State Street Overcharging Reviewed by US Regulators

Custody bank State Street was fined £22.9m in January by the Financial Conduct Authority (FCA) for overcharging clients beyond their contractual terms between June 2010 and September 2011.

State Street, based in the US, is the third largest custody bank with businesses in the UK operating under subsidiary units.

Custody banks work on behalf of institutional investors such as hedge funds, mutual funds and pension funds; providing services such as maintaining records, tracking performance and lending securities.

In the wake of the FCA fine US regulators, the Securities and Exchange Commission (SEC) and the US Attorney’s offices have begun separate investigations into State Street’s activities.

What Were the FCA’s Findings Relating to State Street?

According to the FCA, State Street’s UK Transitions Management business had implemented a deliberate strategy to overcharge clients for certain transitions beyond the agreed management fees and commissions. Affected clients included pension funds and investment management firms that managed money on behalf of retail investors. In total clients were overcharged by £12.3m.

Transition management is a service designed to aid the transition of a portfolio of securities. It is typically used when a fund is restructured, for example where two funds are merged or if asset managers are replaced.

The overcharging was discovered when a client notified staff that certain mark-ups on trades had not been agreed. After the discovery, the individuals involved in the scheme attempted to cover it up by claiming it was a mistake and by deliberately avoiding disclosure of further mark-ups.

FCA: Failings at the ‘Most Serious End of the Spectrum’

The FCA regarded the failure in State Street’s business practices and control environment as systemic weaknesses and at the ‘most serious end of the spectrum’.

The FCA identified breaches of three of its principles of business:

· Failure to treat customers fairly.

· Failure to communicate with clients in a way that was clear, fair and not misleading.

· Failure to take reasonable care in relation to organisation, control with adequate risk systems.

State Street would have been fined £32.7m by the FCA but this was reduced by 30% after it agreed to early settlement.

Comment

Financial firms are still in the political spotlight and regulators are taking a robust approach to enforcement. firms or individuals facing an FCA investigation should seek immediate legal advice; contact James Crighton today by email jcrighton@rollingsons.co.uk or telephone 0207 611 4848.