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Coutts to compensate AIG investors after £6.3m FSA fine

by Daniel Grote on Nov 08, 2011 at 11:06

Coutts to compensate AIG investors after £6.3m FSA fine

Private client bank Coutts is to compensate investors who suffered due to failures in the advice it provided on the AIG Enhanced Life fund, and has agreed to a past business review of its sale of the fund.

The Financial Services Authority (FSA) said Coutts would compensate 'all customers who have suffered loss as a result of any failings on its part' after announcing the review, to be overseen by an independent third party, and confirming a £6.3 million fine.

The regulator said the fine related to Coutts' sale of the Enhanced fund between December 2003 and September 2008, when it invested £1.45 billion of client money into the fund.

It outlined a number of failings in the way Coutts sold the fund including:

  • informing clients the Enhanced fund was a cash fund despite a significant proportion of the funds' assets not meeting this description
  • providing inadequate training to advisers about the risks and features of the fund
  • recommending the fund to some clients even though it may have exposed them to more capital risk than they were willing to accept
  • advising many clients to invest a large proportion of their assets into the fund and risking a lack of diversification
  • failing to respond to declining market conditions in 2007 and 2008
  • failing to review sales after the fund was suspended and customers complained.

Tracey McDermott, FSA acting director of enforcement and financial crime, said: 'Firms giving investment advice must ensure they make suitable recommendations. It is imperative that firms also ensure that clients understand the nature of the product they are buying and the risks it involves.'

The fine follows years of complaints from investors and a long-running investigation of the bank by the regulator, disclosed by parent Royal Bank of Scotland in 2010.

Nectar card scheme founder Keith Mills has led investors' campaign against the bank, after he was advised to invest £65 million into the funds, complaining they were not adequately informed of the risks. Mills has launched pending legal action against Coutts.

The £5.7 billion Enhanced fund was suspended after a wave of redemption requests following the bailout of insurer AIG in September 2008, in the midst of the financial meltdown, before closing.

28 comments so far. Why not have your say?

Anitaki

Nov 08, 2011 at 08:22

I thought Coutts could be referred to as an "upmarket" bank.

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Paul Barnard

Nov 08, 2011 at 08:41

@Anitaki - :-) ha ha

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Reg

Nov 08, 2011 at 08:43

So, one down how many more to go ??

Coutts were not the only one to peddle the AIG Bond as a ' cash alternative '.

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Rob Simpson

Nov 08, 2011 at 08:49

We can't have it both ways folks.

If Coutts are to be fined £6million for this then I see no reason why IFAs should not shoulder the blame for Arch Cru.

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Justin Stockdale

Nov 08, 2011 at 08:51

Didnt that adviser chap(HSBC IFA Matthew Marsden) who was involved in the hnw case with the AIG bond that the judge found against..... join Coutts? Wonder if he was brought on for his experience with AIG Bonds...........

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Julian Sunley

Nov 08, 2011 at 08:53

Are they still advising lottery winners? I wonder how many 'unsophisticated investors' were caught up in the AIG issue......

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Kevin Neil

Nov 08, 2011 at 09:27

@ Reg

True, they weren't - but the key issue is whether others who sold the AIG Bonds also failed to correctly advise clients of the relevant risks or whether they made clients fully aware that these funds were not "cash" and that the extra returns on offer carried additional risks over and above an ordinary cash deposit.

@Rob

As far as I am able to tell no-one is attempting to suggest that the AIG funds have been subject to fraud and / or have invested in assets that were completely different to those detailed in the fund particulars and fact sheets. These are the two most important issues being alleged with the Arch Cru funds, so your comparison is not a vlaid one.

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michael bates

Nov 08, 2011 at 09:29

Surely the FSA is up a gum-tree again? Coutts is whole of market, not an IFA. Therefore unless there's misrepresentation or fraud there's the security for them of being the providers agent. Caveat Emptor applies. Please someone tell me whether the FSA has got it wrong again or not?

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Rob Simpson

Nov 08, 2011 at 10:07

@Kevin

Yes it is. both investments. both went wrong. both advisers fined.

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Steve

Nov 08, 2011 at 10:10

Its all down to those clever marketing guys telling a story without actually knowing the full make-up and risk of such arrangements. Products need to be more transparent and clearly state in VERY LARGE print the risks and where they lie.

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Paul Barnard

Nov 08, 2011 at 10:17

@ Rob. Coutts have been fined for mis-selling, not banks in general just because Coutts are a bank. Those IFAs who sold Arch Cru may be culpable (I said at the time it was a con, but hey ho) but I don not expect to pay their share just because I am an IFA (as in the Keydata/N&P theft from my bank account by the FSCS)

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Anitaki

Nov 08, 2011 at 10:18

Steve has made a very valid point. So often, looking at the list of products that have failed over the years, (and there have been many), the marketing guys had no idea what was within the actual product they were promoting. They only had the tin, and what it said on the tin. The marketing people were never encouraged to look inside it. Many would not have known how to open it.

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Roy Rutter

Nov 08, 2011 at 10:23

Glad someone used the phrase caveat emptor. Here's another one - putting all your eggs in one basket. Coutts has shown once again that the banks repeatedly fail to remind customers of those 2 phrases.

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Reg

Nov 08, 2011 at 10:36

Apologies if I am misreading by ' all egges in one basket ' Roy but wasn't an attraction of AIGs Premier Access Bond the fact that funds were spread across numerous counterparties - if AIG ' failed ' then investors were covered under the 90% rule ??

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RobertMorfee

Nov 08, 2011 at 11:56

Reg - the crucial point here is that the fund failed and not AIG. AIG gave no contractual committment to pay anything at all. Therefore the FSCS protection did not apply and the clients exposed to loss on the closure of the fund.

We have a significant number of these cases. In the cases we have seen the advice process was wholly defective, COB rules not followed and the product simply unsuitable for clients who wanted a cash investment..

What will be interesting is to see if all the other banks follow suit. There is no justification for Coutts to be singled out .

It will be intersting also to see the basis on which the compensation is to be paid.

Robert Morfee

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Reg

Nov 08, 2011 at 12:12

Robert

I agree with your comments - I meant that the 90% rule was used as a big selling point with customers, far better than the £ 50k deposit scheme cover. No one ever mentioned I don't think that the actual Fund itself could fail.

I note Coutts says it will compensate all those customers who have suffered a loss as a result of its failings. So, will this cover the interest payments that customers have had to make by borrowing against their own money and also the loss of interest they could have earned since September 2008 by holding the cash on deposit ??!!!

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Aunty Tacky

Nov 08, 2011 at 13:15

•failing to respond to declining market conditions in 2007 and 2008

•failing to review sales after the fund was suspended and customers complained. That's what the FSA found.

Sounds like arrogance and mis-management, or simply greed of advisers not to mention their managers. Surely now some of them will have the decency to fall on their sword. Maybe even re-pay the large bonuses earned on the back of the easy AIG sale (clearly not advice) to help compensate those clients who were sucked in. Senior Management - anything to say?

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Barman

Nov 08, 2011 at 13:22

Sounds like a good day at the office for the FSA, a bank like this is well trusted by many consumers, mis-selling in this way should be punished.

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Philip Wise

Nov 08, 2011 at 14:17

I pay tax. I own 80% ish of Coutts.

As an adviser, I'm pleased that Coutts has been pulled up for mis-selling. I guess I'm happy that the fine will be shared amongst taxpayers rather than advisers (as there are more taxpayers than advisers).

But I am still miffed that I am paying.

I would like to know what is being achieved by my tax money being used to pay this fine. It would seem reasonable for those who benefitted from the sales of these bonds (I guess this includes RBS shareholders and staff at the time) to return some of their profits, but it's probably impossible. But I would like to know what my money is going to be used for.

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Philip Wise

Nov 08, 2011 at 14:28

That seems fair.

Coutts (owned by us lowly taxpayers) bails out its rich clients using taxpayer money. Take money from the poor and give it to the rich.

Oh, and tax some more money from the taxpayers and give it to the FSA as a fine.

But it's probably good that the ordinary taxpayer is getting a dose of the medicine that we FSCS contributors have had rammed down our throats for the last couple of years.

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Barman

Nov 08, 2011 at 14:52

@PW - So your suggesting that they get away scot-free with mis-selling investments to the public?

Also I would strongly suggest you learn how the bailout money was used.

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Reg

Nov 08, 2011 at 15:02

Looks like the compensation they are agreeing to pay will dwarf the fine - wait unti the FSA finalise their review of the bigger players like Barclays and UBS. If they are ' found out ' then light the blue touch paper and stand well back !!

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Philip Wise

Nov 08, 2011 at 15:20

@Barman

I dont think that they should get away with it, but the fair solution would be to penalise those who profited. The obvious group to single out would be the staff of Coutts, and the RBS shareholders at the time that the profits were generated by the sales. However, that's not practical.

Fining the bank, and making it pay compensation, just results in less profit for the current shareholders, who are a different group than those who owned the bank at the time, and less of the money borrowed by RBS being repaid.

I do think that a bit more imagination is required here as the result is that upshot is that the taxpayer is ultimately giving money to the rich (i.e. clients of Coutts).

I think I've just talked myself into camping in Paternoster Square!

I know how the bailout money was used, but thanks for the little bit of anonymous condescension - it is traditional for Citywire.

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Barman

Nov 08, 2011 at 15:34

You cant fine staff who were following a procedure, aiming for pre-defined targets and approved by a senior management team. The culture and governence of the company is at fault and thats the only fair way to approach this issue. Apologies for the condescension

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Anitaki

Nov 08, 2011 at 16:26

@ Barman > > Correct!!

You cannot fine staff who would "be on a disciplinary" if they didn't follow their employer's procedures. This is why "financial advice" & "targets" are not compatable bedfellows where banks are concerned, (I have seen this from the inside and seen honest people lose their jobs because they refused to sell a rubbish product). Shareholders and directors should pay, but not staff. They lose thier jobs if they don't do exactly as they are instructed, especially if they work for a bank.

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Jonathan Kitchin

Nov 08, 2011 at 16:33

@ Justin Stockdale - you are right. This is at odds with the recent decision of the High Court in Rubenstein v HSBC in which HSBC were not liable for incorrectly describing the AIG bond as the equivalent of a cash deposit.

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Justin Stockdale

Nov 08, 2011 at 16:43

@Jonathan - Sorry if I confused you but I wasnt meaning that and we have had that in depth debate about court v fscs......although why they (the FSA) have focussed on Coutts and not HSBC I have no idea...and a fair point to make.... Is it something to do with the article on investment bonds which i havent read yet?

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MR C.

Nov 09, 2011 at 09:43

@ Barman & Anitaki

Correct. That is exactly how it was when I was employed by them. And the reason I left.

"Sales, Sales, Sales!" Rammed down your throat by the senior management.

"Was the advice appropriate? Oh nevermind, just invite them to the next taxpayer-funded champagne reception, or golf, or shooting, or fashion show, or the opera....and send them a nice card at Xmas. The Queen as a client, posh cheque-book and impressive (read: expensive) offices should help put the clients' minds at rest too."

In the latter years this was fuelled by ex-Natwest/RBS staff merely seeking to get 'Coutts & Co' on their CV before moving on leaving commercial carnage behind them ready for the next wave of incompetent RBS management to swan in and make the next c*ck-up.

Such as shame. With a client bank of 70,000 HNWI's they had the opportunity to realise their ambition to become a highly respected whole of market wealth management company. But for far too long now they have relied upon their reputaton built-up over 300 years. Tarnished again.

Remember this one: http://www.aegistaxswitzerland.com/news/queen-s-bankers-invoved-in-tax-dodge/

Instead this 'private bank' is just an up-market sales force. Sound like anyone else we know?

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