State Street Corp.’s U.K. unit was fined 22.9 million pounds ($37.7 million) by the Financial Conduct Authority for charging clients “substantial” mark-ups without their consent.
State Street, the third-biggest custody bank, “developed and executed a deliberate strategy” to charge undisclosed fees on top of agreed management or commission payments at a unit that helps institutions restructure their investments, the FCA said in an e-mailed statement.
“State Street U.K. allowed a culture to develop in the U.K. Transitions Management business which prioritized revenue generation over the interests of its customers,” said Tracey McDermott, FCA director of enforcement and financial crime. “Their conduct has fallen far short of our expectations.”
From June 2010 until September 2011, Boston-based State Street deliberately overcharged six clients a total of $20.2 million, the FCA said. Total revenue for the unit that overcharged clients during the same period was $77.9 million, meaning the extra money represented 26 percent of revenue. The firm received a 30 percent discount for settling early with the FCA, avoiding a larger fine of 32.7 million pounds.
State Street fell 1.4 percent to $67.27 at 12:24 p.m. in New York.
“Over the past several years, we have worked hard to enhance our controls to address this unacceptable situation,” State Street said in a statement on its website. “The FCA in its notice is critical of our business controls within the U.K. transition management business and our control functions in the U.K. at that time. We acknowledge these as historical problems and have undertaken extensive efforts to address both.”
The FCA said it didn’t find any evidence that executives outside State Street’s Portfolio Solutions Group for Europe, Middle East and Africa had knowledge of the charges or of attempts to conceal them.
State Street said it “dismissed individuals centrally involved in the overcharging” in 2011. Alicia Curran Sweeney, a spokeswoman, declined to comment further on the former employees involved.
The hidden fees came on a service State Street provides to large customers such as asset managers and pension funds, helping them switch money between outside asset managers or when they restructure investments.
In several instances, State Street executives quoted fixed fees to its clients, who were not identified in the FCA’s statement, and then built in extra profit through undisclosed mark-ups on securities trades, according to the FCA.
One customer made changes to $6 billion invested in bonds. After an initial transaction, State Street’s report to the client made no reference to mark-ups that amounted to $2,738,344, the FCA said.
When the same client ordered another transaction, one State Street executive within the unit sent another an e-mail reading, “Back up the truck!,” according to documents made available by the FCA.
Before the second transaction, managers also exchanged e-mail messages discussing whether State Street’s lawyers had examined documents related to the deal.
“Did they [legal] look at the original agreement?” wrote one manager.
“Absolutely not. Nor did they look at the periodic notice. This can of worms stays closed!,” the colleague wrote back, adding that there is “no way” they could disclose the spread, or the profit taken for executing trades.
The extra charges eventually came to light after a client hired a consultant who examined publicly available bond pricing and found undisclosed mark-ups.
Managers in the unit tried to cover up the charges by claiming they were “inadvertent” and rebated the company $1 million. They also told State Street’s compliance officials the charges were erroneous.
An internal investigation later revealed the charges were added deliberately and the firm notified regulators. The company has audited the unit and added new policies for recording, approving and monitoring client charges within it.
“We have bolstered our control functions, governance and culture across all of our UK businesses,” the company said in the statement.
Custody banks keep records, track performance and lend securities for institutional investors including mutual funds, pension funds and hedge funds. State Street also manages investments for individuals and institutions.