Shares digital

Penny shares stockbroker Square Mile Securities has been fined £250,000 by the Financial Services Authority (FSA) for employing high-pressure selling techniques.

The company was found to be using ‘unacceptable sales practices’ following a review of 55 transactions. High-pressure selling is in breech of the FSA’s Principle Six to treat customers fairly.

Paid a ‘low’ basic wage, Square Mile advisers earned the majority of their remuneration from monthly commissions of between 5% to 10% on the value of the securities sold. The higher commissions were for sales of Plus Markets-quoted securities which are generally more illiquid.

Commenting on the broker’s sales model, the FSA’s report said ‘it was likely to encourage advisers to attempt to meet the required figures without regard to the fair treatment of customers.’

Customers were falsely told they had to make immediate decisions on purchases. On one occasion one was propositioned with a ‘pretty special’ opportunity coming up. Five days later, over a series of three further calls, the investor was pressured to buy the shares which Square Mile had in fact been selling for the past 16 months and then continued to sell for a further two months.

Square Mile was also found to be in breach of Principle One, which says an investment company must act with integrity. The breech was for, among other things, failing to stop advisers dishonestly recording transactions.

The practice, known internally as ‘writing up rubbish’, saw advisers falsely claim customers had agreed to buy shares in order to meet sales targets. The result was that customers were sent contract notes requiring payment for shares they had never agreed to buy.

FSA Conduct of Business rules were also broken for failing to provide adequate risk warnings. The FSA said it could have fined the broker £1.5 million but this was reduced due to Square Mile’s ‘financial circumstances’ and an early settlement.

During the period of the FSA review (March to May 2006) Square Mile sold securities worth a total of £4 million to 624 different customers. All these shares have declined in value since then. Square Mile sourced new customers through mail shots which tempted recipients to give consent to be contacted in return for a free research report.

Square Mile is the second broker after Wills & Co to be fined by the FSA following a comprehensive review of the City’s penny share private client brokers which began in June 2006. Wills & Co was fined £49,000 in October.

Prior to these two cases, penny share broker Hoodless Brennan was fined £90,000 in 2006 for using unacceptable sales practices to sell shares in Aim companies. Square Mile has made management changes, agreed to an audit of systems and sales practices and to send a letters to all customers about the FSA findings and details of how to complain.

To see the FSA's report visit www.fsa.gov.uk/pubs/final/square_mile.pdf