State Street UK fined over transition failings
03 February 2014 London
Image: Shutterstock
State Street UK has been fined almost £22.9 million by the Financial Conduct Authority for overcharging its transition management clients.
State Street UK’s transitions management business had developed and executed a deliberate strategy to charge clients substantial mark-ups on certain transitions, in addition to the agreed management fee or commission.
These mark-ups had not been agreed by the clients and were concealed from them.
Tracey McDermott, director of enforcement and financial crime, said: “State Street UK allowed a culture to develop in the UK TM business which prioritised revenue generation over the interests of its customers. State Street UK’s significant failings in culture and controls allowed deliberate overcharging to take place and to continue undetected. Their conduct has fallen far short of our expectations. Firms should be in no doubt that the spotlight will remain on wholesale conduct.”
Between June 2010 and September 2011, the FCA found that State Street UK’s transition management business deliberately overcharged six clients a total of $20,169,603. State Street UK’s clients include large investment management firms and pension funds holding the funds and savings of retail investors.
The systemic weaknesses in State Street UK’s business practices and control environment around the UK transition business were so serious that the overcharging only came to light after a client notified staff that it had identified mark-ups on certain trades that had not been agreed.
Those responsible then incorrectly claimed both to the client and later to State Street UK’s compliance department that the charging was an inadvertent error, and arranged for a substantial rebate to be paid on that false basis. They deliberately failed to disclose the existence of further mark-ups on other trades conducted as part of the same transition.
State Street confirmed that the individuals “centrally involved in the overcharging of transition management clients” were dismissed in 2011.
The FCA views State Street UK’s failings to be at the most serious end of the spectrum. State Street UK acted as an agent to its transition clients and held itself out as being a trusted advisor. Accordingly, it breached a position of trust. Further, the overcharging accounted for over a quarter of its transition management revenue.
When the failings were uncovered, State Street UK was found to have breached three of the FCA’s Principles of Business: it failed to treat its customers fairly; it failed to communicate with clients in a way that was clear, fair and not misleading; and it failed to take reasonable care to organise and control its affairs responsibly, with adequate risk systems.
State Street UK agreed to settle at an early stage of the FCA’s investigation and has therefore qualified for a 30 percent discount on the £22.9 million fine.
In a statement, State Street said: “We deeply regret this matter. Over the past several years, we have worked hard to enhance our controls to address this unacceptable situation. The FCA in its notice is critical of our business controls within the UK transition management business and our control functions in the UK at that time. We acknowledge these as historical problems and have undertaken extensive efforts to address both, including strengthening the controls, procedures and governance within our UK transition management business.”
“We are confident that we have addressed the weaknesses highlighted in the FCA’s notice and as a result, have emerged as a stronger organisation.”
State Street UK’s transitions management business had developed and executed a deliberate strategy to charge clients substantial mark-ups on certain transitions, in addition to the agreed management fee or commission.
These mark-ups had not been agreed by the clients and were concealed from them.
Tracey McDermott, director of enforcement and financial crime, said: “State Street UK allowed a culture to develop in the UK TM business which prioritised revenue generation over the interests of its customers. State Street UK’s significant failings in culture and controls allowed deliberate overcharging to take place and to continue undetected. Their conduct has fallen far short of our expectations. Firms should be in no doubt that the spotlight will remain on wholesale conduct.”
Between June 2010 and September 2011, the FCA found that State Street UK’s transition management business deliberately overcharged six clients a total of $20,169,603. State Street UK’s clients include large investment management firms and pension funds holding the funds and savings of retail investors.
The systemic weaknesses in State Street UK’s business practices and control environment around the UK transition business were so serious that the overcharging only came to light after a client notified staff that it had identified mark-ups on certain trades that had not been agreed.
Those responsible then incorrectly claimed both to the client and later to State Street UK’s compliance department that the charging was an inadvertent error, and arranged for a substantial rebate to be paid on that false basis. They deliberately failed to disclose the existence of further mark-ups on other trades conducted as part of the same transition.
State Street confirmed that the individuals “centrally involved in the overcharging of transition management clients” were dismissed in 2011.
The FCA views State Street UK’s failings to be at the most serious end of the spectrum. State Street UK acted as an agent to its transition clients and held itself out as being a trusted advisor. Accordingly, it breached a position of trust. Further, the overcharging accounted for over a quarter of its transition management revenue.
When the failings were uncovered, State Street UK was found to have breached three of the FCA’s Principles of Business: it failed to treat its customers fairly; it failed to communicate with clients in a way that was clear, fair and not misleading; and it failed to take reasonable care to organise and control its affairs responsibly, with adequate risk systems.
State Street UK agreed to settle at an early stage of the FCA’s investigation and has therefore qualified for a 30 percent discount on the £22.9 million fine.
In a statement, State Street said: “We deeply regret this matter. Over the past several years, we have worked hard to enhance our controls to address this unacceptable situation. The FCA in its notice is critical of our business controls within the UK transition management business and our control functions in the UK at that time. We acknowledge these as historical problems and have undertaken extensive efforts to address both, including strengthening the controls, procedures and governance within our UK transition management business.”
“We are confident that we have addressed the weaknesses highlighted in the FCA’s notice and as a result, have emerged as a stronger organisation.”
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