State Street’s UK transition management business has been handed a nearly £23m (€27.9m) fine by the Financial Conduct Authority (FCA) for “deliberately” overcharging six institutions $20m (€14.6m) using its services.
The regulator criticised that inadequate internal controls meant the overcharging only came to light when a client informed the firm of “mark-ups on certain trades that had not been agreed”, with later press reports of the matter resulting in Ireland’s National Pensions Reserve Fund (NPRF) discovering it had been charged €2.65m in non-contractual fees.
The FCA said: “Those responsible then incorrectly claimed both to the client and later to State Street UK’s compliance department that the charging was an inadvertent error, and arranged for a substantial rebate to be paid on that false basis.
“They deliberately failed to disclose the existence of further mark-ups on other trades conducted as part of the same transition.”
Tracey McDermott, director of enforcement and financial crime at the FCA, said State Street had allowed a culture to develop that prioritised “revenue generation over the interests of its customers”.
“State Street UK’s significant failings in culture and controls allowed deliberate overcharging to take place and to continue undetected,” she said.
“Their conduct has fallen far short of our expectations. Firms should be in no doubt that the spotlight will remain on wholesale conduct.”
The regulator said the overcharging accounted for more than one-quarter of its revenue from its transition management services.
As State Street UK agreed to settle the case “at an early stage”, it was granted a discount from an initial fine of £32.7m, only paying £22.8m for breaching three of the FCA’s guidelines.
The regulator said it failed to treat its customers fairly, failed to communicate with clients in a way that was clear and not misleading and failed to take reasonable care to organise and control its affairs responsibly, with adequate risk systems.
In a statement, State Street said it deeply regretted the matter and that it had been working hard to improve controls to address the “unacceptable” situation.
“In 2011, we dismissed individuals centrally involved in the overcharging of transition management clients,” the statement continued.
“We have fully cooperated with the FCA during their investigation and appreciate that the FCA’s notice acknowledges the overcharging identified in the settlement relates only to our UK transition management business, that we have implemented a comprehensive remediation programme in relation to the controls around the UK TM business, and that we have bolstered our control functions, governance and culture across all of our UK businesses.”
The NPRF used the firm in 2011 to dispose of €4.7bn of its portfolio, a sale triggered by the fund’s contribution toward the €85bn IMF/EU bailout of Ireland.
In late 2012, the fund revealed that it had been charged €2.65m in non-contractual fees that were eventually recovered.
The situation led to State Street’s suspension from the NPRF’s transition management panel.
The National Treasury Management Agency’s chief executive and former NPRF investment director John Corrigan said in January last year that while the agency had concerns about governance within State Street, it would not make any further decision on its relationship with the company until the UK regulator concluded its investigation.
He told a parliamentary commitee: “Before we make any decision on the future basis of the relationship – if any – with State Street, we would wish to see the report from the regulator in the UK.”
In a statement sent to IPE, the debt management agency, in charge of the NPRF’s management, said: “The NTMA is studying the Final Notice published by the FCA today and will report to the NPRF Commission very shortly.”
It also noted that it was still supporting an ongoing investigation by the City of London Police into the matter.
According to the most recent annual report, State Street Global Advisors Ireland managed four mandates worth €861m at the end of December 2012 – three passive equity mandates and one passive global infrastructure mandate.