The firm is reviewing the accounts of all its SGP customers, in order to identify losses that resulted from its failings, and will pay appropriate redress. Customers will be contacted by the firm and need take no action at this stage.
The rule breaches relate to the way in which the firm described the risks of zeros held in the SGP and its failure to alert existing investors promptly when potential new risks emerged. It is not connected with the FSA's separate investigations into alleged collusive behaviour among fund managers and brokers in the split capital investment trust sector. Nor does it relate to the structuring, management or pricing of any trust in which the SGP invested.
Hargreaves Lansdown marketed the SGP, principally by direct offer, as a "low risk" service. When a customer responded to the marketing material, he or she entered into a discretionary management agreement with the firm. Since this agreement established a continuing relationship based only on the risks set out in the marketing material, customers should have been notified promptly when new and potentially-significant risks to their investments arose.
Until 2000, the SGP invested solely in "traditional zeros" which were generally regarded as offering lower risk than equities and so its "low-risk" rating was justified. However, by 2001, the SGP had significant holdings of zeros of trusts that were structured very differently from their predecessors. These trusts had increased gearing, holdings in other splits and investment trusts and increased allocation of charges to capital, all of which had the implicit potential of exposing their shares, including the zeros, to significantly higher risk.
Hargreaves Lansdown did not reflect these important changes in its brochure or the quarterly bulletins that it issued to its investors. Its bulletins continued to be unrealistically optimistic regarding the zeros market and lacked objectivity. Customers would not have been able to deduce that their funds were no longer invested in "traditional" zeros such as had previously made up the portfolio. They were reassured rather than alerted to the potential for market turbulence and possible losses. Direct offer customers were not provided with balanced information that might have provided them with an opportunity to reassess their investments. Customers were informed that Hargreaves Lansdown had revised the SGP's formal risk rating in the firm's October 2001 bulletin. Despite the change, this bulletin continued to describe the SGP as "lower risk", on its first page, categorising it as "low/medium" only under the heading "Technical Factors" at the end of the document. It has not been possible, however, to establish when Hargreaves Lansdown actually decided to change the risk rating. The recollection of its staff is vague and the firm has been unable to state who decided to formalise the change to the rating or who authorised the notification to customers.
Andrew Procter, FSA director of enforcement, said:
"Although the SGP service was mainly sold by direct offer, the firm's responsibility to ensure that its customers were fully informed did not end when the sale was made. Hargreaves Lansdown failed to keep its customers in the picture at a time when a number of the securities in which their funds were invested were changing dramatically and has failed to produce any adequate explanation for why it did not do so."The firm should have made sure customers were given all relevant information about their investment portfolios. They should have got that information promptly, with balanced commentary. That would have allowed them to reassess their investments, taking into account their individual circumstances and requirements."
Background
- The full text of the Final Notice issued by the Regulatory Decisions Committee (RDC), which includes the background to the case, the relevant statutory provisions, regulatory requirements contravened and the factors taken into account by the RDC when setting the level of the fine, may be found here.
- The RDC is established to ensure that FSA decisions regarding enforcement matters (among others) are taken by a body that is separate from the investigation and prosecution functions of the FSA. While the RDC is accountable to the FSA Board for its policies and procedures, this does not affect its independence in relation to its individual decisions.
- Financial penalties are not treated as income by the FSA. They are applied for the benefit of authorised persons (or the issuers of securities admitted to the official list) as appropriate, and so given back to the industry in subsequent years.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.
