Mutuals’ merger on track despite £1.4m bill

N&P was punished by the Financial Services Authority for failing to give its customers suitable advice on Keydata life settlement products in a three-year mis-selling scandal.

It was also told to set aside £51m to pay back customers.

YBS, which is in exclusive merger talks with N&P, said it had already factored in the possibility its smaller rival might have to pay a fine.

The FSA’s long-awaited judgement said N&P advised 3,200 customers to invest in Keydata’s products for three years, but failed to properly assess the financial circumstances of many of these. As a result, some customers were sold unsuitable high-risk products.

N&P also put some customers’ income and capital at risk by moving them from deposit accounts into Keydata investments. Many of these people were approaching or already in retirement, with an average age of 62, and could not afford to lose their money.

Tracey McDermott, the FSA’s acting director for enforcement and financial crime, said: “N&P failed in its basic duty to provide suitable advice to its customers, despite an internal compliance report pointing out that there were problems as early as 2007.

“Firms cannot treat customers fairly unless they pay attention to their financial circumstances and attitude to risk when they make recommendations. This is the only way to prevent widespread mis-selling like this.”

The £51m pot will be used to pay customers to ensure they do not lose out on their investment. N&P last month said it had set aside £57m to cover the Keydata costs.

Before the Keydata provision, N&P reported pre-tax profits of £5.1m for 2010, up from £1.3m in 2009. Once the cost of compensation was taken into account, this fell to an overall loss of £48.9m for the year.

A YBS spokeswoman said: “We anticipated that N&P could be fined by the FSA for the mis-selling of Keydata policies and have fully taken this into account as part of the comprehensive due diligence that we are currently undertaking.

“They have got this issue of their financial advisory service which they no longer operate. If you strip that out and look at rest of the business it’s actually a very solid business, very focused on its members and the traditional business of mortgages and savings.”

Keydata sold bonds packaged in Luxembourg based on complex and opaque United States second-hand life insurance policies.

In June 2007, N&P carried out a review after it realised that Keydata products formed 30 per cent of all the investment products it had sold during the first three months of the year.

The society’s compliance team produced a report flagging up concerns about the suitability of advice that was being given to customers, but no action was taken and the level of Keydata sales remained high.

Keydata was put into administration in June 2009, and is being investigated by the Serious Fraud Office for one of Britain’s biggest personal investment scandals.

The majority of customers who bought a Keydata policy are based in East Anglia and Lincolnshire. The payout will cover people’s initial investment and interest, but any income or other payments they received from their policy will be deducted. They will also have to sign over their rights to their investment to the society.

If YBS does merge with N&P, it will be the third ailing mutual it has taken under its wing during the financial crisis. YBS has merged with the Barnsley and Chelsea Building Societies in recent years, to give it 2.6 million members, 178 branches and assets of more than £30bn.

N&P would broaden its geographical spread in the East of England, where it has few branches. It would add 46 new branches and bring on board new products, such as current accounts.

If the deal goes ahead it would likely be the last acquisition for Iain Cornish, YBS’s chief executive.

He plans to step down this year when a successor is found.

Roots lie in the 19th century

Norwich and Peterborough Building Society traces its roots back to 1852 when the Norwich and District Provident Permanent Benefit Building and Freehold Land Society was established. It later became Norwich Building Society.

In 1860, The Peterborough Provincial Benefit Society was founded. In 1962 its name changed to the Peterborough Building Society. The society absorbed King’s Lynn Building Society in 1967, Stamford Building Society in 1980, and Argyle Building Society in 1985.

In 1986 and Peterborough and Norwich Building Societies merged to become N&P.