State Street U.K. has been fined £22.9 million ($41.2 million) by the Financial Conduct Authority (FCA) after its transition management business had developed and executed a deliberate strategy to charge clients substantial markups on certain transitions, in addition to the agreed management fee or commission.
Between June 2010 and September 2011, the FCA found that the business deliberately overcharged six clients more than $22 million. Transition management is a service provided by the company to support structural changes to asset portfolios with the intention of managing risk and increasing returns. The services may be required when a client needs a large portfolio of securities to be restructured, or when a client decides to remove or replace asset managers.
The company allowed a culture to develop, which prioritized revenue generation over the interests of its customers, says Tracey McDermott, the FCA’s director of enforcement and financial crime.
“State Street U.K.’s significant failings in culture and controls allowed deliberate overcharging to take place and to continue undetected,” she adds. “Their conduct has fallen far short of our expectations. Firms should be in no doubt that the spotlight will remain on wholesale conduct.”
In a statement, State Street says it deeply regrets the matter.
“Over the past several years, we have worked hard to enhance our controls to address this unacceptable situation,” the company states. “We acknowledge these as historical problems and have undertaken extensive efforts to address both, including strengthening the controls, procedures and governance within our U.K. transition management business.”
In 2011, State Street dismissed individuals centrally involved in the overcharging of transition management clients. The company also notified all transition management clients about the overcharging, only six of whom were directly affected.
“We believe we now have industry leading controls within our transition management business and have bolstered our control functions in the U.K., broadening the depth of talent that oversees our businesses,” the company says. “We are confident that we have addressed the weaknesses highlighted in the FCA’s notice and, as a result, have emerged as a stronger organization.”
State Street agreed to settle at an early stage of the FCA’s investigation and qualified for a 30% discount. Were it not for this discount, the FCA would have imposed a financial penalty of £32.7 million ($59.1 million).
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