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.