Salz Review - Wall Street Journal

Salz Review
An Independent Review of Barclays’ Business Practices
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classified the two funds in July 2007 as appropriate for risk-averse investors and in
August began selling accordingly. Concerns were raised within Barclays in November
2007 over whether the risk categorisation of the funds was accurate, and the rating
was changed in December 2007. By then, more than 12,000 customers had invested
almost £700 million in the two funds. In late 2008, Barclays stopped selling both
funds. By 1 April 2009, the value of the Global Balanced Income Fund had fallen by
48% over the previous 12 months, and the Global Cautious Income Fund by 29%. 97
6.30 In January 2011, the FSA fined Barclays £7.7 million for “failing to take reasonable
care to ensure the suitability of its advice” with respect to the Aviva funds.
Underlying failures were identified in training materials, sales briefs, product
brochures, monitoring of sales and lack of action after compliance had identified
potentially unsuitable sales. However, the FSA said that Barclays had not
“deliberately or recklessly contravened regulatory requirements” and had been open
and co-operative during its investigation. The FSA estimated that Barclays would
have to pay over £60 million in compensation to investors. Since then, Barclays has
modified the sales and advice process, as well as increasing training for advisers. 98
6.31 There was a similar incident in Spain in 2009 when the Comisión Nacional del
Mercado de Valores (CNMV), as part of a review of financial market activities in a
number of Spanish financial institutions, found deficiencies in Barclays’ product
classification process. Following action to deal with the issues, CNMV fined Barclays
€600,000 in December 2012 for under-rating the risk in €16.5 million of bonds sold
between January and March of 2008. The regulatory rules in Spain are different from
those in the UK. We consider this breach is mainly a matter of product design,
combined with a failure to classify it correctly for risk purposes.
Operational Failures
6.32 Regulators also require financial services organisations to operate in ways that protect
clients’ money and help monitor transactions so that they can be reviewed
subsequently. Barclays has twice been fined for failure to observe such regulations,
apparently as a result of underinvestment in its systems and processes.
Client Money Segregation
6.33 Financial institutions must protect customers’ assets by segregating them from their
own. When Lehman Brothers collapsed in September 2008, and customers were
unable to withdraw their deposits, its failure to segregate client money from its own
was widely publicised. As a result, regulators intensified their focus on segregation
arrangements.
6.34 In 2009, Barclays identified a failure to segregate client money and launched an
internal review to identify the cause and resolve the issue. The FSA considered this
to have been a “serious breach” though “not deliberate”. In January 2011, it fined
Barclays Capital £1.12 million for “failing to protect and segregate on an intra-day
97 Source: Bloomberg data.
98 FSA, “Final Notice to Barclays”, 14 January 2011.