Barclays Bank Plc

On 14 January 2011 the FSA imposed a financial penalty of £7.7 million on Barclays Bank plc (Barclays) for breaches of the FSA's Principles and rules which occurred between July 2006 and November 2008 in relation the sale of Aviva's Global Balanced Income Fund and Global Cautious Income Fund (the 'Funds'). Barclays agreed to settle at an early stage of the FSA's investigation. It therefore qualified for a 30% (Stage 1) discount under the FSA's executive settlement procedures. Were it not for this discount, the FSA would have imposed a financial penalty of £11m on Barclays. Barclays breached Principle 9 during the Relevant Period in that it failed to take reasonable care to ensure the suitability of its advice regarding the Funds for customers entitled to rely upon its judgement. The customers were typically in or near retirement and included inexperienced investors. The firm's failings include the following: (1) The training material given to Barclays staff was inadequate. It did not identify the types of customers the Funds were suitable for. Nor did it explain clearly that, when markets go down, customers who drew income from the Funds were at risk of their capital being eroded and the amount of income they could draw declining over time. In relation to the Balanced Fund, it did not state that these were significant risks. The training material failed to make staff aware that the Funds were unlikely to be appropriate for customers who wanted capital growth as an investment objective. (2) The sales briefs and product updates Barclays sent to its advisers increased the risk of the Funds being mis-sold because they referred only to the potential benefits of investing in the Funds. They did not refer to any of the risks nor the need for those risks to be clearly communicated to prospective customers. (3) Product brochures and other documentation given to customers contained inadequate information and statements which could have misled customers about the nature and levels of risk involved. The documents did not clearly and prominently explain the extent to which an investment in the Funds was linked to fluctuations in the stock market. For those who drew income from the Funds, it did not explain the risk of capital loss and the negative impact this would have on the amount of income produced by the Funds. (4) Barclays failed to put in place adequate procedures for monitoring of sales of the Funds and this resulted in a failure to promptly identify and investigate potentially unsuitable sales. Where compliance monitoring identified particular issues, Barclays failed to take appropriate and timely action, including by implementing a past business review. Barclays also breached COB 5.3.5R and COBS 9.2.1R. As a consequence of the above failings, Barclays customers were exposed to an unacceptable risk of unsuitable sales and a number of unsuitable sales were made. By 7 December 2010, 1676 customers had complained about their investment in the Funds and compensation of approximately £17 million had been paid. It is expected that further compensation of between £20 million and £42 million will be paid. Seriousness of the breaches and mitigating factors The breaches are viewed as particularly serious because Barclays identified, at an early stage, concerns with the Funds but did not take adequate steps to mitigate those concerns. In particular, Barclays identified: 1. The Funds' enhanced income objective was likely to appeal to vulnerable customers, such as those inexperienced in stock market investments and the elderly looking to invest their retirement savings to generate additional income. 2. Customers may not be able to understand the risks of the Funds because of their complex characteristics. 3. In relation to the Balanced Fund, that its risk categorisation was at the upper end of 'balanced' and additional controls in its sales processes were therefore required to mitigate thiskof unsuitable sales. The FSA has also taken the following into account when considering the seriousness of the breaches: 1. A large number of investors were placed at risk and the potential impact was significant. During the Relevant Period, the total number of customers who invested in the Funds is 12,331 with investments totalling £692 million. 2. The mis-conduct spanned more than 2 years. Barclays is undertaking a comprehensive past business review to ensure that customers do not lose out as a result of the failings identified by the FSA. In particular, Barclays has agreed in consultation with the FSA for a third party firm of accountants to review customer files for sales made during the Relevant Period to ascertain whether those sales were suitable. As part of this process, customers may be contacted if this is necessary to allow a decision on suitability to be made. For those sales which are found to be unsuitable, redress will be paid to the customer to ensure he or she has not lost out financially. Barclays past business review described above has been taken into account when deciding upon the level of disciplinary sanction. It is difficult to predict at this stage, but the total amount Barclays will have to pay to customers could be as much as £60 million.