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View the article online at http://citywire.co.uk/wealth-manager/article/a541431

FSA fine may be ‘only the beginning’ for Coutts

by Emma Dunkley on Nov 11, 2011 at 07:00

FSA fine may be ‘only the beginning’ for Coutts

Coutts may face greater financial liabilities following a £6.3 million FSA fine imposed on it this week for failings in the sale of an AIG fund.

A source close to the situation said the fine could well be ‘only the beginning’ and the firm could face significant compensation claims potentially in the tens of millions.

Coutts sold the AIG Enhanced Variable Rate fund to 427 high net worth clients, including Sir Keith Mills, between 3 December 2003 and 15 September 2008, according to the FSA, with investments amounting to £1.45 billion.

A run on the fund during the financial collapse of late 2008 led to it being suspended with remaining investors locked in. 

When the fund was suspended on 15 September Coutts said the 247 clients who were still invested in the fund could withdraw 50% of their capital and have the remaining 50% transferred into a new AIG Protected Recovery fund.

The source said in theory if investors were not paid interest on the 50% that went into the recovery fund, and if Coutts has to compensate clients for this potential loss of interest, over two years, it could have to potentially pay out over £40 million.

This calculation is based on half of the total £1.45 billion invested, multiplied by 3%, representing the typical savings rate clients would have otherwise achieved per year in another account, which is multiplied by two to represent the two years.

However, Coutts said until it completes its review of all the accounts that remained invested in the fund as of 15 September 2008, no assumptions should be made about any reimbursements to clients. It added that some distributions from the fund had been paid out.

The FSA issued the fine for failings in connection with the sale of the AIG Enhanced Variable Rate fund. These included informing customers it was a cash fund investing in money market instruments that could be seen as an alternative to a bank or building society account.

9 comments so far. Why not have your say?

Evan Owen

Nov 11, 2011 at 09:18

Do they need someone to point them in the right direction?

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Eric Haring

Nov 11, 2011 at 09:19

So how dose one know... if the person you are introduced to ie; your new "wealth manager" is a person thats up for the task..

who out there has their money being looked after by Coutts.. comments please.

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Evan Owen

Nov 11, 2011 at 11:49

Eric

The FSA will probably tell you that the RDR will solve the problem because all advisers will be qualified to the appropriate standard and the firm will be well capitalized. Oh, Coutts would probably already be RDR ready?

Probables all round.

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aidan vaughan

Nov 11, 2011 at 11:54

Let's remember that lots of wealth management banks recommended AIG, say at 0.5% initial commission and each year thereafter(?) -but Coutts are being picked up for how they recommended it.

More generally, it's the privileged position that banks are in with their clients- the day that a large deposit is made a phone call can be made inviting wealth management suggestions! Whether this means that deposit taking institutions should be under a greater degree of care, is up to the regulator.

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PCIAM

Nov 11, 2011 at 14:13

Vade retro, Evan.

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Reg

Nov 12, 2011 at 10:47

What the article does not mention is the number of clients who will have borrowed against the funds held in the PRF - not only have they lost the deposit interest referred to but they have also paid interest on the loan. Presumably this will be factored in to the compensation calculations ?? Afterall, Coutts say that clients will not have suffered any loss as a result of their actions.

If the larger players in the PRF like Barclays Wealth and UBS are found wanting then the figures being looked at will be huge.

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Guy Usabreak

Dec 02, 2011 at 18:00

I imagine normal prudent borrowing rules should have been applied on a loan against an investment.. Coutts were not a registered charity last time I looked. The thing I can't get my head round is why anyone should be surprised that cashing a bond in before maturity holds no guarantees.. Normally. Equally perplexing is why experienced investors would not read the basic terms of the bond before investing large sums into it. Stupidity or greed? Read my comment on the linked article re the FSA s involvement.. I think there were fewer than 1000 experienced wealthy investors involved. Hardly a mass Market sales process.. But a good headline grabber for a failed quango.

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Reg

Dec 05, 2011 at 08:27

Guy, the ' prudent borrowing rules ' did not apply with regards to lending against AIG - Coutts were relying on the AIG PRF ' guarantee ' that applies in July 2012. As such clients could borrow up to 100% of the balance held in the PRF - there were no credit checks as such. Yes, those who cash in by rejecting the PRF have lsot money and acted against the recommendations made by all the Private Banks. I agree with your comments around investors putting in large sums but remember in Coutts case ( and no doubt others ) it was viewed as a ' cash fund ' and marketing material from AIG even said ' ...if you are looking for an alternative to a bank or building society ... '. Not all investors were ' experienced ' instead they were relying on their managers and more often than not this was endorsed by Accountants etc.

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Guy Usabreak

Dec 05, 2011 at 16:33

Reg I have posted on the more up to date thread on this

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