structured products and ensure advisers considered those risks when providing advice to customers, failed to provide suitable advice to its customers and/or failed to demonstrate the suitability of its advice by recording insufficient personal and financial information on customers’ files and failed to implement and maintain appropriate compliance monitoring to control the use of non-compliant direct offer financial promotions.

In addition, in relation to Tenon’s structured products and pension switching business more generally, the FSA found that the firm failed to have effective risk management systems in place to manage and control its affairs – and ultimately failed to prevent or minimise the risk of unsuitable sales.  

Tenon will have to conduct a past business review of structured product and pension switching business, paying customer redress where necessary.

It will also have to have its current investment sales processes reviewed by a skilled person.

Tenon would have been hit with a £1m fine, but qualified for a 30 per cent discount by co-operating with the regulator.

FSA director of enforcement and financial crime Margaret Cole says: “We take failure in this area very seriously and the fine and other actions announced today demonstrate our commitment to credible deterrence.

“This is the first action we have taken for advice failings relating to Lehman-backed structured products following our recent review, and we acted swiftly and decisively in order to return money to investors as quickly as possible.  We will continue to take tough action where we find evidence that firms are giving unsuitable advice to investors.”

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Comments

There are 20 comments at the moment, we would love to hear your opinion too.

  1. What about the advice the Banks have been giving it cient and forcing financial advice to sale Structured Products. I use to work for a big Bank and was always in trouble with my line manager as I refused to sale them. I think that these products should be band as they are NOT GUARANTEED and have never been.

  2. All very well & deserved if sold as no risk. However what FSA forget is that Lehmanns were AA rated. Soon to be potential the rating of UK plc! At the end of the day it was more down to regulatory failings that Lehmanns went down than IFA advice. Shame they only have sticks for others!

  3. Then the FSA should go after all IFA’s Banks ect, who placed this type of business with Lehmans. Get those who did the business to repay all clients and those of us that saw through the contract at the outset would not have to pay a penny into any compensation fund. They had the commission let them repay the costs of this advice

  4. So where does that £700,000 go then? I would hope towards the bill being foisted on IFAs who never touched these products with a bargepole.

    The polluter should pay, but I have a funny feeeling it doesn’t work like that!

  5. I take it that the FSA had conducted a thorough investigation of Lehman backed products and considered them suitable for IFA firms to give advice on? is it not rather odd that only now when structured products are in difficulty they swiftly move the blame over to IFA’s ? Did they know that America’s 3rd biggest bank with strong agency ratings were going bust?
    Who refused to save Lehmans – why it was the British government!
    Why were the FSA satisfied that there was no compensation cover for third parties within structured products? – Had they bothered to look? Enough said.

  6. According to their website, Tenon is one of only 170 Chartered Financial Planning firms!

    It just goes to prove that you can have all the qualifications from all institutes and still fail in a big way because of the need to make a sale to get the income!

    The FSA’s RDR should therefore be less about qualifications but more about competency in specific areas (what is to stop the FSA setting exams for advisers to practice in certain areas, such as investments). Also the business model of the advisory firm is also imperative (are they target driven or self employed consultants (with the need to generate fees/commissions to survive)? How does the business model and remuneration strategy influence advisor behavior and what consequence does this have for the client?

    I think it is obvious that under the current rules, a self employed advisor, or new firm with little capital adequacy, is under significant pressure to sell products/new services to get commissions/fees.

    If you don’t switch a pension, you don’t get large initial commissions. The result is unsuitable switches!

    If you speak with a client and tell them you will charge £3000 to invest in a structured product (often off the shelf with little work required, as it is already done by the provider) then you are unlikely to get much business. However, if you say there is no fee to pay, but a commission is received (conveniently tucked away in a 30 page product provider brochure) then you will get an easy sale. The obvious consequence is for such advisers to heavily promote these commission paying pre-packed products. The result = mis-selling!

    Post RDR and IFA will hopefully no longer receive commissions. They will have to agree a fee with a client. This should make it clear, fair and not misleading.

    This is generally good for the consumer and the industry’s image as a whole (less scandals). However, the downside, it could be argued, is that many IFAs will have to give up as they will not get the level of income they are used to.

  7. Peter Herd – are you typical of a bank adviser, or are you just kidding?

    Your use of English is an embarrassment for a citizen of this country. If you are for real, the sooner they get rid of your kind the better for everyone.

  8. Typical .I have just spent the last 12 months looking after and getting to know and fact finding some clients with a substantial investment and property portfolio.
    I have recently reviewed all their investments.Last year I nearly lost them to Barclays as they offered them a structured product and they invested a large amount of their B/S money in one.This was against my advice as its all about attitude to risk and a abalanced portfolio .I am just on the verge of advising them again at the review to invest some money and look at annuities for retirement and guess !!!what the Barclays “adviser” has popped round cold after seeing how much they have in their account and recommended structured products with guaranteed capital protection.I now find out he has not done a fact find or assessed attitude to risk of the client ,which we do as a matter of course.He has just dropped in some brochures and told them these would be good for you and you should invest in these???????.Consequently I have explained again to my clients the full procedure and they wont be dealing with him in future.BANKERS get away with murder.I should report him to the FSA.

  9. I don’t know about anyone else but I am constantly looking over my shoulder when it comes to advising on anything.

    Once again not necessarily all the FSAs fault but the fault of our industry which keeps coming up with investments of one sort or another that are too sophisticated for many and very hard to get to the bottom of.

    Look at what UCITs 3 has done. We suddenly have an explosion of fund managers who are not only good at long only funds but suddently experts at shorting.

    Control the products and you control the problems.

  10. Pot calling kettle black I think. Like the FSA saw it all coming and gave warnings. They were rather more coy at the Treasury Select Meetings. Ticking boxes but acting on nothing.

  11. FSA director of enforcement and financial crime Margaret Cole says: “We take failure in this area very seriously and the fine and other actions announced today demonstrate our commitment to credible deterrence.

    Decisive action, shame they didn’r pick up on and act so decisvely on the products the banks put together on the institutional markets and sold on to unsespecting investors in Iceland under a AAA rating – but then that kind of investigation is a lot of hard work and needs highly qualified people – have I missed something?

    On the whole structured product debate, they are a usefull tool when used properly as they can be used to give clients equity exposure with some downside protection. It’s all about doing the job properly, expalining the risks (yes there are some) and providing a proper diversified portfolio.

    The problem is, these things get sold for the wrong reasons on the wrong basis and often not , without a full understanding of their design and proper use

  12. I agree with everything posted by Ian James, Ken Gordon and Dan W.

    The central points in this matter are:

    1) Did Advisers and Clients properly understand what they were buying? I always struggled and was never really comfortable with any Structured Product, certainly not to the point where I could have made a genuine recommendation to a client.

    2) Rather more to the point, did the FSA or any of their employees, ever get to the point where they fully understood, and were comfortable with, the basis of thes products.

    3) If they did, where was the policing, monitoring and adviser guidance that should have resulted.

    4) If the danngers were understood, should the sale of these products have required a specific authorisation?

    As an aside, I hold no brief whatever for Banking sector Line Managers, but is it possible that Peter Herd’s difficulties with his Manager may have been worsened by his written English skills?

  13. Well this is a eye watering fine and one that will no doubt all looking for the most robust of wordings for counterparty risk

    i think it is a a bit unfair to call this one however if you really want to point a finger then it has to be at the door of number 11.Alastair Darling it transpires was the sole reason Lehmans fialed as he blocked the Barclays Bid and refused permssion for a bail out allowing Barclays to but Lehmans business at a fraction of the proce and causing a huge mess such as this.So are they going to go and fine the Chancellor then?

  14. So when advising on a structured product, what would you bring to the attention of the client with regards risk?

    The last time a rep from The Hartford (they left the UK) tried to make me position a product like this; “Mr & Mrs Client, how would you like to know that whatever happens to the market, your initial investment will not go down in value, but, should the market go up, your investment will also go up?” – something along those lines. This question implys no risk.

    How would you, as an experienced IFA, communicate the risks?

  15. “If it sounds too good to be true, it is.”

    Therefore as “an experienced IFA” I’d expect you to tell the Harford rep to go away and don’t come back until you’ve got something more realistic. Not just ask “and how much commission….”

    Good to see the method of punishment (forget the fine) – the IFA having to buy back the dodgy products it sold.

  16. So what the FSA is saying is that structured products shouldnt be sold. Neither the FSA nor credit rating companies spotted the problems at Lehman’s so how can an IFA be expected to. Once again an hindsight review where the FSA manages to avoid blame for lax controls.

  17. I think we’d better stop recommending UK Gilts to be on the safe side – the ratings agencies reckon they are AAA but I don’t want the FSA fining me £4 million in a years time for not questionning S&P or Moodys.

  18. Will the FSA ban the word guaranteed or anything that implies a guarantee, as nothing can be guaranteed (any guarantor can fail)? Furthermore, why did they not do this years ago? Maybe they thought guarantees were real?

    Should every IFA write to their clients and inform them that their investments (deposit accounts, national savings, you name it) is at risk.

  19. The central question is – how do you rate the risk level of Structured products & the risk of third parties?
    The FSA & old the King’s men couldn’t do it before the Crash, and there is no evidence that they can do it yet.
    So this crime is judged purely on hindsight, and, as with all bullies, applied against those who are least able to fight back.
    And the most frightening aspect is why Parliament are not fighting this inevitable march towards State Fascism. The FSA is now totally out of control, and I note taking over the role of a number of other State authorities.
    We do need regulation. But we need the FSA like we need a hole in the head.

  20. To answer the question about where the fines go – they are received back into the same sector in which the firm operates and used to offeset the operating costs for that sector in the FSAs budget.
    So there IS some “payback” to fellow IFAs – but sadly not quite enough to offset the enormity of the liabilities of the dead firms falling on IFAs via FSCS.

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