Inadequate research procedures and misleading suitability letters were at the heart of Chase de Vere’s failings in the sale of Keydata products, the FCA says.
Earlier today, the regulator revealed the advice firm had been hit with a £560,000 fine after it sold £49.3m worth of Keydata investments to 2,806 clients between August 2005 and June 2009.
Chase de Vere advisers generated £1,633,053. 85 in commission through the sale of the products, comprising £1,317,581.22 in gross initial commission and £315,472.63 in trail commission.
However, the regulator says as a result of the sums the firm has had to pay customers and the Financial Services Compensation Scheme, it has not financially benefited from the sale of Keydata products.
The FCA’s final notice reveals a catalogue of failings that led to Chase de Vere’s fine. On 8 August 2005, the Keydata Secure Income Bond 1 was added to Chase de Vere’s structured products panel despite failing to meet the firm’s description of a typical structured product.
The description said: “Structured products involve the underlying use of derivatives to create the structure of the investment. Products are usually available on a tranche basis and the risk/return payoff depends on the current level of interest rates and stockmarket volatility.”
The FCA says the Keydata products did not involve a derivative and the returns they offered were not linked to an index. Furthermore, on 25 July 2005 one member of Advice Suitability Group – the body within Chase de Vere to which the Keydata product was referred after the research team flagged that it was “novel” – raised concerns that client-facing literature did not explain how the product’s returns were achieved.
Chase de Vere was unable to produce any evidence recording whether this concern was addressed prior to the admission of the product onto the panel.
Furthermore, the firm was unable to provide details of the research that was undertaken prior to the ASG’s decision to approve it. This original decision was never revisited and Chase de Vere eventually admitted 26 Keydata products to its panel.
Chase de Vere did introduce a rule on 1 October 2008 that structured products could not be sold to customers with an attitude to risk below 5 out of 10 – but Keydata was an exception to this rule and could be recommended to customers with an ATR of 4 out of 10. While further restrictions were introduced on sales of traded life policy investments on 28 April 2009, these were “too late to have any meaningful effect”.
Chase de Vere advisers were also provided with suggested wording, known as “linkage”, to be used when describing Keydata products and the associated risks. This was not compulsory, however, and advisers were able to add and remove information or write their own product descriptions and risk disclosures. In June 2006, Chase de Vere decided to stop linkage altogether. Linkage was not reinstated for structured products until October 2008, when it was made compulsory for all advisers.
But in the period prior to October 2008, Chase de Vere had no controls in place to prevent misleading suitability letters being issued. The FCA found 6 out of a sample of 33 suitability letters that contained misleading statements which were not included in the linkage.
In 4 of the 33 letters the adviser described the Keydata product as a “cash based product…that will provide you with a higher level of income than your standard savings accounts without taking a high level of risk.”
In another letter, an adviser said: “The Keydata Secure Income Plan offers the trust a very high level of capital security and a guaranteed income of 7.5 per cent for five years…There is no investment risk attached to this product…”.
In reality none of the Keydata products offered investors guaranteed income and there were a number of risks investors needed to be aware of.
Advisers going off script were not the sole problem, however. The FCA says Chase de Vere’s linkage failed to adequately explain the nature of the actuarial risk attached to the products, such as technological or pharmaceutical developments that could impact on the accuracy of the model used to determine the mix of cash and insurance contracts.
The linkage for SIB 1 also claimed that capital was protected when in fact Keydata products did not offer capital protection.