Gavin Irwin reviews the recent surge in enforcement activity at the Financial Conduct Authority
After Konstantin Vishnyak’s acquittal at Southwark Crown Court, on 28 September 2020, for destroying communications information, the FCA has recently signalled a renewed intensity in investigations and enforcement action in relation to: (1) unregulated collective investment schemes; (2) market abuse; and, (3) non-financial misconduct.
- Collective Investment Schemes
There are many types of collective investment scheme (‘CIS’), including ‘authorised’ UK schemes and ‘recognised’ schemes from other countries. If a CIS is neither, it is an unregulated scheme (‘UCIS’).
UCISs can be risky products and are not promoted to the public in the UK. However, they can be promoted to specific classes of investor, subject to certain conditions being satisfied. Despite this, they are, at times, sold to ordinary members of the public – some customers are even being advised to invest their SIPP – rather than the sophisticated or high net worth investors for whom they may be suitable.
On 12 November 2020, Nikhil Rathi, the FCA’s Chief Executive Officer, addressed City Regulators at the Mansion House, stating that, “shifting consumer incentives towards high risk investment opportunities at a time when [they] are bearing more of the responsibility for their own investment decisions” remains a long standing challenge.
The day before, on 11 November 2020, the FCA commenced proceedings in the High Court against Robin Forster, Richard Tasker and Fortem Global Limited (‘FGL’) over alleged links to investments in care homes in which investors appear to have lost c.£30 million.
The unauthorised schemes were established and operated by two of Mr Forster’s companies, currently in administration, Qualia Care Developments Limited (QCD) and Qualia Care Properties Limited (QCP). FGL was the main promoter of the schemes but none of the promotional material was approved by an authorised person.
The FCA alleges that:
- a number of misleading statements and/or impressions were given to investors about the financial sustainability of the schemes, including an unrealistic level of return of between 8% and 10% per annum;
- there was never any real prospect that the operation of the care homes could generate profits that could meet the predicted returns;
- payments of this kind were only ever likely to be possible by taking money from later investors to pay the earlier investors – characteristic of Ponzi
Of note, the FCA maintains that, shortly before placing QCD and QCP into administration, Mr Forster moved £1.8 million into a newly established bank account in the name of Qualia Care Holdings Limited (QCH), leaving QCD and QCP without any funds.
- Market Abuse
Preventing and detecting market abuse features regularly in the FCA’s annual business plans, published every April. The business plan for 2019/2020 states that the FCA’s focus would be on “key areas in firms’ control frameworks … such as the control of inside information”. In addition, in its June 2019 Thematic Review, Understanding the Money Laundering Risks in the Capital Markets, the FCA identified “a potential disconnect between some participants’ trade surveillance for market abuse and AML transaction monitoring functions, with the result that participants were not always recognising the potential for correlation between market abuse and money laundering.”
Unrelated to those focus areas, on 18 September 2020, the FCA gave Carillion plc (in liquidation since 15 January 2018) and certain former executive directors of the company, warning notices, proposing public censure as opposed to any financial penalty.
The FCA considered that:
- some of Carillion’s announcements in 2016 and 2017 “were misleading and did not accurately or fully disclose the true financial performance of Carillion. They made misleadingly positive statements about Carillion’s financial performance generally and in relation to its UK construction business in particular, which did not reflect significant deteriorations in the expected financial performance of that business and the increasing financial risks associated with it”;
- Carillion’s systems, procedures and controls were “not sufficiently robust to ensure that contract accounting judgments made in its UK construction business were appropriately made, recorded and reported internally to the Board and the Audit Committee”;
- certain executive directors were “each aware of the deteriorating expected financial performance within the UK construction business and the increasing financial risks associated with it. They failed to ensure that those Carillion announcements for which they were responsible accurately and fully reflected these matters. Despite their awareness of these deteriorations and increasing risks, they also failed to make the Board and the Audit Committee aware of them, resulting in a lack of proper oversight”;
- Carillion and the relevant executive directors had “acted recklessly”.
Those warning notices may be challenged before the FCA’s Regulatory Decisions Committee (‘RDC’).
- Non-financial misconduct
As long ago as 19 December 2018, Christopher Woolard, the FCA’s Executive Director of Strategy and Competition, gave a speech entitled, Opening up and speaking out: diversity and financial services and the challenges to be met. His message was clear: “non-financial misconduct is misconduct, plain and simple”.
On 5 November 2020, the FCA’s announced that the RDC had banned three individuals from working in the financial services industry for misconduct unrelated to their business dealings.
- Russell Jameson, a financial adviser at an authorised firm, and approved by the FCA to hold various significant influence and customer facing functions, had been convicted of making and possessing indecent sexual images and was sentenced to 5 years’ imprisonment;
- Mark Horsey, the sole director and shareholder of an authorised financial advice firm with permission to conduct designated investment business (including advising on and arranging deals in investments) and insurance distribution, had been convicted of voyeurism and was sentenced to 9 months’ imprisonment, albeit suspended, together with being ordered to perform unpaid work in the community;
- Frank Cochran, a director and shareholder of an authorised financial advice firm with permission to advise on pensions, mortgages and investments, had been convicted of sexual assault and engaging in coercive and controlling behaviour and was sentenced to 7 years’ imprisonment.
As a result of their convictions, perhaps unsurprisingly, each was found not to be a ‘fit and proper person’ and, consequently, was prohibited from performing any function in relation to any regulated activity carried on by an authorised person, exempt person or exempt professional firm.
In reaching its decisions, the RDC had regard to: the seriousness of the offences; the surrounding circumstances; the relevance of the offence to the authorised person’s role; any explanation offered; the passage of time; evidence of rehabilitation; the severity of the risk posed by the approved person to consumers; and, confidence in the financial system.
These men were all convicted of serious criminal offences – their criminal conduct taking place at a time when they were approved persons – but not at, or in any way related to, their workplaces or colleagues. While an appeal from a decision of the RDC may be made to the Upper Tribunal, the trend across all regulated industries and professions is clear: conduct that may properly be said to bring an industry into disrepute will not be tolerated, wherever and however it took place.
With Brexit done and with the UK’s leaving of its transitional arrangements with the European Union imminent, now may be an ideal time for financial services firms and individuals to consider regulatory issues and responsibilities in the round and to ensure that reporting and compliance processes are robust and comprehensive.