State Street fined £23m for secret mark-ups charged to clients

The UK market regulator has dealt a stinging rebuke to State Street by fining the US financial group £22.9m for acting with "complete disregard for its customers" by charging clients secret mark-ups on some transactions.

The Financial Conduct Authority said that State Street "deliberately" overcharged six clients in the US group's transition management business a total of $20m between June 2010 and September 2011.

"The FCA views State Street UK's failings to be at the most serious end of the spectrum," said the regulator.

It added that the US group "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".

The six clients affected by the overcharging included Ireland's National Treasury Management Agency, the Kuwait Investment Authority and the Royal Mail and Sainsbury pension funds. The four groups declined to comment.

State Street said: "We deeply regret this matter . . . We acknowledge these as historical problems and have undertaken extensive efforts to address both, including strengthening the controls, procedures and governance within our UK transition management business."

The US group said it had refunded the clients affected and dismissed the staff most closely involved in the overcharging. It was granted a 30 per cent discount for settling the case early, reducing its fine from a potential £32.7m.

Tracey McDermott, the FCA's director of enforcement and financial crime, said: "The findings we publish today are another example of a firm that has acted with complete disregard for the interests of its customers. State Street UK's significant failings in culture and controls allowed deliberate overcharging to take place and to continue undetected. Their conduct has fallen far short of our expectations."

Ireland's National Treasury Management Agency reported the matter to the City of London police, who are still investigating it, according to people familiar with the matter.

NTMA is now considering whether to continue to use State Street as a passive manager for part of its portfolio, the people said. It is thought to have stopped using the company's transition management services and changed its internal procedures to ensure there is greater transparency when there are big portfolio changes, the people said.

The overcharging occurred on 3.5 per cent of transactions but accounted for a quarter of the total revenue by State Street's transition management business in the 16-month period in question.

The FCA said the wrongdoing only came to light "after a client notified staff that it had identified mark-ups on certain trades that had not been agreed".

"Those responsible then incorrectly claimed both to the client and later to State Street UK's compliance department that the charging was an inadvertent error, and arranged for a substantial rebate to be paid on that false basis.

"They deliberately failed to disclose the existence of further mark-ups on other trades conducted as part of the same transition."

Transition management is a service provided to big institutional investors, such as pension funds, to oversee the restructuring of a large portfolio of securities or the replacement of the asset manager.

Graham Dixon of Inalytics, a consultancy, said the FCA's findings were to be welcomed as they would provide greater impetus for transition managers to adopt higher standards. "But the fine for State Street is not indicative of an industry-wide problem," he said.

The FCA is next week expected to publish an overall review of transition management services. A person familiar with that review said it would recommend that some areas of the industry be tightened up, but found no other cases of secret mark-ups.

Mr Dixon said there were areas where transition managers could make improvements, including greater transparency and disclosure, reporting of performance track records, better communication with clients and in standardising legal documents.

One of the State Street staff dismissed over the issue - Edward Pennings - challenged his dismissal at an employment tribunal, which rejected his claim in December 2012.

State Street is being separately sued by California, which alleges the bank improperly charged state pension funds for foreign exchange services, and several US authorities are also looking into the matter, the bank has said in regulatory findings.

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