Credit Suisse (UK) Limited

FCA action

fine

1

in fines

£5.95m

most recent

October 2011

• Fined £5.95m on 25 October 2011

  On 25 October 2011, the FSA imposed a financial penalty of £5,950,000 on Credit Suisse (UK) Limited (Credit Suisse UK) for breaches of Principle 3 of the FSA's Principles for Businesses. These breaches occurred between 1 January 2007 and 31 December 2009 (the Relevant Period) and related to systems and controls failings in relation to the suitability of advice regarding structured capital at risk products (SCARPs) to its private banking retail advisory customers (Customers). SCARPs are complex financial products that provide income to customers but also expose them to a range of outcomes in relation to the return of the initial capital, including a loss of capital. Credit Suisse UK agreed to settle at an early stage of the FSA's investigation. It therefore qualified for a 30% (Stage 1) discount under the FSA's executive settlement procedures. Were it not for this discount, the FSA would have imposed a financial penalty of £8,500,000 on Credit Suisse UK. During the Relevant Period, Credit Suisse UK: (1) failed to put in place adequate systems and controls in respect of the determination of Customers' attitudes to risk. A number of terms contained within the Client Acceptance Booklet (CAB) which assisted Credit Suisse UK in determining a Customer's risk profile may not have been clear to inexperienced investors. As a result, there was an unacceptable risk that Credit Suisse UK may not have accurately understood the level of risk that Customer was willing to accept from their investments. Further, there was no direct correlation between the Customer's stated risk profile and their investment objective; one investment objective could link to a number of possible risk profiles. If the risk profile selected by the Customer fell outside the range of risk profiles which were compatible with the Customer's stated investment objective, the CAB required the Customer to explain the reason why this was the case. These explanations were not, however, always provided in the CAB. In these circumstances, Credit Suisse UK could not demonstrate an understanding of, and the interaction between, a Customer's attitude to risk and/or investment objective. Furthermore, there was little clarification provided in the Customer file notes on how the proposed investment objective linked to the Customer's risk profile; (2) failed to take reasonable care to evidence adequately that the SCARPs it recommended to its Customers were suitable, given the assets and investments held by those Customers at the time. Credit Suisse UK had no formal process in place to assist when building Customers' portfolios. Additionally, the Customer file notes did not demonstrate how the Customer's overall portfolio had been constructed with reference to their investment objectives and risk profile. As a result, testing carried out by a skilled person found that for 17 of the 24 SCARP transactions they tested, there was insufficient evidence of consideration of the Customer's overall portfolio by Credit Suisse UK when determining whether transactions were suitable for the Customers; (3) failed to put in place adequate systems and controls surrounding the recommendation of leverage to Customers. During the Relevant Period, Credit Suisse UK did not have in place policies or controls which governed the use of leverage. Where leverage was used to fund transactions, there was often no documentation available to evidence the rationale for recommending leverage and the appropriateness of the amount of leverage in the context of the Customer's overall wealth. There was also often no documentation showing that the downside risks of leverage had been considered by relevant Relationship Managers when advising the Customer to use leverage to finance their transactions. In addition, there was no formal mechanism to monitor the amount of leverage within Customers' portfolios; (4) failed to put in place adequate systems and controls surrounding the level issuer and investment concentration within Customers' portfolios. During the Relevant Period, Credit Suisse UK did not have in place policies or controls dealing with issuer or investment concentration, or a formal mechanism to monitor the levels of issuer or investment concentration in Customers' portfolios. There was also often no documentation available to evidence that issuer or investment concentration had been considered by the relevant Relationship Managers when recommending transactions; (5) did not effectively monitor transactions in the context of the Customer's overall portfolio. Between January and September of 2009, the suitability of transactions was only considered by Compliance against the Customer's risk profile and investment objectives, and not against the Customer's existing portfolio of investments; and (6) did not effectively monitor its staff to ensure that they took reasonable care to ensure the suitability of their advice. The conduct of the Relationship Managers was not effectively overseen, as the relevant management had too many competing responsibilities. In addition, in the first quarter of 2009, Credit Suisse UK updated its internal evidencing tool which was intended to demonstrate that management had reviewed, amongst other things, the suitability of transactions. However, Credit Suisse UK management at the time did not use this system properly. An internal report identified that reviews performed by Credit Suisse UK's management, some of which were relevant to suitability, were sub-standard in 44% of cases. As a result of the above failings, Credit Suisse UK's Customers were exposed to an unacceptable risk of being sold a SCARP which was unsuitable for them. The FSA has not proceeded to examine whether any individual advised sales were in fact unsuitable. Credit Suisse UK has agreed to carry out a past business review, overseen by and involving an independent third party, in relation to its sale of SCARPs to Customers who purchased these products during the Relevant Period to ensure that Customers do not lose out as a result of the failings identified in this Notice. As part of this process, Customers may be contacted if this is necessary to allow a decision on suitability to be made. If a Customer has been advised to purchase an unsuitable product, redress will be paid to the Customer to ensure that they have not suffered financially as a result. Credit Suisse UK's agreement to undertake this review has been taken into account when deciding upon the level of financial penalty imposed. The FSA considers these failings to be particularly serious because: (1) A significant amount of Customers' money was placed at risk by Credit Suisse UK's failings. During the Relevant Period, approximately 623 of Credit Suisse UK's Customers invested in excess of £1.099 billion in 1,701 SCARPs. (2) Credit Suisse UK is one of the leading private banks in the UK. As a result of its competitive position in the market, the firm's practices set an example which is seen by other market practitioners and customers. It is vital therefore that Credit Suisse UK takes reasonable care to ensure the suitability of its advice to Customers. (3) Credit Suisse UK's failings spanned a period of three years. Credit Suisse UK's failings therefore merit the imposition of a significant financial penalty. Since the discovery of its failings in 2010, Credit Suisse UK and its current senior management have worked with the FSA in an open and co-operative manner. Credit Suisse UK has also made a significant number of changes to its advisory processes, which have been driven by senior management. It has enhanced the systems and controls in place to ensure the suitability of its advice to Customers. It has also undertaken an extensive exercise to ensure that the information it holds in relation to all of its Customers is accurate and up to date.