UK's Financial Services Authority Fines St James's Place £250,000

The Financial Services Authority has fined St. James's Place UK plc, St. James's Place International plc and St. James's Place Unit Trust Group Ltd a total of £250,000 for serious monitoring and record keeping inadequacies. 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:

• disciplinary proceedings were previously taken by LAUTRO against St. James's Place UK plc during 1994 on the grounds of similar failings;
• The importance of the effective monitoring of replacement sales was highlighted by guidance issued by Lautro on 11 March 1994 (Lautro Enforcement Bulletin 30); and
• PIA supervision visits to the firms in 1996 and 1998 had identified inadequacies in the documentation of replacement sales, and in the monitoring of these transactions.

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.

Background

1. The regulated firms are subsidiaries of St. James's Place Wealth Management Group plc ("SJP Plc") which has registered offices at St James's Place House, Dollar Street, Cirencester, Gloucestershire, GL7 2AQ. SJP Plc is a wholly owned subsidiary of St. James's Place Capital plc, which is a majority owned subsidiary of HBOS Insurance and Investment Limited.
2. By virtue of their failings, the Regulated Firms acted in breach of PIA and FSA Rules and Principles as outlined below.
3. In the period 1 January 2000 to 30 November 2001 the Regulated Firms acted in breach of the PIA and Adopted Lautro Rules referred to below in relation to replacement sales:
   1. PIA Rule 7.1.2(1) in that they failed to establish procedures with a view to ensuring that their Appointed Representatives carry out their functions in such a way that they complied at all times with the PIA Rules and Principles;
   2. PIA Rules 5.1.1(1) and (2) in that they failed to keep records which demonstrated that they had complied with the PIA Rulebook; and (3) Principle 9 of the PIA Principles in that they failed to organise and control their internal affairs in a responsible manner and to have well-defined compliance procedures.
4. In the period 1 December 2001 to 13 January 2003, the Regulated Firms acted in breach of the following FSA Rules and Principles in relation to replacement sales:
   1. FSA Rule SYSC 3.2.6R in that they failed to take reasonable care to establish and maintain effective systems and controls for compliance with applicable requirements and standards under the regulatory system; and
   2. Principle 3 of the FSA Principles in that they failed to take reasonable care to organise and control their affairs responsibly and effectively, with adequate risk management systems.
5. By virtue of these matters, the Regulated Firms have demonstrated failings that demand a significant financial penalty. These failings are viewed by the FSA as particularly serious in the light of the following factors:
   1. the deficiencies were serious in nature. They arose from serious systemic weaknesses in the Regulated Firm's processes for monitoring replacement sales. The FSA places very great emphasis on the importance of adequate monitoring systems to ensure compliance with regulatory rules and standards. This requirement is particularly important in relation to replacement sales by virtue of the higher risks they present of inappropriate advice being given;
   2. they occurred notwithstanding the fact that regulatory guidance had been issued to the industry during 1994 which reminded firms of the particular importance of implementing appropriate and effective monitoring procedures in replacement sales to ensure compliance with regulatory standards given the high risk they present as outlined above. The FSA is of the view that it is imperative that, when detailed regulatory guidance is issued, firms and their senior management react to it in a timely and effective manner;
   3. they were widespread. The size and nature of the Regulated Firms' distribution network meant that the risks associated with these failures affected a large number of consumers;
   4. they were not detected by the Regulated Firms. They were only identified by a PIA Supervision visit to SJP-UK during August 2001. This was despite the identification of significant inadequacies in the documentation of replacement sales, and in the monitoring of these transactions, by PIA Supervision visits conducted to the Regulated Firms during 1996 and 1998. These deficiencies should have alerted the Regulated Firms to the need to ensure that their monitoring processes in respect of replacement business were adequate and operating effectively.
   5. they continued over a prolonged period of time. They occurred from 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 the Enforcement investigation.
6. While the failings in this case merit a significant financial penalty, the FSA considers that they have been mitigated by the co-operation demonstrated by the Regulated Firms and the action taken to address those failings and the cost of doing so.
7. This action has included since January 2002 appointing an appropriately qualified Skilled Person under Section 166 FSMA and responding to guidance given by that Skilled Person (the "Skilled Person") by bringing about changes to their existing processes for monitoring replacement business and implementing these processes in a more effective manner.
8. A Skilled Person is a person appointed to make a report required by section 166 of the Act (Reports by skilled persons) for provision to the FSA, in this case Deloitte & Touche
9. 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.
10. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.