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The Financial Services Authority (FSA) has fined Credit Suisse (UK) Limited (Credit Suisse UK) £5.95 million for systems and controls failings in relation to sales by its private bank of structured capital at risk products (SCARPs).
SCARPs are complex financial products that provide income to customers but also expose them to the risk that they lose all or part of their initial capital. Between January 2007 and December 2009 Credit Suisse UK customers invested over £1 billion in SCARPs. However, during that period there were a number of serious failings in the systems and controls in respect of those sales. These included:
- Inadequate systems and controls in relation to assessing customers’ attitudes to risk;
- Failing to take reasonable care to properly evidence the suitability of SCARPs for customers; and
- Failing to monitor staff effectively to ensure that they took reasonable care when giving advice.
Concerns were identified by the FSA during a supervisory visit to the firm, which subsequently led to the FSA commencing its enforcement investigation. The FSA has found that Credit Suisse UK had poor systems and controls in place and failed to maintain adequate records regarding its advice on these products. These failings amounted to a breach of Principle 3. As a result, customers were exposed to an unacceptable risk of being sold a SCARP that was unsuitable for them.
Since the discovery of these failings, Credit Suisse UK has made a significant number of changes to its advisory processes and has enhanced the systems and controls in place to ensure the suitability of its advice to its customers. Credit Suisse UK has also agreed to carry out a past business review, overseen by an independent third party, in relation to SCARP purchases during the period identified. If a customer is found to have been advised to purchase an unsuitable product, redress will be paid to the customer by Credit Suisse UK to ensure that they have not suffered financially as a result.
Credit Suisse UK agreed to settle at an early stage entitling it to a 30% discount on its fine.
Tracey McDermott, acting director of enforcement and financial crime, said:
"We have seen all too frequently the consequences of financial services firms failing to implement proper systems and controls to ensure their customers invest in suitable products. A proper assessment of customers’ individual needs and circumstances is even more critical where firms are selling complex products like SCARPs.
"Credit Suisse UK’s systems were not up to the level we, and their customers, are entitled to expect. Our recent ‘Dear CEO’ letter to the wealth management industry made it clear that significant and widespread failings exist in this area and standards need to improve. This penalty should leave firms in no doubt about our determination to make that happen."
Background
- Read the final notice.
- Credit Suisse UK is a subsidiary of Credit Suisse and is regulated by the FSA. It has a private bank operating within the UK, providing investment advisory services to individuals, trusts, corporate entities and intermediary firms, based both in the UK and overseas.
- During the Relevant Period, Credit Suisse UK recommended and sold a large number of SCARPs to its customers. SCARPs are complex financial products that provide an agreed enhanced level of income to customers over a specified period but also expose them to a range of outcomes in relation to the return of the initial capital. All SCARPs expose the customer to the potential loss of part or, under certain conditions, all of the initial capital invested. It was therefore important when recommending a SCARP that Credit Suisse UK took reasonable care to ensure that each individual SCARP was suitable for each particular customer, and that the relevant customer fully understood the nature of and risks involved in investing in that SCARP. In order to do this, Credit Suisse UK needed to have adequate systems and controls in place.
- On 14 June 2011, the FSA sent a ‘Dear CEO’ letter to the wealth management industry. The letter followed a review of the suitability of client portfolios in a sample of firms in the sector. As part of the review, the FSA identified significant, widespread failings. The FSA considers suitability – and the ability to demonstrate it – a key area of risk in the wealth management industry and firms in this sector are seeing, and will continue to see, an ongoing and increasing focus on these issues.
- Principle 3 is set out in the FSA Handbook and states: A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.
