Pension reserve fund commission to consider State Street action

The commission of the National Pension Reserve Fund (NPRF) is to consider what action it might take with State Street following the decision of the UK's Financial Conduct Authority (FCA) to fine the fund administration and management company £22.9 million for failings in its transition management business.

This relates to the overcharging of six clients, including the National Treasury Management Agency, which has oversight of the NPRF. State Street has already reimbursed €3.2 million to the NTMA in relation to the overcharging scandal dating back to 2010.

It is understood that the NPRF Commission, chaired by Paul Carthy, will meet in the coming days to discuss what additional action it might take against the US group.

Final notice
"The NTMA stated some time ago that it would await the outcome of the FCA investigation to decide what further action it might take with State Street. The NTMA is studying the final notice published by the FCA and will report to the NPRF Commission very shortly," the agency said last night.

State Street Global Advisors Ireland Ltd (SSgA) is one of two index managers used by the NPRF for its passive equity portfolio. This work dates back to the time of Bank of Ireland Asset Management, which was acquired by SSgA in 2011.

It remains to be seen if this relationship will continue in light of the findings by the FCA. The NTMA has already reported the overcharging matter to the Garda.

State Street Bank Europe was one of three so-called transitions managers used by the NPRF, the others being Nomura International and Citigroup.

In total, State Street has a significant presence in Ireland, employing more than 2,000 people from offices in Dublin, Drogheda, Kilkenny and Naas.

The FCA dealt a stinging rebuke to State Street by fining the US financial group for acting with “complete disregard for its customers” by charging clients secret mark-ups on some transactions.

The FCA said State Street “deliberately” overcharged six clients in the US group’s transition management business a total of $20 million 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”.

In addition to the NTMA, clients affected included the Kuwait Investment Authority, and the Royal Mail and Sainsbury pension funds.

'Deep regret'
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 £32.7 million.

Tracey McDermott, the FCA’s director of enforcement, 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.”

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". – (Additional reporting by The Financial Times)