Coutts fined £6m for mis-selling savings product (Nov 2011)

- by Kelly Richards

UK financial services are said to be heavily regulated. For those who work within financial services, they may feel that the regulation is too much. But, for consumers it may seem that there is not enough regulation within the market. The series of misconducts that have occurred over the course of the last ten years have seen fit to make people mistrustful of financial services.

FCA Compliance series - Cashfloat

Of course, it is worth noting that there are significant deals of amazing, independent companies that lend responsibly. They ensure that they are ethical and compliant with the regulations.

But, some of the larger factions think that they are above the rules. As such, they flout the guidelines and the principles of the FCA to ensure that they are profitable within the current markets.

This comes at a cost to the consumer.

As you may or may not know, private banks and wealth management providers have to adhere to the same guidelines as the high street bank. They have to ensure that they are selling products in a fair way. Should they not do this, they can be fined. What’s more, individuals within these larger organisations can be held personally accountable.

There are many cases in point in which misconduct has occurred. Despite the seemingly substantial regulation, banks have not observed the due processes and protocols of their affairs. They have not acted in an honest manner. They have certainly not put the customer’s interests above their profits. All of these things can have severe ramifications for the UK’s economy. Regulation of the financial service sector is vital. Compliance, therefore, is a necessity.

Western Circle trading as Cashfloat.co.uk is a short term loan provider in the UK. As a company regulated by the FCA, we examine cases whereby the FCA have previously disciplined a company in the finance industry. Through this, we can learn to avoid making the same oversights. Let’s take a look at one particular case in point. The case of Coutts is one that highlights the severity of misconduct despite the substantial regulation.

The Case of Coutts: Misconduct and Mis-Selling Issues

During November 2011, Coutts, an investment private bank and wealth management company were investigated by the FSA. This was due to their breach of the stringent principles as espoused by the regulator. It was found that Coutts was mis-selling savings products to their clientele. This could have resulted in substantial losses for the clients. After all, honest and open advice is a must within this sector.

The FSA fined the company £6m for their part in this scandal. However, this was subject to a 30% compliance discount. These discounts are commonplace within the industry following an investigation.

Coutts is one of the banks that deal exclusively with the rich. But, despite their wealth clientele they were still forced to pay compensation for the significant losses that occurred. Over a five year period, Coutts failed to give investors honest and accurate advice about their investment products. The deliberately mis-sold investment products by dressing them up as cash fund accounts. The client’s money was then used in asset backed securities.

However, the financial crisis of 2007 saw these assets take a hit. As such, clients were then found to be operating at a loss. While Coutts stopped the foul play in 2008, 247 customers attempted to take their cash. But, Coutts failed to allow them to do so. This meant that over £748m was invested, but customers could not access their money.

As Coutts failed to adequately inform customers of what their money had been used for, they contravened the principles of the FSA. More worryingly, Coutts also failed to train their staff. This meant that their employees were not aware of the risks regarding the products. As such, there was a knowledge gap between front line staff and customers. As no one was aware of what the product entailed, client’s money was effectively lost from the system. The employees of Coutts could not ascertain where this money had gone.

The bank, at the time, had purposely exposed and misled customers to investing in a product that was deemed high risk. But, these risks were not perpetrated to the investors. As such, they were blindly investing in a product that they had no knowledge. Worse, they were told that these products were safe. By being mis-sold these policies, they were spending enormous amounts of capital that left them at serious financial risk and harm.

When Coutts was investigated, they could not provide clients or the FSA with details about the whereabouts of the cash. As such, they had failed to put in place the right checks and process in place.

The FSAs Ruling: Investigation and Imposed Fines

At the time of the FSA investigation, the actions of Coutts were slammed. They stated that before companies give investment advice they should ensure that they are recommending the right products to the right people. This is in accordance with the principles of the FSA, who state that a firm must take reasonable care to ensure the suitability of its advice. They must also provide discretionary decisions for any customer who is entitled to rely upon its judgment. Clients have to be award of the risks of an investment. Without this, they could stand to lose a good portion of their investment.

Coutts: Fixing the Problem

Coutts was deemed as compliant with these issues. They settled at an early stage and benefited from a 30% reduction in the fine. They have now put in place the right customer service protocols and have ensured that they have the right standards in place to provide staff training. These changes have ensured that customers have not been party to any further losses.

The FCA: Can They Prevent Issues of Misconduct?

Misconduct can still occur despite the heavily regulated nature of the market. This case study has shown that. But, the FCA and the PRA now need to ensure that they are making the right steps to tackle these problems from the onset. Over a five year period, Coutts was able to perform on a dishonest basis. The FCA needs to be a proactive force within the market to ensure that all of the customers of financial service products do not face further ruin. The discounts that are applied to the fines can be seen as a soft touch. The FCA needs to be a force to be reckoned with to actively prevent these instances from occurring.

By ditching the fine discounts and by producing more meaningful, supervisory advice and roles within the sector, these issues can be eradicated.

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About The Author
Kelly Richards
Kelly Richards is the founder of the Cashfloat blog and has been working tirelessly to produce interesting and informative articles for UK consumers since the blog's creation. Kelly's passion is travelling. She loves her job because she can do it from anywhere in the world! Whether inspiration hits her while sitting on the balcony of a French B&B, or whether she is struck with an idea in a roadside cafe in Moscow, she will always make sure that the idea comes to fruition. Kelly's insights come from her knowledge gained while completing her degree in Economics and Finance as well as from the people she meets around the world. Her motto is: Everyone you meet has something valuable to teach you, so meet as many people as you can!
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