FINAL NOTICE

To:


Santander UK plc

1
ACTION

1.1
For the reasons given in this Notice the Authority hereby imposes on Santander UK

plc (“Santander”) a financial penalty of £12,377,800.

1.2
Santander agreed to settle at an early stage of the Authority’s investigation.

Santander therefore qualified for a 30% (stage 1) discount under the Authority’s

executive settlement procedures. Were it not for this discount, the Authority would

have imposed a financial penalty of £17,682,730 on Santander.

2
SUMMARY OF REASONS

2.1
It is of fundamental importance that firms providing investment services to retail

customers take reasonable care to ensure that:

a)
they give suitable advice;

b) where they promote and agree to provide an ongoing review service to check

that investments continue to meet customers’ needs, including where firms

2

hold themselves out as providing discretionary management services, that

adequate steps are taken to ensure that the service promised is provided; and

c)
financial promotions and communications with customers in relation to

investments are fair, clear and not misleading.

2.2
Santander’s provision of investment advice was subject to examination in 2012

during the Authority’s mystery shopping review of retail investment advice and

Phase 2 of the Wealth Management thematic review. These thematic reviews gave

rise to significant concerns about the quality of Santander’s advice and

communications with its retail investment customers.

2.3
The Authority has found that there were significant deficiencies in Santander’s

processes for ensuring that:

a)
customers received suitable advice;

b) in relation to its Premium Investments, regular reviews were carried out to

check that investments continued to meet customers’ needs and that the

service promised to customers was actually provided; and

c)
financial promotions and communications with customers were fair, clear and

not misleading.

2.4
These deficiencies affected the sales of retail investment products by its

Bancassurance business in the period 1 January 2010 to 31 December 2012 and

some of its financial promotions and communications with customers in the period

1 April 2004 to 31 December 2012. As a consequence Santander breached

Principles 7 (Communications with clients) and 9 (Customers: relationships of

trust) of the Authority’s Principles for Businesses and related Rules. In particular, it

breached Principle 7 by failing:

a)
to ensure that during the investment sales process appropriate disclosure

about Santander, its products and services was provided to customers and that

its communications with customers were fair, clear and not misleading; and

b) to ensure that certain of its financial promotions and communications in

relation to its Premium Investments were fair, clear and not misleading.

2.5
Santander breached Principle 9 by failing to ensure that:

3

a)
it had an adequate process in place to ensure that its advisers gathered and

took into account all information that was necessary to establish the suitability

of investment recommendations;

b) it had an adequate process in place for establishing the level of risk its

customers were willing and able to take;

c)
customers
received
adequate
explanations
of
why
investment

recommendations were suitable for them;

d) there was an adequate process in place, in relation to its Premium

Investments, to ensure that regular reviews were carried out to check that

investments still met customers’ needs;

e)
it had implemented adequate procedures for monitoring the quality of

investment advice and remedial action taken where advice had been found to

be unsuitable or unclear; and

f)
new advisers received adequate training before they started to give advice to

customers.

2.6
Santander’s failures gave rise to a significant risk of customers being

recommended, making and remaining in investments that were not suitable for

them.

2.7
Details of the relevant Principles and Rules breached by Santander (and any other

relevant regulatory provisions) are set out in Annex A to this Notice.

2.8
The Authority considers Santander’s failings to be serious because:

a)
they were systemic and related to a large number of customers (including

some who may have been vulnerable due to age, their ability to replace

capital, medical or other personal circumstances);

b) the Authority has repeatedly stressed in its publications the importance of

firms acting in a manner consistent with the points set out at a paragraph 2.1

above;

c)
Santander’s response to the Authority’s letter to Wealth Management Chief

Executive Officers dated 14 June 2011 was too positive and misleading in

relation to its description of its tools and processes and the quality of outcomes

they produced for customers; and

d) on 16 February 2012 the Authority fined Santander £1.5 million for providing

customers with unclear information in relation to the scope of cover for certain

structured products under the Financial Services Compensation Scheme

(“FSCS”).

2.9
The Authority recognises that Santander proactively made a number of

improvements to its investment sales process between 1 January 2010 and 31

December 2012.

2.10 The Authority also recognises that during the period 1 January 2010 to 31

December 2012 customer complaints in relation to Santander’s retail investment

sales were low and customer detriment identified by Santander’s monitoring and

follow up work was low.

2.11 For those customers who invested from January 2010, detriment may also be low

as at the date of this Notice, due to increases in the value of most stock markets

since the start of 2010. However, although the current level of detriment may be

low, there is potential for this to change and for customers to suffer losses on their

investments in the future during downturns in the markets. In view of this, the

Authority has acted to ensure that Santander takes appropriate action. Following

discussions with the Authority in relation to the form of that action, Santander

proposed and has agreed to:

a)
conduct a customer contact exercise writing to all affected customers

highlighting the risks and objectives of their investments and, depending on

the investment and whether the customer remains invested or has exited the

investment, offering customers the opportunity to withdraw from their

investment or have a review of the sale;

b) conduct a redress exercise for both past and current Premium Investments

customers in relation to services promoted and charged for that differed from

the services customers received; and

c)
design and implement a new annual review process which complies with all the

Authority’s Principles and Rules, for all customers who remain invested in

Premium Investments following the customer contact exercise.

2.12 Santander has also agreed to compensate any customers who, during these

exercises, are found to have suffered losses as a result of any failings on its part.

These exercises will be overseen by an independent third party.

5

2.13 Customers
who
made
investments
in
Portfolio
Investments,
Structured

Investments and Investment Bonds in the period 1 January 2010 to 31 December

2012, and Premium Investments customers who made investments in the period 1

April 2004 to 31 December 2012 and have any questions relating to the advice or

service they received can get further information by visiting the following website:

2.14 This action supports the Authority’s operational objectives of securing an

appropriate degree of protection for consumers, and promoting effective

competition in the interests of consumers.

3
DEFINITIONS

3.1
The definitions below are used in this Final Notice:

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

“advisers” means Santander’s Customer Relationship Managers and Financial

Planning Advisers;

“the Authority” means the body corporate previously known as the Financial

Services Authority and renamed on 1 April 2013 as the Financial Conduct

Authority;

“Bancassurance” means the selling of insurance, banking and investment products

through the same sales channel;

“COB” means the Authority’s Conduct of Business in force prior to 1 November

2007;

“COBS” means the Authority’s Conduct of Business Sourcebook in force from 1

November 2007;

“Dear CEO Letter” means the Authority’s letter sent to CEO’s or other senior

management of Wealth Management firms on 14 June 2011. In Santander’s case,

the letter was not addressed to Santander’s CEO, but to another member of senior

management;

“DEPP” means the Authority’s Decision Procedure & Penalties Manual;

“FSCS” means Financial Services Compensation Scheme;

6

“Investment Advice Thematic Review” means the Authority’s thematic review to

assess the quality of lump-sum investment advice within the retail banking sector

between March and September 2012;

“Non-Premium Investments”, for the purpose of this Notice, means Portfolio

Investments, Investment Bonds and Structured Investments, as detailed in

paragraph 4.2 below;

“Premium Investments” means a range of risk-rated portfolios (consisting of up to

eight sub-funds) typically offered to customers with funds in excess of £50,000, as

detailed in paragraph 4.2 below. Prior to November 2007 Premium Investments

were known as Inscape Investments;

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

“Santander” means Santander UK plc;

“Santander Group” means the global financial services group of companies of which

Santander is a member;

“the Thematic Reviews” means the Investment Advice Thematic Review and the

Wealth Management Thematic Review; and

“Wealth Management Thematic Review” means the Authority’s thematic review to

assess the suitability of advice/discretionary investment management decisions,

systems and controls and strategies of the wealth management arms of six major

retail banks in 2012.

4
FACTS AND MATTERS

4.1
Santander operates primarily in the UK as part of a major global services group

offering a wide range of personal finance products and services. It has been

authorised by the Authority to provide investment advice to retail customers since

1 December 2001. Santander operates a network of 1,200 branches through which

its historic Bancassurance business provided retail investment advice to

approximately 295,000 customers in relation to 349,000 investment products, with

investments totalling in the region of £7 billion in value during the period 1 January

2010 to 31 December 2012.

7

4.2
Santander’s advisers would meet with customers on a face-to-face basis and would

generally adopt a two-stage fact-finding and advice process. Between 1 January

2010 and 31 December 2012 advisers used the same investment sales process to

sell the following investment products:

a)
Portfolio Investments: a range of open-ended investment funds for growth and

income, with varying asset mix depending on the fund;

b) Investment Bonds: a single premium insurance-based investment with five

year and six year guarantee options;

c)
Structured Investments: fixed-term investments which generally offered 100%

capital protection at maturity with a minimum return (subject to solvency of

Santander), with additional returns linked to the performance of a specific

index (for example FTSE 100 index or inflation linked); and

d) Premium Investments: a range of risk-rated portfolios (consisting of up to

eight sub-funds) typically offered to customers with funds in excess of

£50,000. The portfolios were designed to align with the specific risk appetite

and return characteristics of segmented customer groupings. Selection of the

investment managers and the asset allocation decisions for each portfolio was

made in line with a house model and there was no capacity to tailor the

portfolios to an individual’s needs.

4.3
The investment funds underlying these products were predominantly managed by

members of the Santander Group.

4.4
Santander marketed Premium Investments as if they were akin to a traditional

wealth management service, charging customers for asset allocation and active

management of portfolios. Customers who invested in Premium Investments were

offered a range of ancillary services including a dedicated Customer Relationship

Manager and support team, monthly statements, automatic ISA-wrapping services,

quarterly performance reports and regular reviews.

4.5
Some of Santander’s failings, as detailed in this Notice, expressly relate to the

promotion and provision of its Premium Investments only. However, as Santander

used the same investment sales process for Premium and Non-Premium

Investments, all other failings relate to sales or potential sales of both.

4.6
Santander’s own assessment of its retail investment customers was that they

tended to have ‘very low’ to ‘medium’ risk appetites. Its customers had an average

age of 60 years. Approximately 30% of Santander’s customers were over 65 years

of age. The majority of customers invested in either Santander’s Portfolio

Investments or Structured Investments and the average investment per customer

was in the region of £24,000.

4.7
Santander’s advisers were provided with tools, template documents and guidelines

covering the end-to-end investment sales process, including the following key

stages:

a)
disclosure;

b) fact-finding;

c)
investment returns forecasting;

d) risk profiling; and

e)
suitability reports.

(a) Investment Sales Process Gap Analysis

4.8
In March 2011 the Authority published Finalised Guidance ‘Assessing Suitability:

Establishing the risks that a customer is willing and able to take and making a

suitable investment selection’ which confirmed pre-existing standards, but did not

create any new obligations for firms. Following this, Santander conducted a gap

analysis between its retail investment sales process and the Authority’s

requirements (“Investment Sales Process Gap Analysis” or “Gap Analysis”). The

results were reported internally on 13 June 2011. The Gap Analysis identified that

Santander’s investment sales process ‘did not’, or ‘did not fully’ meet the

Authority’s requirements in some respects. In particular, there were deficiencies

identified in Santander’s fact-finding process, and its risk profiling questionnaires

(the “Risk Profiling Questionnaire”) and consideration of a customer’s capacity for

loss. High priority recommendations were made to address these deficiencies.

(b) Wealth Management Review – Response to Dear CEO Letter

4.9
Following the issues identified by Phase 1 of the Wealth Management Thematic

Review in 2009/2010, a Dear CEO Letter was sent to the industry on 14 June

2011, requesting that each firm satisfy itself that it was:

‘… meeting our suitability requirements and to mitigate the risk of future non-

compliance, we expect that you will want to consider the client information

contained in your client files and if it is likely to satisfy your obligations regarding

customers’ desired investment portfolios.’

4.10 Santander recognised that although Premium Investments were sold using the

same process as its other retail investment products, they could be aligned with

the wealth management market and so fell within the ambit of the Dear CEO

Letter. Accordingly, Santander instructed external consultants to review a sample

of sales files in the preparation of its response to the letter. The external

consultants’ review of 50 of the 70 Premium Investments sales which had been

made in the first half of 2011 concluded that only 58% of the sales were suitable,

12% were unsuitable and, for 30% of sales it was not clear that they were

suitable. High-level trends were identified including:

a)
recommendations to customers with insufficient capacity for loss;

b) recommendations to customers where there were insufficient details of the

term of the investment; and

c)
inadequate customer risk profiling, due to conflicting facts about a customer’s

attitude to risk.

4.11 The external consultants identified that in more than half of the files the regular

reviews promoted and offered by Santander as a benefit of Premium Investments

had not been booked and there was no clear process for ensuring that a regular

review actually took place.

4.12 In respect of their comments in relation to insufficient capacity for loss and

inadequate risk profiling, the external consultants recommended that Santander’s

investment sales standards and processes be reviewed and updated to ensure that

they were ‘clear, robust, fit for purpose’ and drove the right solutions for end

users.

4.13 Santander responded to the Authority’s Dear CEO Letter on 10 August 2011

‘… we have reflected on the “key concerns” highlighted in your letter.

Our “Business as Usual” management information in respect of Maturities & Re-

investments, Cancellations, Encashments, Customer Complaints and Advice Quality

has been internally reviewed, and has not highlighted any areas of concern.

To support our response to your enquiry we have undertaken a focussed sampling

of an appropriate number of customer files based on our proposition. This

assessment focussed on the “key areas of concern” in your letter and has

supported that our tools and processes work well delivering appropriate outcomes

for the great majority of customers.

We will take the lessons we have learnt from this exercise and build these into our

ongoing review of our sales process and suitability guidelines.’

4.14 This response was too positive and misleading in the light of the results of

Santander’s Investment Sales Process Gap Analysis and the findings of the

external consultants. Santander should have informed the Authority that it had

identified that its investment sales process did not fully meet the Authority’s

requirements, the outcome of the file review exercise and the steps that it

proposed to take to remedy the issues highlighted. Santander informed the

Authority in early 2012 that in response to the Authority’s papers on risk and

suitability, it was making ‘ongoing improvements and enhancements’ in relation to

suitability and conduct risk. Santander did not however make the Authority aware

of the extent of the issues that had been identified and the details of the work that

Santander had undertaken to remedy them until October 2012. In early 2012,

Santander introduced a new process in respect of its communications with the

Authority.

(c) Retail Sales Process Review

4.15 In November 2011 Santander’s internal audit conducted a retail sales review which

included detailed testing of a sample of 147 investment sales files to assess

advisers’ compliance with the investment sales process. This identified issues in

relation to:

a)
the minimum sum or cash reserve that a customer should retain in deposit

based savings to balance the risk of investments rising or falling in value. In

15% of the files reviewed these were not being calculated properly, although in

those files the customers retained more capital than was required by

Santander’s internal policy;

b) the system-generated investment returns forecaster (the “Forecaster”) used by

advisers to show customers the potential returns on investments compared to

cash deposits. The Forecaster did not contain details of the individual fund

being recommended and calculated forecasts for a single term greater than 5

years. This resulted in 44% of the forecasts reviewed not reflecting the

customer’s investment, which was potentially misleading to customers;

c)
Risk Profiling Questionnaires not being on file or not being fully completed,

such that there was no evidence to support the risk profile documented in the

customer fact-finding in 14% of cases reviewed; and

d) suitability reports not matching the information recorded in customer fact-

finding in 16% of cases reviewed.

(d) Investments Health Check

4.16 Santander took steps to remedy the deficiencies identified by its Investment Sales

Process Gap Analysis, internal audit and external consultants during 2011.

However a second review conducted by different external consultants in the fourth

quarter of 2011, reported in early 2012 that:

a)
in 39% of a sample of 59 investment sales from 2011, including ‘high risk’

sales, the suitability of the recommendation was unclear, highlighting similar

issues to those highlighted in the review of Premium Investment sales in mid-

2011, in particular, inadequate risk profiling and a failure to consider capacity

for loss;

b) there were ‘significant issues in relation to sales processes weaknesses’ that

had been highlighted in the Authority’s publications in early 2011, including the

finalised guidance, ‘Assessing Suitability’. These weaknesses included the fact-

finding process; the Risk Profiling Questionnaires and consideration of a

customer’s capacity for loss; as well as weaknesses with the Advice Quality

Department’s (“Advice Quality”) sampling; and

c)
some of the work to address the weaknesses was not progressing quickly

enough and needed to be prioritised, including the roll out of new Risk Profiling

Questionnaire and capacity for loss questions, and changes to the fact-finding

process and suitability reports. The external consultants advised Santander

that the weaknesses needed to be addressed immediately because they would

be of significant concern to the Authority.

4.17 Prior to the external consultants’ involvement, Santander had already commenced

a project dedicated to addressing these investment sales process deficiencies and

further improvements were made in the first half of 2012. However, it was not until

June 2012, over a year after Santander conducted its Investment Sales Process

Gap Analysis that a new Risk Profiling Questionnaire and other key steps to remedy

the investment sales process deficiencies were rolled out to advisers.

(e) Santander’s Mystery Shops

4.18 In addition to the reviews outlined in paragraphs 4.8 - 4.17 above, between August

2011 and August 2012 Santander used an external third party to conduct 66

mystery shops of its investment sales process. While Santander issued

communications in relation to some of the issues seen in the mystery shops and

took steps to develop, discipline, and, in appropriate cases, de-authorise advisers

whose mystery shopping results evidenced investment sales process failings,

Santander did not aggregate the results of its mystery shops to provide senior

management with a holistic view of the issues identified. Had Santander

aggregated the results it would have found that:

a)
over 60% of advisers who were subject to mystery shops failed the

assessment so far as Santander’s sales process was concerned;

b) only 65% of the mystery shop recommendations were suitable;

c)
in 18% of the mystery shops recommendations were unsuitable;

d) in 17% of the mystery shops the suitability of the recommendation was

unclear; and

e)
the mystery shops highlighted potentially wider, underlying issues in relation

to the investment sales process and its implementation by advisers.

4.19 Nine of Santander’s mystery shops took place between August and September

2012 following the introduction of the new Risk Profiling Questionnaire and other

process changes designed to remedy the deficiencies highlighted in 2011. Despite

these changes and associated training, little improvement in the results of the

mystery shopping was seen, with many of the same issues arising as were seen in

the earlier mystery shops.

(f) The Thematic Reviews

4.20 The quality of Santander’s investment advice was tested by mystery shopping as

part of the Authority’s thematic review to assess the quality of lump-sum

investment advice within the retail banking sector. Between March and September

2012 a market research firm conducted mystery shops of Santander’s lump-sum

investment advice process. The Authority reviewed a significant sample and found

that:

a)
only 63% of the mystery shop recommendations were suitable;

b) in 11% of the mystery shops recommendations were unsuitable;

c)
in 26% of the mystery shops the suitability of the recommendation was

unclear; and

d) in 48% of the mystery shops disclosure was unacceptable.

Wealth Management Thematic Review into Premium Investments sales

4.21 Santander’s Premium Investments sales were also reviewed by the Authority as

part of Phase 2 of the Wealth Management Thematic Review. This review assessed

the suitability of advice/discretionary investment management decisions, systems

and controls and strategies of the wealth management arms of six major retail

banks. The review, which considered a small sample of files, gave rise to significant

concerns in relation to the records demonstrating the suitability of Santander’s

Premium Investments; the financial promotions for Premium Investments; fees

and charges relating to the services provided to customers, and the effectiveness

of controls in relation to the provision of on-going reviews and advice. As part of

this review Santander’s Compliance Department (“Compliance”) assessed the

suitability of recommendations in a sample of Premium Investments sales. They

found that 5% of the recommendations in the sample were unsuitable and in 30%

of cases the suitability of the recommendation was unclear.

4.22 The results of the Investment Advice Thematic Review were communicated to

Santander in December 2012. Santander promptly took the decision to suspend its

advisers from providing investment advice and in early 2013 it ceased to offer

retail investment advice to customers, save for those with maturing investments.

4.23 The Thematic Reviews, along with the reviews conducted by Santander, its

external consultants and its internal audit, all highlighted significant deficiencies in

Santander’s investment sales process and its implementation during the period 1

January 2010 to 31 December 2012. These deficiencies gave rise to a significant

risk of customers being recommended, making and remaining in investments that

were not suitable for them.

4.24 Significant changes to Santander’s senior management meant that responsibility

for the investment sales process lay with a large number of different Significant

Influence Function Holders, some of whom were in role for a very limited period of

time. In the circumstances, the failures are Santander’s rather than the personal

responsibility of any individual.

C. Deficiencies in Santander’s Investment Sales Processes

(a) Disclosure: Deficiencies in disclosure and communications with

customers

4.25 Providing clear information up front about the service to be provided, what it is

going to cost and the main features and risks of a product is essential to delivering

fair outcomes for customers. However, Santander failed to ensure that appropriate

disclosure about Santander, or its products and services, was provided to

customers and that its communications with customers were fair, clear and not

misleading. Both Santander and the Authority’s mystery shops highlighted

significant
issues
with
the
disclosure
provided
by
advisers
and
their

communications with customers during the investment sales process.

4.26 In Santander’s mystery shops:

a)
although customers may have been provided with documentation setting out

the scope of FSCS cover, 14% of advisers failed adequately to explain FSCS

protection;

b) 33% of advisers failed adequately to explain the cooling off period and

implications of cancellation;

c)
32% of advisers failed adequately to explain key documentation including the

Cost of Sale, Terms and Conditions and Key Features documents;

d) 44% of advisers gave a poor explanation of Santander, products and/or

market risks; and

e)
94% of advisers failed to provide customers with adequate disclosure and/or

all of the documents required in accordance with Santander’s own process.

4.27 The Authority’s own mystery shops revealed a similar picture. In 48% of these,

advisers breached COBS Rules relating to disclosure and communications with

customers. The majority of the breaches were driven by advisers failing to provide

customers with appropriate information in a durable medium about the firm and its

services. The Authority also found instances of advisers providing information

verbally which was incorrect or misleading in that:

a)
15% failed to provide a balanced explanation of the investment’s returns;

b) 22% provided misleading information about the product; and

c)
28% made a misleading or unclear cost disclosure, and/or failed to provide

disclosure about costs.

4.28 This included:

a)
making statements suggesting that an investment ‘will likely double’ and

incorrectly stating that the ‘FTSE was 8000-9000 in 2008’;

b) saying ‘so in ten years it will beat cash by 87%’ even though the customer’s

investment term was only for five years and returns were not guaranteed;

c)
telling the customer that commission was irrelevant and that the customer

would not be paying commission when, in fact, commission was 7.75% for one

of the products; and

d) saying that Santander’s recommendations were ‘backed by the regulator’,

thereby giving the customer a misleading impression of the level of regulatory

oversight or vetting of the advice.

4.29 Santander remedied the deficiencies highlighted by the Authority’s earlier

Enforcement action in relation to unclear information provided to customers about

the scope of FSCS cover for certain structured products and provided training to

new advisers in relation to the scope of FSCS protection. However, the Authority

found that in 15% of mystery shops, advisers made misleading statements, did not

explain and/or did not provide documents in relation to FSCS protection. Some

advisers suggested that FSCS protection was available for all of Santander’s

investment products. Given the monetary and product-related limitations of FSCS

protection, these sorts of statements were misleading.

(b) Fact-finding: Deficiencies in relation to gathering and taking into

account information from customers

4.30 It is essential to gather and take into account all relevant information in relation to

a customer’s financial situation, needs and objectives in order to provide customers

with suitable advice. However, Santander failed to have an adequate process in

place to ensure that advisers gathered and took into account all of the information

they needed to obtain from customers prior to recommending investment products

or when conducting regular reviews to assess whether Premium Investments

continued to meet customers’ needs.

Design of fact-finding process

4.31 The fact-finding stage of Santander’s investment sales process was designed to

gather sufficient hard facts (e.g. age and financial situation) and soft facts (e.g.

opinions and views) about a customer in order to formulate a suitable investment

recommendation. Santander’s advisers were provided with a number of different

templates and an online tool in order to gather all relevant information during the

fact-finding process. However, advisers were not prompted by those tools to

gather and document the following information that was necessary to establish the

suitability of the advice given to customers:

a)
the customer’s knowledge and experience of investments;

b) the customer’s current and future objectives; and

c)
expected future changes in circumstances.

4.32 The guidance and training provided to advisers did not effectively mitigate the lack

of prompts in the templates. Guidance was very high level, did not cover all

necessary information and while advisers were told to record ‘soft facts’, what was

meant by that term was not defined.

4.33 Santander’s Investment Sales Process Gap Analysis also found that advisers were

not prompted to record details of a customer’s health or whether the customer was

potentially vulnerable and, therefore, whether additional care should be exercised

to ensure they were provided with suitable advice. Santander did not define

vulnerability and advisers had full discretion to determine if a customer was

vulnerable. As a result, there was no consistency in the treatment of vulnerable

customers (if they were identified as vulnerable at all).

4.34 Santander took steps to address the deficiencies by increasing the space available

for recording hard and soft facts, introducing a life plan, introducing guidance in

relation to elderly and vulnerable customers and providing training on fact-finding

which included highlighting the need to consider an investor’s previous investment

experience and knowledge. However, it was not until June 2012 that Santander

rolled out a new fact-find addendum tool (the “Fact-Find Addendum”), which

provided automated prompts to advisers to record all soft facts about a customer

and which did not have a character limit. The Fact-Find Addendum was designed to

sit alongside the fact-finding tool and the two documents together constituted the

complete fact-finding record (the “Fact-Find”). However, despite the fact that these

documents constituted the basis for the suitability report and the Fact-Find

Addendum was designed to remedy the deficiencies in gathering information about

customers, the Fact-Find Addendum was not a mandatory part of the process.

Use of fact-finding process

4.35 Santander’s mystery shops highlighted the impact of the deficiencies in

Santander’s guidance and process relating to gathering and taking into account

information from customers:

a)
35% of advisers failed to gather or take into account information in relation to

customers’ current and future objectives including the term of the investment;

b) 41% of advisers failed to gather or take into account information in relation to

a customer’s health; and

c)
48% of advisers demonstrated general weaknesses in gathering or taking

customer information into account.

4.36 The mystery shops also highlighted issues in relation to gathering information

about customers’ previous investment experience and adequate consideration of

the repayment of debt. These findings were mirrored in the reviews conducted by

the Authority and Santander’s external consultants.

4.37 The deficiencies in Santander’s fact-finding process meant that there was an

unacceptable risk of advisers failing to gather and take into account sufficient

information about a customer to enable a suitable recommendation to be made.

Santander was also unable to demonstrate that its recommendations were

suitable.

(c) Investment Returns Forecasting: Deficiencies in Santander’s use of the

4.38 A mandatory part of Santander’s investment sales process involved the use of the

Forecaster, which was a third party stochastic forecast tool. The Forecaster

produced a forecast showing potential returns available by investing in one of

Santander’s investment products versus retaining the capital in a cash account.

4.39 Santander identified the need to review how the Forecaster was used in its

Investment Sales Process Gap Analysis in June 2011. Santander’s external

consultants also noted a risk that the Forecaster, by showing a default period of

ten years, would present a different (and likely more positive) outcome than if

based on a five year analysis. Despite this, the Forecaster in use remained largely

the same until 31 December 2012.

4.40 The Authority’s review identified significant deficiencies in the use of the Forecaster

in that it:

a)
did not confirm the assumptions used for inflation or the assumed investment

returns used to generate the figures provided to the customer; and

b) used a cash rate for comparison (the Bank of England base rate minus 0.5%)

which was misleading in that it was not representative of the actual returns

available in the market at the time (which were often significantly better than

the Bank of England base rate) for customers who were willing to leave their

money on deposit for a fixed term. The use of such a low cash rate

underplayed the returns which could be provided by retaining the capital in a

cash account and therefore made investments appear more attractive.

4.41 In November 2011 Santander’s internal auditors found that 44% of a sample of

investment sales files contained a forecast which did not reflect the details of the

customer’s investment. The Authority’s mystery shops also found instances where

advisers:

a)
emphasised the average or the ‘highest’ return suggested by the Forecaster

without providing sufficient information to the customer on the potential

downside risk attached to the investment. Without a balanced explanation,

there was a danger, particularly when dealing with inexperienced investors,

that the results provided by the Forecaster would be misunderstood or viewed

over-positively; and

b) extended the customer’s required investment term, thereby making potential

returns look far more attractive, particularly when compared to the cash rates.

4.42 The deficiencies in the use of the Forecaster meant that there was an unacceptable

risk of customers being misled about the potential benefits of investments versus

retaining their capital in a cash account and of misunderstanding the potential for

loss associated with the investments recommended to them.

(d) Risk Profiling: Deficiencies in relation to establishing the risk a

customer is willing and able to take

4.43 Santander used Risk Profiling Questionnaires as part of its investment sales

process in order to establish the risk a customer was willing and able to take.

However, there were significant deficiencies with the design and use of the Risk

Profiling Questionnaires which meant that Santander failed to have an adequate

process in place for determining the risk a customer was willing and able to take.

Design of the Risk Profiling Questionnaires prior to June 2012

4.44 The Investment Advice Thematic Review identified significant deficiencies in the

design of Santander’s manual Risk Profiling Questionnaires. In particular that:

a)
the three key questions (and one sub-question) used to determine the level of

risk customers were willing to take (correlated to the six risk profiles for non-

Premium Investments) made the output of the questionnaire overly sensitive

to the answers to individual questions;

b) they contained questions that were both open to interpretation and too

complex for Santander’s target market to understand and answer correctly. For

example, one question asked customers to indicate the period after which they

would consider an ‘alternative investment solution’ if their investment started

to fall in value by ‘as much as 3% each month.’ This question required

customers to calculate a 3% month on month fall in the value of their

investment and then determine how long the fall could continue before they

would consider moving to another investment. The Authority’s mystery shops

showed that this question was not well understood by customers as they did

not appreciate the extent of the potential losses implied by their initial answer

to the question;

c)
the risk categories generated by the Risk Profiling Questionnaires did not

clearly quantify the level of risk that investors would take, creating a risk that

customers, particularly those with little investment experience, were unable to

understand the level of risk to which they would actually be exposed;

d) risk categories that the Risk Profiling Questionnaires produced needed to be

checked against the customer’s knowledge and experience. However, advisers

did not in all cases check whether customers understood the risk categories or

confirm that they reflected the level of risk they were willing to take with their

investments; and

e)
Risk Profiling Questionnaires did not adequately address a customer’s ability to

financially
bear
the
risks
associated
with
the
investment
products

recommended to them (i.e. their capacity for loss) even though it was critical

to the suitability of a recommendation to be able to demonstrate that this was

the case.

4.45 Santander’s own Investment Sales Process Gap Analysis in June 2011 had

identified that the Risk Profiling Questionnaires ‘did not’ or ‘did not fully’ meet the

Authority’s requirements, with the Risk Profiling Questionnaires posing a risk of

‘being too simplistic and aligning customers with a profile’ that was ‘more

adventurous than they expect’.

Use of the Risk Profiling Questionnaires prior to June 2012

4.46 Santander’s internal audit and mystery shops highlighted issues with the use of the

Risk Profiling Questionnaires, with nearly a quarter of advisers who were subject to

mystery shops failing to complete a Risk Profiling Questionnaire fully and/or

inappropriately leading customers toward certain answers. The Authority’s mystery

shops also revealed instances of advisers failing to use the Risk Profiling

Questionnaire properly, or, in some cases, at all.

4.47 Santander’s external consultants also found evidence of unclear and/or unsuitable

recommendations due to customers having insufficient capacity for loss, noting

that the risk profiling process did not include any consideration of a customer’s

capacity to bear loss, or examination of the risk profiling outcome and other

information viewed in the round to determine whether a recommendation was

suitable overall.

4.48 The inherent limitations of the Risk Profiling Questionnaires placed significant onus

on individual advisers to check whether customers understood the output from the

questionnaire and that this reflected the level of risk they would be willing to take

with their investments. However, the Authority’s mystery shops showed that

Santander’s advisers often failed to do this and, in a number of cases, the output

from the Risk Profiling Questionnaire was clearly at odds with wider statements the

customer had made about their risk appetite. For example:

a)
in one case the Risk Profiling Questionnaire assessed the customer as a ‘high

risk’ investor when the customer had said that they ‘did not want anything

risky’; and

b) in another case, the adviser placed too high a reliance on the automated

output which assessed the customer as ‘high risk’. The adviser failed to

properly challenge the ‘high risk’ outcome after the customer stated that they

were only comfortable with a ‘medium’ level of risk.

Design and Use of the Risk Profiling Questionnaire post June 2012

4.49 During 2011 and the first half of 2012, Santander implemented improvements to

its process for establishing the risk appetite of customers. This included issuing

guidance to all advisers to ensure that any inconsistencies between customer

discussions and risk profiling responses were explained and clarified within the

paperwork. However, despite having recognised the limitations of the Risk Profiling

Questionnaires, it was not until June 2012 that Santander rolled out a new system

based Risk Profiling Questionnaire.

4.50 The new Risk Profiling Questionnaire remedied many of the inherent weaknesses in

the old questionnaires in that there were:

a)
15 questions correlated to six risk profiles;

b) each risk profile was accompanied by a description which contained the key

relevant risks (including the need to hold an investment for the medium term),

thereby assisting the customer to validate the output from the Risk Profiling

Questionnaire; and

c)
specific capacity for loss questions.

4.51 However, the Authority’s mystery shops:

a)
found instances where, despite the introduction of the new Risk Profiling

Questionnaire, the advice was unsuitable in whole or in part due to its use; in

particular, advisers failed to check whether the output from the Risk Profiling

Questionnaire was correct; and

b) called into question whether the newly added questions to establish a

customer’s capacity for loss were being used appropriately by advisers. For

example, in one case the adviser increased the customer’s risk profile after the

customer’s answers to the capacity for loss questions suggested they could

afford to take more risk. Capacity for loss should not be used to increase a

customer’s attitude to risk.

4.52 The deficiencies in Santander’s processes for establishing the risk that a customer

was willing and able to take gave rise to an unacceptable risk of customers being

aligned to a risk profile that did not match their attitude to risk and being

recommended investments that were unsuitable for the level of risk they were

willing and able to take.

(e) Suitability reports: Deficiencies in Santander’s suitability reports

4.53 Santander’s advisers usually presented and explained recommendations to

customers during a second meeting. Suitability reports setting out their

recommendations were provided to customers at or after these meetings.

Santander failed to ensure that customers received adequate explanations of why

investment recommendations were suitable for them in the suitability reports they

received.

Design of suitability reports

4.54 Advisers were provided with system-based templates to allow them to write a

detailed suitability report of their recommendations for individual customers in a

consistent and efficient fashion. There were deficiencies in Santander’s templates

which did not prompt advisers to:

a)
as appropriate address a customer’s:

i.
recent and/or future changes in circumstances;

ii.
relevant existing or previous investments;

iii.
source of funds; and

iv.
capacity for loss;

b) describe a customer’s attitude to risk. It simply confirmed the customer’s risk

profile (e.g. low, medium, high) without explaining what that meant.

4.55 Guidance and sales manuals provided to advisers did not effectively mitigate the

deficiencies in the templates. While advisers were told in guidance that a suitability

report should cover a customer’s needs, priorities, attitude to risk and financial

situation, the guidance did not address these in any detail.

4.56 Santander took steps to mitigate the deficiencies in the suitability report templates

by providing advisers with training, increasing the space available to advisers and

issuing a communication in April 2012 reminding advisers of the need to explain a

recommendation in full. However, it was not until June 2012 when the new fact-

finding process was rolled out that new suitability report templates were provided

to advisers.

Use of suitability reports

4.57 The reviews by Santander’s external consultants and internal audit all identified

issues with the quality of the suitability reports. One external consultant noted

that:

a)
the rationale for the investment products selected was often weak, such that it

was not always clear why one product had been selected over another;

b) the reports used overly standardised paragraphs;

c)
there was a need to build ‘reason why’ information into the reports; and

d) in 17% of files reviewed there was insufficient explanation in relation to why a

move from cash to equities had been recommended.

4.58 A number of the Authority’s mystery shops did not proceed to the stage of

suitability reports. Where suitability reports were produced, issues were identified,

including reports which were misleading because they did not reflect what the

customer had said during their meetings with the adviser. This included reports

a)
mis-represented the nature of the customer’s objectives and discussions by

stating, ‘you told me that you did not miss the money and you wanted

something long term’ when in fact, the customer had repeated on a number of

occasions that the term for their investment was 3 years;

b) misrepresented the customer’s desired term stating ‘You want to invest a sum

of £24,000 for the long term i.e. no specific need for this capital within that

period. Your need is to produce growth on this capital sum as you are not

happy with the current level of return as you are looking to buy a property in

future that is after 5 year’ when in fact the customer had stated they wanted

to buy a house in 5 years; and

c)
failed to reflect that a customer had outstanding car finance when the

customer had stated this during the meeting with the adviser.

(f)
Recommendations:
Unsuitable
or
unclear
recommendations
for

customers

4.59 The reviews conducted by Santander, its external consultants and the Authority all

found that a significant proportion, between 35 and 42% of recommendations in

the sales or mystery shops reviewed were unsuitable or the suitability of the

recommendations were unclear.

4.60 The Authority’s mystery shops included instances where:

a)
advisers ignored the customer’s desired term of investment. For example, one

adviser recommended that the customer invest £30,000 in a medium to long

term investment despite the customer indicating a short investment term of 3-

4 years. The adviser had even acknowledged that the product did not meet the

customer’s requirements during the meeting, saying that the product was ‘a

medium-term investment, it's not short term’ and that he ‘would have to

technically recommend that [the product was invested] for 5 years’;

b) advisers did not adequately consider the repayment of debt before

recommending an investment. For example, one adviser recommended that a

customer invest £40,000 in a high risk investment without gathering full

information on the customer’s assets and outgoings; without recommending

that the customer consider repayment of credit card debt before investing; and

without confirming the customer’s understanding of the risks associated with

the product despite highlighting the benefits of the product to the customer;

and

c)
advisers did not gather sufficient information about customers before making

recommendations. For example, one adviser recommended that a 71 year old

customer invest £35,000 into a product with a 6 year term and which

contained penalties for early encashment. This was without determining the

customer’s income, expenditure, debts, or liabilities; without requiring the

customer to
complete the
Risk Profiling Questionnaire; and without

determining whether the customer had any health issues.

4.61 The unclear and unsuitable recommendations highlighted by the various reviews

conducted in 2011 and 2012 were intrinsically linked to the deficiencies in

Santander’s investment sales process.

(g) Training: Inadequate training of advisers

4.62 Santander provided training to new advisers and all existing advisers in relation to

new products, initiatives and changes in process. It also committed significant

resource in 2011 and 2012 to ensuring advisers obtained the minimum Retail

Distribution Review professionalism requirements. However, in addition to the

weaknesses in the guidance, documents and tools provided to advisers highlighted

above, there were deficiencies in the training provided to new advisers which

impacted upon their ability to provide suitable advice to customers.

4.63 The course for new advisers required a significant amount of pre-course learning,

which was tested by an assessment on the first day of the course. While the pre-

course assessment pass mark did not impact on whether advisers ultimately

passed their final assessments (which took place at the end of the course), this

pre-course assessment acted as a gateway to enable Santander to establish

whether advisers had completed the pre-course learning to an acceptable level.

During a review carried out by Compliance in December 2011, it was discovered

that the pass rate had been set at 70% by Human Resources without seeking

Compliance’s sign off. The pass rate was set below the normal 80% pass mark

which was in place for other courses. It was noted that if the pass rate had been

80%, 41% of advisers who completed the training during the third quarter of 2011

would have failed the assessment and may not have been able to attend the

training course at that time.

4.64 Santander’s reliance on pre-course learning and the assumption that this had been

understood and absorbed by advisers impacted upon the content and pace of the

face-to-face training. Compliance concluded that the training was rushed and did

not provide advisers with sufficient time to ensure that they fully embedded the

investment sales process. Limited time was spent on key parts of the investment

sales process, with insufficient time spent on the Suitable Advice Manual, the

principle guidance for advisers. This was reflected in some of the feedback received

from advisers, such as:

‘[I]n reality we do a demanding job that has a lot of detail and very little detail was

given on the course.’

‘I felt the suitable advice manual was very rushed in the pre-course work and also

on the course and as this is a major part of our day to day business activity more

time should be spent on this.’

4.65 The most significant issue for new advisers was that they received no training on

the systems they would use during the investment sales process prior to their first

meeting with customers. 80% of advisers, who were asked how well the training

prepared them for their role, said this lack of training left them unprepared for the

‘real world’. Feedback from advisers highlighted the difficulties they faced as a

result:

‘To not have access to the actual system which we would be using during the client

meetings was frankly ridiculous so [the] training world and real world were on

opposite sides of the spectrum.’

‘… [A]t times I am having to call other experienced advisers and bother other staff

constantly to find out key things that I need to do my job. Simple things like… how

to actually complete a fact find on the system and complete a sale.’

4.66 Santander took steps to remedy the weaknesses in its training. The pass rate for

pre course learning was increased to 80% and from March 2012 Santander

introduced a process to ensure advisers received training on relevant systems

before their first customer meeting. In mid-2012, Santander provided training for

all its advisers in relation to the new Risk Profiling Questionnaire and on assessing

suitability, and again in preparation for the changes required by the Retail

Distribution Review in late 2012.

(h) Monitoring: Inadequate Compliance monitoring of investment sales

4.67 Santander’s Advice Quality assessed the quality of investment advice and the

completeness of the paperwork provided to customers. The number of investment

sales failed by Advice Quality between 1 January 2010 and 31 December 2012 was

generally low. However, the department’s monitoring was inadequate due to

weaknesses in the:

a)
approach used to review investment sales;

b) sampling methodology used to select sales for review;

c)
management information produced; and

d) tracking of remedial action.

Review approach

4.68 Until August 2011, when Santander began to conduct small waves of mystery

shops, the quality of advice was typically assessed through a desk-based review of

the paperwork produced during an investment sale and/or customer-contact calls.

There were weaknesses in both the paperwork and customer contact review

processes.

4.69 Prior to the fourth quarter of 2011, Advice Quality’s approach to the paperwork

review was inadequate. It was largely a ‘tick box’ exercise to establish if the

correct sales process had been followed, rather than a holistic review of each sale

to form an opinion on whether the sale had resulted in a suitable recommendation

for the customer. Advice quality failure rates increased in the months following the

move to a more holistic review, changes to the sales process and the introduction

of a new investment product by Santander, which all took place at around the

same time.

4.70 A review by Santander’s external consultants in late 2011 highlighted the

inadequacy of the reviews being conducted by Advice Quality. 41 of the files

reviewed by the external consultants had also been reviewed by Advice Quality.

The external consultants disagreed with Advice Quality’s findings in 37% of those

cases.

4.71 There were also weaknesses in the customer contact calls. The guidance provided

to Advice Quality did not set out the aims and objectives of the customer contact

calls or explain how the overall grading of a review was determined. Further, until

the fourth quarter of 2012, customer contact scripts were not aligned to the

Authority’s Treating Customers Fairly outcomes and did not sufficiently capture the

customer’s perception and understanding of the product because they relied on

closed questions (which have a tendency to lead to yes or no answers).

4.72 While improvements to the scripts used by Advice Quality were made in the fourth

quarter of 2012, the scripts remained focussed on discussing a customer’s

understanding of the products recommended and the documentation issued to

them. However, the scripts failed to focus on whether advice was actually suitable

for customers. A customer’s understanding of the product they invested in is

important, but it does not in and of itself establish that the product was suitable for

them. It is necessary to confirm that key information recorded is correct including,

for example, the customer’s investment objectives; the desired term of

investment; tax status; details of any outstanding debt; and the customer’s risk

profile.

Sampling methodology

4.73 Advice Quality reviewed a random sample of three cases per adviser per quarter.

This was increased by a further three cases for advisers who were perceived to be

a greater risk and, if customer detriment was identified, an additional three cases

were requested. In addition, thematic reviews to monitor specific risks (adviser risk

or product/customer risk) were also conducted.

4.74 There were, however, deficiencies in this sampling approach in that:

a)
it did not ensure that appropriate coverage of all products across the adviser

and customer population was being obtained; and

b) there was no defined risk-assessment methodology to determine what

constituted a ‘high risk’ product or customer.

4.75 Santander identified in May 2010 that Advice Quality’s sampling methodology did

not allow for sufficient coverage of all investment products sold by Santander. This

was noted again by Santander’s external consultants in January 2012 who advised

Santander to consider whether it was running risks with its processes until a new

sampling methodology was in place. However, it was not until the fourth quarter of

2012 that a new sampling methodology was approved, which prioritised the

checking of sales of higher risk products or to higher risk customers.

Management Information

4.76 Until the third quarter of 2012, management information produced by Advice

Quality did not facilitate effective management action to address any issues

identified by monitoring because it was:

a)
quantitative in nature and did not include commentary on trends or root

causes; and

b) not aggregated with other management information to present an overall

assessment of current and emerging regulatory risks.

Remedial action

4.77 Until the fourth quarter of 2012, the process for monitoring remedial action taken

in cases where a risk of customer detriment had been identified was weak in that

a)
did not include a defined process for reporting and escalating cases where

remediation had been delayed; or

b) involve monitoring and tracking of such cases through regular management

information.

4.78 Further, Santander also failed to follow up on the Premium Investments sales that

had been identified as unclear or unsuitable by external consultants in June 2011

in a timely manner. It was not until October 2012 that remedial action was taken.

Two customers were found to have suffered financial detriment and they were

appropriately compensated.

4.79 The weaknesses in Santander’s compliance monitoring of investments sales gave

rise to an unacceptable risk that poor sales behaviours, practices and any resulting

customer detriment would not be identified and remediated in a timely manner.

D. Premium Investments – Deficiencies in the process for arranging

regular reviews

4.80 Santander promoted and offered regular reviews as one of the benefits of its

Premium Investments. Despite this, Santander failed to have an adequate process

to ensure that Premium Investments customers received a regular review of their

investments to check that the investments continued to meet their needs.

4.81 Customer statements recommended that Premium Investments customers review

their investments on an annual basis. However, there was no set process to ensure

that customers received regular reviews. Until 2008 the guidance provided to

advisers made clear that reviews were ‘an important part of the advice process’

and ‘should generally be on an annual basis’. However, the guidance provided to

advisers from December 2008 made no reference to the need to conduct reviews

over and above the fact that regular reviews were one of the services for Premium

30

Investments customers. Santander’s external consultants noted in August 2011

that:

a)
in more than half of the files they reviewed, regular reviews had not been

booked; and

b) there was no clear process for ensuring a regular review actually took place.

4.82 The sample of Premium Investments files reviewed during the Wealth Management

Thematic Review also revealed that reviews had not been booked and in some

cases customers had not received a review of their investments for a number of

years. Santander took steps to remedy the deficiencies in its process from June

2012 and has agreed to re-design its annual review process for customers who

continue to be invested in Premium Investments.

E. Premium Investments – Financial Promotions

4.83 The Authority identified that from April 2004 Santander issued a range of

promotional material and communications in relation to its Premium Investments

and in doing so failed to ensure that they were fair, clear and not misleading.

Promotional brochures suggested that:

a)
Santander
would
build
a
portfolio
‘tailored’
to
customers’
‘precise

requirements’, ‘personal circumstances’ or ‘specific needs’, and that customers

would receive a ‘truly individual service’; and

b) customer’s portfolios would be subject to ‘regular reviews’ with a dedicated

personal adviser to make sure portfolios always matched their needs as they

changed over time, with some versions of the brochures suggesting that these

reviews would take place on an annual basis.

4.84 Further, customers who went on to invest:

a)
were charged a Portfolio Management fee which was said to include a sum for

‘asset allocation and active management of your investment positions to

achieve your objectives’; and

b) signed terms and conditions which included a clause relating to ‘Discretionary

Investment Management’ which was defined as authorising the manager to

‘exercise any degree of discretion in buying or selling the investments which

make up a client’s portfolio at any time.’

4.85 These promotions and communications were not clear or fair and had the potential

to mislead in that they gave the impression that the service a customer who

invested in Premium Investments would receive was bespoke or akin to traditional

wealth management services, when it was not. Customers who went on to invest in

Premium Investments were provided with other documents which may have meant

that they were not ultimately misled in relation to the nature of the portfolio in

which they invested. They may also have received some of the ancillary services

promoted as a benefit of Premium Investments. However, the Authority found that,

in practice, some of the services promoted or charged for, for example regular

reviews (see paragraphs 4.80 - 4.82 above) or asset allocation and active

management of investment positions may not have been received. Powerful

messages are left by advertising, and from a perspective of consumer protection

and fair competition between firms, it is important that consumers’ expectations

are met by reality, which is why all financial promotions must be stand-alone

compliant.

4.86 Apart from a rebranding exercise in late 2007, there were minimal changes to the

text of the Premium Investments promotional brochures between 1 April 2004 and

31 December 2012. The changes that were made went through Santander’s

Financial Promotions process and received appropriate sign-off. However, the

process focussed on proposed changes in isolation, without a holistic assessment of

whether the brochures as a whole were fair, clear and not misleading in relation to

the nature of the portfolios in which customers would invest and the service they

would receive. If Santander’s processes had included such an assessment, this

may have led to the proactive identification of the issues identified by the

Authority.

5
FAILINGS

5.1
Based on the facts and matters described above, the Authority concludes that

Santander has failed to satisfy Principles 7 and 9 and associated COBS Rules (see

Annex A).

5.2
Specifically, on the basis of the facts and matters set out at paragraphs 4.1 - 4.86

above Santander breached:

a)
Principle 7 (Communications with clients) by failing to pay due regard to the

information needs of its clients, and by failing to communicate information to

them in a way which was fair, clear and not misleading; and

b) Principle 9 (Customers: relationships of trust) by failing to take reasonable

care to ensure the suitability of its advice and discretionary decisions for any

customer who was entitled to rely upon its judgment.

5.3
Santander breached Principle 7 by failing to:

a)
ensure that its advisers provided customers with appropriate disclosure about

Santander, its products, services and associated costs (paragraphs 4.25 - 4.29

above); and

b) pay due regard to the information needs of its Premium Investments

customers by producing financial promotions, namely Premium Investment

Brochures, that did not satisfy the requirement to be fair, clear and not

misleading (paragraphs 4.83 - 4.86 above).

5.4
These failings meant that Santander also breached a number of the Authority’s

rules namely COB 2.1.3 R, 3.8.4(1) R and COBS 4.2.1 R, 6.1.4 R, 6.1.9 R and

5.5
Santander breached Principle 9 by failing to:

a)
ensure that its advisers gathered all necessary information from customers to

enable suitable recommendations to be made, in particular:

i.
advisers were not prompted to gather and record key pieces of

information including a customer’s knowledge and experience of

investments and their investment objectives;

ii.
relevant information about customers was missing from sales files

reviewed by Santander and its external consultants; and

iii.
both Santander’s and the Authority’s mystery shops found that advisers

failed to gather sufficient information about customers prior to making

investment recommendations in over 30% of shops (paragraphs 4.30 -

4.37 above);

b) ensure there was an adequate process in place for assessing the risk that a

customer was willing and able to take: in particular, until June 2012

i.
used Risk Profiling Questionnaires to assess the risk profiles of customers

which had significant weaknesses including:

a.
the use of a very limited number of questions which made the output

of the questionnaire overly sensitive to customer’s answers to

individual questions;

b.
questions which were open to interpretation and too complex for the

firm’s target market to understand and answer correctly; and

c.
risk category descriptions that did not clearly quantify the level of risk

that the investor would be taking;

ii.
did not require advisers to check whether customers understood the

output from the Risk Profiling Questionnaire and confirm this reflected the

level of risk they would be willing to take with their investments; and

iii.
did not address a customer’s ability to bear the risks associated with the

investment products recommended to them (i.e. their capacity for loss)

(paragraphs 4.43 - 4.52 above);

c)
ensure its advisers obtained all necessary information before making personal

recommendations to customers (paragraphs 4.30 - 4.37 above);

d) ensure that it provided customers with suitability reports which adequately

specified their demands and needs, justified why Santander had concluded its

recommendations were suitable for them by reference to the customer’s

objectives, and explained any possible disadvantages of the investments

recommended (paragraphs 4.53 - 4.58 above);

e)
ensure that there was an adequate process in place to check that Premium

Investments continued to meet customers’ needs (paragraphs 4.80 - 4.82

above);

f)
implement adequate procedures for monitoring the quality of investment

advice and remedial action taken where advice had been found to be

unsuitable or unclear; and

g) ensure new advisers received adequate training before they started to give

advice to customers.

5.6
These failings meant that Santander also breached a number of the Authority’s

rules namely COBS 2.1.1 R, 9.2.1 R, 9.2.2 R, 9.2.3 R, 9.2.5 R, 9.2.6 R and

5.7
Having regard to the issues above, the Authority considers it appropriate and

proportionate in all the circumstances to take disciplinary action against Santander

for its breaches of the Principles and associated Rules.

6
SANCTION

6.1
For the reasons set out in this Notice, the Authority considers that Santander

breached Principles 7 and 9 along with the relevant Rules in COBS. The Authority

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
The principal purpose of a financial penalty is to 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 benefits of

compliant behaviour.

6.3
The Authority’s policy on the imposition of financial penalties is set out in Chapter 6

of the Authority’s Decision Procedure & Penalties Manual (DEPP). In determining

the financial penalty, the Authority has had regard to this guidance.

6.4
The conduct at issue took place both before and after 6 March 2010. As set out at

paragraph 2.7 of the Authority’s Policy Statement 10/4, when calculating a

financial penalty where the conduct occurred during both penalty regimes, the

Authority must have regard to both the penalty regime which was effective before

6 March 2010 (“the old penalty regime”) and the penalty regime which was

effective after 6 March 2010 (“the current penalty regime”).

6.5
The Authority has calculated the financial penalty as follows:

a)
In relation to Santander’s failure to pay due regard to the information needs of

its Premium Investments clients by producing financial promotions that did not

satisfy the requirement to be fair, clear and not misleading (Principle 7), the

i.
calculated a pre-discount financial penalty of £1,000,000 by applying the

old penalty regime to the Firm’s breach during the period 1 April 2004 to 5

March 2010; and

ii.
calculated a pre-discount financial penalty of £518,760 by applying the

current penalty regime to the Firm’s breach during the period 6 March

2010 to 31 December 2012.

b) In relation to Santander’s failure during the investment sales process:

i.
to ensure that appropriate disclosure about Santander, its products and

services was provided to its customers and that its communications with

customers were fair, clear and not misleading (Principle 7); and

ii.
to take reasonable care to ensure that it gave suitable investment advice

to its customers (Principle 9);

the Authority calculated a pre-discount financial penalty of £16,163,970 by

applying the current penalty regime to the Firm’s breach during the period 1

January 2010 to 31 December 2012.

6.6
The Authority added the penalties calculated at paragraph 6.5 a) and b) above to

produce a total pre-discount financial penalty of £17,682,730.

6.7
Santander agreed to settle at an early stage of the Authority’s investigation. The

Firm therefore qualified for a 30% (Stage 1) discount under the Authority’s

executive settlement procedures. The Authority therefore imposes on Santander a

financial penalty of £12,377,800.

Breach of Principle 7 during the period 1 April 2004 to 5 March 2010

(Financial promotion failings in relation to Premium Investments)

6.8
All references to DEPP in this section are references to the version of DEPP in force

prior to 6 March 2010.

6.9
In determining whether a financial penalty is appropriate, and if so, the appropriate

level of financial penalty the Authority is required to consider all the relevant

circumstances of a case. DEPP 6.5.2 G identifies a non-exhaustive list of factors

that may be relevant in determining the level of financial penalty. The Authority

considers that the following factors are particularly relevant in this case.

Deterrence (DEPP 6.5.2 G (1))

6.10 The Authority considers that the financial penalty imposed on Santander will

promote high standards of regulatory conduct by deterring firms which have

breached regulatory requirements from committing further contraventions, helping

36

to deter other firms from committing contraventions and demonstrating generally

to firms the benefit of compliant behaviour.

6.11 It strengthens the message to the industry that it is of fundamental importance

that firms providing investment advice to retail customers take reasonable care to

ensure that financial promotions and communications with customers in relation to

investments are fair, clear and not misleading.

The nature, seriousness and impact of the breach (DEPP 6.5.2 G (2))

6.12 The Authority considers Santander’s breach of Principle 7 during the period 1 April

2004 to 5 March 2010 to be serious for the following reasons:

a)
the failings continued undetected for a number of years;

b) the failings were not identified by the Firm, but by the Authority as part of

Phase 2 of the Authority’s Wealth Management Thematic Review; and

c)
the failings occurred in a period during which the Authority brought and

published other Enforcement cases against a number of firms for misleading

financial promotions. As such, Santander ought to have been aware of the

need to ensure that financial promotions were not misleading.

The extent to which the breach was deliberate or reckless (DEPP 6.5.2 G (3))

6.13 The Authority does not consider that Santander committed the breach deliberately

or recklessly.

The size, financial resources and other circumstances of the firm (DEPP 6.5.2 G

(5))

6.14 The Authority has considered Santander’s size and its financial resources.

6.15 The Authority has no evidence to suggest that Santander is unable to pay the

financial penalty.

The amount of benefit gained or loss avoided (DEPP 6.5.2 G (6))

6.16 It is not practicable for the Authority to quantify any financial benefit that

Santander may have derived directly from its breach at this stage.

Conduct following the breach (DEPP 6.5.2 G (8))

6.17 As set out at paragraph 2.11 above Santander will conduct a redress exercise for

both past and current Premium Investments customers for services promoted by

Santander that differed from the services customers in fact received.

Other action taken by the Authority (DEPP 6.5.2 G (10))

6.18 In determining whether and what financial penalty to impose on Santander, the

Authority has taken into account action taken by the Authority in relation to other

authorised persons for comparable behaviour.

6.19 The Authority considers that Santander’s breach of Principle 7 during the period 1

April 2004 to 5 March 2010 merits a financial penalty of £1,000,000.

6.20 Santander agreed to settle at an early stage of the Authority’s investigation. The

Firm therefore qualified for a 30% (Stage 1) discount under the Authority’s

executive settlement procedures. The Authority therefore imposes on Santander a

financial penalty of £700,000 for its breach of Principle 7 in the period prior to 6

March 2010.

Breach of Principle 7 during the period 6 March 2010 to 31 December 2012

(Financial promotion failings in relation to Premium Investments)

6.21 All references to DEPP in this section are references to the version of DEPP

implemented as of 6 March 2010 and currently in force.

6.22 In respect of conduct occurring on or after 6 March 2010, the Authority applies a

five-step framework to determine the appropriate level of financial penalty. DEPP

6.5A sets out the details of the five-step framework that applies in respect of

financial penalties imposed on firms.

Step 1: disgorgement

6.23 Pursuant to DEPP 6.5A.1 G, at Step 1 the Authority seeks to deprive a firm of the

financial benefit derived directly from the breach where it is practicable to quantify

this.

6.24 It is not practicable for the Authority to quantify any financial benefit that

Santander may have derived directly from its breach at this stage. However, as set

38

out at paragraph 2.11 above Santander will carry out a redress exercise for both

past and current Premium Investments customers in relation to services promoted

and charged for by Santander that differed from the services customers received.

6.25 Step 1 is therefore £0.

Step 2: the seriousness of the breach

6.26 Pursuant to DEPP 6.5A.2 G, at Step 2 the Authority determines a figure that

reflects the seriousness of the breach. Where the amount of revenue generated by

a firm from a particular product line or business area is indicative of the harm or

potential harm that its breach may cause, that figure will be based on a percentage

of the firm’s revenue from the relevant products or business area.

6.27 The Authority considers that the revenue recognised by Santander during the

period 6 March 2010 to 31 December 2012 in respect of sales made during the

same period of Premium Investments is indicative of the harm or potential harm

caused by its breach in this case. The Authority therefore considers Santander’s

relevant revenue to be £10,375,210.

6.28 In deciding on the percentage of the relevant revenue that forms the basis of the

Step 2 figure, the Authority considers the seriousness of the breach and chooses a

percentage between 0% and 20%. This range is divided into five fixed levels which

represent, on a sliding scale, the seriousness of the breach; the more serious the

breach, the higher the level. For penalties imposed on firms there are the following

five levels:

Level 1 – 0%

Level 2 – 5%

Level 3 – 10%

Level 5 – 20%

6.29 In assessing the seriousness level, the Authority takes into account various factors

which reflect the impact and nature of the breach, and whether it was committed

deliberately or recklessly. DEPP 6.5A.2 G (11) lists factors likely to be considered

‘level 4 or 5 factors’. The Authority does not consider that any of these factors

apply.

6.30 DEPP 6.5A.2 G (12) lists factors likely to be considered ‘level 1, 2 or 3 factors’. Of

these, the Authority considers the following factors to be relevant:

a)
there was no risk of loss to consumers, investors or other market users

individually and in general;

b) there was no actual or potential effect on the orderliness of, or confidence in,

markets as a result of the breach;

c)
there is no evidence that the breach indicates a widespread problem or

weakness at the Firm; and

d) the breach was committed negligently or inadvertently.

6.31 The Authority also considers that the following factors are relevant:

a)
the failings continued undetected for a number of years;

b) the failings were not identified by the Firm, but by the Authority as part of the

second phase of the Authority’s Wealth Management thematic review; and

c)
the failings occurred in a period during which the Authority brought and

published other Enforcement cases against a number of firms for misleading

financial promotions. As such, Santander ought to have been aware of the

need to ensure that financial promotions were not misleading.

6.32 Taking all of these factors into account, the Authority considers the seriousness of

the breach to be level 2 and so the Step 2 figure is 5% of £10,375,210.

6.33 Step 2 is therefore £518,760.

Step 3: mitigating and aggravating factors

6.34 Pursuant to DEPP 6.5A.3 G, at Step 3 the Authority may increase or decrease the

amount of the financial penalty arrived at after Step 2, but not including any

amount to be disgorged as set out in Step 1, to take into account factors which

aggravate or mitigate the breach.

6.35 The Authority considers that the Firm’s previous disciplinary history aggravates the

breach. In February 2012, the Authority imposed a financial penalty of £1.5 million

on Santander for breaches of Principles 2 and 7 and COBS 6.1.16. Between 1

October 2008 and 6 October 2010, Santander failed to confirm under which

circumstances its structured products would be covered by the FSCS.

6.36 The Authority considers that the following factors mitigate the breach:

a)
As set out at paragraph 2.11 above Santander will conduct a redress exercise

for both past and current Premium Investments customers for services

promoted by Santander that differed from the services customers in fact

received; and

b) Santander has co-operated fully with the Authority throughout its enforcement

investigation.

6.37 Having taken into account these aggravating and mitigating factors, the Authority

considers that the Step 2 figure should remain unchanged.

6.38 Step 3 is therefore £518,760.

Step 4: adjustment for deterrence

6.39 Pursuant to DEPP 6.5A.4 G, if the Authority considers the figure arrived at after

Step 3 is insufficient to deter the firm who committed the breach, or others, from

committing further or similar breaches, then the Authority may increase the

penalty.

6.40 The Authority considers that the Step 3 figure of £518,760 represents a sufficient

deterrent to Santander and others, and so has not increased the penalty at Step 4.

6.41 Step 4 is therefore £518,760.

Step 5: settlement discount

6.42 Pursuant to DEPP 6.5A.5 G, if the Authority and the firm on whom a penalty is to

be imposed agree the amount of the financial penalty and other terms, DEPP 6.7

provides that the amount of the financial penalty which might otherwise have been

payable will be reduced to reflect the stage at which the Authority and the firm

reached agreement. The settlement discount does not apply to the disgorgement of

any benefit calculated at Step 1.

6.43 The Authority and Santander reached agreement at Stage 1 and so a 30% discount

applies to the Step 4 figure.

6.44 Step 5 is therefore £363,100.

Breaches of Principles 7 and 9 during the period 1 January 2010 to 31

December 2012 (Investment sales process failings)

6.45 All references to DEPP in this section are references to the version of DEPP

implemented as of 6 March 2010 and currently in force.

6.46 Where the gravamen of the conduct occurred on or after 6 March 2010, the

Authority applies a five-step framework to determine the appropriate level of

financial penalty to all of the conduct in question. DEPP 6.5A sets out the details of

the five-step framework that applies in respect of financial penalties imposed on

firms.

Step 1: disgorgement

6.47 It is not practicable for the Authority to quantify any financial benefit that

Santander may have derived directly from its breach at this stage. However, as set

out at paragraph 2.11 above Santander will carry out a customer contact exercise

which will provide customers with an opportunity to withdraw from their

investment or have the sale reviewed.

6.48 Step 1 is therefore £0.

Step 2: the seriousness of the breach

6.49 The Authority considers that the revenue recognised by Santander during the

period 1 January 2010 to 31 December 2012 in respect of sales made during the

same period of Premium Investments and Non-Premium Investments is indicative

of the harm or potential harm caused by its breach in this case. The Authority

therefore considers Santander’s relevant revenue to be £107,759,803.

6.50 In assessing the seriousness level, the Authority takes into account various factors

which reflect the impact and nature of the breach, and whether it was committed

deliberately or recklessly. DEPP 6.5A.2 G (11) lists factors likely to be considered

‘level 4 or 5 factors’. Of these, the Authority considers the following factor to be

relevant:

The breach revealed serious and systemic weaknesses in Santander’s

investment advice process. Its failings were serious and a large number of

customers, including customers who may have been vulnerable were

potentially exposed to a significant risk of being recommended investments

that were unsuitable for them and of not being adequately informed about

their features and risks.

6.51 DEPP 6.5A.2 G (12) lists factors likely to be considered ‘level 1, 2 or 3 factors’. Of

these, the Authority considers the following factors to be relevant:

a)
there was no actual or potential effect on the orderliness of, or confidence in,

markets as a result of the breach; and

b) the breach was committed negligently or inadvertently.

6.52 Taking all of these factors into account, the Authority considers the seriousness of

the breach to be level 3 and so the Step 2 figure is 10% of £107,759,803.

6.53 Step 2 is therefore £10,775,980.

Step 3: mitigating and aggravating factors

6.54 The Authority considers that the following factors aggravate the breach:

a) Santander’s response to the Dear CEO Letter in August 2011 was too positive

and misleading. Santander should have informed the Authority that it had

identified that its sales process did not fully meet the Authority’s requirements,

the outcome of the file review exercise and the steps that it proposed to take

to remedy the issues highlighted. Santander informed the Authority in early

2012 that in response to the Authority’s papers on risk and suitability, it was

making ‘ongoing improvements and enhancements’ in relation to suitability

and conduct risk. Santander did not however make the Authority aware of the

extent of the issues that had been identified and the details of the work that

Santander had undertaken to remedy them until October 2012.

b) The Authority has repeatedly stressed in its publications the importance of

firms taking appropriate steps to ensure that suitable investment advice is

given to customers and, where ongoing investment services are provided, that

investments remain suitable for customers’ circumstances on an ongoing basis.

c)
The Authority imposed a financial penalty of £1.5 million on Santander in

February 2012 for breaches of Principles 2 and 7 and COBS 6.1.16. Between 1

October 2008 and 6 October 2010, Santander failed to confirm under which

circumstances its structured products would be covered by the FSCS.

d) Santander remedied the deficiencies highlighted by the Authority’s earlier

Enforcement action in relation to unclear information provided to customers

about the scope of FSCS protection. However, the Authority found that in 15%

of mystery shops, advisers made misleading statements, did not explain

and/or did not provide documents in relation to FSCS protection. Some

advisers suggested that FSCS protection was available for all of Santander’s

investment products. Given the monetary and product limitations of FSCS

protection, these sorts of statements were misleading.

6.55 The Authority considers that the following factors mitigate the breach:

a) As set out at paragraph 2.11 above Santander will conduct a customer contact

exercise in respect of relevant customer sales. Santander will contact all

affected customers offering them the opportunity to withdraw from their

investment or have their sale reviewed. In order to demonstrate its

commitment to treating customers fairly, the option to withdraw from

investments will be available to all affected customers regardless of whether or

not the investment sale was suitable for them.

b) Santander proactively made a number of improvements to its sales process.

This included reviewing its investment sales processes in response to the

Authority’s Finalised Guidance of March 2011 titled ‘Assessing Suitability:

Establishing the risks that a customer is willing and able to take and making a

suitable investment selection,’ together with the Dear CEO Letter. Santander

also instructed external consultants to review parts of its investment sales

process and samples of sales files. Santander committed time and resource to

remediating the deficiencies that were highlighted by these reviews and

provided training and support for advisers as changes were introduced relating

to minimum Retail Distribution Review professionalism requirements. This was

during a period when a significant proportion of senior management resigned

and moved to positions at other firms.

c) After receiving the results of the Investment Advice Thematic Review, on 14

December 2012 Santander promptly took the decision to suspend its advisers

from providing retail investment advice to new customers.

d) Santander has co-operated fully with the Authority throughout its Enforcement

investigation, including being open in sharing the results of its own initiative

investigation into the response to the Dear CEO Letter which noted that the

response was misleading. It concluded that at the time of the response to the

Dear CEO Letter there were weaknesses in its process for communicating with

the Authority and there were also significant changes occurring within

Santander. The Authority notes that Santander has since implemented a new

process in respect of its communications with the Authority.

6.56 Having taken into account these aggravating and mitigating factors, the Authority

considers that the Step 2 figure should be increased by 50%.

6.57 Step 3 is therefore £16,163,970.

Step 4: adjustment for deterrence

6.58 The Authority considers that the Step 3 figure of £16,163,970 represents a

sufficient deterrent to Santander and others, and so has not increased the penalty

at Step 4.

6.59 Step 4 is therefore £16,163,970.

Step 5: settlement discount

6.60 The Authority and Santander reached agreement at Stage 1 and so a 30% discount

applies to the Step 4 figure.

6.61 Step 5 is therefore £11,314,700.

Conclusion as to financial penalty

6.62 The Authority therefore imposes on Santander a financial penalty of £12,377,800

(£17,682,730 pre-discount).

7
PROCEDURAL MATTERS

Decision maker

7.1
The decision which gave rise to the obligation to give this Notice was made by the

Settlement Decision Makers.

7.2
This Final Notice is given 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 Santander to the Authority by no later

than 7 April 2014, 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 8 April 2014, the Authority

may recover the outstanding amount as a debt owed by Santander and due to the

Authority.

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 Authority must publish such information about the matter to which this notice

relates as the Authority considers appropriate. The information may be published

in such manner as the Authority considers appropriate. However, the Authority

may not publish information if such publication would, in the opinion of the

Authority, be unfair to you or prejudicial to the interests of consumers or

detrimental to the stability of the UK financial system.

7.6
The Authority intends to publish such information about the matter to which this

Final Notice relates as it considers appropriate.

Authority contacts

7.7
For more information concerning this matter generally, contact Guy Wilkes (direct

line: 020 7066 7574) of the Enforcement and Financial Crime Division of the

Authority.

Financial Conduct Authority, Enforcement and Financial Crime Division

ANNEX A

RELEVANT STATUTORY AND REGULATORY PROVISIONS

1
RELEVANT STATUTORY PROVISIONS

1.1
The Authority’s operational objectives are set out in section 1B (3) of the Financial

Services Act 2012 and include the consumer protection objective and promoting

effective competition in the interests of consumers.

1.2
Section 206(1) of the Act provides:

‘If the Authority considers that an authorised person has contravened a

requirement imposed on him by or under this Act… it may impose on him a

penalty, in respect of the contravention, of such amount as it considers

appropriate.’

2
RELEVANT REGULATORY PROVISIONS

2.1
In exercising its power to impose a financial penalty, the Authority has had regard

to the relevant regulatory provisions and policy published in the Authority’s

Handbook. The main provisions that the Authority considers relevant to this case

are set out below.

Principles for Businesses (“Principles”)

2.2
The Principles are a general statement of the fundamental obligations of firms

under the regulatory system and are set out in the Authority’s Handbook. They

derive their authority from the Authority’s rule-making powers set out in the Act.

The relevant Principles are as follows.

2.3
Principle 7 (Communications with clients) provides that:

‘A firm must pay due regard to the information needs of its clients, and

communicate information to them in a way which is fair, clear and not misleading.’

2.4
Principle 9 (Customers: relationships of trust) provides that:

‘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 judgment.’

Conduct of Business (“COB”)

2.5
The Authority’s Conduct of Business Rules (COB) applied to authorised firms prior

to 1 November 2007.

Clear fair and not misleading communication

2.6
Chapter 2 of COB sets out the Authority’s rules governing communicating with

clients.

2.7
COB 2.1.3 R provides:

‘When a firm communicates information to a customer, the firm must take

reasonable steps to communicate in a way which is fair, clear and not misleading.’

Form and content of financial promotions

2.8
COB 3.8.4 R (1) provides:

‘A firm must be able to show that it has taken reasonable steps to ensure that a

non-real time financial promotion is fair, clear and not misleading.’

Conduct of Business Sourcebook (“COBS”)

2.9
The Authority’s Conduct of Business Sourcebook (COBS) has applied to authorised

firms since 1 November 2007.

Conduct of business obligations

2.10 COBS 2.1.1 R (1) provides:

‘A firm must act honestly, fairly and professionally in accordance with the best

interests of its client (the client's best interests rule).’

Communicating with clients

2.11 Chapter 4 of COBS sets out the Authority’s rules governing communicating with

clients, including those relating to financial promotions.

2.12 COBS 4.2.1 R provides:

‘(1) A firm must ensure that a communication or a financial promotion is fair, clear

and not misleading.

(2) This rule applies in relation to:

(a) a communication by the firm to a client in relation to designated investment

business other than a third party prospectus;

(b) a financial promotion communicated by the firm that is not:

(i) an excluded communication;

(ii) a non-retail communication;

(iii) a third party prospectus; and

(c) a financial promotion approved by the firm.’

2.13 COBS 4.5.2 R provides:

‘A firm must ensure that information:

(1) includes the name of the firm;

(2) is accurate and in particular does not emphasise any potential benefits of

relevant business or a relevant investment without also giving a fair and

prominent indication of any relevant risks;

(3) is sufficient for, and presented in a way that is likely to be understood by,

the average member of the group to whom it is directed, or by whom it is likely

to be received; and

(4) does not disguise, diminish or obscure important items, statements or

warnings.’

2.14 COBS 4.5.6 R provides:

‘(1) If information compares relevant business, relevant investments, or persons

who carry on relevant business, a firm must ensure that:

(a) the comparison is meaningful and presented in a fair and balanced way; and

(b) in relation to MiFID or equivalent third country business;

(i) the sources of the information used for the comparison are specified; and

(ii) the key facts and assumptions used to make the comparison are

included.

(2) In this rule, in relation to MiFID or equivalent third country business, ancillary

services are to be regarded as relevant business.’

Information about the firm, its services and remuneration

2.15 Chapter 6 of COBS sets out the Authority’s rules governing disclosure of

information to clients.

2.16 COBS 6.1.4 R provides:

‘A firm must provide a retail client with the following general information, if

relevant:

(1) the name and address of the firm, and the contact details necessary to enable

a client to communicate effectively with the firm;

(2) in the case of MiFID or equivalent third country business, the languages in

which the client may communicate with the firm, and receive documents and other

information from the firm;

(3) the methods of communication to be used between the firm and the client

including, where relevant, those for the sending and reception of orders;

(4) a statement of the fact that the firm is authorised and the name of the

competent authority that has authorised it;

(5) in the case of MiFID or equivalent third country business, the contact address

of the competent authority that has authorised the firm;

(6) if the firm is acting through an appointed representative or, where applicable,

a tied agent, a statement of this fact specifying the EEA State in which that

appointed representative or tied agent is registered;

(7) the nature, frequency and timing of the reports on the performance of the

service to be provided by the firm to the client in accordance with the rules on

reporting to clients on the provision of services (COBS 16);

(a) in the case of a common platform firm, a description, which may be

provided in summary form, of the conflicts of interest policy;

(b) other than in the case of a common platform firm, when a material interest

or conflict of interest may or does arise, the manner in which the firm will

ensure fair treatment of the client;

(9) in the case of a common platform firm, at any time that the client requests it,

further details of the conflicts of interest policy.

2.17 COBS 6.1.9 R provides:

‘A firm must provide a retail client with information on costs and associated

charges including, if applicable:

(1) the total price to be paid by the client in connection with the designated

investment or the designated investment business or ancillary services, including

all related fees, commissions, charges and expenses, and all taxes payable via the

firm or, if an exact price cannot be indicated, the basis for the calculation of the

total price so that the client can verify it. The commissions charged by the firm

must be itemised separately in every case;

(2) if any part of the total price referred to (1) is to be paid in or represents an

amount of foreign currency, an indication of the currency involved and the

applicable currency conversion rates and costs;

(3) notice of the possibility that other costs, including taxes, related to

transactions in connection with the designated investment or the designated

investment business may arise for the client that are not paid via the firm or

imposed by it; and

(4) the arrangements for payment or other performance.’

2.18 COBS 6.1.13 R provides:

‘Except where expressly provided, a firm must provide the information required by

this section in a durable medium or via a website (where it does not constitute a

durable medium) where the website conditions are satisfied.’

2.19 COBS 6.1.16 R provides:

‘(1) A firm carrying on MiFID business must make available to a client, who has

used or intends to use those services, information necessary for the identification

of the compensation scheme or any other investor-compensation scheme of which

the firm is a member (including, if relevant, membership through a branch) or any

alternative
arrangement
provided
for
in
accordance
with
the
Investor

Compensation Directive.

(2) The information under (1) must include the amount and scope of the cover

offered by the compensation scheme and any rules laid down by the EEA State

pursuant to article 2 (3) of the Investor Compensation Directive.

(3) A firm must provide, on the client's request, information concerning the

conditions governing compensation and the formalities which must be completed to

obtain compensation.

(4) The information provided for in this rule must be made available in a durable

medium or via a website if the website conditions are satisfied in the official

language or languages of the EEA State.’

2.20 Chapter 9 of COBS sets out the Authority’s rules for governing suitability (including

basic advice).

2.21 COBS 9.2.1 R provides:

‘(1) A firm must take reasonable steps to ensure that a personal recommendation,

or a decision to trade, is suitable for its client.

(2) When making the personal recommendation or managing his investments, the

firm must obtain the necessary information regarding the client’s:

(a) knowledge and experience in the investment field relevant to the specific

type of designated investment or service;

(b) financial situation; and

(c) investment objectives;

so as to enable the firm to make the recommendation, or take the decision, which

is suitable for him.’

2.22 COBS 9.2.2 R provides:

‘(1) A firm must obtain from the client such information as is necessary for the firm

to understand the essential facts about him and have a reasonable basis for

believing, giving due consideration to the nature and extent of the service

provided, that the specific transaction to be recommended, or entered into in the

course of managing:

(a) meets his investment objectives;

(b) is such that he is able financially to bear any related investment risks

consistent with his investment objectives; and

(c) is such that he has the necessary experience and knowledge in order to

understand the risks involved in the transaction or in the management of his

portfolio.

(2) The information regarding the investment objectives of a client must include,

where relevant, information on the length of time for which he wishes to hold the

investment, his preferences regarding risk taking, his risk profile, and the purposes

of the investment.

(3) The information regarding the financial situation of a client must include, where

relevant, information on the source and extent of his regular income, his assets,

including liquid assets, investments and real property, and his regular financial

commitments.’

2.23 COBS 9.2.3 R provides:

‘The information regarding a client's knowledge and experience in the investment

field includes, to the extent appropriate to the nature of the client, the nature and

extent of the service to be provided and the type of product or transaction

envisaged, including their complexity and the risks involved, information on:

(1) the types of service, transaction and designated investment with which the

client is familiar;

(2) the nature, volume, frequency of the client's transactions in designated

investments and the period over which they have been carried out;

(3) the level of education, profession or relevant former profession of the client.’

2.24 COBS 9.2.5 R provides:

‘A firm is entitled to rely on the information provided by its clients unless it is

aware that the information is manifestly out of date, inaccurate or incomplete.’

2.25 COBS 9.2.6 R provides:

‘If a firm does not obtain the necessary information to assess suitability, it must

not make a personal recommendation to the client or take a decision to trade for

him.’

2.26 COBS 9.4.7 R provides:

‘The suitability report must, at least:

(1) specify the client’s demands and needs;

(2) explain why the firm has concluded that the recommended transaction is

suitable for the client having regard to the information provided by the client; and

(3) explain any possible disadvantages of the transaction to for the client.’

Decision Procedure and Penalties Manual (“DEPP”)

2.27 Chapter 6 of DEPP, which forms part of the Authority’s Handbook, sets out the

Authority’s statement of policy with respect to the imposition and amount of

financial penalties under the Act. Changes to DEPP were introduced on 6 March

2010. Given that the misconduct occurred both before and after that date, the

Authority has had regard to the provisions of DEPP in force before and after that

date.

The Enforcement Manual

2.28 The Enforcement Manual, which was in force until 28 August 2007, set out the

Authority’s approach to exercising its enforcement powers prior to that date.

The Enforcement Guide

2.29 The Enforcement Guide sets out the Authority’s approach to exercising its main

enforcement powers under the Act.

2.30 Chapter 7 of the Enforcement Guide sets out the Authority’s approach to exercising

its power to impose a financial penalty.