FSA fines R&SA 1.35 million for pensions review failings

The FSAs investigation and remedial action undertaken by R&SA has identified up to 13,500 consumers whose cases had, in error, not previously been identified for review by R&SA. Without this work those consumers may not have been paid redress exceeding 32 million.

Carol Sergeant, Managing Director for Regulatory Processes and Risk at the FSA, said:

"The FSA expects firms to identify and provide compensation to all consumers due redress and to complete the pensions review on time. This is a significant penalty to reflect the serious nature of R&SAs past failings in its handling of the review. R&SA failed in its identification of customers who might have been due redress, it failed to complete review work on time and its management failed to monitor the process effectively.

The FSA is determined to ensure that consumers who are due redress from firms, for whatever reasons, have their cases dealt with in a timely and effective manner. The responsibility for delivering this rests with senior management of firms, who must ensure proper control and monitoring of such work."

R&SA group companies had previously been fined 225,000 for failings in their conduct of the pensions review, following a 1997 visit by the FSAs pensions review monitoring department. The FSA visited R&SA again in July and August 2000 to review its progress with its pensions review. It found limited evidence of effective senior management control of the review. Subsequent remedial work identified weaknesses in the management control and monitoring of the review including the use of poor quality management information. This breakdown in R&SAs systems and controls had led R&SAs senior management to believe the review was progressing adequately.

Since that visit, R&SA has carried out extensive remedial work including the appointment of independent third party consultants and has been open and co-operative with the FSA. It has kept the regulator informed of the work which is now being undertaken and the matters which are being identified as a result of the remedial work. This co-operation has been reflected in the level of the fine.

R&SAs past breaches and failings are, nevertheless, viewed by the FSA as particularly serious due to the following aggravating factors:

• they occurred after and notwithstanding that a substantial fine had already been imposed on R&SA by PIA for serious failings in respect of the conduct of its pensions review in the period up to September 1997;

• certain breaches were identified by PRMD in July and August 2000 and not by R&SA, whose management until that time had believed its Pensions Review to be proceeding satisfactorily;

• in the FSAs view, if those certain breaches had not been identified by PIA, R&SA may not have identified up to 13,500 reviewable cases and, as a result, may not have identified investors entitled to redress exceeding 32 million. The FSA, however, accepts that R&SA did not deliberately set out to avoid paying proper redress to investors;

• they were identified more than 2 years after R&SAs deadline for completion of all Phase 1 cases and, as a result, R&SA will not complete Phase 1 until 4 years after that deadline; and

• they have, by virtue of the nature and size of R&SAs customer base, exposed numerous customers to the risk of loss as well as revealing weaknesses in its management systems and internal controls.

Remedial work undertaken by R&SA has now established that up to 13,500 reviewable cases had not been identified. This represented some 23% of R&SAs total number of reviewable cases. More than 5,000 of these cases were Phase 1 cases which R&SA should have completed by June 1998. As at 8 February 2002, R&SA had 1,908 outstanding Phase 1 cases, more than 50% of the total number of outstanding Phase 1 cases among product provider firms. As at 30 June 2002 R&SA had concluded 98.6% of its pensions review. R&SA will conclude Phase 1 of the review in October 2002 and currently anticipates concluding the whole of the review by November 2002.

Notes for editors

1. Full details of the case are available from the FSA.

2. Following corporate restructuring which took place after the merger of the Royal Insurance and Sun Alliance groups in 1997, there are now three companies whose policies form part of the pensions review, namely Royal & Sun Alliance Life & Pensions Limited; Royal & Sun Alliance Linked Insurances Limited; and Sun Alliance and London Assurance Company Limited.

   All reporting to the FSA on the pensions review since the merger has been conducted by Royal & Sun Alliance Life and Pensions Limited.

3. The pensions review was a review set up by the Personal Investment Authority (PIA), one of the FSAs predecessor regulators.

4. Since the beginning of the pensions review, the Authority has taken disciplinary action against 349 firms, resulting in fines totalling 10, 986, 250.

5. Previous Disciplinary Action

   Royal Life Insurance Limited (now Royal & Sun Alliance Life and Pensions Limited) and Sun Alliance Life Limited were jointly fined 225,000 in October 1998 and ordered to pay costs of 100,000 by the Membership and Disciplinary Tribunal of PIA in respect of a failure adequately to progress certain aspects of the Pensions Review in accordance with PIA Rule 7.2.2. Those aspects were not the same as those now identified.

   That disciplinary action arose from a visit made by PIAs Pensions Review Monitoring Division (PRMD) in 1997. Following that visit corrective action was prescribed by PRMD including, for instance, a requirement that R&SA confirmed the accuracy of its Phase 1 starting population. R&SA reported to PRMD on the completion of this remedial action and in March 1998 provided PIA with a report from a specialist auditor addressing the starting population issue.

6. The penalty is to be imposed pursuant to Section 206 of the Act in respect of breaches by R&SA of PIA Rules 7.2.2, 5.1.1 and 5.1.3 and SIB Principles 2 and 9.

   SIB Principle 2 requires firms to use due skill, care and diligence in complying with their regulatory obligations. R&SAs serious failings in the conduct of the Pensions Review constitute a breach of Principle 2.

   SIB Principle 9 requires firms to organise and control their internal affairs in a responsible manner and to have well defined compliance procedures. R&SAs serious failings both in respect of conduct of its Pensions Review and in respect of its archiving facilities also constitute breaches of Principle 9.

   PIA Rule 7.2.2 requires firms to take all reasonable steps to carry out the Pensions Review in accordance with the Guidance. R&SA has failed to do so.

   PIA Rules 5.1.1 and 5.1.3 require regulated firms to maintain accurate records which can easily be retrieved in respect of transactions undertaken by investors. R&SA has, again, failed to do so.

7. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection of consumers; and fighting financial crime.
   
   

8. The FSA aims to maintain efficient, orderly and clean financial markets and to help retail consumers achieve a fair deal.