Missed bond early redemption and cash sweep
A client holds NZ$300,000 face value of a NZX-listed corporate bond with a 5.25% coupon maturing in 2029. On 3 March the issuer announces a mandatory early redemption of the series at par plus accrued interest, with a cash payment date of 20 March. The client had told the adviser in February that she wanted the maturity proceeds placed in a two-year term deposit at her bank. The adviser is on annual leave from 4 to 24 March and does not see the announcement. The bond is redeemed on 20 March and the cash is swept into the broker's default cash account, earning 0.50% while the bank term deposit would have paid 5.20%. The client returns from overseas on 28 March and complains that no one told her. The adviser's firm acts as custodian and uses a third-party registry.
1. What obligations did the firm have when the issuer announced the early redemption?
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As custodian and adviser, the firm needed a corporate-actions process: monitor issuer notices and registry communications, identify affected clients, and pass on material information promptly. The client had already given a standing instruction about the maturity proceeds, so the firm should have linked that instruction to the redemption event, confirmed the cash date and either placed the term deposit or sought fresh instructions.
The firm also needed to reconcile the redemption proceeds, credit the correct cash account, and check that the default cash rate and any sweep arrangement were disclosed. A 20 March payment date does not mean the firm can wait until the adviser returns. Key-person cover and a backup corporate-actions calendar were missing. The adviser's leave is not a defence. The firm should review the registry notice, the client mandate, the cash sweep terms and the complaint record. It should also check whether other clients held the same series and whether any instructions were missed.
2. How should the firm remediate the client and prevent recurrence?
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Remediate promptly and calculate the loss on a consistent basis. If the bank term deposit would have paid 5.20% and the default cash account paid 0.50%, the difference is 4.70% a year. On NZ$300,000 that is NZ$14,100 a year, or about NZ$38.63 a day; for the eight days from 20 to 28 March the approximate shortfall is NZ$309. The firm should credit that amount plus any fees, confirm the calculation in writing, and apologise for the missed instruction. If the client placed the term deposit late at a different rate, use the actual rate and actual dates.
Prevention: maintain a corporate-actions register with owner and backup, require daily review of registry and issuer notices, and set calendar alerts for cash dates. Build a leave handover that lists open client instructions. Test the cash-sweep disclosure and default rate. Record the complaint and root cause, report it under the firm's conduct and risk process, and sample other redemptions to check for similar misses.