FINAL NOTICE

1.
ACTION

1.1
For the reasons given in this Notice, the FSA hereby imposes on Coutts a financial
penalty of £6.3 million.

1.2
Coutts agreed to settle at an early stage of the FSA’s investigation. It therefore
qualified for a 30% (Stage 1) discount under the FSA’s executive settlement
procedures. Were it not for this discount, the FSA would have imposed a financial
penalty of £9 million on Coutts.

2.
SUMMARY OF REASONS

2.1.
The penalty is in respect of Coutts’ failure to comply with Principle 9 in connection
with its sale of the AIG Life Premier Access Bond and Premier Bond, Enhanced
Variable Rate Fund (the Fund) between 3 December 2003 and 15 September 2008 and
its compliance review of those sales between October 2008 and July 2009.

2.2.
Coutts failed to take reasonable care to ensure the suitability of its advice and
discretionary decisions for any customer who was entitled to rely upon its judgement.

2.3.
In particular, Coutts:

(1)
failed to have an adequate sales process in place for the Fund. Coutts’ advisers
were not provided with adequate training on the Fund and its features and risks
were not sufficiently explained to them. Nor did Coutts’ sales documentation
accurately or adequately describe the Fund and its risks. As a result,
customers were exposed to an unacceptable risk of an unsuitable sale of the
Fund;

(2)
recommended the Fund to some customers even though it may not have
provided them with the level of capital security they appear to have required.
In other cases, it should have advised customers in relation to their competing
investment objectives and made them sufficiently aware of the trade-off
between the Fund’s risks and returns. Many customers were advised to invest
a large proportion of their overall assets in the Fund and there is a risk that
their investments were not appropriately diversified;

(3)
generally informed customers that the Fund was a cash fund which invested in
money market instruments and could be seen as an alternative to a bank or
building society account. However, a significant proportion of the Fund was
invested in assets which did not meet this description and customers may have
misunderstood the true position about the risks they were assuming;

(4)
failed to respond appropriately to the changing market conditions in late 2007
and during 2008 when there was a greater risk of the Fund suspending
redemptions and of customers suffering a loss. Despite having been aware of
these issues affecting the Fund, Coutts failed to make the necessary changes to
the way in which it sold the Fund, and did not ensure that advisers who sought
to reassure existing customers inquiring about their investment in the Fund
provided a fair explanation of the risks. Nor did Coutts properly deal with
questions raised from December 2007 around its past sales of the Fund,
including about whether it had explained the Fund’s risks to customers
adequately and whether their investments were appropriately diversified; and

(5)
failed to undertake an effective compliance review of its sales of the Fund after
the Fund was suspended and customers complained. The review failed to
adequately address suitability and disclosure issues and was not completed in a
timely manner.

2.4.
As a consequence of the above failings, Coutts’ customers were exposed to an
unacceptable risk of an unsuitable sale of the Fund over the Sales Period. At the time
of the Fund’s suspension on 15 September 2008, 247 Coutts customers had £748
million invested in the Fund. Of these, 93 customers have complained.

2.5.
Following discussions with the FSA, Coutts has agreed to implement a comprehensive
past business review of its sales of the Fund. This will, where necessary, include
contact with customers who may have been adversely affected by Coutts’ failings.

The review will be overseen by an independent third party. Coutts will compensate
all customers who have suffered loss as a result of any failings on its part.

3.
DEFINITIONS

3.1.
The following definitions are used in this Final Notice:

“Act” means the Financial Services and Markets Act 2000;

“adviser” means Coutts Financial Planners authorised to sell the Fund;

“AIG” means AIG Inc;

“ALICO” means American Life Insurance Company;

“Coutts” means Coutts & Company;

“DEPP” means the FSA’s Decisions Procedure and Penalties manual;

“ENF” means the FSA’s Enforcement manual;

“FSA” means the Financial Services Authority;

“Fund” means the AIG Life Premier Access Bond and Premier Bond, Enhanced
Variable Rate Fund;

“Principles” means the FSA’s Principles for Businesses;

“Relevant Period” means 3 December 2003 to July 2009;

“Sales Period” means 3 December 2003 to 15 September 2008; and

“Tribunal” means the Upper Tribunal (Tax and Chancery Chamber).

4.
FACTS AND MATTERS

4.1.
Coutts offers a range of private banking services, including investment and wealth
management and advisory services, to high net worth individuals and businesses. It is
wholly owned by the Royal Bank of Scotland Group, through its National
Westminster Bank subsidiary. It was authorised by the FSA on 1 December 2001.
Coutts has permission from the FSA to carry on regulated activities in relation to,
among other things, advising on investments and arranging deals in investments.

4.2.
The Fund was recommended to Coutts’ customers in an advised sales process by
Coutts’ advisers. They operated out of Coutts’ various UK offices. Coutts’ sales
force also comprised private bankers who were responsible for the day to day
relationship with customers, but private bankers were not permitted to sell the Fund
from 1 June 2005.

4.3.
Coutts commenced sale of the Fund on 3 December 2003. The Fund was provided by
ALICO, a UK branch of a wholly owned subsidiary of AIG. AIG was, and remains,
one of the world’s largest international insurance and financial services organisations
and was AA rated from 2005 until its downgrade on 15 September 2008. ALICO’s
UK insurance business was ringfenced from AIG’s and its own assets and liabilities
through a separate account. As the Fund was held within an insurance bond, a
customer’s investment was also subject to the Financial Services Compensation
Scheme, which covered 100% of the first £2,000, plus 90% of the balance (with no
upper limit) in the event ALICO defaulted.

4.4.
The Fund was invested in financial and money market instruments, including
certificates of deposit, bank deposits and commercial paper. However, unlike a
standard money market fund, it was seeking to deliver an enhanced return by
investing a material proportion of the Fund’s assets in:

(1)
asset backed securities. These comprised on average 27% of the Fund’s assets
between 6 July 2005 and 28 December 2007 and reduced to between 23% and
15% in the period 1 February 2008 to 8 August 2008, varying over the Sales
Period between approximately 31% and 14%. They were primarily backed by
UK residential and commercial mortgages;

(2)
floating rate notes. These comprised on average 38% of the Fund’s assets
between 6 July 2005 and 28 December 2007 and reduced to between 30% and
27% in the period 1 February 2008 to 8 August 2008, varying over the Sales
Period between approximately 51% and 27%; and

(3)
assets which had terms to maturity of between 3 and 5 years. Again, these
comprised on average 54% of the Fund’s assets between 6 July 2005 and 28
December 2007 and reduced to between 41% and 15% in the period 1
February 2008 to 8 August 2008, varying between approximately 65% and
15% of the Fund’s assets.

4.5.
The Fund’s investment strategy was to smooth out fluctuations in the market value of
its assets so that it achieved steady, increasing returns for customers which were better
than the returns available on a typical bank deposit account. Customers purchased
units in the Fund which had a value assigned to them by ALICO. ALICO determined
the value of the units by reference to the book value of the Fund’s underlying assets,
rather than their market value. This was because it was intended that the underlying
assets would be held by the Fund to their maturity periods of between one day and
five years. However, if necessary, the longer dated assets could also be sold on the
secondary market prior to maturity for a price which depended upon market
conditions. To meet ordinary levels of withdrawal requests, the Fund held a
proportion of its assets in cash or near cash products (overnight cash or on very short
term deposit). ALICO quoted variable annual rates of return for the Fund on
approximately a monthly basis.

4.6.
The Fund was designed to be tax efficient; there was no personal liability to lower or
basic rate income tax or capital gains tax because ALICO accounted for tax liabilities
on the underlying funds. Higher rate tax payers were only liable to pay additional tax
on any gains over the amounts invested when they withdrew more than 5% in any
policy year.

4.7.
During the financial crisis of 2007 and 2008, the market values of some of the assets
in the Fund fell below their book values. There was also adverse press about the
financial stability of ALICO’s parent company, AIG. This, together with volatile
market conditions, prompted concerns on the part of Coutts and some of its customers
about the Fund. From mid to late 2007, in view of the then market conditions,
ALICO began to increase the liquidity of the Fund, including by decreasing the
proportion of asset backed securities in the Fund and increasing the proportion of
overnight cash.

4.8.
On 15 September 2008, the day of Lehman Brothers’ application for Chapter 11
bankruptcy protection in the US and a sudden drop in AIG’s share price, a large
number of investors sought to withdraw their investments and there was a run on the
Fund. ALICO was unable to meet all withdrawal requests immediately. It established
that it could not meet the requests without having to sell some of its longer dated
assets for materially less than their book value, which would have given rise to a
significant drop in the accrued value of customers’ investments. ALICO suspended
withdrawals and ultimately closed the Fund to new customers.

4.9.
Existing customers were subsequently permitted to withdraw 50% of their investment
(comprising capital plus accrued interest), realising its full accrued value. However,
since 14 December 2008, they have been able to withdraw the remaining 50% but not
for its full value (as at 14 December 2008, this represented a 13.5% reduction in the
accrued value of their entire investment). ALICO offered a guarantee that customers
would get back this proportion of their investment in full, based on its value as at 14
December 2008, if they kept their money in a Protected Recovery Fund (which
ALICO established) until 1 July 2012. Eight customers did not enter the Protected
Recovery Fund and suffered a loss on their accrued investment (of these, 5 suffered a
capital loss). As at 17 October 2011, customers who transferred 50% of their
investment into the Protected Recovery Fund have, taking into account distributions
made from that fund, recovered approximately 99% of the value of their entire
investment as at 14 December 2008. However, these customers have lost the
opportunity to earn an investment return on 50% of these monies since 14 December
2008. These customers have also suffered a loss of liquidity. Coutts attempted to
address this by offering a loan to these customers up to the amount they have been
unable to access in the Protected Recovery Fund. This loan attracts an interest rate of
one per cent over the Bank of England Base Rate.

Failure to have an adequate sales process in place for the Fund

4.10. Coutts failed to establish an adequate sales process for the Fund. Coutts relied on
another member of its group to carry out the due diligence on the Fund with a view to
determining whether the Fund should be sold by Coutts. This was an appropriate
procedure to follow. However, Coutts did not take the additional and necessary steps
to understand all of the Fund’s features and risks in order to consider sufficiently how
they should be taken into account in the sale of the Fund. This was a key contributor
to the specific failings detailed below.

Inadequate training and guidance for advisers

4.11. Coutts failed to provide adequate training and guidance on the Fund to its advisers.

4.12. Coutts made some written guidance available to advisers in relation to the Fund, in
addition to the general training it provided to advisers about financial products. It
otherwise relied upon its advisers actively seeking out information for themselves
about the further details of its features and risks. Coutts should have provided
additional, product-specific training and guidance to minimise the risk of its advisers
failing to:

(1)
properly understand the more detailed but potentially important characteristics
of the Fund;

(2)
explain adequately to customers the risks associated with the Fund; and

(3)
appreciate when Coutts’ other products should be recommended to customers
instead of the Fund.

4.13. The FSA’s review of documentation held on a number of sales files indicates that
many advisers may have underestimated the Fund’s risks and failed to describe them
appropriately to customers. The lack of adequate product-specific training is likely to
have contributed to the apparent failure of some advisers to fully understand the Fund.

Sales documentation

4.14. Coutts’ suitability letters, which recorded its recommendation of the Fund to
customers, contained descriptions about the Fund which, in the absence of an
appropriate explanation to the customer during the sale, were inaccurate and were in
any event potentially unclear and potentially misleading.

4.15. Template suitability letters were produced by Coutts’ Training and Competency team
and were used by Coutts’ advisers until the Fund’s suspension in September 2008.
The letters were personalised having regard to the particular circumstances of the
customer. The standard paragraphs in the letters which described the Fund were not
usually amended.

4.16. The template suitability letters informed customers that their investment was in a
single premium, unit linked whole of life assurance policy and as the Fund was unit
linked, the value of their investment could go down as well as up. They also informed
customers that ALICO reserved the right to introduce a 90 day notice period which
would only be applied in very exceptional circumstances. However, the following
standard phrases which appeared in Coutts’ template suitability letters (based on
similar language in ALICO’s literature but adapted and used by Coutts in a different
context) could have given an unclear, unfair or misleading explanation of the Fund:

(1)
That the Fund invested in “money market instruments” and in “a wide range of
assets within the money markets”. The letters should not have referred to the
assets in the Fund as money market instruments without also explaining that a
material proportion of the Fund was invested in assets which were more
complex and had longer maturity dates than assets in a standard money market

fund in order to generate enhanced rates of return. They should also have
explained that because of this, the Fund exposed customers to greater levels of
capital and liquidity risk than a standard money market fund;

(2)
That the Fund was a “cash” product. This was an inaccurate description of the
Fund because it contained a significant proportion of non-cash assets,
including the asset backed securities (which were backed by UK residential
and commercial mortgages and generally had terms to their maturity of three
to five years) and floating rate notes (which generally had terms to their
maturity of one to three years); and

(3)
The Fund could “be seen as an alternative to traditional bank and building
society deposits”. It may not have been clear to customers from these words
and the context in which they were used that, in fact, in order to generate an
enhanced return, the Fund exposed customers to greater levels of capital and
liquidity risk than that typically associated with a traditional bank or building
society deposit account.

4.17. A document summarising the characteristics of a “cash bond” was also enclosed with
suitability letters sent to customers from April 2007. The title of this document was
potentially misleading and it may not have been clear to customers that the Fund was
also comprised of non-cash assets.

4.18. Coutts’ suitability letters should have highlighted and explained the risks, as well as
the benefits of the Fund, in a balanced way. As a result of the issues identified above
the template suitability letters did not adequately explain the risks and there was
therefore a risk that customers were unable to make an informed decision about
whether to invest in the Fund.

4.19. In particular, there was a risk that some customers may have compared the returns on
other financial products with the returns on the Fund without appreciating that they
were not comparing like for like in terms of the risks they were assuming.

Failure to monitor the Fund effectively

4.20. Coutts relied on another member of its group to undertake an annual review of the
Fund with a view to determining whether the Fund should continue to be sold by
Coutts. However, Coutts did not adequately consider how the Fund was changing
over time and how it had been described to customers: for example, how changes in
the Fund’s asset composition and market developments could impact on the Fund over
time. This information affected the level of risk associated with the Fund and
therefore whether any changes should be made over time as to how the Fund was sold.

Risk of unsuitable sales

4.21. The FSA considers, based on its review of sales files, that there was a significant risk
that a material number of unsuitable sales have been made. The FSA’s review did not
include customer contact and, as such, was not able to determine if actual unsuitable
sales were made.

7


Failings in relation to risk to capital

4.22. Many Coutts customers had stated that they were looking for a short term cash
position or a cash type alternative with a higher rate of return than a bank or building
society account. Others described themselves as risk averse and wanted to avoid the
risk of a bank or building society default associated with a typical deposit account.
Some Coutts customers wanted to invest in a product with capital protection.

4.23. Coutts recommended the Fund to customers which included the types of customer
referred to above. However, the Fund was potentially unsuitable for such types of
customer because a significant proportion of its assets were not cash or cash
alternatives (which is what those customers appear to have requested) and because the
Fund exposed them to a level of capital risk which was greater than they appeared
willing to accept.

4.24. Coutts’ customers who invested in the Fund generally indicated that they had a
limited appetite for investment risk. However, they were chasing returns which were
better than those offered on a typical bank deposit account. By recommending the
Fund to these customers, Coutts aimed to meet their objectives of achieving a high
level of return. However, Coutts’ advisers should have drawn to their attention the
fact that there were mis-matches in their investment objectives in that they could not
achieve the level of return they were seeking without also being exposed to an
increased level of capital risk. They should have advised customers in relation to their
competing investment objectives and assisted them to make trade-offs between them.
However, the FSA has found little or no evidence in the sales files it has reviewed of
Coutts’ advisers having had appropriate discussions with customers about this trade-
off in risks and rewards when recommending the Fund.

Failings in relation to diversification

4.25. In the files it has reviewed as part of its investigation, the FSA has identified
customers who have been advised to invest what Coutts understood to be up to 100%
of their total investment assets, comprising millions of pounds, in the Fund.
Approximately 26% of customers who remained in the Fund at the time of its
suspension had been advised to invest more than half of their investment assets in the
Fund.

4.26. Coutts sales files for these customers do not evidence a sufficiently robust rationale
for this level of investment in the Fund for many of these customers. These customers
were exposed to an unacceptable risk of their investment assets not being
appropriately diversified.

4.27. Although the Fund’s underlying assets were diverse, by investing so high a proportion
of their overall wealth into one product, customers were overexposed to risks
associated with a single fund provider and to the risk of the Fund failing to be able to
meet withdrawal requests in the ordinary course because of the long dated nature of
some of its assets (a risk which in fact crystallised).

4.28. Although Coutts had a general policy on diversification of investment products, that
policy did not apply to the Fund. Coutts failed to give any specific guidance to its
advisers on how diversified customers’ investments in the Fund should be.

Failure to respond appropriately to the changing market conditions in late 2007
and during 2008

4.29. In late 2007 and during 2008 there was increased uncertainty with regard to the
market value and liquidity of some of the underlying assets of the Fund. These issues
particularly affected the asset backed securities (which were primarily backed by UK
residential and commercial mortgages) and floating rate notes in the Fund. As a
result, during this period, there was an increased risk of the Fund suspending
redemptions and of customers suffering a loss because:

(1)
the market value of a material proportion of the Fund’s assets dropped to
below their book value. This gave rise to an increased likelihood of ALICO
changing the valuation approach for the Fund’s units so that they reflected the
market value of those assets rather than their book value. This would have
resulted in a decrease in the value of the Fund’s units and consequently a drop
in the value of customers’ investments in the Fund; and

(2)
there was speculation in the press about the financial stability of ALICO’s
parent company, AIG. Together with the volatile market conditions, this
increased the risk of a run on the Fund. In this event, ALICO was unlikely to
be able to meet all withdrawal requests without having to sell quickly some of
the longer dated and less liquid assets in the Fund at below book value. A
significant increase in withdrawals could have forced ALICO to suspend
withdrawals from the Fund to allow it to sell assets and fairly value customers’
units in the Fund (a risk which in fact crystallised in September 2008).

4.30. In response to the changing market conditions, Coutts initiated discussions with
ALICO to obtain additional information about the Fund. Coutts took comfort from
ALICO’s decision in late 2007 to begin to increase the overall cash composition of the
Fund in view of market conditions by decreasing the proportion of asset backed
securities in the Fund and increasing the proportion of overnight cash. It met ALICO
on two occasions, obtained further information on the assets held within the Enhanced
Fund (in particular confirming that there was no exposure to US subprime mortgages),
and monitored outflows as well as the increasing cash composition of the Fund.

4.31. In response to speculation in the press about the financial stability of AIG, ALICO's
parent company, Coutts investigated and reconfirmed the ringfencing in place to
protect customer investments in the Fund from the financial position of AIG, drew
comfort from this protection, and updated sales advisers about this ringfencing.
Coutts also continued to monitor press commentary on the position of AIG through
the middle of 2008, when there continued to be differing opinions in the market about
the extent of AIG’s exposure to US subprime mortgages.

4.32. Whilst Coutts’ above actions were in themselves appropriate, overall they amounted
to an insufficient response to the increased risks to the Fund which Coutts had
identified. In particular, these actions did not adequately mitigate the risk of a
suspension of the Fund or of customers suffering a drop in the value of their
investment. The failure to react properly meant that Coutts did not take adequate
steps to address the interests of customers. In particular, Coutts:

(1)
did not properly explain these risks or their impact to its advisers, although it
did make available to its advisers some information received from the product
provider about the assets underlying the Fund. Coutts did not therefore ensure
that its advisers were in a position to take the above risks into account when
assessing whether the Fund was suitable for new customers. Advisers were
inappropriately reassured about the Fund because they were given incomplete
information;

(2)
failed adequately to disclose the issues affecting the Fund to new customers, or
alternatively stop selling the Fund; and

(3)
did not take appropriate action to ensure that advisers who sought to reassure
existing customers inquiring about their investment in the Fund provided a fair
explanation of the risks.

Failure to adequately investigate and address questions raised about past sales

4.33. In addition, from December 2007, Coutts became aware of, and was considering, the
questions detailed below about how it had previously sold the Fund. In particular, a
sales adviser flagged the need for advisers to understand that enhanced funds are not
like funds that invest in short term, highly rated government debt. Coutts became
aware through discussions with four of its advisers in January 2008 that some of them
did not know all of the types of assets in which the Fund was invested.

4.34. Between December 2007 and February 2008, questions were raised by a senior
member of staff as to whether customers who remained invested in the Fund may
have been exposed to material liquidity risk for some time without their knowledge
and whether advisers were aware of, and communicating to customers, the higher risk
profile of the Fund compared to other products. It was also suggested by that staff
member that Coutts investigate whether the assets of customers of the Fund were
adequately diversified.

4.35. Despite these issues having been highlighted, Coutts failed to take prompt and
effective action to address them. For example, it did not carry out a review of past
sales of the Fund to determine whether its risks had been adequately highlighted to
customers and whether they received a suitable recommendation to invest in the Fund,
until after the suspension of the Fund (see paragraphs 4.37 to 4.40 below). Nor did
Coutts ensure its advisers were adequately informed about the Fund to be able to
determine whether it was suitable for prospective customers or be in a position to
respond appropriately to queries from existing customers.

4.36. In respect of the diversification issue, Coutts did conduct an investigation into its top
13 customers by value of their investment in the Fund which revealed that some
customers, who had millions of pounds invested in the Fund, had between 50% and
90% of their overall investment assets in it. Whilst there might have been a rationale
for such levels of investment, further consideration should have been given to this and
its impact, if any, on the position of other customers.

Inadequate compliance sales review

4.37. Between October 2008 and July 2009 Coutts carried out a compliance review of its
sales of the Fund to customers who remained invested in the Fund as at 15 September
2008. However, the review was inadequate in that it failed to adequately address
suitability and disclosure failures by Coutts’ advisers. Nor was the review completed
in a timely manner.

4.38. Coutts carried out the review in response to a significant number of complaints it
received following the Fund’s suspension on 15 September 2008 from customers who
it had advised to invest in the Fund. Most of these complaints were in relation to
allegations of unsuitable advice and misleading information.

4.39. The quality of the checklist used by Coutts’ compliance personnel for carrying out the
review was poor. In particular:

(1)
there was nothing in the questionnaire which prompted those conducting the
review to consider whether the right product was recommended to the
customer in view of their financial circumstances and objectives; and

(2)
the questionnaire was process driven and not customer outcome focussed.

4.40. As a result of its review, Coutts identified 10 clients which it considered were entitled
to redress and offered them redress in the form of either a settlement sum or a limited
recourse loan pending maturity of the Protected Recovery Fund.

Impact on customers

4.41. A total of 247 Coutts customers with investments totalling £748 million were invested
in the Fund on the date of its suspension on 15 September 2008.

4.42. 239 customers (97%) opted to withdraw 50% of their investment (realising its full
value) and opted to transfer some or all of the remaining 50% to ALICO’s Protected
Recovery Fund. As at 17 October 2011, customers who transferred 50% of their
investment into the Protected Recovery Fund have, taking into account distributions
made from that Fund, recovered approximately 99% of the accrued value of their
entire investment as at 14 December 2008. If these customers keep their investment
in the Protected Recovery Fund until 1 July 2012, ALICO has guaranteed to
customers that they will get back 100% of this proportion of their investment based on
its value on 14 December 2008. However, these customers have lost the opportunity
to earn an investment return on this proportion of their investment since that date.
Coutts has offered them loans at one percent over the Bank of England Base Rate up
to the value of their investment in the Protected Recovery Fund. 46 customers have
opted to utilise this loan.

4.43. Eight customers withdrew the entirety of their investment before 14 December 2008
and suffered a loss of approximately 13.5% of its accrued value. Of these, 5 suffered
a capital loss.

4.44. Coutts has received complaints concerning the Fund from 93 (38%) customers who
were invested in the Fund at the time of its suspension in September 2008.

4.45. In addition, four sets of legal proceedings have been commenced against Coutts by
Coutts’ customers in relation to the recommendations they received to invest in the
Fund. These proceedings have not yet concluded.

4.46. Coutts will compensate all customers who have suffered loss as a result of any failings
on its part.

5.
FAILINGS

5.1.
On the basis of the facts and matters set out above, Coutts has breached Principle 9
(Customers: relationships of trust).

5.2.
Principle 9 states:

“A firm must take reasonable care to ensure the suitability of its advice and
discretionary decisions for any customer who is entitled to rely upon its judgement.”

5.3.
By reason of the matters set out in paragraphs 4.10 to 4.3640 above, Coutts has
breached Principle 9 by failing to establish and maintain an adequate sales process for
the Fund and thereby failing to take reasonable care during the Sales Period to ensure
the suitability of its advice in relation to the Fund for its customers. In addition,
Coutts failed to respond appropriately to issues affecting the Fund in the period
December 2007 to 15 September 2008, investigate and address questions about its
past sales of the Fund identified during that period and carry out an adequate
compliance review of its sales of the Fund between October 2008 and July 2009.

6.
SANCTION

Relevant guidance on sanction

6.1.
The FSA has considered the disciplinary and other options available to it and has
concluded that a financial penalty is the appropriate sanction in the circumstances of
this particular case.

6.2.
In determining the financial penalty, the FSA has had regard to guidance contained in
DEPP and ENF, which formed part of the Handbook during the Relevant Period.
During that period, both DEPP 6.5 and Chapter 13 of ENF contained some of the
factors that may be of particular relevance in determining the appropriate level of a
financial penalty. However, DEPP 6.5.1 G and ENF 13.3.4 G both stated that the
criteria listed in DEPP 6.5 and ENF 13.3 respectively were not exhaustive and that all
relevant circumstances of the case should be taken into consideration. In determining
whether a financial penalty is appropriate and the amount, the FSA is therefore
required to consider all the relevant circumstances of the case.

Deterrence

6.3.
The FSA considers that in this case, the financial penalty imposed will promote high
standards of regulatory conduct by deterring firms who have breached regulatory
requirements from committing further contraventions, helping to deter other firms
from committing contraventions and demonstrating generally to firms the benefit of

compliant behaviour. It will strengthen the message to the industry that it is vital for
firms to take reasonable care to ensure the suitability of their advice to customers.

The nature, seriousness and impact of the breach in question

6.4.
The FSA has had regard to the seriousness of the breaches, including the nature of the
requirements breached, the number and duration of the breaches, the number of
customers who were exposed to risk of loss and whether the breaches revealed serious
weakness of the management systems or internal controls. In view of these, the FSA
considers that Coutts’ breaches are of a serious nature. The failings identified within
Coutts existed for more than four and half years.

The extent to which the breach was deliberate or reckless

6.5.
The FSA does not consider that the misconduct on the part of Coutts was deliberate or
reckless. However, the FSA considers it particularly serious that Coutts failed to take
reasonable care to establish and maintain an adequate sales process for the Fund and
ensure the suitability of its advice throughout the Relevant Period. The FSA also
considers it particularly serious that Coutts failed to take prompt and appropriate
action to address questions raised by a senior member of staff in relation to the Fund
and its sales of it.

The size, financial resources and other circumstances of the person on whom the
penalty is imposed

6.6.
The FSA has taken into account Coutts’ size and financial resources. Coutts is a
major private bank in the UK. As such, it has a leading competitive position in the
market and its practices set an example for others in the financial services industry.
During the Relevant Period, Coutts’ gross income from sales of the AIG Life Premier
Access Bond and Premier Bond Standard Rate Variable Fund and Enhanced Rate
Variable Fund was approximately £10.5 million. During the Relevant Period, Coutts
advised on investments in the Fund to approximately 427 customers. The total value
of investments in the Fund by Coutts’ customers during this period was £1.45 billion.

Conduct following the breach

6.7.
In consultation with the FSA, Coutts has agreed to undertake a review, overseen by an
independent third party, in relation to all of its sales of the Fund to customers who
remained invested at the time of the Fund’s suspension on 15 September 2008 to
ensure that customers do not lose out as a result of the failings identified in this
Notice. For any sales which are found to be unsuitable, redress will be paid to the
customers to ensure that they have not suffered financially.

6.8.
Since the commencement of the FSA’s investigation, Coutts and its senior
management have worked in an open and cooperative manner with the FSA.


7.
PROCEDURAL MATTERS

Decision maker

7.1.
The decision which gave rise to the obligation to give this Final Notice was made by
the Settlement Decision Makers.

7.2.
This Final Notice is given to Coutts under and in accordance with section 390 of the
Act.

Manner of and time for payment

7.3.
The financial penalty must be paid in full by Coutts to the FSA by no later than 21
November 2011, 14 days from the date of the Final Notice.

If the financial penalty is not paid

7.4.
If all or any of the financial penalty is outstanding on 22 November 2011, the FSA
may recover the outstanding amount as a debt owed by Coutts and due to the FSA.

7.5.
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of information
about the matter to which this notice relates. Under those provisions, the FSA must
publish such information about the matter to which this notice relates as the FSA
considers appropriate. The information may be published in such manner as the FSA
considers appropriate. However, the FSA may not publish information if such
publication would, in the opinion of the FSA, be unfair to Coutts or prejudicial to the
interests of consumers.

7.6.
The FSA intends to publish such information about the matter to which this Final
Notice relates as it considers appropriate.

FSA contacts

7.7.
For more information concerning this matter generally, contact Lance Ellison (direct
line: 020 7066 2422 / fax: 020 7066 2423) of the Enforcement and Financial Crime
Division of the FSA.

………………………………………………..

William Amos
FSA Enforcement and Financial Crime Division