State Street Fined £23m by UK Regulator over Transition Management

The UK regulator has fined State Street for overcharging six clients in 2010 and 2011.

(January 31, 2014) — State Street has been hit with a £22.9 million penalty charge after acting “with complete disregard for the interest of its customers,” the UK’s Financial Conduct Authority (FCA) announced today.

The fine was levied on the global financial giant over activities in its transition management department in that were revealed in 2011.

“State Street UK’s transitions management (TM) business had developed and executed a deliberate strategy to charge clients substantial mark-ups on certain transitions, in addition to the agreed management fee or commission,” the FCA said.  “These mark-ups had not been agreed by the clients and were concealed from them.”

Clients that were overcharged included the Royal Mail Pension, Ireland’s National Pension Reserve Fund, and the Kuwait Investment Authority. Clients were all refunded the fees they had overpaid, the amounts of which totalled more than $20,000,000.

“The findings we publish today are another example of a firm that has acted with complete disregard for the interests of its customers,” said Tracey McDermott, director of enforcement and financial crime at the FCA. “State Street UK allowed a culture to develop in the UK TM business which prioritised revenue generation over the interests of its customers. State Street UK’s significant failings in culture and controls allowed deliberate overcharging to take place and to continue undetected.  Their conduct has fallen far short of our expectations. Firms should be in no doubt that the spotlight will remain on wholesale conduct.”

Following the discovery of the overcharging, State Street dismissed several of its employees that had taken part in the activity. Ross McLellan, who led the team and his deputy Ed Pennings left the firm, with Pennings taking State Street to an employment tribunal for unfair dismissal in November 2012.  He claimed the State Street hierarchy were fully aware of the team’s actions. This was refuted by State Street. A year ago, the judge concluded that State Street had dismissed Pennings unfairly, but only due to failings in the process carried out by the human resources department. He said that Pennings’ conduct had warranted dismissal but the bank’s actions during the process had complicated the affair. The tribunal did not award Pennings any damages.

A further tribunal brought by former TM team member Rick Boomgaardt was withdrawn a month later after an undisclosed out of court settlement was agreed.

The FCA said it viewed “State Street UK’s failings to be at the most serious end of the spectrum.  State Street UK acted as an agent to its TM clients and held itself out as being a trusted advisor.  Accordingly, it breached a position of trust. Further, the overcharging accounted for over a quarter of its TM revenue”.

The event propelled the FCA to tackle the industry more widely with a full investigation.

In October 2013, Clive Adamson, director of supervision at the FCA, gave his views on the transition management industry and its failings: “Poor transparency and opaque legal documentation could lead to poor consumer outcomes in the provision of this service.”

Over the past 12 months, JP Morgan has closed down its transition management business for all areas outside Australia and Credit Suisse acted likewise—neither had been revealed to have committed any wrongdoing.

State Street agreed to settle at an early stage of the FCA’s investigation, and qualified for a 30% discount on its fine. The original amount had been set at £32,692,800.

In a statement, the company said: “Today brings to a conclusion the FCA’s inquiry into the overcharging of six EMEA-based transition management clients in 2010 and 2011 that we self-reported in 2011. We deeply regret this matter. Over the past several years, we have worked hard to enhance our controls to address this unacceptable situation. The FCA in its notice is critical of our business controls within the UK transition management business and our control functions in the UK at that time. We acknowledge these as historical problems and have undertaken extensive efforts to address both, including strengthening the controls, procedures and governance within our UK transition management business.”

In January 2012, State Street brought on board former JP Morgan transitions guru John Minderides to reform and lead the State Street transitions team.

Related content: Pennings Lied to State Street Clients, Judge Concludes & Ex-Employee Claims Overcharging Was “Accepted Business Practice” at State Street