Penny shares advisory stockbroker Wills & Co failed to properly inform customers it was making profits of up to 67% on the shares it sold them. The broker was last week fined £49,000 by the Financial Services Authority (FSA) for breaching the watchdog’s rules.
Wills & Co is among a number of penny share brokers in the City that ‘act as principal’. This is where the broker owns the shares it sells to customers and makes its profit between the price it buys and sells the stock.
This compares to acting as agent where the broker buys shares for a customer through a market maker and takes a commission for its efforts. Acting as principal is a permitted business model but the broker has to be clear about the mark up it takes.
An FSA investigation of 17 Wills & Co transactions between April and December 2006 found that on every transaction the mark ups – ranging from 23.44% to 66.67% helping the broker net a £17,216 profit – were not properly communicated.
The regulator said: ‘Investment advisers hurriedly disclosed the two prices after the customer had agreed to purchase the securities, thereby obscuring the exact amount of the mark up that Wills & Co would make on the sale.’
In eight of the 17 transactions, investments advisers gave ‘unclear or misleading explanations’ about the firm’s interest in the shares and ‘customers may not have been aware of the potential conflict of Wills & Co selling as principal.’
In ten out of the 17 transactions clients were advised the transaction was commission free. In fact there was a £15 ‘compliance charge’. As well as breaching two of the FSA’s Principles for Businesses, Wills & Co contravened its Conduct of Business rules for failing to warn customers about the risks of penny shares.
Wills & Co compliance director Kate Prichard, says: ‘They [the FSA] were quite right. We have put right the wrongs.’ Asked if acting as principal was an appropriate business model for a penny shares stockbroker, she added: ‘It can be done appropriately if clients have a complete understanding of what is happening.’
