Gina Miller, the founder of SCM Private and the True and Fair Campaign which seeks to make advice and asset-management fees more transparent, takes us through the details of a financial scandal which, although it happened to institutional investors, is doubtless happening at this very moment to an HNW investor near you.

Gina Miller, the
founder of SCM Private and the True and Fair Campaign which seeks to
make advice and asset-management fees more transparent, takes us
through a scandal.

Many people have seen
The Wolf of Wall Street, Scorsese’s latest blockbuster that exposes
the fraudulent culture of depravity at a large and successful US
financial company. But whilst many may question how real to life the
goings-on in the film were, there have been recent shocking
revelations along the same lines about a present-day large and
successful US company. State Street, one of the largest custodians of
investments worldwide, looks after £2.9 trillion in Europe alone.
The UK's regulator, the Financial Conduct Authority, fined it £22.9m
for double-charging clients. This firm appears no different from many
of the UK's leading financial services firms, whose guiding principle
still appears to be to spout rhetoric about trust, integrity and
professionalism then abuse clients remorselessly until found out.

If it can happen to
them, it can happen to us

It is reported that six
State Street clients, labelled A to F, which are believed to have
included our very own Royal Mail and Sainsbury pension funds,
Ireland’s National Treasury Management Agency and the Kuwait
Investment Authority, faced significant hidden charges. The lesson
for the high-net-worth asset management market is clear: if firms can
do this to corporate customers with huge compliance departments, they
can certainly do it to HNW individuals. The part of State Street that
fell foul of the regulator ‘assists’ many large clients to change
their investments or investment managers in an efficient way, a
service known as ‘transition management’. However, the main form
of assistance turned out to be help for the clients to pay fees they
knew nothing about.

Who took what

Email exchanges
revealed that Client A wanted to know how much it would cost to
‘transition’ a €4.7 billion portfolio. State Street decided to
charge just 1.25 basis points for a portion of the trade but then
added some hidden charges. As one email explained: “Gotta win this
one! Any ideas how to get more revenue would be appreciated….We
need to charge fee then otherwise they get suspicious.” State
Street UK’s total agreed contractual fee for A’s transitions was
$1.6 million. However, State Street UK earned an additional $3.7
million from undisclosed mark-ups and commissions.

Client B agreed a
management fee of £350,000 but then State Street earned $1m from
undisclosed mark-ups. State Street told Client D, that it “believes
in providing full transparency to clients.” It charged an agreed
fixed management fee of €350,000 but then earned $1.1m from hidden
mark-ups. Client E wanted to pay 0 for trading $6 billion of bonds,
requesting that no explicit commission should be charged. State
Street, of course, secretly arranged to receive “a share of the
spread from the ‘other side’” of the various trades it made –
this free trade ended up costing the client $9.7 million!

Scratching the
surface of the problem

So how did this happen
under the noses of the fiduciaries and compliance officers of these
huge schemes? Anyone who still believes that the custodians of
pension funds exercise the highest standards of fiduciary management
should be very worried about the wolf-like culture at State Street
and, by implication, at other similar organisations.

All this went on some
five or six years ago and the State Street managers of today are keen
to tell us that all concerned have been sacked, internal controls
have been tightened and current clients such as the National
Employment Savings Trust (owned by you and me) and Scottish Widows
(partly owned by you and me) who use State Street Asset Management
should not be concerned.

The wider problem

Anyone who thinks that
State Street is the only wolf in town should think again. We hear
that Aviva has joined the club of artful dodgers by having to set
aside £323 million to deal with underpayments on pensions, insurance
and savings products that affect various high-net-worh people in the
UK, many of whom are yet to be contacted about the mistake. Aviva
means 'innocent' in Hebrew but obviously not in English.

Alas, State Street and
Aviva are not the only predators to be hitting the headlines.
Fidelity in the US is currently facing a class action from members of
its pension plan for charging $355 record-keeping fees per member
against a true underlying cost of just $10. Like Aviva, Fidelity's
brand name is rather ironic; maybe they should consider changing
their name to Infidelity?

So the wolves are alive
and scavenging, with profiteering, self interest and greed at the
heart of their businesses instead of customer service. 

The wider solution

Why are these practices
allowed? In short, it is because we do not have true transparency
that can shine a disinfecting light on hanky-panky in the City. By
making fees, administration costs and other costs needlessly complex,
firms can hide a multitude of sins from their HNW customers and the
market. If they were simple and straightforward about their
charges, customers would know enough to defend themselves and,
indeed, would have fewer problems to ward off as many firms would
think twice about levying unfair charges once they had decided to
publicise them. Instead of this, though, many industry trade bodies
issue empty sound-bites about transparency and their voluntary codes
are rarely followed and, indeed, rarely seen.

Worst of all, these and
other ways of picking the pockets of savers are not a major target
for regulators as a) they are too ingrained and b) many of the
regulators are expecting to leave their quangos for well-paid jobs in
the industry. In most cases, these are the first private-sector jobs
they will have.

This is why the
government has to step in. The politicians have a duty to end these
corrupt practices. The only rational and practical answers to these
problems are simplification and transparency rather than complexity
and opacity. These recent revelations show that bankers are not the
only ones with their fingers in the till. The problem for the average
HNW individual is that as long as the financiers know that he cannot
even see the till, he will never know how much of his savings
and investments they are stealing from it every year.

* Gina Miller can be
reached at gina@scmprivate.com
or on +1 207 838 8650.