UK regulatory body the Financial Conduct Authority (FCA) disclosed on Monday that it has fined financial services companies Credit Suisse International (CSI) and Yorkshire Building Society (YBS) £2,398,100 and £1,429,000, respectively, for failing to provide clear and fair information in the financial promotions for CSI’s Cliquet Product, a capital protected 4, 5 or 6 year structured deposit product which guarantees a minimum return.
Both firms reportedly agreed to settle at an early stage of the FCA’s investigation and therefore received a 30% settlement discount. This is the first time that the FCA has simultaneously taken action against the manufacturer of a product and its distributor.
CSI designed the Cliquet Product to provide capital protection and a guaranteed minimum return, with the apparent potential for a better return if there was consistent good performance on the FTSE 100, which was marketed as a key promotional feature. However, the FCA found that the probability of achieving only the minimum return was 40-50%, while the probability of achieving the maximum return was almost 0%. If the sum of the returns of the FTSE Index over each six month period (with the return in each period capped and floored) exceeded the minimum return, the deposit paid the sum of the FTSE returns. For the maximum return to be achieved the FTSE 100 was required to rise by at least the cap level in every 6 month period.
The Cliquet Product was sold by distributors under the following names: Protected Capital Plus Account, Guaranteed Capital Account, Protected Capital Account, Capital Plus Account, Guaranteed Capital Plus Account and Guaranteed Investment Account.
CSI had identified customers for the Cliquet Product who were said to be conservative and risk averse. This target market was described by CSI as “stepping stone customers”. According to the FCA, unsophisticated investors with limited investment experience and knowledge were sold the Cliquet Product through several distributors, with a total of £797,380,716 being invested in the product by 83,777 customers. YBS was one of the distributors and was responsible for approximately 75% of the total amount invested.
The FCA investigation discovered that YBS approved both CSI’s product brochures for the Cliquet Product, in which the maximum return figure was given undue prominence. YBS’s own financial promotions for the product did not clearly explain how returns were calculated. YBS changed its promotions in September 2010, so that undue prominence was no longer given to the potential maximum return, following concerns raised by third parties. But YBS continued to cite the potential maximum return and was found to have given an unfair impression of the likelihood of achieving it. CSI also reviewed its promotions in response to the third parties’ concerns at that time; however it decided not to change its product brochure significantly. The FCA also found that CSI did not have a regular procedure in place for a complete review of their long running promotions. If a review had been included in CSI’s processes, the problems with the product brochure could have been remedied earlier.
Customers who bought the issues of the Cliquet Product available between 1 November 2009 and 17 June 2012 will be contacted by both CSI and YBS. These customers will be allowed to exit the product without penalty (where applicable) and will be offered interest up to the date they exit based on a fixed term deposit rate.
FCA’s director of enforcement and financial crime, Tracey McDermott, commented:
“It is crucial that firms consider the needs of their customers from the time that products are being designed through to their marketing and sale. The information provided to customers forms an important part of this. Financial promotions are often the primary source of information for consumers and in this case CSI and YBS let their customers down badly. These promotions were a serious breach of the requirement to be clear, fair and not misleading.
“CSI and YBS knew that the chances of receiving the maximum return were close to zero but they nevertheless highlighted this as a key promotional feature of the product. This was unacceptable.”