The U.K. financial regulator says it has fined State Street £22.9 million for transition management failings.
The Financial Conduct Authority found State Street U.K.’s transitions management business, which covers across State Street Bank Europe and State Street Global Capital Markets (SSGM), “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. These mark-ups had not been agreed by the clients and were concealed from them.”
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).
Between June 2010 and September 2011, the FCA found State Street U.K.’s TM business deliberately overcharged six clients, including Royal Mail pension, the Kuwait Investment Authority (KIA) and the National Pension Reserve Fund (NPRF) in Ireland, a total of $20,169,603.
In issuing its final enforcement notice today, the regulator says the systemic weaknesses in State Street U.K.’s business practices and control environment around the U.K. transitions business practices and control environment around the U.K. TM business were so serious that the overcharging only came to light after a client notified staff that it had identified mark-ups on certain trades that had not been agreed.
It notes that 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, and arranged for a substantial rebate to be paid on that false basis. “They deliberately failed to disclose the existence of further mark-ups on other trades conducted as part of the same transition,” says the FCA.
Subsequent to the rebates and an internal investigation, State Street dismissed certain employees who were involved in the overcharging scheme. Among them was Edward Pennings, formerly SSGM head of Global Client Solutions and head of EMEA for the bank’s transition management business. Pennings was dismissed from his duties as senior managing director in September 2011 when it came to light that clients such as the Royal Mail pension fund and the Kuwait Investment Authority (KIA) were overcharged on transition management deals. Pennings elected to face a disciplinary hearing in early November and was subsequently dismissed. He sued the custodian bank for unfair dismissal and a hearing took place at an East London tribunal.
It emerged at his tribunal in December 2012 that the Royal Mail audited the transition of a bond portfolio of March 2011 and discovered that mark-ups worth about $1 million were charged on the U.S. leg. That amount was paid back to the client. Royal Mail then commissioned an independent study into the transition with the help of performance measurement firm Inalytics, and found it was overcharged for the entire transition. The amount outstanding for overcharging on the non-U.S. trades was then also refunded.
In February last year, the tribunal ruled that Pennings should not be compensated for unfair dismissal from the custodian bank. His superiors, Ross McLellan and Rick Boomgardt, who were also dismissed from State Street in relation to the overcharging incident shortly before him.
The FCA notes that once senior management became aware of the issue State Street UK took action to investigate the misconduct and to implement a comprehensive program to improve the UK TM business controls and bolster control functions, governance and culture across its UK businesses.
The regulator says it views State Street UK’s failings to be at the most serious end of the spectrum. “State Street UK acted as an agent to its TM clients and held itself out as being a trusted advisor,” says its statement. “Accordingly, it breached a position of trust. Further, the overcharging accounted for over a quarter of its TM revenue.
When the failings were uncovered, State Street UK was found to have breached three of the FCA’s Principles of Business: it failed to treat its customers fairly; it failed to communicate with clients in a way that was clear, fair and not misleading; and it failed to take reasonable care to organise and control its affairs responsibly, with adequate risk systems.
Early settlement meant State Street qualified for a 30% discount. Were it not for the discount the penalty would have been £32.7 million.
In a statement in relation to the notice State Street says: “In 2011, we dismissed individuals centrally involved in the overcharging of transition management clients. Their behavior was unacceptable and a significant departure from the high standards of conduct and transparency that we expect and certainly not consistent with the manner in which our employees act on behalf of clients every day.
“We believe we now have industry leading controls within our transition management business and have bolstered our control functions in the UK, broadening the depth of talent that oversees our businesses.”
Ireland’s National Treasury Management Agency, as manager of the NPRF, was previously repaid €3.2 million as reimbursement for being overcharged for transition management services by State Street Bank Europe. It said the overcharging involved the application of unauthorized commissions to NPRF trades in a manner that was never visible to the NTMA or the fund’s global custodian and had the effect of reducing the sale proceeds obtained by the NPRF by 0.07%.
According to the NTMA, the trades involved were undertaken on the NPRF’s behalf in 2011 as part of a €4.7 billion program of asset disposals. The agency previously said it was awaiting the outcome of the FCA investigation to decide what further action it might take with State Street. “The NTMA is studying the Final Notice published by the FCA today and will report to the NPRF Commission very shortly,” it said.The U.K. financial regulator says it has fined State Street £22.9 million for transition management failings.
The Financial Conduct Authority found State Street U.K.’s transitions management business, which covers across State Street Bank Europe and State Street Global Capital Markets (SSGM), “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. These mark-ups had not been agreed by the clients and were concealed from them.”
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).
Between June 2010 and September 2011, the FCA found State Street U.K.’s TM business deliberately overcharged six clients, including Royal Mail pension, the Kuwait Investment Authority (KIA) and the National Pension Reserve Fund, a total of $20,169,603.
In issuing its final enforcement notice today, the regulator says the systemic weaknesses in State Street U.K.’s business practices and control environment around the U.K. transitions business practices and control environment around the U.K. TM business were so serious that the overcharging only came to light after a client notified staff that it had identified mark-ups on certain trades that had not been agreed.
It notes that 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, and arranged for a substantial rebate to be paid on that false basis. “They deliberately failed to disclose the existence of further mark-ups on other trades conducted as part of the same transition,” says the FCA.
Subsequent to the rebates and an internal investigation, State Street dismissed certain employees who were involved in the overcharging scheme. Among them was Edward Pennings, formerly SSGM head of Global Client Solutions and head of EMEA for the bank’s transition management business. Pennings was dismissed from his duties as senior managing director in September 2011 when it came to light that clients such as the Royal Mail pension fund and the Kuwait Investment Authority (KIA) were overcharged on transition management deals. Pennings elected to face a disciplinary hearing in early November and was subsequently dismissed. He sued the custodian bank for unfair dismissal and a hearing took place at an East London tribunal.
It emerged at his tribunal in December 2012 that the Royal Mail audited the transition of a bond portfolio of March 2011 and discovered that mark-ups worth about $1 million were charged on the U.S. leg. That amount was paid back to the client. Royal Mail then commissioned an independent study into the transition with the help of performance measurement firm Inalytics, and found it was overcharged for the entire transition. The amount outstanding for overcharging on the non-U.S. trades was then also refunded.
In February last year, the tribunal ruled that Pennings should not be compensated for unfair dismissal from the custodian bank. His superiors, Ross McLellan and Rick Boomgardt, who were also dismissed from State Street in relation to the overcharging incident shortly before him.
The FCA notes that once senior management became aware of the issue State Street UK took action to investigate the misconduct and to implement a comprehensive program to improve the UK TM business controls and bolster control functions, governance and culture across its UK businesses.
The regulator says it views State Street UK’s failings to be at the most serious end of the spectrum. “State Street UK acted as an agent to its TM clients and held itself out as being a trusted advisor,” says its statement. “Accordingly, it breached a position of trust. Further, the overcharging accounted for over a quarter of its TM revenue.
When the failings were uncovered, State Street UK was found to have breached three of the FCA’s Principles of Business: it failed to treat its customers fairly; it failed to communicate with clients in a way that was clear, fair and not misleading; and it failed to take reasonable care to organise and control its affairs responsibly, with adequate risk systems.
Early settlement meant State Street qualified for a 30% discount. Were it not for the discount the penalty would have been £32.7 million.
In a statement in relation to the notice State Street says: “In 2011, we dismissed individuals centrally involved in the overcharging of transition management clients. Their behavior was unacceptable and a significant departure from the high standards of conduct and transparency that we expect and certainly not consistent with the manner in which our employees act on behalf of clients every day.
“We believe we now have industry leading controls within our transition management business and have bolstered our control functions in the UK, broadening the depth of talent that oversees our businesses.”
Ireland’s National Treasury Management Agency (NTMA), as manager of the NPRF, was previously repaid €3.2 million as reimbursement for being overcharged for transition management services by State Street Bank Europe. The NTMA said this overcharging involved the application of unauthorized commissions to NPRF trades in a manner that was never visible to the NTMA or the Fund’s global custodian and had the effect of reducing the sale proceeds obtained by the NPRF by 0.07%. The trades involved were undertaken on the NPRF’s behalf in 2011 as part of a €4.7 billion programme of asset disposals, it added.
The NTMA stated some time ago that it would await the outcome of the FCA investigation to decide what further action it might take with State Street. In a statement following the publication of the FCA’s final notice, the agency said it is studying the notice and will report to the NPRF Commission very shortly.