Sesame was handed a £6m fine for its failings on Keydata advice today.
Here is the Financial Conduct Authority's (FCA's) reasoning for its enforcement action.
The £6,031,200 fine was issued for two sets of failings:
- failing to ensure that investment advice given to customers was suitable
- failings in the systems and controls that governed the oversight of Sesame's appointed representatives (ARs).
The penalty is made up of a £245,000 fine for Sesame's advice failings in relation to Keydata life settlement products, and a £5,786,200 fine for systems and controls weaknesses across its investment advice business.
The FCA said all of the failings relate to Sesame's oversight of its ARs, which are individuals or firms that draw their authorisation from a principal (in this case, Sesame), with the principal ultimately accountable to the regulator for poor practice.
Between July 2005 and June 2009 Sesame advised 426 customers to invest a total of more than £6.1m in Keydata life settlement products. #
However, the vast majority of Sesame's sales were flawed because:
- there was a mismatch between customers' stated investment objectives, attitude to risk and the product sold;
- the suitability letters provided to customers stated incorrectly that income or capital growth was guaranteed; and/or customers were advised incorrectly that the Keydata life settlement products were low risk.
The FCA said: "This was despite Sesame's own view that the Keydata life settlement products presented investors with 'a considerable amount of risk'. While it issued its ARs with this view, it failed to take any further steps to prevent and/or identify mis-selling.
"In this way Sesame failed to take reasonable care to ensure the advice given by ARs and the decisions they made on behalf of customers were suitable. In fact in every case reviewed by the FCA Sesame had failed to explain to customers all of the key risks and had failed to give a balanced view of the advantages and disadvantages of the Keydata life settlement products."
Systems and controls
The FCA also found, following further supervisory work, between July 2010 and September 2012, that Sesame failed to take reasonable care to organise and control its affairs responsibly and effectively, and had failed to improve its oversight of the ARs.
- Sesame failed to identify and monitor sales of those products and funds which were not suitable for most customers;
- both desk-based file reviews and visits by Sesame's internal compliance team were not always suitably robust; and
- problems with record-keeping for ARs continued.
Furthermore, in terms of Sesame's culture, the language used internally within the firm supported an incorrect view that its customers were the ARs rather than the end retail customers.
The FCA found that these failings in Sesame's systems and controls meant that the unsuitable sales that occurred between 2005 and 2009 could have been repeated in relation to other investment products between July 2010 and September 2012.
The following sales are examples of unsuitable advice that Sesame gave in relation to the Keydata Products:
Ms K, 79-years-old, was advised by Sesame in September 2006 to invest £138,602 (89% of her savings) in the Keydata Products, despite having a "very cautious" attitude to risk and thus seeking only "minimum amount of risk to your capital" (referred to numerically as 2/5 with 5 being the highest risk appetite). She was advised that the Keydata Product was suitable for her very cautious ATR.
Ms R, 58-years-old, was advised in January 2006 to invest £10,000 (24% of her savings) in a Keydata Product. She was in receipt of disability benefits and had an income shortfall of £600 per year at the time she sought Sesame's advice. Sesame classified her ATR as "low risk" (referred to numerically as 3/10), seeking only low risk to capital.
However, her file notes recorded that she would "need security of capital" and "need guaranteed income and return of capital" suggesting she did not even seek minimal risk to capital.
The suitability letter sent to her after the Keydata Product had been applied for did set out some of the risks involved, but then listed amongst the product's benefits that the investment was lower risk than high yield corporate bonds or equities and that it provided "guaranteed return of capital" and "guaranteed income", which the AR should have known was not the case.
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