Coutts, the private bank that counts the Queen among its clients, has been handed a £6.3m fine by the Financial Services Authority for misrepresenting the risks of investing in a money market fund it sold to its clients, the regulator said on Tuesday. Coutts is the wealth management division of the nationalised Royal Bank of Scotland.
The AIG Life Enhanced Variable Rate Fund, which invested in financial and money market instruments, also invested some of its capital into higher risk asset-backed securities and floating rate notes, the FSA said. Coutts sold the fund to more than 425 clients between 2003 and September 2008, when the US investment bank Lehman Brothers collapsed, causing values to collapse and investors in the fund to try to withdraw their cash.
The FSA said that in selling the fund, Coutts had told customers that the vehicle invested like a normal, lower risk money market fund and could be used as an alternative to a bank account. "In fact, a significant proportion of the Fund’s assets did not meet this description and customers may have misunderstood the true position about the risks they were assuming," the regulator said.
The company's sales advisers recommended the fund to customers who may not have wanted to accept the levels of risk that the fund exposed them to, the FSA said, and Coutts' advisers and sales material were not adequately prepared to inform potential buyers.
After the start of the financial crisis and the change in market conditions, when the market for asset-backed securities in particular was under enormous pressure, the bank did not change how it sold the fund, the FSA said, even though the risks should have been more in focus. After the fund was suspended by the provider, AIG's American Life Insurance Company (Alico) in 2008, Coutts "failed to undertake an effective compliance review of its sales", according to the regulator.
In a statement, the bank said that it accepts the regulator's findings and will undertake a review of its sales process relating to the funds. The company is writing to affected customers.
Rory Tapner, Coutts' CEO, said: “We always strive to provide the highest level of investment advice to our clients and have therefore been disappointed that we did not meet our high standards of service in respect of this product.
"We had already implemented enhancements to our investment advice procedures, which provide reassurance that the past failings identified by the FSA will not be repeated. We remain fully committed to ensuring that Coutts' investment advice is fully compliant with relevant regulatory standards and provides a valuable service to our clients in all markets in which we operate."
In June, the FSA wrote to 260 wealth managers, warning that it had identified "significant, widespread failings" in the industry's approach to managing clients' risks. Having surveyed the client files of 16 companies, the FSA found that 14 posed "a high or medium risk of detriment to their customers" and made investment decisions that were not suitable for their clients.