Santander has been fined £1.5m by the City regulator for failing to inform customers that stock market-linked bonds they were buying were not covered by the Financial Services Compensation Scheme (FSCS) if the bank went bust.
Until January 2010, the bank told investors in its Guaranteed Capital Plus and Guaranteed Growth plans that their money "may be covered by the Financial Services Compensation Scheme", and referred them to the FCSC website for further details.
In fact, because these were structured products offering returns linked to stock market performance rather than savings accounts, cover under the scheme was very limited. Had the bank collapsed investors would not have been able to claim their money back as they can with deposit accounts; they could only claim compensation had the product been mis-sold or mismanaged.
The Financial Services Authority (FSA) said customers had begun to query the cover towards the end of 2008, following the collapse of Icelandic bank Icesave, but it had taken Santander until June 2009 to conclude cover was limited, and a further six months to clarify the position in its literature.
During that time Santander allowed sales to continue with incorrect Key Facts literature: investors paid approximately £2.7bn into the products, including £1.2bn after June 2009.
The FSA said investors in these structured products may have included some with no or low appetite for risk, or no or little previous investment experience, and that following the onset of the financial crisis in September 2008 the bank ought to have been aware of the increased importance of the issue of FSCS cover to investors.
Tracey McDermott, acting director of enforcement and financial crime at the FSA, said: "When firms provide customers with literature about products, the information has to be correct and unambiguous. After all, it is there to help people make informed decisions about whether to invest."
She added: "Considering that sales of these products took place between 2008 and 2009 – a time of financial uncertainty – Santander should have moved more quickly to confirm under which circumstances FSCS cover would be available."
Santander said it was "disappointed with the outcome" and had registered its opposition to the FSA's findings. It had asked for the case to be taken to regulatory decisions committee, meaning it missed the chance to have its fine reduced by settling early.
In a statement it said: "The FSA's decision notice does point out that there is no evidence that the products were sold to customers for whom they were not suitable; and that no customers have suffered a financial loss. However, in order to conclude a lengthy investigation process, Santander has decided, in the circumstances, that we will not challenge further the decision, nor the fine."
A spokesman for the bank said its literature had been consistent with other banks' at the time, and it had spent 12 months taking legal advice to establish whether products were covered before it changed the literature.
Following that, it had contacted more than 150,000 customers who had bought the products to check they were happy to stay invested, and that the 1% who were not had been able to cash in their holding without penalty and been paid interest as if they had invested in a best-buy savings account.
The FSA would not comment on whether other banks using similar wording will face fines.
Since January 2010, Santander's Key Facts documents have contained the following wording: "In the unlikely event that Santander ISA Managers Limited, Santander UK plc or Alliance & Leicester plc becomes insolvent and unable to meet their liabilities, claims arising against them in respect of the sale or management of your investment in the Plan, may be eligible for compensation from the Financial Services Compensation Scheme.
"Eligible claims for most types of investment business are covered up to a maximum limit of £50,000. If you lose money solely because Abbey National Guarantee Company fails to meet its obligations under the guarantee, due to insolvency or for any other reason, you will not be able to claim against the FSCS for loss caused by such failure."
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