This fund invested in financial and money market instruments but, unlike standard money market funds, sought to deliver enhanced returns through investing a proportion of the fund’s assets in asset backed securities and floating rate notes.
Between 3 December 2003 and 15 September 2008, Coutts sold the fund to 427 high net worth customers with investments totaling £1.4bn.
But the price of AIG’s fund fell sharply on 15 September 2008 after the collapse of Lehman Brothers and there was a run on the fund as customers sought to withdraw their investments.
As a result, Coutts suspended the fund and customers were prevented from withdrawing all of their investment.
The FSA believes that Coutts failed to inform customers about the nature of the fund, have an adequate sales process for the fund, appropriately diversify investments and respond to changing market conditions ahead of Lehman’s collapse.
It also recommended the fund to customers who were not suited to it and did not complete an effective compliance review of the fund. These factors exposed clients to an unacceptable risk of an unsuitable sale of the fund.
Tracey McDermott, FSA acting director of enforcement and financial crime, said: “It is disappointing that Coutts failed to reflect properly upon the impact of changing market conditions and what that meant for the advice they had given, and were giving, to their customers.”
Coutts agreed to settle at an early stage entitling it to a 30 per cent discount. It also agreed to carry out a business review overseen by a third party in relation to all customers who were invested in the fund on 15 September 2008 and will compensate those who suffered a loss as a result.