Banque Havilland and three former employees challenge UK FCA integrity findings
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The UK Financial Conduct Authority (FCA) has issued decision notices to Banque Havilland and three individuals for failing to act with integrity by preparing advice recommendations involving manipulative trading strategies. Banque Havilland and two of the individuals are challenging the FCA’s decisions against them. The fourth decision notice is being challenged by a third party referred to in the notice but against whom the FCA has not taken formal enforcement action. The summary below is based on the facts as alleged by the FCA in its decision notices.
What is the FCA proposing to do and why?
The FCA alleges that, between September and December 2017, Banque Havilland created and disseminated a presentational document that contained improper advice for potential investors (the Presentation). This advice included recommending manipulative trading strategies that would create a false and misleading impression of the market in certain financial instruments. The alleged objective of this was to destabilise a state’s economy. The FCA considered that this conduct could amount to a criminal offence, if it took place in the UK.
To market its services, Banque Havilland is alleged to have intended to present these trading strategies to representatives of other states. It also provided a copy of the trading strategies to one state’s sovereign wealth fund.
As a result, the FCA found that Banque Havilland had not conducted its business with integrity. Banque Havilland therefore breached Principle 1 of the FCA’s Principles for Businesses.
The FCA also took enforcement action against three individuals for their alleged role in the misconduct:
- Mr Edmund Rowland: The Chief Executive of Banque Havilland’s London Branch during part of the FCA’s relevant period, who held a senior management function (SMF21). Mr Rowland played a key role in directing the creation and dissemination of the Presentation, including tasking Mr Bolelyy with preparing the Presentation.
- Mr David Weller: Head of Asset Management at Banque Havilland’s London Branch, who also held a senior management function (SMF21). Mr Weller knowingly made significant contributions to the Presentation’s creation.
- Mr Vladimir Bolelyy: A senior investment analyst and assistant to Mr Rowland. Mr Bolelyy knowingly made significant contributions to the creation and dissemination of the Presentation, including preparing initial and later drafts of the Presentation.
The FCA found that the three individuals breached Individual Conduct Rule 1 (by failing to act with integrity) due to their participation in the creation and dissemination of the Presentation. The FCA also found that the individuals were not fit and proper persons. The FCA noted the seriousness of Mr Rowland’s and Mr Weller’s actions given they held positions of significant influence, and the fact that Mr Rowland asked a junior member of staff (Mr Bolelyy) to work on the Presentation.
The FCA intends to fine Banque Havilland GBP10 million. The FCA also proposes to impose fines and prohibition orders against the three individuals. Banque Havilland and two of the individuals have referred their decisions to the Upper Tribunal. The four decision notices also refer to the conduct of a third party, Mr David Rowland (Mr Rowland’s father), who is the ultimate controller of Banque Havilland. David Rowland has referred all four decision notices to the Upper Tribunal, as a third party is entitled to do, under the third party rights provisions in section 393 of the Financial Services and Markets Act, if they are identified in a decision notice in a way that is prejudicial to them.
Key points of interest in the decision notices
Banque Havilland and the three individuals made representations to the FCA’s Regulatory Decisions Committee (RDC) on a wide range of issues including the following points of particular interest.
- Whether the creation and dissemination of the Presentation amounted to carrying on a regulated activity. Banque Havilland argued that it had not carried on a regulated activity, as the Presentation did not contain regulated advice under Article 53 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO). This was because the Presentation was not given to anyone, none of the relevant parties were ‘investors’, did not contain advice ‘on the merits’, and did not relate to a particular investment. As a result, Banque Havilland argued that, as no regulated or ancillary activity had been carried on, it could not be liable for a breach of Principle 1. The RDC rejected these arguments. The RDC found on the facts that it was likely that copies of the Presentation were given to parties who were investors or potential investors because they held the relevant financial products that the Presentation related to. The RDC found that the content of the Presentation constituted advice ‘on the merits’ because it contained a significant element of evaluation, value judgement and persuasion (meaning it was beyond the mere provision of information). The RDC also considered that the identification of the relevant financial products in the Presentation was sufficiently ‘particular’ for the purposes of the RAO.
- Whether the trading strategies could be considered as ‘bank business’ and the impact of plausibility on the FCA’s findings. Banque Havilland and all three individuals argued that the Presentation was prepared in relation to other non-bank projects. Banque Havilland also argued that it could not carry out the trading strategies described in the Presentation due to resourcing issues, and said that the Presentation was an unrealistic and amateur marketing document that had not been approved by compliance or its product approval process. The RDC disagreed and said that the circumstances around the preparation of the Presentation, including Mr Rowland’s other projects and the use of Banque Havilland’s systems and premises, did not preclude the Presentation being ‘bank business’. The RDC also said that, even if Banque Havilland could not execute the trading strategies itself, it could still source any further advice required from elsewhere. The RDC viewed the Presentation as so obviously improper that this explained why the individuals had not sought internal approval for it.
- Assessing lack of integrity: The COCON sourcebook in the FCA Handbook sets out a non-exhaustive list of examples of conduct that indicate when an individual lacks integrity. The Upper Tribunal in Tinney v FCA  UKUT 0435 (TCC) also confirmed that a lack of integrity extends beyond ‘dishonesty’ and applies where an individual, “acts recklessly with respect to a result if he is aware of a risk that it will occur and it is unreasonable to take that risk having regard to the circumstances as he knows or believes them to be.”
In this case, the FCA found that the creation and dissemination of a document that recommended conduct that could be a criminal offence if it took place in the UK indicated a clear lack of integrity on the part of Banque Havilland (regardless of whether the strategy in the document was achievable in reality).
In relation to the three individuals, the FCA found that:
- Mr Rowland failed to act with integrity because he deliberately designed the improper trading strategy that risked an authorised firm facilitating financial crime. Mr Rowland argued that the document that Mr Bolelyy prepared was very different to what Mr Rowland had asked for, and he was therefore not responsible for it. The RDC disagreed on the basis that Mr Rowland instigated, and was the driver of, the creation and dissemination of the Presentation. Mr Rowland also allegedly took steps to cover up his conduct. This resulted in his culpability being considered the most serious, with a ‘Level 5’ seriousness finding.
- Mr Weller contributed to the creation of the Presentation with a series of steps that recommended engaging in what the FCA considered to be obviously improper conduct, including the preparation of a document setting out details of the trading strategy. Mr Weller was found to have acted recklessly in making a significant contribution to the Presentation where he was aware that there was a material risk that it could be disseminated to potential investors. Mr Weller argued that, as a person with no history of a reckless disregard of risks and nothing to gain through the proposals set out in the Presentation, it was inherently unlikely that he would assist in a market manipulation strategy. The RDC concluded that Mr Weller knew there was a material risk that the Presentation would be circulated to investors. As he did not take reasonable steps to ensure that his ideas relating to the trading strategy would go no further, it was unreasonable for Mr Weller to take that risk and this behaviour amounted to recklessness.
- Mr Bolelyy was found to have lacked integrity in creating and disseminating the Presentation in circumstances where he was aware that the purpose of the dissemination included marketing Banque Havilland’s services to investors and that Mr Rowland hoped the Presentation would generate fees.
- Mr Bolelyy’s role and the FCA’s approach to misconduct of junior employees: Mr Bolelyy argues that he was a personal assistant to Mr Rowland and, therefore, is not subject to the Individual Conduct Rules. Mr Bolelyy also argues that he was a junior employee ‘led astray by very senior people who appeared reputable’. The RDC found that Mr Bolelyy’s involvement was not purely administrative, and included taking an active part in discussions around what was credible and coherent content for the Presentation. The RDC considered that Mr Bolelyy understood the contents of the Presentation sufficiently to appreciate its obvious impropriety, and that he knowingly and willingly helped the formulation of a plan to undertake manipulative trading. Therefore, regardless of the fact that more senior individuals instructed Mr Bolelyy to prepare the Presentation, it was appropriate to take disciplinary action against Mr Bolelyy.
- Attribution of Mr Rowland’s lack of integrity to Banque Havilland: Banque Havilland argued that it had not lacked integrity at an organisational level and, once aware of the issues, it took steps to notify regulators and conduct an investigation. The RDC accepted that Banque Havilland did not lack integrity at an organisational level and was not presently lacking integrity. However, the RDC noted that the three individuals’ misconduct was particularly serious and the FCA could attribute Mr Rowland’s misconduct to Banque Havilland. The RDC found that, despite the actions taken by Banque Havilland following the discovery of the issues, it remained reasonable and proportionate to conclude that Banque Havilland lacked integrity.
A recent trend keeping the Upper Tribunal busy
The number of FCA decisions against larger financial services firms and their employees being referred to the Upper Tribunal has increased significantly in the last 18 months. In addition, the number of referrals from individuals against whom the FCA has made a finding of lack of integrity is creeping up.
The Upper Tribunal recently overturned three FCA decision notices against former employees of another UK regulated firm, which sought to prohibit the individuals on the basis that they lacked integrity. The lengthy Tribunal judgment provides helpful guidance on the difference between negligent and reckless conduct and the factors that can and should be taken into account when assessing the reasonableness of an individual’s conduct after the event. Whilst the Tribunal did not consider there was evidence to support the FCA’s finding of recklessness and, therefore, a lack of integrity, it did consider there were instances where the individuals’ conduct remained questionable and where they might be considered to have acted without due, skill, care and diligence. For example, where experienced senior managers had not considered proposals in sufficient detail or could have asked for more information about particular arrangements and business relationships, which would have brought to their attention significant risks.
Now that the Senior Managers and Certification Regime is well established, firms are regularly engaged in assessing the conduct of individuals at all levels within the organisation. Upper Tribunal judgements handed down as a result of individuals and firms referring FCA decisions on lack of integrity to the Tribunal should provide further guidance on the standard of conduct expected in the financial services sector and the steps that should be taken to ensure these expectations are met.