FCA warns investors following £22.9 million fine for State Street

The Financial Conduct Authority (FCA) has advised pension funds and other investors to ensure that their controls over transition management (TM) are adequate, following a large fine against TM provider State Street for serious failings.

State Street UK was fined £22.9 million by the FCA for deliberately overcharging some of its TM clients, including pension funds. Between June 2010 and September 2011, the FCA found that State Street UK overcharged six clients by a total of over £20 million, equivalent to around 25% of its total transition management income. The FCA said that State Street’s failings were at the most serious end of the spectrum, as it breached a position of trust.

The FCA reduced its fine by 20%, from £32.6 million because State Street agreed to settle at an early stage of the investigation.

The overcharging was detected when a client identified mark-ups on certain trades which had not been agreed. The FCA said: “Those responsible then incorrectly claimed both to the client and to State Street UK’s compliance department that the charging was an inadvertent error, and arranged for a substantial rebate to be paid on that false basis. They deliberately failed to disclose the existence of further mark-ups on other trades as part of the same transaction.”

In a statement on transition management following the fine, the FCA said that £165 million in assets are transferred between managers every year by 13 specialist TM providers. The FCA added it has now reviewed the TM sector and said that it found that the quality and effectiveness of controls, marketing materials, governance and transparency varied. FCA director of supervision, Clive Adamson, commented: “Transition management often flies below the radar, but done properly, helps to ensure that investors get the best returns on their assets. By taking a proactive look across the sector, we’ve acted to ensure that standards are high and the consequences of failing to meet our expectations are clear.”