The UK Financial Services Authority (FSA) has fined Credit Suisse’s UK operations £5.95 million for failing to maintain accurate records for its structured capital at risk products (SCARPs) and risk related systems and controls failures. According to the regulator, the private bank had inadequate systems and controls in place in order to assess its customers’ risk appetite and therefore did not accurately judge their suitability for investment in SCARPs, which are complex financial products that provide income to customers but also expose them to the risk that they may lose all or part of their initial capital.
Between January 2007 and December 2009 Credit Suisse UK customers invested over £1 billion in SCARPs, but these customers may not have been told the full story with regards to the risk they were exposing themselves to, says the regulator. The FSA picked up the potential failures when it conducted an on site visit at the firm; a practice that the regulator is increasing in its bid to crackdown on firms’ risk management practices.
The FSA indicates that the failures have resulted in Credit Suisse UK breaching Principle 3 of the FSA’s handbook, relating to selling products to customers that were unsuitable for them. As a result, the private bank has since made a significant number of changes to its advisory processes and has enhanced the systems and controls in place to ensure the suitability of its advice to its customers, says the regulator. It has also agreed to carry out a past business review, overseen by an independent third party, in relation to SCARP purchases during the period identified. If a customer is found to have been advised to purchase an unsuitable product, redress will be paid to the customer by Credit Suisse UK to ensure that they have not suffered financially as a result. Hence the fine is only part of the financial cost of these failings for the firm.
On 14 June 2011, the FSA sent a ‘Dear CEO’ letter to the wealth management industry, following a review of the suitability of client portfolios in a sample of firms in the sector. As part of the review, the regulator identified what it called “significant, widespread failings”. The FSA considers suitability – and the ability to demonstrate it – a key area of risk in the wealth management industry and indicates that firms in this sector are seeing, and will continue to see, an ongoing and increasing focus on these issues.
Keeping tighter control over risk management assessments and instrument data with regards to client suitability all plays into the wider data management arena. By keeping up to date records and being able to produce them on demand to the regulator, firms could avoid the financial and reputational impact of fines such as these.
You can read the FSA’s full final notice to Credit Suisse UK on the regulator’s website here.