The Financial Services Authority has fined Standard life £2.45m (and that’s after a discount for good behaviour) in its first significant penalty of 2010 following a bumper year for fines in 2009. Jonathan Mayner reports.
Topic: Financial Services
Who: Financial Services Authority / Standard Life
When: January 2010
Where: United Kingdom
Law stated as at: 22 February 2010
Following a record year in 2009 for fines imposed by the Financial Services Authority (the "FSA), on 20 January 2010 the regulator announced that it had fined Standard Life Assurance Limited ("Standard Life") the sum of £2.45m for what it called "serious systems and controls failures" which led to the production of marketing material for its Pension Sterling Fund (the "Fund") that failed to comply with rules on financial promotions.
FSA fines in 2009
In the wake of the credit crunch, and under much governmental, public and media scrutiny, the FSA cracked down on firms in the financial services industry in 2009, levying fines totalling almost £35m – a record for the regulator and an increase of some 53% on the previous year. At the same time, the number of firms fined actually dropped indicating that the regulator was willing to hand out much more severe penalties to those firms that it found to have breached the rules and regulations which it is empowered to enforce.
The large fines gave garnered criticism from many quarters in the financial services sector, with many industry insiders complaining that the FSA is being too heavy-handed at a time when the economy has not yet recovered from the credit crunch and that public and media scrutiny of the sector has become highly politicised. Some investor groups however have taken the view that while the fines are high when compared with historical figures, they are still not punitive enough to act as an effective deterrent to breaches of regulatory rules.
The FSA's investigation into marketing materials related to the Standard Life Fund revealed that Standard Life had failed to comply with the regulator's high-level rule that financial promotions be "fair, clear and not misleading".
The Fund itself was intended primarily for the investment of pensions and promoted as appropriate for individuals approaching retirement. Marketing for the Fund had held it out as being wholly invested in cash when in fact, by July 2007, the Fund was invested primarily in Floating Loan Notes, resulting in a risk of unexpected capital losses – an unacceptable risk profile for a fund targeted at near-retirement age investors. The FSA took the view that there had been insufficient systems and controls in place to ensure that the marketing material complied with its rules and accurately reflected the investment strategy of the Fund.
What happened to the Fund and Standard Life's response
In January 2009, the value of the Fund fell by 4.8% (approximately £100m) and in the face of agitprop by investors and financial advisers, Standard Life consequently paid almost £103m into the Fund to restore the value of the investors' holdings.
Alongside this huge capital injection, Standard Life contacted existing customers who had been identified as having received misleading marketing material in order to determine whether any further compensation could be owed in individual cases. The firm also commissioned an independent third party report into, and took steps to improve, the systems and controls relating to marketing materials. The FSA reported that Standard Life co-operated fully with the regulator and agreed to settle at an early stage, which qualified the firm for a 30% reduction in the penalty – reducing the fine from £3.5m to a mere £2.45m.
Why this matters:
The Standard Life fine will raise concerns for other financial services advertisers, not only because of its value, but because it was so high in spite of the firm's early engagement with the problematic Fund, the corrective measures taken and the firm's co-operation with the FSA.
If the 2009 figures and the Standard Life fine are to be taken as indications of the FSA's intent, then the financial services sector will be preparing itself for more large fines in the future. These fines have implications not only for the firms fined, but for all financial services firms as the industry will doubtless allocate more resource to their compliance regimes.
Firms engaged in making financial promotions and their colleagues in the marketing industry will be keen to review and, if necessary reinforce, their current policies and procedures to ensure that they do not fall foul of the regulator in its current punitive mood.
This situation is also unlikely to change any time soon given Tory pronouncements putting the FSA's future in question and the regulator's consequent need to show it is punching its weight and also generating windfalls for beleaguered government coffers, given that the fines the FSA levies do not go into its own pocket, but into public funds.