The Financial Services Authority has fined Capita Trust Company £300,000 and agreed £3.5m in compensation for mis-selling precipice bonds after buying the business from Royal & SunAlliance in 2001.
Around 500 customers who bought precipice bonds between June 1997 and September 2002 are said to have lost around £3.5m.
However, the fine imposed on Capita could have been “considerably higher” according to the FSA, had the firm not agreed to compensate its customers - worth around £3.5m - and fully co-operate with the investigation.
According to a statement from the FSA, Capita bought the trust business from R&SA Trust in May 2001 but the firm was first put under notice there were “serious deficiencies” in the advisory sales process in August 2001 as 95% of the 60 cases it reviewed failed to ensure products would suit the 3,000 clients precipice bonds were marketed to.
Even though 75% of the transactions were originally advised by R&SA Trust until May 2001, the firm also failed to check and review past bond recommendations when the first notice was made or implement the changes suggested by its consultants before winding down sales in 2002.
The firm sold over 50 varieties of precipice bonds across the three-year period and the majority of sales lost over 50% as capital losses ranged from 9% to 100%.
Some clients are also thought to have bought more than one product, so the total number of transactions amounted to 800.
Further details presented by the FSA suggest in all transactions reviewed, the firm failed to take “reasonable steps” to ensure customers understood the risks involved in precipice bonds as well as ensure written communications and information was clear, fair and not misleading.
In its comments on Capita, the FSA takes a swipe at firms such as David Aaron Partnership which advised clients on precipice bond sales but later had to put the firm into liquidation, forcing clients to claim back compensation for losses from the Financial Services Compensation Scheme.
Andrew Procter, FSA director of enforcement, says the willingness of Capita to pay £.35m in compensation means clients will reclaim some of their losses much faster.
"It is essential that higher risk products be promoted with great care, and the risks must be clearly and unambiguously explained to customers. Over a sustained period this firm failed to provide customers with suitable advice. Such a very high failure rate over such a prolonged period would normally merit a significantly higher financial penalty,” says Proctor.
“This action will mean that the firm's customers who have suffered a loss will receive redress much more quickly than would have been possible if the firm had not co-operated with the FSA in this manner. This is in marked contrast to some recent cases where firms have put them themselves into liquidation leaving investors to rely on the FSCS for compensation,” he adds.
Several firms have already received enforcement action for their apparent mis-selling of precipice bonds, says the FSA.
The regulator removed permission to give investment advice from David Aaron Partnership after reported widespread mis-selling of precipice bonds, while Lloyds TSB Bank picked up a £1.9m fine and agreed to pay £98m in compensation for its sales of high income equity-linked bonds through its branches.
Chase de Vere Investments was also fined £165,000 for allegedly sending out misleading marketing literature on precipice bonds.IFAonline
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