View more on these topics

Santander FSA fine: How other structured firms’ wording compared

Natalie Holt looks at FSA’s rejection of the bank’s FSCS cover claim

The FSA dismissed Santander’s defence that the wording of the literature for its structured products was in line with “prevailing industry standards” when imposing a £1.5m fine.

An investigation by Money Marketing (see table below) finds that other providers were much quicker to change literature following the fallout of the Lehman Brothers’ collapse.

Last week, the FSA fined Santander for failing to explain to customers the limitations in FSCS cover for its guaranteed capital plus product and its guaranteed growth plan. The products were backed by a guarantee from Santander subsidiary Abbey National Guarantee Company. FSCS cover was available for the structured products if Santander became insolvent and investors had a claim for negligent advice or misselling. Cover was also in place if the plan manager, another Santander subsidiary, was insolvent and investors had a claim for maladministration or misappropriation of funds.

However, FSCS cover was not available on Santander’s structured products where the guaranteed minimum payment was not made to investors in the event of poor investment performance or Santander’s insolvency. The bank’s key features documents did not explain this.

Between October 2008 and January 2010, Santander sold about 178,000 structured products to 141,000 investors, with a total of around £2.7bn invested.

The FSA’s final notice against Santander states: “Santander asserts that during the relevant period, its conduct in relation to FSCS disclosure was in step with prevailing industry standards. Santander contends the FSA is attempting retrospectively to apply standards of conduct which exceed those required during the relevant period and which are out of line with those which were (and arguably still are) followed by the industry as a whole.”
The FSA rejected this argument.

Deposit-based structured products provide FSCS compensation up to the £85,000 limit per institution. FSCS cover for investment-based structured products is limited in that it does not cover the risk of counterparties to the products becoming insolvent and being unable to honour guaranteed payments.

Santander’s key features document for its guaranteed growth plan said: “We are covered by the FSCS. You may be entitled to compensation from the scheme if we cannot meet our obligations. This depends on the type of business and the circumstances of the claim. Most types of investment business are covered for 100 per cent of the first £30,000 and 90 per cent of the next £20,000, so the maximum compensation is £48,000.”

In January 2010, Santander amended this to say: “If you lose money solely because Abbey National Guarantee Company fails to meet its obligations under the guarantee due to insolvency or for any other reason, you will not be able to claim against the FSCS for loss caused by such failure.”

Money Marketing has seen wording from several structured product providers’ historical marketing literature. Providers that offered investment-based structured products include HSBC, Scottish Widows and Barclays.

HSBC marketed its capital protected plan through its bank branches and via its global asset management arm. In February 2008, the brochure and terms and conditions for the product stated: “You may be entitled to compensation from the scheme if the relevant company cannot meet its obligations. This depends on the type of business and the circumstances of the claim. Most types of business are covered for 100 per cent of the first £30,000 and 90 per cent of the next £20,000, so the maximum compensation is £48,000 per person.”

HSBC changed its wording in October 2008 to include the phrase: “The scheme does not cover counterparty failure or the fund failing to meet its investment objectives.” A spokeswoman says: “We made it clear that counterparty risk was not covered by the FSCS.”

HSBC was also the hedge provider for the protected FTSE bonus plus plan managed by Keydata. HSBC says Keydata was responsible for its marketing literature.
Scottish Widows offered its capital-protected fund mainly through its Lloyds TSB, Halifax and Bank of Scotland branches and its protected capital solutions fund through its wealth channel.

It used similar wording to that used by Santander and HSBC in its explanation of FSCS cover as at December 2008 but this was amended in July 2009 to include the statement: “The FSCS will not cover financial loss in the course of normal open-ended investment company business if Scottish Widows Unit Trust Managers is still solvent, including losses due to counterparty failure.”

A Scottish Widows spokesman says: “When FSCS coverage became higher profile in early 2009, we took external legal opinion on the detail of FSCS coverage, specifically its application of Oeic business, including structured products. This detail was reflected in our structured product literature from July 2009 onwards.”

Literature on Barclays’ defined returns plans, which were sold through branches and Barclays Wealth, stated: “If Barclays Bank fails to make payments due under those investments, you would not be entitled to any compensation solely on the grounds of such a failure.”

A Barclays Wealth spokeswoman says: “We are happy our literature disclosed the appropriate risks and information to our investors and we continue to provide this in our client communication.”

Structured product wording for FSCS cover

Santander original wording:
“We are covered by the FSCS. You may be entitled to compensation from the scheme if we cannot meet our obligations. This depends on the type of business and the circumstances of the claim. Most types of investment business are covered for 100 per cent of the first £30,000 and 90 per cent of the next £20,000, so the maximum compensation is £48,000.”

In January 2010, it was amended to:
“If you lose money solely because Abbey National Guarantee Company fails to meet its obligations under the guarantee, due to insolvency or for any other reason, you will not be able to claim against the FSCS for loss caused by such failure.”

HSBC original wording:
“You may be entitled to compensation from the scheme if the relevant company cannot meet its obligations. This depends on the type of business and the circumstances of the claim. Most types of investment business are covered for 100 per cent of the first £30,000 and 90 per cent of the next £20,000, so the maximum compensation is £48,000 per person.”

In October 2008, it was amended to:
“HSBC Trust Company (UK) Limited is a member of the FSCS. You may be eligible to compensation from the scheme if you have a valid claim against us in respect of investment business and we cannot meet our obligations. The scheme does not cover counterparty failure or the fund failing to meet its investment objectives. Most types of investment business are covered up to a maximum limit of £50,000 per person.”

Scottish Widows’ original wording:
“We are covered by the FSCS. You may be entitled to compensation from the scheme if we cannot meet our obligations (for example, if Scottish Widows were to become insolvent or unable to meet the claims against it). This depends on the type of business and the circumstances of the claim, for example, most types of investments are covered for 100 per cent of the first £30,000 and 90 per cent of the next £20,000 so the maximum compensation is £48,000 while most insurance contracts are covered for 100 per cent of the first £2,000 and 90 per cent of the remainder of the claim.”

In July 2009, it was amended to:
“Open-ended investment company funds are not directly covered by the FSCS. However Scottish Widows Unit Trust Managers Limited is covered as the authorised corporate director. The FSCS will not cover financial loss in the course of normal Oeic investment business if SWUTM is still solvent, including losses due to counterparty failure.”

Barclays’ original wording:
“In the unlikely event that Woolwich Plan Managers Limited becomes insolvent, there are measures in place that may allow you to claim compensation. In the event, you should contact the FSCS. The investments that we buy on your behalf are issued by Barclays Bank plc. If Barclays Bank plc fails to meet its obligation under those investments, you would not be entitled to any compensation solely on the grounds of such a failure.”

In October 2009, it was amended to:
“In the event that you suffer a loss as a result of Woolwich Plan Managers Limited failing to meet its obligations in the management of the plan, it is possible that you have a claim against the FSCS. Such a claim would be subject to financial and other restrictions. Further details can be obtained from FSCS. The investments that we buy on your behalf are issued by Barclays Bank plc. If Barclays Bank plc fails to make payments due under those investments, you would not be entitled to any compensation solely on the grounds of such a failure.”

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. It isn’t just the wording of the literature the regulator should sort out, the salespeople are misleading the customers to an even greater extent.

  2. Lindsay Bateman 5th March 2012 at 12:29 pm

    “100% principal protection” should mean exactly that – and if this protection is subject to the solvency of a third party – that third party must be named and this risks clearly set out in the literature. Otherwise the bank issuing the product must stand by their offer of “100% protection” – Too many cases remain unresolved to this day where Lehman’s were the counterparty. Banks issuing such products across all jurisdictions have to be clear, accurate and complete in marketing such structured products – in terms of both risks, and protections provided

  3. owen David-Levveret 5th March 2012 at 1:29 pm

    The pressure was on the market from all adivisers that they couldn’t sell these “100% protected products” which quite a few were marketed as such if it had this wording on it. I worked for a company that sold these products and I rememeber there were Scottish Amicable products (blast from the past!) that had the counterparty risk wording on them and we were told not to touch them. I think it is the industry to blame, it was too hard to explain so the ones with the correct wording on them were left on the shelf! I wonder if any of them that did selll actually lost anyone any money>?

  4. This is not the only company to be doing this and surely the FSA needs to find other players in the market including prominent builing societies. I ran a campaign myself against Chelsea Building Society for a very misleading structured bond they were marketing at 18% minimum rate return, see link for further details:

    http://essentialifa.wordpress.com/2010/11/18/chelsea-building-society-misleading-18-capital-protected-bond/

    I managed to get these posters banned after sucessfuly getting support from the general public that these posters were misleading, but to date, the regulator has not fined Chelsea.

    The Nationwide Building Society is starting to offer this type of product as well as a Cash ISA which is totally misleading and is not even sold through advisors, but through branch staff, which I feel is a serious breach of treating clients fairly.

    Surely it is time that the regulator starts to investigate the sales procedures of banks and builing societies, including their marketing material before we end up with yet another banking mis selling scandal.

  5. MIssold Investor 6th March 2012 at 8:34 pm

    When FSA investigated the sale of Lehman-backed structured products in 2009, they concluded (amongst other things) that warnings on the limitations of FSCS cover were insufficiently clear. FSCS concluded that the warnings were clear enough so as not to have to pay compensation for mis-selling. Happily for affected investors, FSCS has started compensating some of the ‘capital at risk’ plans for other reasons. Many haven’t claimed, because FSCS has kept this quiet.

  6. brian merifield 8th March 2012 at 5:37 pm

    What about Lehman Bros. in this context . At the moment the financial and compensation authorities seem to be pushing away us loosers from Lehman Bros. collapse

Leave a comment

Close

Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm

Email: customerservices@moneymarketing.com