FSA fines Square Mile Securities Ł250,000 for using high pressure sales tactics

FSA fines Square Mile Securities Ł250,000 for using high pressure sales tactics

Jan 16 2008 Susannah Hammond

The Financial Services Authority has fined Square Mile Securities Limited Ł250,000 for persistently using high pressure sales tactics and misleading information to sell customers shares they did not want or could not afford. The FSA reviewed 55 transactions that Square Mile carried out between March and May 2006, some involving older persons and inexperienced investors.

Important issues arising

This is the second fine from an ongoing FSA thematic project, which started in June 2006; it looks at the selling practices used by small firms when recommending higher risk shares. In October 2007, the FSA fined Wills and Co., stockbrokers Ł49,000 for not ensuring its customers understood the risks associated with penny shares.

The FSA's review of Square Mile showed that the company had set up a high pressure sales business which disadvantaged customers and did not have appropriate controls. It also showed that Square Mile knew its advisers frequently used unacceptable sales tactics and sometimes failed to get a customer's consent before selling them high risk shares. Square Mile also made false statements, provided inaccurate and misleading information and failed to disclose important details and significant risks about the shares to its customers. The firm also made recommendations without first ensuring these were suitable for the customer.

An indication of how serious the failings were at Square Mile is illustrated by the fact that the FSA considered that the issues warranted a financial penalty of Ł1.5m. This was reduced as Square Mile agreed to settle at an early stage of the FSA investigation and, therefore, qualified for a 30 per cent (stage one) reduction of the financial penalty under the FSA's executive settlement procedures. The FSA also took into account Square Mile's present financial circumstances and the fact that it will have to pay for independent approval of its transactions and new account openings, appointment of a skilled person and any appropriate redress payable.

Square Mile has made changes to its senior management and agreed to appoint a skilled person to assess its systems and sales practices, as well as what customer compensation would be appropriate. Square Mile has also agreed to send its customers a letter advising them of the FSA's findings, which will include information on how they can make a complaint.

Next steps and compliance tips

As with many enforcement actions, the main lessons to be learned are to be found in the detail of the final notice. There are a number of compliance tips which are relevant to almost all broking and advisory firms, although the Square Mile final notice reads like a list of what not to do. Overall, Square Mile did not either understand or choose to implement its regulatory obligations and its actions had deliberately disadvantaged a number of vulnerable customers.

Compliance officers of stockbroking or advisory firms would be well advised to run their senior managers through the detail of this final notice and should double check that all of the following areas are picked up in their compliance monitoring and assurance work:

Assessment of sales polices and procedures to ensure that they are not, and could not become, a high pressure sales environment that undermines regulatory requirements and disadvantages customers.
Ensure customers' consent to proceed with the purchasing of securities can be robustly and consistently evidenced.
Assessment of the reward and remuneration system and sales-driven environment to ensure that it does not, and could not, lead to advisers putting the interests of the firm ahead of the customers' interests.
Assessment of sales practices to ensure they do not place undue pressure on customers.
Ensure that the provision of the required risk warning and assessment and provision of information to customers regarding the risks of the transactions can be robustly and consistently evidenced.
Assessment of the communication of information regarding the business of the firm to ensure there are robust systems and controls in place to make sure it is clear, fair and not misleading.
Review of information given to customers to ensure that fair, clear and not misleading information is given about the past performance of securities.
Ensure the information communicated about the skills and experience of the firm's advisers and its services is clear, fair and not misleading.
Ensure that the information communicated about the professional and technical services of the firm is not misleading.
Ensure that the gathering, retention and accuracy of sufficient personal and financial information about the firm's customers can be robustly and consistently evidenced.
Ensure that the assessment of suitability prior and/or while recommending securities to customers can be robustly and consistently evidenced.
Assessment of the establishment of clear and appropriate senior management responsibilities and reporting lines. This may be one area where the compliance function could ask internal audit to undertake the necessary assurance work.
Assessment of the reasonable steps to implement adequate risk management systems. This may again be an area where the compliance function could ask internal audit to undertake the necessary assurance work.
Ensure that all appropriate compliance processes and procedures are implemented, and robustly and consistently documented.
Assessment of the policies and procedures around the monitoring of small cap securities recommendations and sales.
Assessment of implementation of systems and controls regarding the use of non-public information.
Ensure training and competence arrangements are fully documented and all training records are up-to-date, and that any and all gaps in individuals' training are followed up.

Accountability

The Square Mile final notice is a lesson in how not to run a stockbroking firm. Given the litany of issues, some of the appalling examples given and the sheer number of times the FSA has used "recklessly" to describe the actions of the firm, it is astonishing that the regulator has not sought to sanction individual members of the senior management at Square Mile.

The views and the opinions expressed in 'hot topics' are that of the individual authors and not necessarily those of the Securities & Investment Institute.