"State Street UK has been fined £22,885,000 by the Financial Conduct Authority (FCA). State Street UK’s Transitions Management (TM) business had developed and executed a deliberate strategy to charge clients substantial mark-ups on certain transitions, in addition to the agreed management fee or commission."
Published: 31/01/2014
Source: fca.org.uk
SERVICES PROVIDED
1. TM is a service provided to clients to support structural changes to asset portfolios.
2. The services may also be required when a client needs a large portfolio of securities to be restructured, or when a client decides to remove or replace asset managers.
3. The main objective is to manage risk and increase returns.
4. A transition manager can charge fees and generate revenue in a number of different ways. It can charge commissions on equities and futures trades, mark-ups on bonds, and/or it can charge a project management fee (which can either be a fixed fee, or a fee based on a percentage of the overall portfolio).
REGULATOR'S FINDINGS
1. The overcharging came to light after a client notified staff that it had identified mark-ups on certain trades that had not been agreed.
2. Those responsible then incorrectly claimed both to the client and later to State Street UK’s compliance department that the charging was an inadvertent error.
3. Substantial rebate were arranged to be paid on that false basis.
4. Further mark-ups on other trades conducted as part of the same transition were not disclosed.
5. The overcharging accounted for over a quarter of its TM revenue.
6.Between June 2010 and September 2011 the FCA found that State Street UK’s TM business deliberately overcharged six clients a total of $20,169,603.
RECTIFICATION
1. Senior management became aware of the issue and took action to investigate the misconduct and to implement a comprehensive programme to improve the UK TM business controls and bolster control functions, governance and culture.
OPERATIONAL ISSUE
1. As a brief overview, Bonds trade on a bid-ask spread, where one party offers to sell at one price while the other party offers to buy at another. The transaction clears somewhere in the middle.
2. The difference is the the 'spread'. Spreads are higher for junk bonds as compared with gov-backed bonds.
3. State Street UK acted as an agent to its TM clients and held itself out as being a trusted advisor.
4. Staffs hid the secret commissions from clients and others within State Street. This can be achieved by instructing traders to not break out these overcharges in post-trade reports.
5. Clearly a position of trust has been breached. A position of trust is any position that requires its holder to enjoy the trust of those who elected or chose the holder.
6. Senior managers too have failed to take reasonable care to organise and control its affairs responsibly, with adequate risk systems.
7. What made it possible for sales staffs to access and alter the commissions charged? Were there any check and balances? Or was it a collusions between front & back end staffs?
8. This case would suggest a lack of build-in monitoring and exception reports embed in the IS.
9. Although not mentioned in the articles, its is highly believed that the amount of commission charged are tied to staff's bonuses.
10. This is counter-productive in the long run as staffs would focus on jacking up the commissions charged rather then looking for new businesses. Relying on total production(transactions made) would certainly minimize the risks of this event.
11. During Q1 2015, banks were alleged to defrauded pension funds and other clients by overcharging them on currency transactions. This could indicate a widespread problem existing in the FI environment.
12. Commission rates have decreased drastically in the financial industry due to competition. A lack of transparency in the breakdown would certainly induce agents to overcharge.
13. Regulators should introduce policies to promote transparency although the argument is customers wpuld compare prices without understanding other intangible value involved.
