FCA takes enforcement action against compliance officer for being knowingly concerned in a breach of regulatory requirements committed by the firms he worked for
10 April 2015
In this case report we consider the FCA's final notice issued to Stephen Edward Bell who was responsible for compliance systems and controls within two firms that were found by the FCA to breach regulatory requirements. The FCA took separate action against Mr Bell, finding that he had been knowingly concerned in the firms' breach of regulatory requirements.
Financial Ltd and Investment Ltd (together, the Firms) form an adviser network, which advises approximately 60,000 customers on pensions, investments, mortgages, general insurance and protection products. Between them, the Firms are also responsible for over 300 registered individuals (RIs) and 250 appointed representatives (ARs).
Previous investigations relating to the Firms
2009: Enforcement action following a thematic review
In 2009, the FSA (as it then was) commenced an investigation into the Firms, following a thematic review of pension-switching recommendations and firms' management, oversight and compliance monitoring of such advice. This resulted in the FSA taking enforcement action against Charles Palmer, the Chief Executive and majority shareholder of the group of which the Firms were a part, for breach of his regulatory obligations as a significant influence function holder (SIF).
2012: Follow-up assessment
In 2012, the FSA undertook a follow-up assessment of the Firms' pension switching advice. The FSA raised further concerns about the Firms' pension switching advice as a result of this assessment. As a result of these concerns, FSA required the Firms to commission a skilled person's report under section 166 of the Financial Services and Markets Act 2000 (FSMA) to review the effectiveness of the Firms' systems and controls and risk management (Skilled Persons Report).
The Skilled Persons Report was issued in September 2013 and identified material deficiencies in the Firms' systems and controls. It also found that the Firms had failed to implement a robust risk management framework that enabled the Firms' senior management to identify and manage risk proactively.
Breach of Principle 3
Following the Skilled Persons Report and in consideration of the "high risk of consumer detriment" identified by the skilled person, the FCA (as it had become) launched a further investigation into the Firms.
The FCA found that between August 2008 and April 2013 the Firms had breached Principle 3 of the FCA's Principles for Businesses (PRIN). Principle 3 is a broad obligation that requires a firm to "take reasonable care to organise and control its affairs responsibly and effectively" and to implement "adequate risk management systems". The basis for the FCA concluding that the Firms had breached Principle 3 was as follows:
· The Firms had failed to establish and operate effective systems and controls sufficient to ensure that the Firms' ARs and RIs met applicable regulatory requirements and standards, including in relation to their recruitment processes, training and suitability assessments, as well as their supervisory processes.
· The Firms had failed to implement effective processes that enabled senior management proactively to identify, measure, manage and control the risks that the Firms were or might be exposed to.
The FCA directly attributed these failings to the Firms' "cultural focus" which "viewed the ARs and RIs, rather than their customers, as the end consumer", thereby creating an environment that the FCA found "allowed poor standards of business to continue over a prolonged period of time".
The FCA publicly censured the Firms and imposed a recruitment restriction on them using its powers under section 206A of FSMA. The terms of this restriction prevented the Firms from appointing any ARs or RIs for a period of 126 days from the date the final notice was published.
Mr Bell: The Firms' Compliance Director
Role and responsibilities
Mr Bell was responsible for the compliance systems and controls within the Firms during the period when the Firms' breach of Principle 3 occurred. At various points during this period, Mr Bell held a combination of the following SIF positions at the Firms: CF1 (Director), CF10 (Compliance Oversight), CF11 (Money Laundering Reporting) and CF28 (Systems and Controls).
In particular, the FCA noted that Mr Bell had been responsible for establishing the majority of the systems that were found by the FCA to be inadequate in its enforcement investigation concerning the Firms (see Breach of Principle 3 above). These systems included the application and recruitment processes for the ARs and RIs, the training and supervision of the ARs and RIs, and the systems and controls for determining an RI's competence to advise customers.Knowingly concerned in the Firms' breach of Principle 3
As Mr Bell held a number of SIF positions during the period in question, it would have been open to the FCA to investigate and, if appropriate, find that Mr Bell had breached certain of the FCA's Statements of Principles for Approved Persons (APER) relating to his responsibilities for compliance systems and controls within the Firms. However, the FCA took a different approach in this case.
Under section 66 of FSMA, the FCA may take enforcement action against an individual if that individual is found to have been knowingly concerned in a contravention of a regulatory requirement (including the FCA's Principles for Businesses). See box, "Knowingly concerned" below for an explanation of the legal test for finding whether an individual has been knowingly concerned in a breach of regulatory requirements.
Using its powers under section 66, the FCA found that Mr Bell had been knowingly concerned in the Firms' breach of Principle 3 insofar as it related to the management of compliance risks. The FCA came to this conclusion on the basis that Mr Bell had knowledge of, and was responsible for, the compliance systems and controls at the Firms and that these had been found by the FCA to have fallen short of regulatory requirements.
To establish that an individual was "knowingly concerned" in a breach of a regulatory requirement, the FCA must establish that the individual in question had knowledge of the facts that caused the breach, but not that he or she had knowledge that a breach had actually occurred. In addition, it is not necessary for the FCA to prove that an individual has acted dishonestly to find that they have been knowingly concerned in a breach of a regulatory requirement. This is quite a low threshold for the FCA to meet if they want to argue that an individual was knowingly concerned in a breach of a regulatory requirement.
The FCA imposed a financial penalty of GBP 33,800 on Mr Bell. In addition, the FCA imposed a prohibition order on Mr Bell, preventing him from performing the CF10 (Compliance Oversight) function in the future on the basis that he is not a fit and proper person in terms of his competence and capability.
The FCA took a different approach in this case to the one it typically takes in enforcement investigations involving SIFs. Instead of focusing on potential breaches of APER, the FCA instead chose to take action against Mr Bell for being knowingly concerned in a breach of regulatory requirements committed by the Firms. It is not entirely clear why the FCA took this different approach in this case. However, it is possible that the various different SIF positions that Mr Bell held during the relevant period may have made it complicated for the FCA to establish that he had breached APER throughout this period. Alternatively, the FCA may have considered that its findings against Mr Bell were so closely aligned to the Firms' regulatory breaches that it was more appropriate to find that Mr Bell had been knowingly concerned in the Firms' regulatory breaches.
The relatively low legal threshold that the FCA must meet if it wants to find that someone has been knowingly concerned in a breach of a regulatory requirement presents another risk for senior individuals within financial institutions. Even if the FCA cannot establish that they breached APER or other regulatory requirements, the FCA may be able to satisfy the lower legal threshold and argue that an individual has been knowingly concerned in a breach of a regulatory requirement by a firm.
FCA final notice issued to Stephen Edward Bell (dated 13 March 2015).
This article first appeared on Practical Law and is published with the permission of the publishers.