State Street UK has been fined nearly £23 million by regulators after its transitions management (TM) business was found to be over-charging commissions on trades for asset management and pension fund clients.
Handing out the £22.9 million fine today, UK regulator the Financial Conduct Authority said that State Street had deliberately charged clients substantial mark-ups on transitions, a service designed to help clients to restructure their portfolios, and failed to have sufficient controls and procedures to detect and prevent this activity.
In total, State Street UK overcharged six clients by US$20.17 million, by charging fees and commissions in excess of those agreed by clients.
The TM business also concealed over-charging from clients and the problem was only brought to light when one client identified mark-ups that had not been agreed.
Once notified of the issue, State Street then told the client it was an inadvertent error and issued a rebate, though this was untrue.
Tracey McDermott, director of enforcement for financial crime, said: “State Street UK’s significant failings in culture and controls allowed deliberate overcharging to take place and to continue undetected. Their conduct has fallen far short of our expectations. Firms should be in no doubt that the spotlight will remain on wholesale conduct.”
Transitions are intended to help institutional investors to restructure their portfolios to better manage risk and improve returns. Transition managers are able to charge commissions on equity and futures trades and mark-ups on bonds it makes on behalf of its clients.
State Street UK’s TM business was found to have overcharged clients for these trades and also deliberately misrepresented its earnings from transitions with clients through pre-trade estimates and post-trade reporting.
State Street’s senior management has taken steps to investigate the misconduct and has implemented a programme to improve its UK transitions management business, according to the FCA.
Following the discovery of the overcharging, State Street dismissed several of its employees that had taken part in the activity. Ross McLellan, who led the team and his deputy Ed Pennings left the firm, with Pennings taking State Street to an employment tribunal for unfair dismissal in November 2012. He claimed the State Street hierarchy were fully aware of the team’s actions. This was refuted by State Street. A year ago, the judge concluded that State Street had dismissed Pennings unfairly, but only due to failings in the process carried out by the human resources department. He said that Pennings’ conduct had warranted dismissal but the bank’s actions during the process had complicated the affair. The tribunal did not award Pennings any damages.
A further tribunal brought by former TM team member Rick Boomgaardt was withdrawn a month later after an undisclosed out of court settlement was agreed.
The event propelled the FCA to tackle the industry more widely with a full investigation.
In October 2013, Clive Adamson, director of supervision at the FCA, gave his views on the transition management industry and its failings: “Poor transparency and opaque legal documentation could lead to poor consumer outcomes in the provision of this service.”
Over the past 12 months, JP Morgan has closed down its transition management business for all areas outside Australia, and Credit Suisse acted likewise—neither had been revealed to have committed any wrongdoing.
State Street agreed to settle at an early stage of the FCA’s investigation, and qualified for a 30% discount on its fine. The original amount had been set at £32,692,800.
In a statement, the company said: “Today brings to a conclusion the FCA’s inquiry into the overcharging of six EMEA-based transition management clients in 2010 and 2011 that we self-reported in 2011. We deeply regret this matter. Over the past several years, we have worked hard to enhance our controls to address this unacceptable situation. The FCA in its notice is critical of our business controls within the UK transition management business and our control functions in the UK at that time. We acknowledge these as historical problems and have undertaken extensive efforts to address both, including strengthening the controls, procedures and governance within our UK transition management business.”
In January 2012, State Street brought on board former JP Morgan transitions guru John Minderides to reform and lead the State Street transitions team.
By John Bakie, editor, theTRADEnews.com, & Elizabeth Pfeuti, European editor, aiCIO