The TM business developed and used a deliberate strategy to charge clients above the agreed management fee or commission without their knowledge.
TM is a service that supports structural changes to asset portfolios with the aim of managing risk and increasing returns.
The service is generally used by clients who need a large portfolio of securities to be restructured, or who require asset managers to be removed or replaced.
Between June 2010 and September 2011, the FCA discovered that State Street UK’s TM business overcharged six clients a total of $20.17 million, which accounted for over one quarter of its revenue.
State Street UK’s clients mainly include large investment management firms and pension funds holding the funds and savings of retail investors.
According to the FCA, the overcharging was discovered when a client notified staff that it had identified mark-ups on certain trades that had not been agreed to.
Those responsible claimed to the client and the State Street UK compliance department that the charging was an “inadvertent error” and paid a large rebate on that basis.
The TM business chose not to disclose the existence of further mark-ups on other trades conducted as part of the same transition.
State Street UK was found to have breached three of the FCA’s Principles of Business. It failed to treat customers fairly; to communicate with clients in a way that was clear, fair and not misleading; and failed to take reasonable care to organise and control its affairs responsibly with adequate risk systems.
FCA director of enforcement and financial crime, Tracey McDermott, said this was another example of a firm acting with complete disregard for the interests of its customers.
“State Street UK allowed a culture to develop in the UK TM business which prioritised revenue generation over the interests of its customers,” said Ms McDermott.
“State Street UK’s significant failings in culture and controls allowed deliberate overcharging to take place and to continue undetected.”
Ms McDermott said the FCA will remain focused on wholesale conduct.
The FCA said State Street UK senior management has taken action to investigate the misconduct and has implemented a comprehensive programme to improve the UK TM business controls and strengthen control functions, governance and culture across its UK businesses.
State Street UK would have paid a financial penalty of more than £32.69 million if the company had not received a 30 per cent discount for agreeing to settle at an early stage of the FCA’s investigation.
