Credit Suisse hit with £5.6m fine

Systems and controls failings warrant a multimillion-pound fine from the FSA

LONDON – The UK Financial Services Authority (FSA) has fined the UK operations of Credit Suisse £5.6 million for breaching FSA Principles 2 and 3 by failing to conduct their business with due skill, care and diligence, and failing to organise and control their business effectively.

Credit Suisse released its financial results for 2007 on February 12 this year. On February 19, Credit Suisse announced that it had identified mismarking and pricing errors by a small number of traders and that it was repricing certain asset-backed securities. The re-pricing involved a writedown of revenues by $2.65 billion.

The breaches related to the pricing of certain asset-backed securities held by the structured credit group (SCG) within Credit Suisse’s investment banking division. The SCG specialises in complex, high-risk structured products.

FSA Principle 2 states that “a firm must conduct its business with due skill, care and diligence,” while FSA Principle 3 states that “a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems”. Credit Suisse has been fined for breaching both principles. According to the FSA: “In breach of Principle 2, the [Credit Suisse] subsidiaries failed adequately to supervise the business of the SCG and did not act in a timely way on the concerns they had identified about the pricing of certain asset-backed positions”.

And, “in breach of Principle 3, adequate systems and controls were not put in place by the subsidiaries, which meant that they failed to recognise, for approximately five months, that certain of the SCG’s asset-backed positions were wrongly valued”.

“The penalty reflects our tougher stance on enforcement and our policy of imposing higher penalties to achieve credible deterrence,” says Margaret Cole, director of enforcement at the FSA. “It is imperative, particularly in more challenging financial conditions, that firms have in place appropriate systems and controls to manage their risks. The subsidiaries here failed to take appropriate steps to control the potentially high-risk combination in the structured credit group’s holdings of exotic products, opaque valuations and high leverage.

“The sudden and unexpected announcement of the writedown had the potential to undermine market confidence.”

The subsidiaries co-operated fully with the FSA and agreed to settle at an early stage of the FSA’s investigation. As such, they have qualified for a discount under the FSA’s settlement discount scheme, which the fine of £5.6 million reflects.

Credit Suisse commissioned a detailed review of the causes of the writedown, which identified serious failures in the subsidiaries’ controls over the SCG, and the operation and management of those controls, and concluded they were not effective. Senior management accepted the findings of the review and a comprehensive remedial programme is under way.