These failings exposed investors to the risk of surrendering existing investment contracts and committing money to new investment contracts in circumstances where this may not have been in their interests.
The fine is apportioned equally between the three companies, which are subsidiaries of St. James’s Place Wealth Management Group plc.
This disciplinary action relates to recommendations made to customers by the firms' Appointed Representatives to surrender and replace existing investment contracts that had been arranged by competitor product providers and the firms' monitoring of these transactions. These two connected transactions are together referred to as “a replacement sale”. The firms’ procedures for monitoring replacement sales failed to detect, and prevent, serious deficiencies in record keeping. This meant that it was impossible to check whether or not the sales had been suitable for the investors without obtaining further information.
Andrew Procter, FSA Director of Enforcement, said:
"Firms must understand that procedures to monitor advisers, particularly where high-risk transactions are being recommended, are not a 'nice to have', they are a necessity. It is essential that senior management take responsibility to ensure that procedures are in place to make sure that advisers are doing their job properly."
The problems were identified in August 2001 during a visit to St James's Place UK by the Personal Investment Authority (PIA), one of the FSA's predecessor regulators. It is noted that:
This should have alerted the firms to the need to ensure that their monitoring of replacement business was adequate and operating effectively, yet the deficiencies continued over a prolonged period of time. They occurred from 1 January 2000 and were not fully rectified until 13 January 2003, a year and a half after they were identified by PIA and as a result of an investigation by the FSA's Enforcement team.
In all of the cases reviewed by the Enforcement team, the original customer file contained insufficient information from which to fully assess whether the recommendation was suitable for the customer, in that the original documentation did not make sufficiently clear the client’s particular circumstances, financial needs and objectives, or how the replacement sale met those needs and objectives. Each replacement sale to which this documentation related had been pre-approved by the firms' monitoring staff and deemed to be suitable for the customers based on the deficient information, prior to the advice being given.
As part of the FSA's investigation, in January 2002, the firms were required to appoint an appropriately qualified "Skilled Person" (note 8) to review their procedures and help them bring about changes to their existing processes for monitoring replacement business and implement these processes in a more effective manner.
The Skilled Person carried out a review of replacement sales transacted by the firms since 1 January 2000 and a review of new replacement sales until 13 January 2003. These reviews considered whether the recommendations were suitable and whether the supporting documentation was adequate. On 13 January 2003 the Skilled Person reported that the firms’ own monitoring processes were operating to an adequate standard.
The Skilled Person concluded that the firms had recognised that replacement business is a higher risk than most other new business and had appropriately recognised the importance of suitability in giving advice to their clients. However, in the past, the firms had not attached enough importance to the maintenance of sound evidential standards of documentation in client specific files. Nevertheless, the Skilled Person did not identify any systemic issues affecting the suitability of replacement business and did not recommend a further review of replacement sales.
In deciding the level of penalty to be imposed, the FSA has taken into account that, while the firms' failings in this case were serious, the firms are considered to have co-operated in the Enforcement investigation and in conducting remedial action where required. This remedial action included the appointment of the Skilled Person and responding to the recommendations of the Skilled Person. In addition by moving quickly to agree the facts of the case and to settle the matter it has helped the FSA to work expeditiously towards its statutory objectives. Were it not for the remedial action taken and for the co-operation demonstrated, resulting in the early settlement of the matter, the financial penalty would have been significantly higher.
