The Financial Services Authority (FSA) has fined Pi Financial Limited (Pi) £58,300 for advising its clients to invest in high risk products which were clearly unsuitable.
During the relevant period of 1 January 2009 to 3 February 2012, Pi failed to take reasonable care to ensure the suitability of its advice. Pi advised 168 clients to invest £6 million in Unregulated Collective Investment Schemes (UCIS) and 362 clients to invest £20 million in structured products. Of the sample of files that the FSA reviewed, 50% were found to be unsuitable. Across the unsuitable files there was a clear disparity between the clients' moderate attitude to risk and the high risk nature of the products that were recommended. In several cases, clients who appeared to have low incomes, limited assets and limited capacity for loss were advised to invest in high risk products, which were clearly not right for them.
Examples of unsuitable advice include:
- Client A was advised to place £51,000 in a UCIS and £34,000 in a structured product, which constituted all of his pension funds (other than those held in a final salary scheme)
- Client B was advised to invest 93% of his SIPP funds in structured products, with the effect that 54% of his total investment portfolio was invested in structured products
- Client C, with an annual income of £18,500 and two dependant children, was advised to transfer his entire pension fund of £78,000 to one UCIS
Product sales were not effectively monitored and systems and controls at the firm were inadequate. Supervision of the two advisers who accounted for the highest sales of UCIS and structured products was poor, while the file checking process was unclear and the checks themselves incomplete. Pi employed a maximum of only 4 file checkers during the relevant period, serving a total of 72 financial advisers. The compliance manual provided to advisers made no mention of UCIS at all.
Georgina Philippou, head of retail enforcement at the FSA, said:
"Pi's failings were serious. The firm sold Unregulated Collective Investment Schemes and structured products to ordinary retail investors, when these products were clearly unsuitable for their needs.
"We have made our views on UCIS very clear in a series of communications, most recently in our consultation paper and supervisory letters to firms active in this market. UCIS are very often high risk, complex products, which should not be promoted to the vast majority of retail investors in the UK. Where we see evidence of mis-selling, we will take action.
"For years we have emphasised the need for suitable advice. Pi made personal recommendations that clearly did not fit its clients' individual needs and circumstances."
Pi would have been fined £83,363 but agreed to settle at any early stage and thus qualified for a 30% discount.
Background
- The Final Notice <http://www.fsa.gov.uk/static/pubs/final/pi-financial-limited.pdf> for Pi Financial Limited.
- Pi Financial Limited is based in Shrewsbury and has approximately 72 investment advisers and 16 appointed representatives.
- This is the eighteenth enforcement case brought against an advisory firm for UCIS failings since 2011. A full list of all firms and individuals fined for failings in relation to UCIS can be found here. <http://www.fsa.gov.uk/smallfirms/your_firm_type/financial/investment/ucis-enforcement-notices.shtml>
- The FSA has previously published a consultation paper on UCIS <http://www.fsa.gov.uk/static/pubs/cp/cp12-19.pdf> , supervisory letters <http://www.fsa.gov.uk/smallfirms/your_firm_type/financial/pdf/ucis-letter-retail-intermediaries.pdf> , final guidance on traded life policy investments <http://www.fsa.gov.uk/library/policy/final_guides/2012/fg1212> , a thematic review of UCIS <http://www.fsa.gov.uk/pages/library/other_publications/ucis/index.shtml> , guidance for small firms <http://www.fsa.gov.uk/smallfirms/your_firm_type/financial/investment/ucis.shtml> , consumer information <http://www.fsa.gov.uk/pages/consumerinformation/product_news/saving_investments/ucis/index.shtml> on its website, and has also spoken publicly <http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2010/1214_lw.shtml> about UCIS. More information can be found here. <http://www.fsa.gov.uk/smallfirms/your_firm_type/financial/investment/ucis.shtml>
- Examples of UCIS include traded life policy investments, wine, crops, unlisted shares and timber. Often investments in these assets are structured as UCIS but they can also take other legal forms, such as special purpose vehicles. These assets may sometimes appear to offer better returns with less volatility than more usual investment types but they are actually higher risk investments. The risks they carry are often esoteric and difficult to assess. For example, they may be illiquid, difficult to value and susceptible to catastrophic loss of value. Governance controls can also be weaker than on mainstream investment vehicles, which may increase the risk of product failure and loss of capital for investors.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.
- The FSA will be replaced by the Financial Conduct Authority and Prudential Regulation Authority in 2013. The Financial Services Bill <http://services.parliament.uk/bills/2010-12/financialservices.html> currently undergoing parliamentary scrutiny is expected to receive Royal Assent by the end of 2012.