Royal Bank of Scotland Group Plc’s Coutts & Co. unit was fined 6.3 million pounds ($10.1 million) by a U.K. regulator for not warning clients about the risks of investing in a bond fund overseen by American International Group Inc.
Coutts marketed the AIG Enhanced Variable Rate Fund as a standard money-market fund and didn’t indicate it invested “a material proportion” of clients’ money in asset-backed securities and floating-rate notes, the Financial Services Authority said in a statement today.
Coutts sold 1.45 billion pounds in investments in the fund to 427 wealthy customers from late 2003 until Sept. 15, 2008, the day that Lehman Brothers Holdings Inc. filed for bankruptcy. AIG’s share price subsequently plunged and the U.S. government bailed out the insurer.
“I made the mistake, along with hundreds of other customers, of trusting Coutts and they abused that trust,” said Keith Mills, a British entrepreneur and deputy chairman of the organizing committee for the 2012 London Olympic Games, who is suing Coutts over the investment. “The least they could do now is to apologize and fairly compensate their customers.”
The fund, which saw some assets fall below book value, was suspended as a large number of customers tried to withdraw their investments after Lehman’s collapse, the FSA said.
The regulator found that Coutts failed to give its staff adequate training about the risks of the fund, didn’t adequately describe the fund and its risks in marketing documents, didn’t give its customers good advice on diversifying their investments outside the fund, and didn’t respond to market conditions in 2007 and 2008 that made the fund more risky. The bank also failed to review its sales of the fund after it was suspended and customers had complained, the FSA said.
Coutts received the FSA’s standard 30 percent discount on the fine for settling early.
The private bank implemented “enhancements to our investment advice procedures” so that “the past failings identified by the FSA will not be repeated,” Rory Tapner, the chief executive officer of Coutts, said in an e-mailed statement. The bank, based in London, said it will also hire an independent third party to conduct a review of the sales of the fund and may offer redress to customers who lost money.
“Firms giving investment advice must ensure they make suitable recommendations,” said Tracey McDermott, the acting director of enforcement at the FSA. “It is imperative that firms also ensure that clients understand the nature of the product they are buying and the risks it involves.”