Royal Bank’s US subsidiary fined $3 million in mis-selling scandal

By Ian Fraser

Sunday Herald

July 31st, 2005

HIGH-pressure sales tactics employed by the Royal Bank of Scotland’s Citizens Financial Group in the US have led to the bank paying a $3 million civil fine and agreeing to reimburse funds to elderly investors who were mis-sold variable annuity products.

A securities brokerage affiliate of Citizens, CCO Investment Services, was rapped by Massachusetts regulators for “unethical and dishonest conduct” in selling variable annuities to elderly customers, as well as for failing to keep a good record of internal e-mails.

However, in a deal reached with Massachusetts secretary of state William F Galvin’s securities division, CCO Investment Services has agreed to stop violating the state securities act, Galvin’s office said.

“This company pressured elderly bank customers into buying variable annuities without regard for the appropriateness of such an investment,” said Galvin, adding these “illegal sales tactics will not be tolerated” in Massachusetts.

The bank has admitted to Galvin’s findings that it engaged in “unethical or dishonest conduct”.

“It’s an acknowledgment on the part of the bank that there was wrongdoing and that it was deliberate, ” said Galvin.

CCO Investment also agreed to allow all Massachusetts customers who were 75 or older when they bought a variable annuity from CCO to recover their money without any penalty. This offer applies to variable annuities sold by the bank in 2003 and 2004. Eligible customers may surrender their variable annuities in full or in part, while those who already had surrendered their variable annuities will receive refunds of their surrender fees.

Variable annuities are insurance products that provide investors with regular income payments, but their value can rise or fall, depending on where the money is invested.

Because of the risk of losing money and steep fees for early withdrawal, Galvin and other critics contend that such annuities are unsuitable for most elderly investors, who may have sudden needs to tap into savings. The products have high surrender charges, up-front fees and “often-illusory” tax and probate benefits, according to Galvin’s office.

The complaint against CCO Investment arose following sales practices adopted by a branch of Citizens Bank in the Cape Cod seaside community of South Yarmouth. Bank tellers were rewarded for referring depositors to stockbrokers.

According to Galvin, Citizens employees made a concerted effort to sell variable annuities to the elderly through “cold calling” sessions.

Top-selling investment consultants were eligible for company- paid trips to the Caribbean. Sales personnel from insurance companies would lavish Citizens’s investment personnel with tickets for concerts and sporting events and trips to casinos.

“There were some very egregious cases here,” Galvin told the Boston Globe. “We found a pattern of Citizens deliberately targeting elderly customers.”

Galvin said several employees involved in the annuities affair had since left Citizens. The bank refused to comment, but Citizens has agreed to adopt restrictions on the sale of variable annuities to elderly customers and to have an independent consultant review its sales practices.

The Royal Bank of Scotland’s US subsidiary is the second bank in the past month to concede to Massachusetts regulators that such investments may be inappropriate to sell to senior citizens.

Citizens chief executive Larry Fish said: “On behalf of the company, I regret mistakes made by our broker dealer. I want to assure our customers, particularly senior citizens, that we have taken prompt and corrective action.”

The refund is available to customers anywhere, not just those who live in the 13 states in which Citizens has branches.

RBS declined to comment.

Separately it has emerged that Sir Tom McKillop, currently chief executive of drugs firm AstraZeneca, will become RBS’s deputy chairman. McKillop, who is to step down from AstraZeneca in January, is poised to replace Sir George Mathewson, 64, as RBS chairman in July 2006.

Copyright 2005 SMG Sunday Newspapers Ltd.

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