FSA fines Capita Trust Company Ltd 300,000 for mis-selling precipice bonds

The firm's marketing of precipice bonds to an estimated customer base of 3,000 potentially placed a significant number of customers at risk of loss. In all of the 60 files reviewed by the FSA, the firm had failed to take reasonable steps to ensure its customers understood the nature of the risks involved in this product. In addition, in 95% of these transactions, the firm had failed to take reasonable steps to ensure that the recommendation made was suitable for the customer which resulted in compensation of approximately 3.5 million.

The firm was first put on notice in August 2001 that there were serious deficiencies in its advisory sales processes. Despite this, the firm failed to review its past bond recommendations to check whether unsuitable advice had been given and failed to implement changes suggested by its consultants.

Andrew Procter, FSA Director of Enforcement, said:

"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.

However, in acknowledging its responsibilities to its customers, the firm has ensured that none of the investors will lose out as a result of the firms historic compliance failings and has co-operated fully throughout the investigation. The firm has volunteered to proceed straight to compensation for all of its precipice bonds customers and will pay approximately 3.5 million to those who have suffered a loss, without requiring proof of unsuitability in each individual case.

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."

The majority (75%) of the precipice bond transactions were based on advice given to customers between September 1997 and May 2001 when the firm was Royal & Sun Alliance Trust Company Ltd. After May 2001, when the firm became Capita Trust Company Ltd, the sales of these products continued for a further 15 months, gradually winding down to a fairly low volume until September 2002, after which no more bonds were recommended by the firm. The firm sold over 50 varieties of precipice bonds in the relevant period. The capital loss ranges from 9% to 100% depending on the particular bond, but most of the capital losses exceed 50%.

In 95% of all transactions reviewed the firm had failed to ensure that the recommendation made was suitable for the customer. In all transactions reviewed, the firm failed to take reasonable steps to ensure its customers understood the nature of the risks involved in precipice bonds. As well, in 80% of all transactions reviewed, the firm failed to ensure that written communications and information which the firm gave to customers was presented clearly and fairly and failed to communicate with customers in a way which was clear, fair and not misleading.

Notes for editors

1. The full text of the Final Notice issued by the Regulatory Decisions Committee, which includes the background to the case, the relevant statutory provisions, regulatory requirements contravened and the factors taken into account by the RDC when setting the level of the fine, may be found here.

2. Financial penalties are not treated as income by the FSA. They are applied for the benefit of authorised persons (or the issuers of securities admitted to the official list) as appropriate, and so given back to the industry in subsequent years.

3. Recently, the FSA took action against David M Aaron Ltd by removing its permission to give investment advice following widespread mis-selling of precipice bonds by the firm. The FSA has also fined Lloyds TSB Bank plc (LTSB) 1.9 million for a number of unsuitable sales of a high income equity-linked bond through the LTSB branch network. LTSB will pay compensation of approximately 98 million in respect of 22,500 sales. In another high-profile case, the FSA fined Chase de Vere Investments 165,000 for sending out misleading marketing literature on precipice bonds.

4. In 1997 the firm was known as Royal & Sun Alliance Trust Company Limited. The principal activity of the firm was the provision of non-regulated services including advising on inheritance tax planning, acting as on-shore corporate trustees and the provision of trust and administration services. These non-regulated activities account for approximately 70% of the business carried on by the firm. The remaining 30% of the business consisted of regulated investment business 15% portfolio management for private clients and 15% independent financial advice. In this latter capacity the firm provided financial advice to a closed client base consisting primarily of ex-employees of the Royal & Sun Alliance group (RSA) and their spouses.

5. In May 2001, the firm was sold as a going concern to the Capita Group and was renamed Capita Trust Company Ltd. After the sale, the firm continued to provide investment services to the same niche client base of ex-RSA staff.

6. In the period June 1997 to December 2001, the firm breached the following IMRO rules: IMRO II 3.1(1), 3.2(1)(a), 4.1(1) and in the period from December 2001 to September 2002, the firm breached the following FSA rules: COB 5.3.5(1)R, COB 5.4.3R, and COB 2.1.3R, by:

   1. failing to take reasonable steps to ensure that the advice given to customers was suitable in relation to the purchase of precipice bonds;

   2. failing to take reasonable steps to enable its customers to understand, or to ensure that customers understood, the nature of the risks involved in precipice bonds; and

   3. failing to take reasonable steps to ensure that written communications and information which the firm gave to customers was presented clearly and fairly, and failing to take reasonable steps to communicate with customers in a way which was clear, fair and not misleading.

7. In the relevant period approximately 500 customers of the firm invested in precipice bonds based on recommendations made by the firm. Some customers invested more than once, resulting in approximately 800 precipice bond transactions in total. The total amount invested in precipice bonds on the basis of advice given by the firm was approximately 9 million.

8. As a result of the widespread and serious nature of the failings identified it appears to the FSA that the firm has acted in breach of SIB Principles 2, 4 and 5 and FSA Principles 2, 6, and 7 by:

   1. failing to act and/or conduct its business with due skill care and diligence;

   2. failing to seek adequate information about the circumstances and investment objectives of its customers and failing to pay due regard to the interests of its customers and failing to treat customers fairly; and

   3. failing to provide adequate information to enable its customer to make informed decisions and failing to communicate information to its customers in a way which was clear fair and not misleading.

9. 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.

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