The Financial Services Authority has once again imposed an eye watering financial penalty for mis-selling of financial products. Questionable training practices and commission-driven payment structures were under the spotlight. Louise Ball reports.
Topic: Financial services
Who: The Financial Services Authority ("FSA") and AWD Chase de Vere Wealth Management Limited ("AWD Chase")
When: November 2008
Where: UK
Law stated as at: 10 November 2008
What happened:
The FSA fined AWD Chase £1.12m for breaches of Principles 9 (Customers: relationships of trust) and 3 (Management and control) of the FSA's Principles for Businesses (the "Principles") between 28 February 2006 and 31 October 2007 in respect of mis-selling pension transfer, pension annuity and income withdrawal business in branches all over the country.
The main criticism of AWD Chase is levelled at the unsuitability of its advice to customers: Treating Customers Fairly (TCF) has been a tenet for the FSA since 2004. In addition to TCF, the FSA has made regular public statements to the regulated IFA sector highlighting the importance of giving suitable advice in relation to pension transfers. While the overall value of the losses to customers has yet to be quantified precisely, AWD Chase has estimated that approximately 800 customers may have received unsuitable advice in relation to 1,200 sales.
The facts
As early as November 2005, the FSA had noted compliance issues at AWD Chase. The firm produced a report at the behest of the FSA in September 2007 which identified significant concerns that AWD Chase may have given unsuitable advice to customers regarding pension transfers and pension annuities. There followed an independent compliance review in which 125 cases were sampled, comprising:
- 89 pension transfers;
- 28 pension annuities; and
- 8 income drawdowns/income withdrawals.
During its investigation, the FSA agreed with the findings of this independent review that AWD Chase mis-sold:
- 29% of its pension transfers (26 cases);
- 25% of its pension annuities (7 cases); and
- 38% of its income withdrawals (3 cases).
In its Final Notice, dated 10 November 2008, the FSA gave examples of mis-selling which had occurred at AWD Chase:
- making unsolicited recommendations where the customer's existing pension arrangements were adequate and a transfer to a new product was neither requested nor required by the customer;
- failing to take account of the customer's risk profile and their financial objectives where the customer was advised to move into more speculative funds;
- penalties incurring in transferring into new products were not always disclosed or specifically quantified;
- when advising the customer to switch to products which required a higher growth rate to achieve parity with the customer's existing plan, risk warnings were not given as a matter of course.
In its examination of the breaches of Principle 3, the FSA criticised the flawed sales and advisory process:
"The advisers were remunerated on the volume of business they generated. Sales managers were remunerated on the productivity of their advisers and also received commission from their own sales. Compliance factors did not affect the remuneration of sales managers or their advisers…
There were insufficient incentives, either financial or disciplinary, to ensure sales managers and advisers acted compliantly."
Why this matters:
The Final Notice makes the point, twice, that during the period in which AWD Chase was in breach, the net commission generated from the sales of pension transfers, pension annuities and income withdrawals was approximately £8.6 million.
The FSA's policy of credible deterrence is starting to bite on firms who are not paying appropriate attention to maintaining compliance controls. The level of fines imposed in the past year show a marked increase compared with those fines imposed in the previous year.
A firm conducting regulated activities, including telesales, must be alert to the FSA's TCF requirements. Appropriate marketing, training of staff and transparency of information about financial products are not new concepts, as AWD Chase has found to its cost.
