FINAL NOTICE

To:
State Street Bank Europe Limited; and




State Street Global Markets International Limited

Of:
20 Churchill Place


London


E14 5HJ

Firm











Reference
187358 & 194525
Numbers:



Date:
30 January 2014

1.
ACTION

1.1.
For the reasons given in this notice, the Authority has decided to impose on State

Street Bank Europe Limited and State Street Global Markets International Limited

(together, “State Street UK”) a financial penalty of £22,885,000. This penalty is

in respect of breaches of Principle 6, 7 and 3 of the Authority’s Principles for

Businesses during the period 1 January 2010 to 30 September 2011 (“the

Relevant Period”).

1.2.
State Street UK agreed to settle at an early stage of the Authority’s investigation

and has 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 £32,692,800 on State Street UK.

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2.
SUMMARY OF REASONS

2.1.
The State Street group is a global financial services company, headquartered in

the USA and operating in the UK through a number of legal entities including

those described in this Final Notice as State Street UK. One of the investment

services State Street offers is transition management, carrying out major

structural changes to asset portfolios on a client’s behalf. Those services are

carried out in Europe and the Middle East by the UK transition management

business (“State Street UK’s TM business” or the “UK TM business”). This forms

part of the Portfolio Solutions Group (“PSG”) global business line.

2.2.
In the Relevant Period State Street UK failed to treat its customers fairly by

allowing a culture to develop in the UK TM business which prioritised revenue

generation over the interests of customers. As a result, the UK TM business

developed and executed a deliberate and targeted strategy to charge substantial

mark-ups on certain transitions, in addition to the agreed management fee or

commission, that were deliberately not agreed with clients or disclosed to them.

This strategy was used on the transitions carried out for six clients, who were

overcharged by a total of $20,169,603 in the period between June 2010 and

September 2011.

2.3.
State Street UK failed to communicate with its clients in a way which was clear,

fair and not misleading because the UK TM business deliberately misrepresented

State Street UK’s earnings from particular transitions in certain of its

communications with clients, including pre-trade estimates and post-trade

reporting. State Street UK also falsely held itself out in two instances as

complying with the T-Charter, a statement of industry best practice to which

State Street UK was a signatory, when it did not do so.

2.4.
Throughout the Relevant Period State Street UK failed to take reasonable care to

organise and control its affairs effectively with adequate risk management

systems. The State Street group’s matrix management framework meant that

EMEA PSG management were not effectively challenged by State Street UK senior

management. State Street UK’s business line controls and control functions did

not ensure that TM documentation, the trading process, or communications with

clients were adequately monitored. Existing processes were easily circumvented

by EMEA PSG management and employees.

2.5.
The misconduct within the UK TM business only came to light after a client

notified staff that it had identified mark-ups on certain trades that had not been

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agreed. State Street UK’s control weaknesses were such that members of PSG

senior management were able to claim to the client that this was an inadvertent

error, and to arrange for a substantial rebate to be paid on that false basis.

Further, members of PSG senior management deliberately failed to disclose the

existence of further mark-ups on other trades conducted as part of the same

transition, concealed these both from the client and from State Street UK

Compliance, and did not disclose them to State Street UK senior management.

Concerns were subsequently identified by State Street UK management outside

PSG, and an internal investigation was commenced in September 2011. State

Street UK initially contacted the clients affected in October 2011 and has since

provided rebates, or offered to provide rebates, of all the amounts overcharged.

2.6.
The Authority views State Street UK’s failings as particularly serious for the

following reasons:

(1) State Street UK’s failings caused six of its clients to be deliberately

overcharged by a total of $20,169,603 by the UK TM business in order for it

to meet its challenging revenue targets. Overcharging occurred on only 3.5%

of the transitions in the Relevant Period but generated over 25% of the total

revenue earned by State Street UK in connection with its UK TM business in

that period;


(2) In carrying out TM services for its clients, State Street UK acted as agent to

its clients, and held itself out as being a trusted advisor. In one of the

relevant transition agreements, State Street UK agreed to act as a fiduciary.

Accordingly, State Street UK breached a position of trust;

(3) State Street UK’s clients include large investment management firms and

pension funds holding the funds and savings of retail investors. Accordingly,

the actions of the UK TM business in the wholesale market caused a risk of

serious detriment to retail investors; and

(4) The systemic weaknesses in State Street UK’s control environment around the

UK TM business were so serious that the overcharging remained undetected

until the end of the Relevant Period when it was identified by a client.

2.7.
The Authority’s operational objectives include: (a) securing an appropriate degree

of protection for consumers; and (b) protecting and enhancing the integrity of the

UK financial system, which includes seeking to ensure that it is not used for a

purpose connected with financial crime. State Street UK’s failings threatened

these objectives. State Street UK’s conduct resulted in breaches of Principles 6, 7

and 3 during the Relevant Period. Accordingly, the Authority considers that State

Street UK’s failures merit the imposition of a substantial financial penalty.

2.8.
The Authority acknowledges that, when UK senior management became aware of

the issue, State Street UK took prompt action to investigate the misconduct and

has since implemented a comprehensive remediation programme in relation to

the controls around the UK TM business, and bolstered its control functions,

governance and culture across all of its UK businesses.

2.9.
The Authority therefore proposes to impose a financial penalty on State Street UK

in the amount of £22,885,000 pursuant to section 206 of the Act.

3.
DEFINITIONS

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

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

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

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

Authority;

“bps” or “basis points” means 1/100th of 1%;

“Compliance” means the SSGM EMEA Compliance team within State Street UK;

“DEPP” means the part of the Authority Handbook entitled “Decision Procedure

and Penalties Manual";

“EMEA” means Europe, Middle East and Africa, one of the geographical regions

into which State Street Group’s global business lines were split;

“EMEA PSG” means the Portfolio Solutions Group within State Street UK which is

headquartered in London;

“Fx” means Foreign Exchange;

“Finance” means the State Street UK Finance Department;

“Global PSG” means the Global Portfolio Solutions Group of the State Street

Group;

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“Global PSG senior management” means senior management of State Street’s

Global Portfolio Solutions Group;

“Legal” means the State Street UK Legal department;

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

“PSG” means the Portfolio Solutions Group;

“SMC” means the SSGM EMEA Senior Management Committee;

“Relevant Period” means from 1 January 2010 to 30 September 2011;

“State Street” or the “State Street Group” is the State Street global financial

services organisation which provides investment services including transition

management services;

“State Street UK” or “the Firm” means the two entities listed at the header of this

Notice;

“SSGM” means State Street Global Markets, one of the State Street Group’s major

business divisions;

“Skilled Person” means the accountancy firm appointed under s166 of the Act to

prepare a report into State Street UK’s TM business;

“TM” means Transition Management;

“TMA” means Transition Management Agreement;

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

“UK ExCo” means the State Street UK Executive Committee; and

“UK TM business” means the transition management business within EMEA PSG.

4.
FACTS AND MATTERS

4.1.
State Street is a global financial services organisation which provides investment

servicing, investment management, and research and trading services to

institutional investors including: mutual funds, collective investment funds,

6

corporate
and
public
pension
funds,
insurance
companies,
foundations,

endowments and investment managers.

4.2.
State Street is comprised of four global business divisions one of which is State

Street Global Markets (“SSGM”). SSGM is organised globally into four business

lines one of which is the Global Portfolio Solutions Group (“Global PSG”). Global

PSG provides trading, transition management and interim/overlay services to

owners and managers of asset portfolios. State Street’s Global PSG operations

are split and organised into three geographical regions: the Americas; Europe,

Middle East, and Africa (“EMEA”), and Asia-Pacific. Its EMEA PSG operations are

based in London.

4.3.
State Street operates in the UK through a number of legal entities. During the

Relevant Period, State Street UK’s TM business formed part of its EMEA PSG which

was run by EMEA PSG management. EMEA PSG was itself part of the Global PSG.

The trading required to execute a transition was conducted by different entities

ordinarily within State Street. The revenue derived by State Street UK from the

TM business in the Relevant Period was $77,904,287.

4.4.
During the Relevant Period, the oversight of EMEA PSG (and therefore the UK TM

business) operated according to the matrix management framework in existence

at State Street. This meant that responsibility for the TM business was shared

between global business line management (“Global PSG senior management”)

and State Street UK senior management. In practice, the matrix management

framework did not operate jointly. Instead Global PSG senior management took

primary responsibility, set business targets, and assessed performance.

Consequently, EMEA PSG senior management did in fact bid for and negotiate the

terms on which State Street UK conducted its TM business without sign off and

with little scrutiny from State Street UK senior management.

4.5.
EMEA PSG performance, including the performance of the UK TM business, was

discussed in various committee meetings including the SSGM EMEA Senior

Management Committee (“SMC”) and the State Street UK Executive committee

(“UK ExCo”). These discussions included TM deals in the pipeline and EMEA PSG

performance to budget. No granular Management Information was provided by

EMEA PSG management to these governance bodies on a transition by transition

basis, or any written detail regarding the reasons for changes in monthly revenue.

Further, there was no analysis recorded in committee minutes of the types of

transitions (for example, equity vs. fixed income), or why some transitions were

more profitable than others.

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Transition Management

4.6.
TM is a service provided to clients to support structural changes to asset portfolios

with the intention of managing risk and increasing portfolio returns. In the

Relevant Period State Street UK’s TM clients were predominately large investment

management firms or asset owners (including pension fund trustees) holding the

pension funds or savings of retail investors.

4.7.
TM services may be required when a client needs a large portfolio of securities to

be restructured, or when a client decides to remove or replace asset managers.

For example, a typical pension fund trustee may decide to change the general

type of assets (such as equities and fixed income bonds) that the pension fund

should be invested in. Where the change is large and complex, the pension fund

trustee may appoint a transition manager to project manage and effect the

transition.

4.8.
The process will generally require the TM provider to use hedging instruments to

minimise exposure before selling one portfolio and buying another and effecting

any Fx required.

4.9.
A transition manager can charge fees and generate revenue in a number of

different ways. It can charge commissions on equities and futures trades, mark-

ups on bonds, and/or it can charge a project management fee (which can either

be a fixed fee, or a fee based on a percentage of the overall portfolio).

4.10. The main performance indicator, and the basis upon which transition managers

generally compete for transitions, is the “implementation shortfall”, which equates

to the frictional cost of moving from one portfolio allocation to another and

includes the explicit costs as well as the market impact incurred prior to

completion of the transition as compared to the legacy portfolio’s performance.

Implementation shortfall is sometimes referred to as the “performance drag” on a

portfolio; it is, in effect, the true cost of a transition to an asset owner.

4.11. The implementation shortfall comprises a number of different components

including: (a) commissions, mark-ups and/or project management fees (which, as

set out above, are charged by the transition manager), and taxes which are

together referred to as “explicit costs”; and (b) trading costs such as the bid-ask

spread, market impact, and opportunity costs which are together referred to as

“implicit costs.”

State Street UK typical charging model

4.12. There are significant differences between the TM models of the leading TM

providers in the industry. Some TM providers (such as investment banks) can

trade as principal with their clients and can earn revenue for themselves by

charging a spread. The UK TM business marketed itself in client proposals as

offering a unique TM model, which was derived from State Street UK’s un-

conflicted, fiduciary role. Unlike investment banks offering TM services, the UK

TM business claimed that State Street UK could avoid the conflicts that would be

created through executing transitions and also running a proprietary trading book.

4.13. In a proposal document produced for a pension provider in October 2010, State

Street UK noted: “It is our responsibility as transition manager to minimize the

overall implementation shortfall, which includes both explicit and implicit costs.”

4.14. In 2007 State Street UK was a founding signatory to the T-Charter; a voluntary,

best-practice code for transition managers. The T-Charter sets out a number of

principles relating to disclosure and remuneration, and in particular states that

the transition manager will not apply dealing commission or charges, adjust prices

or apply a mark-up or mark-down other than as agreed with the client in the

contracting documentation and as disclosed in a disclosure document. State

Street UK’s TM business explicitly held itself out to various TM clients as adhering

to the principles contained in the T-Charter.

4.15. To earn revenue on a transition, the UK TM business typically agreed to charge a

client a commission when trading in equities and took a disclosed spread or mark-

up on any fixed income transitions. On occasion, a fixed management fee would

be charged instead of a commission or spread. In addition to these sources of

revenue, State Street UK would also generate revenue from the Fx and futures

transactions it carried out as part of a transition.

4.16. State Street UK’s TM business would typically outline the revenue and charges

noted in paragraph 4.15 above in a transparent way in the key contractual

documentation: the TMA (the master agreement for each client outlining how TM

services will be provided); and/or the Periodic or Transition Notice (an Appendix

that was signed for each transition, which referred back to the TMA, and provided

more specific details of individual transitions). Fx revenue, which would typically

be earned by a State Street entity acting as principal on a disclosed basis, would

not generally be specified. State Street UK’s TM business would also typically set

out the revenue and charges which the implementation shortfall was comprised of

in both the pre and post-trade analysis reports provided to clients.

Departures from the typical charging model

4.17. During 2008 and 2009 there was a significant withdrawal of competition from the

TM market and EMEA PSG won a large number of transitions for clients who were

seeking to restructure their asset portfolios. The return of a number of

competitors to the market during 2010, and a shortage of major TM deals of the

scale of those seen during 2009, had a significant impact on the financial

performance of the EMEA PSG business in 2010.

4.18. As a result of these market pressures, in May 2010 members of PSG senior

management discussed new ways of earning revenue. On certain transitions

from June 2010 the UK TM business moved away from the typical charging model

so as to earn additional revenues from mark-ups to trade prices that were not

agreed with or disclosed to the clients concerned. This was done in three

transitions in the second half of 2010.

4.19. In late 2010 or early 2011 this approach was discussed among EMEA PSG

management and PSG senior management. When concerns were raised by some

members of EMEA PSG management about the UK TM business moving away

from its typical charging model on some transitions, PSG senior management

claimed that this practice was operated by State Street UK’s competitors,

permitted under the terms of State Street UK’s standard agreements with its TM

clients, and approved by Legal. EMEA PSG management were prepared to accept

the assurances from PSG senior management and failed to raise any concerns

with State Street UK’s Legal or Compliance functions (who were not aware of and

had not approved any strategy to apply undisclosed mark-ups or charges on

transitions). By doing so, EMEA PSG management gave legitimacy to this

practice to more junior employees in the TM business.

4.20. The new charging model was deployed on the transitions conducted for six clients

during the Relevant Period, as set out below. In each case, the practice of

applying undisclosed mark-ups was not raised with Compliance or Legal, and was

not disclosed or escalated to anyone outside of the PSG.

Client A

4.21. State Street UK’s TM business conducted a large and complex transition for Client

A involving both fixed income and equities trading. The transition was split into

three tranches, with separate client reporting for each tranche. The total value of

the three tranches was approximately €4.7 billion. The UK TM business applied

undisclosed commissions and mark-ups to the equity and fixed income trades

which had not been expressly agreed by Client A.

4.22. In deciding what bid to make to Client A, a series of emails were sent between

members of PSG senior management which included the following comments on

how revenue would be earned from the transition:

“Gotta win this one! Any ideas how to get more revenue would be appreciated.”

“How about a 1bp management fee or something of that nature, no commissions

and then take a spread? We need to charge fee then otherwise they get

suspicious.”

“Just to clarify – 1.25bps is the management fee. The extra quarter point makes it

look like we actually thought about it and did the calculations.”

4.23. A fixed management fee of 1.65bps was eventually agreed with Client A as set

out in the Transition Notice. This fee was subsequently reduced to 1.25bps for

the third tranche. However, members of PSG senior management continued to

discuss possible other sources of revenue over email:

A: “need to be very creative here”

B: “we will.”

A: “Here’s what I think we should do with our new best friends[…]: - 1.65bps for

the privilege of working with us […] - 10-12 bps out of FI – 3bps spread out of US

equity and global small cap – trade all global em mkt net through brokers –

organise with FX to collect 5bps for trading back to euro. Perhaps the FX bit needs

a discussion upfront involving you and [an individual from SSGM Sales and

Trading Research], but we HAVE to show revenue in our numbers”.

B: “… Fx won’t be a problem.”

4.24. In addition to the agreed fixed management fee, the UK TM business charged

Client A undisclosed commissions on the equity trades on both tranche one and

tranche three. The UK TM business also charged undisclosed mark-ups on the

fixed income trades across all three tranches. The mark-ups to the fixed income

trades were on average 1.4bps on tranche one, 1.94bps on tranche two and

2.91bps on tranche three. The Authority has found no evidence of mark-ups on

the Fx trading.

4.25. In order to disguise the commissions added to the equity trades, EMEA PSG

management agreed to book the trades through a trading account which was

typically used for non-TM business to provide an average price to clients for a

day’s trading. However, this was not a situation where average prices were being

used. Instead, at the direction of EMEA PSG senior management, EMEA PSG

management extracted trade data from the trading records, added commissions,

and then uploaded the adjusted equity prices into the trading records. The use of

the account in this way meant that the commissions added to the equity trades

would not be visible to Client A.

4.26. Written trading instructions were issued to the trading desks, specifying that

there were to be no commissions applied to the fixed income trades. However,

contrary to the agreement with Client A, further instructions were then provided

by members of PSG senior management to traders in the UK and the US that

mark-ups should be applied. The Authority has not found any evidence of written

instructions which justify these mark-ups.

4.27. The application of mark-ups was questioned by a senior Global PSG individual

(“Individual A”), who was told by EMEA PSG management:

“its on a need to know basis… speak with [Global PSG senior management who]

knows the strategy here.”

4.28. Individual A then forwarded the query to Global PSG senior management and

asked: “care to share? I want to make sure I tell Finance the right amount to

accrue, looks like we are recognising revenues on the fixed income and futures

[EMEA PSG management] refrrd [sic] me to you.” The response from Global PSG

senior management stated: “1.75 bps on value traded. Will also have revenue

potentially from etf redemption.”

4.29. The Authority has found no evidence of any discussion of this issue between

anyone in PSG and any employee of State Street outside of PSG. Further, the

issue of applying mark-ups on an undisclosed basis when a fixed fee had been

agreed, was not raised with Compliance or Legal and was not disclosed or

escalated to anyone outside PSG.

4.30. State Street UK’s total agreed contractual fee for Client A’s transitions was

$1,634,085. However, State Street UK earned additional illegitimate revenue of

$3,709,187 from the undisclosed mark-ups and commissions that were applied on

this transition.

Client B

4.31. State Street UK’s TM business carried out a transition for Client B involving the

restructuring of a £850 million bond portfolio. State Street UK’s TM business

agreed to perform the transition for a fixed management fee of £350,000.

4.32. The TMA permitted State Street UK to earn a spread on fixed income trades in lieu

of commission, but specified that any such spread was to be specifically identified

in the Transition Notice. The Transition Notice provided to Client B referred to the

agreed fixed management fee of £350,000 but it made no reference to the

earning of a spread.

4.33. No mark-ups were built into the pre-trade estimate provided to Client B.

However, during trading, an average undisclosed mark-up of 0.55bps was applied

to fixed income trades in addition to the agreed fixed management fee. The post-

transition analysis report provided to Client B did not refer to the mark-ups which

had been applied to the fixed income trades, and only referred to the agreed

management fee of £350,000. The actual post implementation shortfall reported

to Client B after the transition had completed was significantly under the pre-

trade estimate due to favourable market conditions. However, the full benefit of

these market conditions was not passed on to Client B. Instead, a mark-up which

had not been agreed with Client B was earned and concealed within the bid-ask

spread line in the post-trade analysis report which was provided to Client B.

4.34. State Street UK earned additional illegitimate revenue of $1,003,375 from the

undisclosed mark-ups that were applied to the fixed income trades on this

transition.

4.35. State Street UK’s TM business carried out a €1.6 billion transition involving the

restructuring of the Euro-denominated fixed income portfolios of two pension

funds managed by Client C.

4.36. Ahead of the transition, Client C was informed by State Street UK’s TM business

that:

“The transition team will provide transparent implementation shortfall reporting,

highlighting the transition related cost. This allows for a clear cost and

performance attribution.”

4.37. Before trading commenced, Client C informed the UK TM business that all futures

should be executed through its broker rather than via State Street UK’s futures

broker. An email sent between members of PSG senior management commented

on the impact of losing the futures mandate for State Street UK’s potential

earnings from the transition:

“Just have to charge a bit more given that we don’t get futures revenue.”


4.38. Correspondence with Client C indicated that it was agreed that State Street UK

would earn a 1bp mark-up on the fixed income trades, which amounted to

$3,368,257, and that this would be built into the spread. However, the mark-up

charged was, on average, 1.5bps.

4.39. The post implementation shortfall analysis report provided to Client C contained

within the bid-ask spread undisclosed mark-ups of an additional 0.5bps over and

above the 1bp expressly agreed with the client. Despite having agreed 1bp with

Client C, and that clear and transparent transition reporting would be provided,

no separate line for the mark-up was disclosed in the post-transition report.

4.40. State Street UK earned additional illegitimate revenue of $1,574,349 from mark-

ups on fixed income trades which had not been expressly agreed with Client C.

Client D

4.41. State Street UK’s TM business carried out a €1 billion global equities and fixed

income transition for Client D. The transition was executed in two phases. State

Street UK’s TM business quoted a fixed management fee of €350,000 for the

transition, plus a 1bp commission on futures which totalled $547,609.

4.42. In pre-contractual negotiations Client D requested that the UK TM business:

"explicitly identify in the Transition Notice all…fees and charges and where they

cannot be explicitly identified they should list all possible sources of Revenue,

Futures Clearing, Bond Bid/Offer Spreads etc”.

4.43. Despite the specific request from Client D, State Street UK’s TM business only set

out the €350,000 fixed management fee in the Transition Notice and did not

disclose that any other commission or additional mark-up would be charged on

the fixed income trades.

4.44. Further, State Street UK’s TM business also represented to Client D in its bid

proposal that State Street UK was “fully compliant to the principles set out in the

T-Charter” and “believes in providing full transparency to clients.” Compliance

with the T-Charter would require the UK TM business to disclose to Client D all

sources of remuneration received by it as a result of the transition.

4.45. During the execution of the transition, the trading instructions emailed to the UK

trading desk stated “zero comms” for the fixed income trades, which meant that

no mark-up should be applied. However, subsequent to this email, the trading

desk applied a mark-up of approximately 0.5bps to most fixed income trades. No

written trading instructions have been identified which justify the mark-ups

applied to the fixed income trades.

4.46. The UK TM business failed to disclose to Client D the additional mark-ups that

were charged. The undisclosed mark-ups were hidden in the bid-ask spread or

opportunity cost lines of the post implementation shortfall.

4.47. The post-transition report sent to Client D only referred to the agreed fixed

management fee of €350,000. State Street UK earned additional illegitimate

revenue of $1,105,280 as a result of mark-ups which were not disclosed to Client

D.

Client E

4.48. State Street UK’s TM business performed two fixed income transitions for Client E

with a combined value of approximately $6 billion during the Relevant Period.

4.49. Following communications between EMEA PSG senior management and Client E

prior to the first transition, in which Client E requested that no explicit

commission be charged, EMEA PSG senior management proposed to undertake

the transition on a zero commission (and no management fee) basis.

4.50. In a series of communications between EMEA PSG senior management and Client

E, EMEA PSG senior management made clear that State Street UK preferred to

charge a disclosed commission, but in this instance it had arranged to receive:

“a share of the spread from the ‘other side’ (the successful/winning counterparty

for each individual security as chosen by us as your agent in a competitive bid

process)”

This representation was false; State Street UK’s earnings from any mark-up on

the spread would come, not from the “other side” but would be paid for by Client

E.

4.51. Further, EMEA PSG senior management confirmed that this would amount to “only

a few” basis points of commission and Client E would “get the best execution in

the market”.

4.52. Client E asked EMEA PSG senior management to confirm that “In terms of quoting

zero commission” State Street UK was in compliance with the T-Charter. EMEA

PSG senior management gave such a confirmation by reference to a draft of the

Periodic Notice which disclosed that the source of revenue would be mark-ups

included in the spread.

4.53. The UK TM business had no further communication with Client E regarding the

fees for the first transition. The post-trade analysis report provided to Client E

included no reference to the mark-ups that EMEA PSG senior management had

applied to Client E’s trades, which amounted to $2,738,344, equivalent to 9 basis

points.

4.54. These communications between EMEA PSG senior management and Client E were

inadequate and misleading. Whilst it was made clear to Client E that State Street

UK would earn remuneration from the transition, that was not reflected in the

Periodic Notice, the UK TM business did not receive a portion of the spread from

the executing broker, and the total revenue earned by State Street UK was

significantly more than “only a few” basis points. In addition, the source and

calculation of revenue was not properly disclosed. The Periodic Notice sent to

Client E for signature and the executed version of the Periodic Notice did not

disclose that the source of revenue would be mark-ups included in the spread as

required for a firm complying with the T-Charter. Nor did the UK TM business

disclose how remuneration was calculated and collected which was also a

requirement of the T-Charter.

4.55. For Client E’s second fixed income transition, the UK TM business again quoted a

zero commission and no management fee. The Periodic Notice provided in draft to

Client E stated that: “Trades will not attract any commission and will be priced

net. The manager may benefit from a bid-ask spread.” However, the signed

version returned by Client E did not contain this language. There were no further

communications with Client E regarding the revenues that would be earned.

4.56. On being awarded the second fixed income transition for Client E, members of

EMEA PSG management exchanged emails commenting: “Nice!” and “Back up

the truck!”

4.57. Shortly before the transition commenced, members of PSG senior management

exchanged further emails about the extent of scrutiny by Legal of the legal

documents governing the transition:

B: “Did they [Legal] look at the original agreement?”

A: “Absolutely not. Nor did they look at the periodic notice. This can of worms

stays closed!”

“Btw - there is no way we can disclose our spread.”

B: “Agreed.”

4.58. The pre-trade analysis report sent to Client E for the second transition included a

“market impact” estimate of approximately $5 million. This was an artificial and

fictitious figure which was moved from the estimate of the bid-ask spread to the

market impact line by a member of the UK TM team on instructions from EMEA

PSG senior management. This presentation of the trading costs disguised the

amount of the mark-up which EMEA PSG senior management expected to charge

Client E.

4.59. State Street UK’s earnings for the second transition were disguised within the

market impact and bid-ask spread costs instead of being separately specified,

thus the amount of revenue earned by State Street UK on this transition was not

disclosed to Client E. The total costs listed in the post-trade analysis report

include $4.7 million for market impact which was a fiction as this figure

incorporated the earnings made by State Street UK from the undisclosed mark-

ups which the UK TM business had applied to Client E’s trades.

4.60. In addition, State Street UK’s TM business failed to obtain permission before

executing Fx trades required in connection with the transition despite this being

required by the terms of the Periodic Notice. This failure was concealed from the

client when permission was belatedly sought.

4.61. State Street UK earned a total of $9,720,062 of revenue on Client E’s two

transitions as a result of the mark-ups which were not disclosed to Client E.

4.62. State Street UK’s TM business carried out a £1.3 billion transition for Client F

which involved the restructuring of fixed income and liquidity mandates. The

Transition Notice sent to Client F, confirmed that a fixed fee of 1.75bps “on the

value of the portfolio” would be charged. An additional 1bp of the “traded value”

of futures was later agreed with Client F by email. State Street UK’s total agreed

fee was $922,107.

4.63. Client F asked for confirmation that the agreed fixed fee was the “full and final

transition fee including all buying and selling required.” EMEA PSG senior

management
confirmed
that
that
was correct. However, following this

confirmation,
email
correspondence
between
members
of
PSG
senior

management indicated an intention to apply an additional mark up on top of the

agreed fixed management fee: “I am thinking 1.5-2bpy”.

4.64. State Street UK’s TM business included an undisclosed mark-up of 1.75bps in the

bid-ask spread line of the initial pre-trade analysis report. This was reduced to

0.75bps in the final pre-trade analysis report sent to Client F.

4.65. During execution, the trading instructions sent to the UK trading desk stated

“Comms: ZERO COMMS” (which meant that no mark-up should be applied to the

trades) which was consistent with the contractual documentation. However, an

average mark-up of 1bp was applied to US trades, and an average mark-up of

2bps was applied to European trades. The Authority has not found any evidence

of written instructions which justify these mark-ups.

4.66. When Finance queried why mark-ups of 1bps and 2bps were added when the

instructions read zero commission, Individual A forwarded this query to EMEA PSG

senior management and was informed that zero commissions were “none of their

concern.” There is no evidence that anyone in Finance, or Individual A, followed

up on this issue, challenged anyone in EMEA PSG management further, or raised

the issue with Compliance.

4.67. Futures traded as part of the transition were also conducted at a higher rate of

commission than the 1bp agreed.

4.68. The post-implementation shortfall reported to Client F was almost identical to the

estimate in the pre-trade analysis report, but hidden within the bid-ask spread

line was $3,057,350 of illegitimate revenue earned as a result of the undisclosed

mark-ups which had been applied.

4.69. Finance did not query the request from EMEA PSG senior management that a

further $3 million of “missing revenue” for Client F (effectively the undisclosed

mark-ups) should be added to the management accounts in May 2011.

Discovery of overcharging

4.70. On 21 June 2011, Client F contacted EMEA PSG senior management asking if the

1.75bps agreed fee, plus commissions for futures execution was “the sole revenue

for SSGM and/or any of its affiliates on this event.” EMEA PSG senior management

confirmed this was correct, despite being aware that undisclosed mark-ups had

been taken on the fixed income trades. Client F responded noting that their own

consultant, using publicly available bond pricing information in the US, had

identified mark-ups on certain US fixed income trades which had not been

disclosed and which had not been expressly agreed.

4.71. EMEA PSG senior management sent a holding response to Client F stating that it

“doesn’t seem right”, despite being fully aware that undisclosed mark-ups had

been deliberately applied to the US trades. Members of PSG senior management

then agreed that they should provide the following inaccurate response to Client F

on behalf of State Street UK:

“our trading desk in the US has erroneously applied commissions of 1 bp of yield

to trades that should have gone through at zero commission.”

4.72. Members of PSG senior management agreed that State Street UK would rebate

Client F approximately $1 million for the mark-ups that had been applied to the

US trades, describing them as “inadvertent commissions.”

4.73. Members of PSG senior management then circumvented the usual processes and

procedures to make the rebate so that it was not recorded in the loss event

tracking system. As a result, the rebate was paid without alerting Compliance or

State Street UK senior management to the issue.

4.74. While arranging the rebate for Client F, members of PSG senior management

failed to disclose to Client F that they had also deliberately taken mark-ups on

Client F’s European trades, which had earned State Street UK further undisclosed

revenue of approximately $2 million.

4.75. Client F appointed a third-party analyst to perform a full post-transition review, at

State Street UK’s cost. As part of its review, the analyst requested that

Compliance provide written confirmation that the correct amount had been repaid

and the error did not constitute a regulatory breach.

4.76. Compliance undertook a limited investigation of the transition and relied on

assurances from members of PSG senior management that it was an isolated

error affecting the US based trades and that no applicable regulations had been

breached. As a result, Compliance prepared a factually incorrect letter, based on

a misleading draft provided by members of PSG senior management, stating that

the mark-ups were an error and limited to the US trades to send to Client F’s

analyst. This letter was not sent, after concerns were escalated to State Street

UK senior management by a senior individual outside of PSG following a

conversation with one of the EMEA PSG managers.

Summary of overcharging

4.77. State Street UK’s TM business therefore departed from its agreed charging model

by overcharging six clients between June 2010 and September 2011. It also

misled these clients as to the fees and charges being levied through undisclosed

commissions and hidden mark-ups totalling $20,169,603 and deliberately

provided false information to these clients despite holding itself out to certain

clients as complying with the T-Charter.

Actions since overcharging identified

4.78. Once concerns were escalated, State Street UK commenced an internal

investigation into the Client F overcharging incident in September 2011 and

promptly notified the Authority. Once State Street UK senior management

recognised that the overcharging issue could extend to other clients, State Street

UK appointed external advisors to undertake their own independent investigation.

In October 2011 State Street UK notified those clients that it understood had been

overcharged based upon its investigation and notified all UK TM clients of the

charging issues that had arisen. In January 2012, pursuant to a requirement by

the Authority, a leading accountancy firm was appointed as a skilled person (the

“Skilled Person”) under s166 of the Act to prepare a report into the UK TM

business during the Relevant Period. The Skilled Person’s report was delivered in

August 2012 and concluded that State Street UK’s TM business had overcharged

Clients A – F and that it should repay any outstanding amounts to the

overcharged clients.

4.79. State Street UK implemented a comprehensive remediation programme, at its

own initiative, to resolve the overcharging issues that arose in the UK TM business

and to substantially enhance the control environment in the EMEA PSG business.

This programme began before the Skilled Person had been appointed and then

later
encompassed
a
structured
programme
to
implement
the
control

enhancements and other recommendations set out in the Skilled Person’s report.

Further, State Street UK established and resourced a central function to review

and make improvements to the controls and culture across all of its UK

businesses, not only the UK TM business. State Street UK has bolstered its

control functions in terms of both the quality and quantity of the staff and has

made several new senior level appointments within its control functions. State

Street UK also dismissed various individuals centrally involved in the overcharging

of TM clients.

4.80. As mentioned above, State Street UK has contacted the affected clients and has

now provided rebates, or offered to provide rebates, to all of the affected clients

of the full amount they were overcharged, including the amount State Street UK’s

TM business overcharged Client F on the European trades. State Street UK’s

communications with one client did not properly explain the misrepresentations

made to it, or that it had been overcharged, until late in 2013, more than a year

after the completion of the Skilled Person’s report. As a result, although State

Street UK has agreed to compensate that client for detriment suffered as a result

of failings in the UK TM business, there are on-going discussions as to the

appropriate rebate amounts in relation to that client. State Street UK has agreed

to conduct further work with the oversight of the Authority to confirm that the

issue described at paragraph 4.60 above is an isolated issue.

Systems and controls

4.81. There was a lack of formality in the control environment around the UK TM

business. Of most significance, there was no independent reconciliation of final

commissions recorded in State Street UK’s books and records and those disclosed

in the final client reporting, back to the contractually agreed client charges per

the legal documentation, or to the fees agreed in email correspondence.

4.82. Further, the following specific issues were identified in connection with the UK TM

control environment in the Relevant Period:

(1) Contractual documentation – the UK TM business did not consistently comply

with State Street UK’s policy concerning the review and sign-off of legal

agreements (including TMAs) and transition notices by Legal. There were no

specific procedures or controls in place during the Relevant Period to prevent

or detect this circumvention of this policy. Consequently, the contractual

documentation was in some cases poorly drafted and lacked clarity, and the

basis for charging was misleading or unclear in certain instances. In some

cases there was a complete absence of fee information in the contractual

documentation; fees were sometimes communicated to clients by email. In

other cases, some of the contractual documentation was informal and

unsigned;

(2) Trading instructions – verbal communication between the TM desk and the

PSG trade execution desks meant that trading instructions were not

consistently documented or recorded;

(3) Manual booking of trades – for the majority of the Relevant Period, the TM

team relied on manual processes and spreadsheets for managing and booking

out transition trades which meant that it was possible for them to be

manually adjusted. Accordingly, there was a risk that they could be

manipulated;

(4) Segregation of duties - there was an absence of any segregation of duties

which meant that front-office staff were able to enter, amend and verify TM

trading commissions without an independent secondary review; and

(5) Client reporting – the client reporting process (both pre and post-trade) was

manual and there were no clear protocols in relation to the calculation of

costs and their allocation to various explicit and implicit costs lines in the

client reports. In particular, there was no requirement in the TM desk policy

for transition managers to fully disclose commissions or mark-ups separately

from the bid-ask spread cost category in post-trade reporting. Instead, it was

at the discretion of the transition manager whether fixed income mark-ups

were shown separately. There was a lack of documented secondary review of

client reports.

4.83. Separately, State Street UK did not have a comprehensive set of policies and

procedures setting out the correct procedure for recording, approving, monitoring

and reporting of all types of rebates. Accordingly, there was a risk that client

rebates would not be recorded appropriately and/or brought to the attention of

Compliance or State Street UK senior management.

4.84. As set out in paragraph 4.4 above, the matrix management framework in place at

State Street in the Relevant Period operated in a way which meant that State

Street UK senior management had only a secondary role in the day to day

management of the UK TM business. As a result, State Street UK allowed

business practices to develop in its UK TM business whereby acting in the client’s

interests was less of a priority than profit making.

4.85. Compliance had responsibility for oversight of the compliance of EMEA PSG (and

therefore State Street UK’s TM business) with applicable regulatory requirements

during the Relevant Period. This was achieved through the presence of business

aligned compliance officers with identified responsibility for EMEA PSG, and

through the implementation of an annual Compliance Monitoring and Testing

programme.

4.86. Although Compliance was situated on the same floor as TM, Compliance was not

considered particularly visible by those working in the UK TM business; it was

considered peripheral and was not embedded into the business.

4.87. The adequacy of Compliance resourcing was a standing Key Risk Indicator

reported to the monthly UK Risk and Compliance Committee meetings and was

reported as both Red and Amber for a number of months in the Relevant Period.

4.88. The business aligned compliance officers were part of the Advisory team within

Compliance and they were tasked with providing ongoing compliance advisory

support and guidance to their respective business units. Despite this, Compliance

was not informed by anyone from EMEA PSG or elsewhere within State Street

about the overcharging.

4.89. The annual Compliance Monitoring and Testing programme failed to identify any

of the control issues in respect of the UK TM business that existed in the Relevant

Period. It was carried out on a thematic basis. There was no end-to-end testing

of processes and controls within the SSGM businesses, including TM, in the

Relevant Period.

4.90. Legal resource supporting State Street UK was known to be stretched at the time

and, although arrangements were made to put cover in place, Legal was unaware

that the UK TM business was entering into agreements which had not been

reviewed by and cleared with Legal under applicable policies, and that contractual

documentation was being used by the UK TM business which was in some cases

poorly drafted and lacked clarity. As Legal was not closely involved in the UK TM

business during the Relevant Period, Legal was unable to prevent or detect the

overcharging.

4.91. SSGM’s Corporate Audit Function was based in Boston and had responsibility for

internal audit oversight of the UK TM business. Two audits of the UK TM business

were undertaken in the Relevant Period. The first covered PSG front office

arrangements, while the second covered the operational functions supporting

PSG. Although the audits identified some control issues (for example the manual

nature of the fixed income processes), they did not identify a number of the

weaknesses that existed in the Relevant Period. Both audits received a

satisfactory rating.

4.92. Whilst the Risk Management function identified some control weaknesses in the

UK TM business, including concerns surrounding the accuracy and timeliness of

client reporting in the Relevant Period, they did not identify the operational

control weaknesses which existed during the Relevant Period, such as the lack of

adequate processes overseeing the correct application of commission rates and

spreads for TM trading.

5.
FAILINGS

5.1.
The statutory and regulatory provisions relevant to this Final Notice are referred

to in Annex A.

5.2.
Principle 6 states:

A firm must pay due regard to the interests of its customers and treat them fairly.

5.3.
By reason of the facts and matters set out below, the Authority considers that

State Street UK failed to pay due regard to the interests of its customers and treat

them fairly, in breach of Principle 6:

(1) State Street UK allowed a culture to develop in its UK TM business in which

the interests of customers were subordinated to the generation of revenue for

the firm;

(2) In order to meet revenue targets State Street UK’s TM business initiated and

executed a deliberate and targeted strategy to overcharge certain UK TM

clients and to conceal those charges from such clients. Between 1 June 2010

and 30 September 2011, State Street UK’s TM business overcharged six of its

clients, illegitimately earning $20,169,603. The strategy was primarily

executed by EMEA PSG senior management, but it was also carried out by

members of EMEA PSG management and it had the full support of, and was

enabled by, Global PSG senior management. Further, other more junior staff

in the UK TM business and Finance enabled the overcharging to take place

and failed to raise any concerns; and

(3) State Street UK exposed its TM customers to this overcharging because it

failed to identify or manage the risk that this would occur. This failure arose

because of the serious deficiencies in its business controls and control

functions in relation to the UK TM business, and the inherent weaknesses in

its governance and matrix management oversight framework throughout the

Relevant Period.

Principle 7

5.4.
Principle 7 states:

A firm must pay due regard to the information needs of its clients, and

communicate information to them in a way which is clear, fair and not misleading.

5.5.
By reason of the facts and matters set out below, the Authority considers that

State Street UK failed to pay due regard to the information needs of its TM clients

and communicated with those clients in a way which was unclear, unfair and

misleading, in breach of Principle 7:

(1) State Street UK allowed its UK TM business to repeatedly provide certain TM

clients with inaccurate, unclear and misleading information, at all stages of

the transition process, as to the remuneration State Street UK would earn on

transitions, and the charges and fees that would be levied, in order to conceal

these from clients;

(2) State Street UK allowed its UK TM business to falsely hold itself out to two of

the affected clients as complying with the Principles of the T-Charter, which it

was aware was likely to be a material consideration for those customers in

deciding whether to appoint it for the transitions, and then failed to comply

with the T-Charter; and

(3) When Client F identified that mark-ups had been made to its US trades that

had not been agreed, State Street UK’s TM business deliberately failed to

disclose to Client F the existence of further mark-ups on other trades

conducted as part of the same transition.

5.6.
Principle 3 states:

A firm must take reasonable care to organise and control its affairs responsibly

and effectively, with adequate risk management systems.

5.7.
By reason of the facts and matters set out below, the Authority considers that

State Street UK failed to take reasonable care to organise and control its affairs

responsibly and effectively, with adequate risk management systems, in breach of

Principle 3.

5.8.
There were significant failings in the business controls relating to the UK TM

business. In particular, State Street UK failed to put in place appropriate systems

and controls around its UK TM business to adequately mitigate the risk that

employees would mislead and/or overcharge clients, and if such conduct occurred,

to detect it in a timely manner. The systemic weaknesses in State Street UK’s

control environment around its UK TM business were so serious that the

overcharging remained undetected throughout the Relevant Period until it was

identified by a client.

5.9.
The matrix management framework in place at State Street in the Relevant Period

operated in a way which meant that State Street UK senior management had only

a secondary role in the day to day management of the UK TM business. EMEA

PSG senior management primarily agreed strategy and approach with Global PSG

senior management, and conducted business with clients without sign-off and

with little scrutiny from State Street UK senior management. As a result, State

Street UK allowed business practices to develop in its UK TM business whereby

acting in the client’s interests was less of a priority than profit making. Further,

State Street UK did not recognise that a culture had developed in its UK TM

business which subordinated the interests of clients to the generation of revenue

for the firm and did not identify the very serious misconduct within the UK TM

business.

5.10. The level of discussion, scrutiny and challenge in relation to the UK TM business

and its revenue streams in key State Street UK senior management meetings,

including those of the UK Board, UK ExCo and SMC, was inadequate during the

Relevant Period.

Business controls

5.11. The following key failings were specifically identified or reflected in the section

166 report. The Authority considers that these failings existed throughout the

Relevant Period and that they constitute a breach of Principle 3:

(1) The fundamental control failing which enabled the overcharging to take place

was a lack of independent reconciliation of final commissions recorded in

State Street UK’s books and records, as well as those disclosed in the final

client reporting, back to the contractually agreed client charges as per the

legal documentation (or to emails or other documents where fee agreements

had been recorded);

(2) The UK TM business did not consistently comply with State Street UK’s policy

concerning the review and sign-off of legal agreements (including TMAs) and

transition notices by Legal. Consequently, in many cases, the contractual

documentation was poorly drafted and lacked clarity, and the contractually

agreed basis for charging was misleading or unclear in many instances;

(3) The absence of any segregation of duties enabled front-office staff to enter,

amend and verify TM trading commissions without an independent secondary

review. The fact that commissions could be altered manually led to the risk

that they would be inappropriately manipulated;

(4) The client reporting process (both pre and post-trade) was manual and there

were no clear protocols in relation to the calculation of costs and their

allocation to various explicit and implicit costs lines in the client reports. In

particular, there was no requirement in the TM desk policy for transition

managers to fully disclose commissions or mark-ups separately from the bid-

ask spread cost category in post-trade reporting. Instead, it was at the

discretion of the transition manager whether fixed income mark-ups were

shown separately;

(5) There was a lack of documented secondary review (incorporating a check

back to the underlying contractual terms) of client reports prior to the report

being sent to the client which increased the risk that they would contain

errors; and

(6) State Street UK did not have a comprehensive set of policies and procedures

setting out the correct procedure for recording, approving, monitoring and

reporting of all types of rebates. This exposed the business to an increased

risk that the procedures could be circumvented and rebates could be made to

clients without scrutiny. As a result, members of PSG senior management

were able to circumvent the usual processes to make a partial rebate to Client

F in an effort to avoid detection by Compliance and State Street UK senior

management.

Control Functions

5.12. The Compliance function failed to embed itself into State Street UK’s TM business,

and was known to be under resourced in the Relevant Period. The Authority

considers that the lack of a compliance culture within the UK TM business was a

key factor in why staff did not escalate any concerns to Compliance.

5.13. The Compliance Monitoring and Testing programme undertaken in relation to

EMEA PSG (including the UK TM business) was wholly inadequate in the Relevant

Period as it did not perform end to end testing of the risks and controls within the

business but focussed instead on carrying out testing on a thematic basis.

Consequently, Compliance failed to prevent or detect any of the numerous,

serious failings relating to the UK TM business.

5.14. Neither the Corporate Audit function nor Risk Management identified the critical

control failings that permitted the over-charging to take place and remain

undetected.

5.15. Legal resource supporting State Street UK was known to be stretched at the time

and, although arrangements were made to put cover in place, Legal was unaware

that the UK TM business was entering into agreements which had not been

reviewed by and cleared with Legal under applicable policies, and that contractual

documentation was being used by the UK TM business which was in some cases

poorly drafted and lacked clarity. As Legal was not closely involved in the UK TM

business during the Relevant Period, Legal was unable to prevent or detect the

overcharging.

5.16. There was a specific failure by Compliance to carry out an appropriate

investigation into the Client F overcharging incident. In particular, Compliance

did not take sufficient steps to confirm representations made to them by the

EMEA PSG senior management before preparing a letter to Client F. They did not,

for example, review the full transition file, client reports and legal agreements, or

speak to others involved in executing the transition so as to understand what had

occurred and satisfy themselves as to the appropriate terms of the letter.

6.
SANCTION

6.1.
The Authority’s policy for determining a financial penalty is set out in Chapter 6 of

DEPP which is part of the Authority Handbook. The Authority’s current penalty

regime applies to breaches which took place on or after 6 March 2010.

6.2.
State Street UK’s misconduct took place both before and after 6 March 2010.

However, as a significant majority of the Relevant Period falls after 6 March 2010,

and given that the overcharging of clients by the UK TM business, took place after

6 March 2010, the Authority has determined the appropriate financial penalty

pursuant to the framework set out in DEPP 6.5A (as set out below).

6.3.
In deciding the penalty, the Authority has had regard to all the circumstances of

the case and the financial resources of State Street UK.

6.4.
The Authority considers it appropriate in the particular circumstances of this case

to impose a combined financial penalty for the Principle 6, Principle 7 and

Principle 3 breaches.

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

financial benefit derived directly from the breach.

6.6.
As set out in section 4 of this Notice, State Street UK’s TM business deliberately

overcharged a number of its TM clients during the Relevant Period and as a result

made a profit of $20,169,603.

6.7.
As State Street UK has fully rebated, or offered to rebate, Clients A to F the full

amount that they were overcharged, the Step 1 figure is nil.

Step 2: Seriousness and impact of the breach

6.8.
The nature of TM is such that various of State Street’s UK entities are involved in

facilitating the transition process and generate revenue from the transitions. The

Authority considers that the total revenue generated by State Street in connection

with the UK TM business in the Relevant Period is the appropriate indicator of

harm.

6.9.
The relevant revenue is therefore the total revenue generated by State Street’s

UK entities in connection with the UK TM business during the Relevant Period,

which is £49,534,6791 ($77,904,287).

6.10. The Authority considers the breaches in this case to be particularly serious for the

following reasons:

(1) State Street UK’s failings allowed a culture to develop in the UK TM business

which prioritised revenue generation over the interests of customers. As a

result, the UK TM business developed and executed a deliberate and targeted

strategy to overcharge certain TM clients;

(2) Six TM clients were significantly overcharged a total of $20,169,603;

(3) State Street UK’s TM clients over the Relevant Period included large

investment management firms and asset owners holding the pension money

and investments of retail customers. Accordingly, State Street UK’s actions in

the wholesale market caused a risk of serious detriment to retail investors;

(4) In carrying out TM services for its clients, State Street UK acted as agent, and

held itself out as being a trusted advisor. In one of the relevant transition

agreements, State Street UK agreed to act as a fiduciary. Accordingly, State

Street UK breached a position of trust;

(5) State Street UK’s breaches revealed systemic weaknesses in State Street UK’s

systems and controls around their UK TM business;

(6) Further, the systemic weaknesses in State Street UK’s control environment

around the UK TM business were so serious that the overcharging was able to

remain undetected until it was highlighted by a client. Had Client F not

identified the mark-ups on its trades, the overcharging of clients may have

remained undetected and further clients may have been overcharged; and

(7) State Street UK’s breaches caused a significant risk that financial crime would

be facilitated.

1 The conversion to GBP was calculated using the average yearly or part yearly exchange rate applicable to

each calendar year (2010/2011).

30

6.11. Taking into account the above factors, the Authority considers the seriousness of

the breaches to be Level 5. Therefore, the Step 2 figure is 20% of £49,534,679.

6.12. The Step 2 figure is £9,906,936.

Step 3: Mitigating and aggravating factors

6.13. The Authority considers that the following are relevant aggravating and mitigating

Aggravating factors

(1) It was only upon the instruction of a third-party analyst, and the completion

of the internal and external investigations (including the investigation by the

Skilled Person), that the extent of the overcharging against the TM clients

was uncovered; and

(2) Although State Street UK has contacted the affected clients and has provided

rebates or offered to provide rebates to all affected clients, State Street UK’s

communications with one client did not fully explain the misrepresentations

made to it, or that it had been overcharged, until late in 2013, more than a

year after the completion of the Skilled Person’s report. As a result, there are

on-going discussions as to the appropriate rebate amounts to one client.

(3) Despite the numerous investigations conducted since the overcharging came

to light, the fact that a State Street entity had on one transition traded Fx

without first having sought the client’s permission and concealed this fact

from the client was only identified by State Street UK in January 2014.

Mitigating factors

(4) The
Authority
acknowledges
that
State
Street
UK
implemented
a

comprehensive remediation programme, at its own initiative, to resolve the

overcharging issues that arose in the UK TM business. This included a

structured programme to implement the control enhancements and other

recommendations set out in the Skilled Person’s report. Further, State Street

UK established and resourced a central function to review and make

improvements to the controls and culture across all of its UK businesses, not

only the UK TM business. State Street UK has also bolstered its control

functions in terms of both the quality and quantity of the staff and has made

several new senior level appointments within its control functions.

6.14. Having taken into account the aggravating and mitigating factors set out above,

the Authority considers that of the Step 2 figure should be increased by 10%.

6.15. The Step 3 figure is therefore £10,897,629.

Step 4: Adjustment for deterrence

6.16. The Authority considers that DEPP 6.5A.4(1)(a) is relevant in this instance and

has therefore determined that this is an appropriate case where an adjustment for

deterrence is necessary.

6.17. Without an adjustment for deterrence, the financial penalty would be

£10,897,629. The Authority considers that a penalty of this size would not serve

as a real credible deterrent as it is less than the amount of revenue generated by

State Street UK from overcharging its TM clients. Given the size and stature of

State Street UK, and the egregious nature of the misconduct, it is necessary for

the Authority to increase the penalty to achieve credible deterrence.

6.18. Having taken into account the factors outlined at DEPP 6.5A.4G the Authority

considers that a multiplier of 3 should be applied at Step 4. Therefore, the Step

4 figure is £32,692,888.

Step 5: Settlement discount

6.19. Pursuant to DEPP 6.5A.5G, 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. The Authority and State Street

UK reached agreement at Stage 1 and so a 30% discount applies to the Step 4

figure.

6.20. The Step 5 figure is £22,885,000 (rounded down to the nearest £100).

6.21. The Authority therefore proposes to impose a total financial penalty of

£22,885,000 on State Street UK for the breaches set out in this notice.

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 State Street UK to the Authority by

no later than Thursday 13 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 Friday 14 2014, the

Authority may recover the outstanding amount as a debt owed by State Street UK

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 Clare McMullen,

Kerri Scott or Meg Gardiner at the Authority (on 020 7066 1000).

....................................................................................

Financial Conduct Authority, Enforcement and Financial Crime Division

ANNEX A

RELEVANT
STATUTORY
PROVISIONS,
REGULATORY
REQUIREMENTS
AND

AUTHORITY GUIDANCE

1.
STATUTORY PROVISIONS

1.1.
The Authority’s strategic objective, set out in section 1B(2) of the Act, is ensuring

that the relevant markets function well. This is supported by three operational

objectives which are;

1.1.1. The consumer protection objective;

1.1.2. The integrity objective;

1.1.3. The competition objective.

1.2.
Section 206 of the Act provides that if the Authority considers that an authorised

person has contravened a requirement imposed on him by or under the Act, it

may impose on him a penalty, in respect of the contravention, of such an amount

as it considers appropriate.

1.3.
The Firm is an authorised person for the purposes of section 206 of the Act.

2.
REGULATORY PROVISIONS

2.1.
In exercising its power to issue a financial penalty, the Authority must have

regard to the relevant provisions in the Handbook of rules and guidance (the

“Handbook”).

2.2.
In deciding on the action proposed, the Authority has also had regard to guidance

published in the Authority Handbook and set out in the Regulatory Guides, in

particular the Decision Procedure and Penalties Manual (“DEPP”) and the

Enforcement Guide (“EG”).

3.
PRINCIPLES FOR BUSINESSES (PRIN)

3.1.
The Principles are a general statement of the fundamental obligations of firms

under the regulatory system and are set out in the Handbook. They derive their

authority from the rule-making powers as set out in the Act and reflect the

Authority’s regulatory objectives.

3.1.1 The relevant Principles are as follows:

Principle 6 provides: “A firm must pay due regard to the interests of its

customers and treat them fairly.”

Principle 7 provides: “A firm must pay due regard to the information

needs of its clients, and communicate information to them in a way

which is clear, fair and not misleading.”

Principle 3 provides: “A firm must take reasonable care to organise and

control its affairs responsibly and effectively, with adequate risk

management systems”.

4
ENFORCEMENT GUIDE (EG)

4.1
The Authority’s approach to taking disciplinary action is set out in Chapter 2 of

EG. The Authority’s approach to financial penalties and public censures is set out

in Chapter 7 of EG. EG 7.1 states that the effective and proportionate use of the

Authority’s powers to enforce the requirements of the Act, the rules and the

Statements of Principles for Approved Persons will play an important role in the

Authority’s pursuit of its regulatory objectives. Imposing financial penalties and

public censures shows that the Authority is upholding regulatory standards and

helps to maintain market confidence and deter financial crime. An increased

public awareness of regulatory standards also contributes to the protection of

consumers.

5
DECISION, PROCEDURE AND PENALTIES MANUAL (DEPP)

5.1
Guidance on the imposition and amount of penalties is set out in Chapter 6 of

DEPP. Changes to DEPP were introduced on 6 March 2010. As a significant

majority of the Relevant Period falls after 6 March 2010, and as the Authority

considers the overcharging of clients, which took place after 6 March 2010, to be

the gravamen of the misconduct, it has determined the appropriate financial

penalty pursuant to the framework set out in DEPP 6.5A.