Barclays slapped with record £7.7m fine UK’s fifth largest bank expects to repay upto £59m

18 January 2011


Barclays, the UK’s fifth largest bank, has been fined a record £7.7m and forced to pay nearly £60m in compensation to investors who were heavily missold two Aviva investment funds between July 2006 and November 2008, the Financial Services Authority (FSA) has announced today (18 January).

Over 12,000 investors were inappropriately sold the Aviva Global Balanced Income fund and Aviva Global Cautious Income fund, with investments totalling £692m. The FSA found a number of serious failings in the way the funds were sold to investors and stated that even though Barclays identified the problems itself, the bank failed to act quickly enough to rectify the situation.

Serious failings in Barclays sale of Aviva funds

The core reason behind Barclays record £7.7m fine for its sale of the two Aviva funds was that it failed to ensure that the advice and recommendations it made for the funds was suitable. The FSA’s investigation found that 80% of the customers that invested in the funds were aged between 60 and 90 years old, and either nearing or in retirement.

The FSA found that the training material given to Barclays staff was inadequate and did not identify the types of customers the Aviva funds were suitable for, nor did it explain that if markets fell, investor’s money could be lost in the funds.

Furthermore, the FSA discovered that the brochures accompanying the funds only highlighted the benefits of the funds and none of the risks, increasing the chances of misselling. One in seven of the people that invested in the Aviva funds through Barclays have now made a complaint.

What other problems did the FSA find with Barclays?

Barclays also failed to introduce adequate procedures to monitor sales of the Aviva funds. The regulator stated that even though Barclays identified many of these failings itself by June 2008, it failed to take action quickly enough.

As a result, the FSA believes that Barclays exposed its customers to ‘unacceptable risk of unsuitable sales and a number of unsuitable sales were made.’ By the beginning of December 2010, 1,676 people had complained and Barclays had paid £17m in compensation. The bank estimates that it will pay additional compensation between £20m and £42m.

The riskiness of the Aviva funds sold by Barclays

When creating the two funds, Barclays used a new method of risk rating its investments for its customers. The Cautious fund contained 40% equities and 60% in high quality corporate bonds, while the Balanced fund invested 60% in equities and 40% in fixed interest investments (mostly convertible bonds of varying quality).

However, the Balanced fund was found to be so risky that it should have been labelled adventurous. The risk rating of the fund was not changed by Barclays until December 2007. The fund had been on sale since 2006.

What do to if you think you are affected by Barclays failings

The FSA has called for anyone advised by Barclays to invest in either of the Aviva funds to contact the bank on 0800 587 7495. Barclays told Which? that it was contacting all customers immediately to assess each case individually. It estimated that the compensation process would take between six months to a year.

Which? has already expressed concerns about the appropriateness of managed funds labelled as ‘cautious’ or ‘balanced,’ and we believe that the names of these funds can be very misleading to consumers. Check the February 2011 edition of Which? Money to read our investigation into cautious funds.

pound coins

Which? Money when you need it

You can follow @WhichMoney on Twitter to keep up-to-date with our Best Rates and Recommended Provider product and service reviews.

Sign up for the latest money news, best rates and recommended providers in your newsletter every Friday.

Or for money-saving tips, and news of how what's going on in the world of finance affects you, join Melanie Dowding and James Daley for the Which? Money weekly money podcast

For daily consumer news, subscribe to the Which? news RSS feed here. And to find out how we work for you on money issues, visit our personal finance campaigns pages.