The firm was first put on notice in August 2001 that there were serious deficiencies in its advisory sales processes. Despite this, the firm failed to review its past bond recommendations to check whether unsuitable advice had been given and failed to implement changes suggested by its consultants.
Andrew Procter, FSA Director of Enforcement, said:
"It is essential that higher risk products be promoted with great care, and the risks must be clearly and unambiguously explained to customers. Over a sustained period this firm failed to provide customers with suitable advice. Such a very high failure rate over such a prolonged period would normally merit a significantly higher financial penalty.
However, in acknowledging its responsibilities to its customers, the firm has ensured that none of the investors will lose out as a result of the firm’s historic compliance failings and has co-operated fully throughout the investigation. The firm has volunteered to proceed straight to compensation for all of its precipice bonds customers and will pay approximately £3.5 million to those who have suffered a loss, without requiring proof of unsuitability in each individual case.
This action will mean that the firm's customers who have suffered a loss will receive redress much more quickly than would have been possible if the firm had not co-operated with the FSA in this manner. This is in marked contrast to some recent cases where firms have put them themselves into liquidation leaving investors to rely on the FSCS for compensation."
The majority (75%) of the precipice bond transactions were based on advice given to customers between September 1997 and May 2001 when the firm was Royal & Sun Alliance Trust Company Ltd. After May 2001, when the firm became Capita Trust Company Ltd, the sales of these products continued for a further 15 months, gradually winding down to a fairly low volume until September 2002, after which no more bonds were recommended by the firm. The firm sold over 50 varieties of precipice bonds in the relevant period. The capital loss ranges from 9% to 100% depending on the particular bond, but most of the capital losses exceed 50%.
In 95% of all transactions reviewed the firm had failed to ensure that the recommendation made was suitable for the customer. In all transactions reviewed, the firm failed to take reasonable steps to ensure its customers understood the nature of the risks involved in precipice bonds. As well, in 80% of all transactions reviewed, the firm failed to ensure that written communications and information which the firm gave to customers was presented clearly and fairly and failed to communicate with customers in a way which was clear, fair and not misleading.
