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Insights from the UK FCA's enforcement action against Carphone Warehouse

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Sarah Hitchins



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03 May 2019

The UK Financial Conduct Authority’s (FCA) enforcement action taken in relation to The Carphone Warehouse Ltd (CPW) is the second of three focused resolution agreements entered into by the FCA. Importantly, it is the first focused resolution agreement that has resulted in changes being made to a financial penalty imposed by the FCA. The summary of the representations that were made to the FCA by CPW in relation to its proposed financial penalty, and the FCA’s response to those representations, provides us with more detailed insights into the FCA’s penalty calculation methodology than are usually available in final notices. In addition, alongside its findings in relation to insurance misselling, the FCA’s final notice issued to CPW also sets out some interesting observations in relation to whistleblowing arrangements.


On 13 March 2019, the FCA published the final notice it had issued to CPW, fining it GBP29,107,600 for failings that led to the misselling of a mobile phone insurance and technical support product called “Geek Squad”.

In particular, the FCA found that CPW breached Principle 3 (management and control), Principle 6 (customers’ interests) and Principle 9 (customers: relationships of trust) of the FCA’s Principles for Businesses between 1 December 2008 and 30 June 2015. During this period, Geek Squad policies to a value of GBP444,771,786.41 were sold, with over 90% of those sales being made in-store.

Focused resolution agreements

The FCA introduced focused resolution agreements in March 2017 as a formal mechanism to allow subjects of investigations to partly contest proposed enforcement action. For example, subjects can decide to challenge some of the FCA’s proposed factual findings or breaches before the FCA’s Regulatory Decisions Committee (RDC) and retain at least some of the early settlement discount that they would otherwise have been entitled to. Alternatively, subjects can decide to accept the FCA’s proposed factual findings and breaches but challenge the FCA’s proposed financial penalty before the RDC, while retaining the full 30% early settlement discount.

CPW opted to take the second of these two approaches. It accepted the FCA’s factual findings and breaches, but opted to enter into a focused resolution agreement and challenge the FCA’s proposed financial penalty.

This is the second of three focused resolution agreements that have been entered into by the FCA that are in the public domain. The first was entered into with Linear Investments Limited in 2017 and was the subject of a reference to the Upper Tribunal (Tax and Chancery Chamber).

CPW’s focused resolution agreement

The CPW focused resolution agreement is the first one where the FCA has reduced its proposed financial penalty. The reduction was made as a result of arguments advanced by CPW before the RDC relating to its revenue and aggravating factors that the FCA had taken into account.


The FCA uses a “relevant revenue” figure as its starting point for calculating a financial penalty for a firm.

The FCA’s penalties policy defines “relevant revenue” broadly as: “the revenue derived by the firm during the period of the breach from the products or business areas to which the breach relates” (DEPP 6.5A.2(2)G).

The FCA proposed using the gross written premium (GWP) that had been collected by CPW on behalf of the insurer that underwrote the Geek Squad insurance product as the relevant revenue figure on which it should base its financial penalty calculation.

CPW successfully argued before the RDC that the FCA should not use the GWP as the relevant revenue for these purposes. In particular, CPW succeeded in arguing that two elements of the GWP, insurance premium tax and a fee that was payable to the insurer, should not be included in the relevant revenue figure used by the FCA. The FCA accepted this argument on the basis that CPW was not entitled to these sums under its agreement with the insurer and did not “earn or receive them”. Following CPW’s representations to the RDC, the FCA used the total of CPW’s sales commission, post-sales payments and its profit commission (all of which were paid to CPW by the insurer from the GWP) as its relevant revenue figure.

The specific figures that led to the FCA changing the relevant revenue figure that it used in relation to CPW are specific to insurance products. However, to the extent that a firm does not earn, receive or retain certain aspects of revenue it collects in relation to a business or product, that firm may have grounds to argue that such revenue should be excluded from the FCA’s penalty calculation.

Aggravating factors

The financial penalty imposed on CPW was increased by 5% as a result of an aggravating factor. This aggravating factor concerned CPW’s disciplinary record as in 2006 it was publicly censured and fined by the FSA (as it then was) for failing to comply with certain specific documentation requirements relating to insurance products that it sold. CPW argued that this previous disciplinary action was not relevant to the FCA’s latest findings as it did not relate to CPW’s conduct in relation to the sale of insurance products or the handling of complaints in relation to those products.

CPW undertook two voluntary customer redress exercises in response to the issues that formed the basis of the FCA’s enforcement action. The FCA took these exercises into account as mitigating factors and offset them against the aggravating factor referred to above, but still decided to apply an uplift to CPW’s financial penalty.

CPW argued that the FCA should have given more weight to the two voluntary customer redress exercises that it had undertaken. Even though CPW acknowledged that these redress exercises were “limited in scope”, CPW noted that FCA Supervision had been satisfied with these exercises at the time and that it had paid almost GBP1 million of redress to affected customers.

Following CPW’s representations to the RDC, the FCA did not change its decision to apply an uplift to CPW’s financial penalty as a result of the mitigating factor referred to above, for the following reasons:

  • As part of the settlement reached with CPW in 2006, the FSA had taken into account as a mitigating factor the fact that CPW had committed to a “comprehensive programme of reviewing and strengthening its systems and controls in relation to all of its general insurance sales channels”. The FCA found that the breaches that gave rise to its current enforcement against CPW meant that “CPW [had] clearly failed properly to carry out that which it had undertaken to do” in 2006.
  • The FCA acknowledged that CPW had undertaken two voluntary customer redress exercises. Although the FCA expressly stated that it was not criticising CPW in relation to these exercises, the FCA commented that “had CPW not limited [the] scope [of these customer redress exercises], it is likely that the [FCA] would have given more weight to the redress exercises as mitigating factors” in its penalty calculation process.

Even though the FCA maintained its decision to apply an uplift to CPW’s financial penalty, based on the wording of the final notice it appears that the FCA agreed to reduce the amount of the uplift. However, the final notice issued to CPW does not state the amount of the original uplift that the FCA proposed to apply or the amount by which it was reduced.

Whistleblowing and expectations of senior management

In the final notice, the FCA criticised CPW’s approach to logging and escalating disclosures made by whistleblowers. In particular, the FCA found that:

  • CPW’s whistleblowing disclosure logs were inaccurate and contained inadequate detail. For example:
    • a number of key fields in the disclosure log had not been completed in relation to the majority of the disclosures;
    • there was a “significant discrepancy” between the number of entries in the disclosure log and the number of whistleblowing disclosures that CPW had recorded as having been received; and
    • no information was included to explain why certain entries in the disclosure had been closed with no further action being taken.
  • The inadequacy of the information contained in CPW’s whistleblowing logs meant that CPW was “unable to evidence how it dealt with the issues raised”, some of which the FCA found were indicative of misselling.
  • The ownership of CPW’s whistleblowing investigation process was found to be unclear. In particular, the FCA found that CPW had been “unable to articulate… how [this] process worked in operation” and that it had been unable to nominate any members of staff who could be interviewed in order to describe how CPW’s whistleblowing investigation process worked, as well as CPW’s governance arrangements in relation to whistleblowing.

As a result of these issues that were identified by the FCA in the final notice, the FCA found that issues that had been raised by whistleblowers did not appear to have been considered by one of CPW’s board committees, which was responsible for overseeing CPW’s compliance with FCA requirements. It appears that this board committee received relatively limited information about issues that had been raised by whistleblowers, principally the number of whistleblowing disclosures that CPW had received. However, the FCA did not identify evidence of this board committee having “specific discussions relating to themes or findings of individual case investigations”.

The matters covered in the final notice pre-date the introduction of the FCA’s more detailed rules in relation to whistleblowing arrangements which are set out in SYSC 18. As a result, the FCA tied its findings in relation to CPW’s whistleblowing arrangements to CPW’s breach of Principle 3, namely its failure to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems. However, the issues identified by the FCA in relation to CPW’s whistleblowing arrangements touch on a number of the requirements and concepts that are included in SYSC 18, notably the way in which firms handle and record whistleblowing disclosures and the FCA’s expectations in relation to the oversight that senior management must have of those arrangements, as well as themes and trends arising from individual whistleblowing disclosures.


The FCA’s final notice issued to CPW has provided us with the first public example of where the use of a focused resolution agreement has led to the reduction of a financial penalty imposed by the FCA. In a recent speech, Mark Steward, FCA Director of Enforcement and Market Oversight, described focused resolution agreements as “genuine opportunities to test and challenge the FCA’s sanctioning discretion without losing the credit normally applied for cooperation in agreeing the relevant facts and matters”.

The overview of the representations made by CPW before the RDC in relation to the FCA’s proposed financial penalty, and the FCA’s response to those representations, provides us with an insight into the FCA’s penalty calculation methodology that is not usually available in final notices. Although the FCA’s approach to ascertaining the “relevant revenue” for the purposes of calculating a financial penalty in this case is linked to quite specific revenues that are associated with an insurance product, the general approach outlined in the final notice may be of broader application, beyond cases involving insurance products.

In addition, the FCA’s approach to the two voluntary redress schemes that CPW had undertaken serves as a reminder to firms that, even if FCA Supervision does not raise objections to such schemes, this does not necessarily mean that FCA Enforcement will view those voluntary redress schemes as mitigating factors when it comes to calculating a financial penalty.

Although not specifically linked to the requirements set out in SYSC 18, the FCA’s comments about CPW’s whistleblowing arrangements give us some insights from an enforcement perspective into the way in which the FCA expects firms to establish and operate its whistleblowing arrangements, including the oversight that senior management are expected to have over these arrangements.