Financial promotions relating to a structured product aimed at mainstream consumers that “let their customers down badly” have resulted in a £2.4m fine for Credit Suisse International and £1.4m penalty for Yorkshire Building Society.
The ‘cliquet’ product was designed by CSI to provide capital protection and a guaranteed minimum return with the apparent potential for significantly more if the FTSE 100 performed consistently well.
The probability of achieving only the minimum return was 40 to 50 per cent and the probability of achieving the maximum return was close to 0 per cent, the City watchdog calculated.
Despite this CSI’s and YBS’s financial promotions marketed the potential maximum return on the product as a key promotional feature. The target market for the Cliquet Product was described by CSI as “stepping stone customers” who were conservative and risk averse.
But the regulator found the product was typically sold to unsophisticated investors with limited investment experience and knowledge through a number of distributors.
A total of 83,777 customers invested a total of £797.4m in the product, with YBS being the distributor responsible for about 75 per cent of the total amount invested.
According to the regulator the maximum return figure was given undue prominence in both CSI’s product brochures, which YBS approved and provided to their clients, as well as in YBS’s own financial promotions for the product.
Tracey McDermott, director of enforcement and financial crime at the FCA, said: “It is crucial that firms consider the needs of their customers from the time that products are being designed through to their marketing and sale.
“The information provided to customers forms an important part of this. Financial promotions are often the primary source of information for consumers and in this case CSI and YBS let their customers down badly.
“These promotions were a serious breach of the requirement to be clear, fair and not misleading.
“CSI and YBS knew that the chances of receiving the maximum return were close to zero but they nevertheless highlighted this as a key promotional feature of the product. This was unacceptable.”
In September 2010, following concerns raised by third parties, including Which?, YBS changed its promotions so that undue prominence was no longer given to the potential maximum return.
However, the regulator ruled YBS continued to cite the potential maximum return and to give an unfair impression of the likelihood of achieving it.
CSI also reviewed its promotions in response to the third parties’ concerns, but decided not to change its product brochure significantly.
In addition, the FCA found that CSI failed to have a procedure in place for a complete review of their long running promotions on a periodic basis.
If CSI’s processes had included such a review, this may have resulted in the problems with the product brochure being remedied earlier.
Both firms agreed to settle at an early stage of the FCA’s investigation and therefore received a 30 per cent settlement discount.