Latest Keydata enforcement action sets out valuable lessons for compliance officers
28 June 2016
Mr Johnson was formerly the compliance officer and money laundering reporting officer (MLRO) for Keydata Investment Services Ltd. Mr Johnson was found to have acted without integrity and failed to have been open and cooperative with the FSA and the FCA during the course of their investigation. The FCA's findings in relation to Mr Johnson contain some valuable lessons for compliance officers.
Keydata Investment Services Ltd was a firm that designed, launched and, via independent financial advisers (IFAs), distributed structured investment products to retail customers. Keydata went into administration on 8 June 2009 and was dissolved on 2 July 2014. Prior to its administration, Keydata had GBP 700 million of its own and GBP 2.1 billion of other institutions' investment products under administration.
For details about the products that Keydata sold to retail clients, see FCA publishes decision notices in respect of three former members of Keydata's senior management.
In addition to investigating Mr Johnson, the FCA also investigated Stewart Ford, the former Chief Executive Officer of Keydata, and Mark Owen, the former sales director of Keydata. Mr Ford and Mr Owen have referred the decision notices issued by the FCA to them in November 2014 to the Upper Tribunal (Tax and Chancery Chamber). Mr Johnson also referred the decision notice issued to him by the FCA to the Upper Tribunal, but subsequently withdrew his reference and agreed to settle the FCA's enforcement action against him.
For more information about other related investigations undertaken by the FCA (and its predecessor, the FSA) and the Serious Fraud Office (SFO) in connection with Keydata, see FCA publishes decision notices in respect of three former members of Keydata's senior management.
Mr Johnson's role
Mr Johnson was the compliance officer at Keydata until 1 December 2008. He was approved to perform the following FSA controlled functions: CF30 (customer), CF10 (compliance oversight) and CF11 (money laundering reporting). After 1 December 2008, Mr Johnson became Keydata's operations director. He was not approved to perform a significant influence function (SIF) for this role but retained his customer approval.
The FCA's findings against Mr Johnson
APER Principle 1: Failure to act with integrity
The FCA found that Mr Johnson was aware that:
- Keydata had received professional advice that its financial promotions relating to the products contained unclear, incorrect and misleading statements and that Keydata's due diligence relating to the products was inadequate.
- There was a risk that the bonds underpinning the products may not perform as expected.
The FCA concluded that Mr Johnson had recklessly failed:
- Either to take adequate steps to ensure that Keydata addressed these issues and risks or to take adequate steps to stop Keydata from marketing and selling the products until appropriate remedial steps were taken.
- To take adequate steps to ensure that Keydata explained or mitigated the risk to investors who had invested in the products and that material circulated to investors gave an inaccurate impression of the risks associated with the bonds underlying the products, despite becoming increasingly aware of the risks and issues affecting the bonds.
In the final notice issued to Mr Johnson, the FCA stated that the steps that Mr Johnson could have taken to ensure that Keydata's board committed to addressing the issues outlined above included refusing to sign-off financial promotions relating to the products, and/or making it clear that, if Keydata's board did not commit to Keydata taking these actions, he would have no alternative to resign from his position and/or notify the FSA/FCA of these issues.
In addition, the FCA found that Mr Johnson had deliberately misled it by representing to the FSA during a compelled interview that there had never been a problem with the income payments relating to the products and that the products were on target to meet their obligations when he knew that this was not the case.
The FCA also concluded that Mr Johnson had recklessly failed to take adequate steps to prevent Keydata from continuing to market and sell the products as fulfilling the conditions set out in the Individual Savings Account Regulations 1998, despite being aware that it was highly unlikely that the products fulfilled these conditions.
APER Principle 4: Failure to be open and cooperative with the FCA/FSA
The FCA found that Mr Johnson:
- Had failed to deal with it in an open and co-operative way due to him having made misleading statements to the FSA during compelled interviews and having withheld information from the FSA about the issues relating to the performance of the products or the professional advice received by Keydata in relation to the products.
- Was aware that information provided by Keydata's solicitors to the FSA in connection with this matter was likely to mislead the FSA as it misrepresented the projected income for the products, but took no steps to correct this information.
The FCA maintained its earlier position that a financial penalty of GBP 200,000 should be imposed on Mr Johnson. However, in contrast to the FCA's decision notice, the FCA agreed in its final notice that Mr Johnson would not be required to pay this financial penalty as he was able to demonstrate that requiring him to do so would cause him serious financial hardship.
The FCA also maintained its position that Mr Johnson should be prohibited from performing any function in relation to any regulated activity in the future. The FCA concluded that Mr Johnson was not fit and proper to perform such functions on the basis that he lacked integrity and had failed to demonstrate a readiness and willingness to comply with the requirements and standards of the regulatory system.
Comment: valuable lessons for compliance officers
With the FCA indicating that one of its enforcement priorities is holding individuals working in financial services to account for their actions, compliance officers should take note of the lessons to be learned from the FCA's enforcement action against Mr Johnson. The FCA's enforcement action against Mr Johnson adds to several enforcement cases against compliance officers that have been concluded over the past year, for example:
- Tariq Carrimjee. Mr Carrimjee was fined and publicly censured for failing to act with due skill, care and diligence in relation to his dealings with one of his firm's clients, who went on to commit market abuse (see Upper Tribunal overturns FCA decision that fund manager acted without integrity by recklessly assisting a client to commit market abuse). Mr Carrimjee is currently challenging the FCA's proposal to impose a prohibition order on him (see Fund manager challenges FCA's decision to impose prohibition order.)
- Anthony Willis. Mr Willis was fined and publicly censured for failing to deal with the FCA in an open and co-operative way. He was found to have provided or arranged for misleading information to be provided to the FSA and FCA relating to the progress of a remediation programme that his firm was required to undertake (see FCA fines bank, compliance officer and internal auditor for providing misleading information to the FCA).
In relation to both of these cases, as well as the most recent enforcement action against Mr Johnson, the FCA has emphasised the importance of compliance officers and the reliance placed on such individuals by regulators such as the FCA. For example, in relation to Mr Willis, Georgina Philippou (the then Acting Director of FCA Enforcement) commented:
"We are reliant on compliance officers… to act as an important line of defence, to support effective regulation at firms and to show backbone even when challenged by their colleagues".
In the enforcement cases involving Mr Willis and Mr Johnson, there were suggestions that the conduct of senior management had influenced or affected by the way in which each of Mr Willis and Mr Johnson had performed their duties as the CF10 (compliance oversight). In both cases, the FCA was unsympathetic to how each compliance officer claimed to have been influenced by senior management. For example, the FCA did not accept Mr Willis' argument that some of his communications with the FSA and FCA that turned out to be misleading were "influenced by comments made by senior management". In relation to Mr Johnson, the FCA said that he could have taken further steps to ensure that Keydata's board committed to addressing issues relating to the products by, for example, refusing to sign-off on financial promotions relating to the products, or making it clear to Keydata's board that he would have no alternative but to resign from his position and/or notify the FCA of these issues.
It is clear that the FCA is keen to reinforce its message to the industry that compliance officers have an important role to play, both in relation to their own firms but also their firms' regulators. Although compliance officers may face pressures internally, the FCA has made it clear through its enforcement action against Mr Willis and Mr Johnson that it expects compliance officers to be able to robustly challenge and push-back on such internal pressures. As the FCA's enforcement action against Mr Willis and Mr Johnson demonstrates, the fact that a compliance officer was influenced by such internal pressures is unlikely to be accepted by the FCA as a defence, should it decide to take enforcement action against a compliance officer. In terms of what actions compliance officers in difficult situations may need to take, these actions will vary depending on the situation. In particular, as the FCA suggested in relation to Mr Johnson, a senior compliance officer may need to refuse to provide certain approvals or sign-offs until a particular issue has been addressed or resolved. In more extreme cases, a senior compliance officer may feel obliged to resign from their position, and/or approach the FCA directly in relation to the issue in hand.
However, under the new Senior Managers Regime (SMR), approaching the FCA or the PRA in relation to issues or concerns may become less of an option and more of an obligation for certain individuals. For example, Senior Manager Conduct Rule 4 requires senior managers (which includes an individual designated to perform the SMF16 Compliance Oversight role) to "disclose appropriately any information of which the FCA or PRA would reasonably expect notice". If a senior manager found themselves in a position comparable to that faced by Mr Johnson, it is likely that the FCA would expect that senior manager to approach the FCA directly with their concerns. However, this kind of approach is only likely to be adopted in quite exceptional cases. In most instances, firms will be self-reporting issues and concerns to the FCA and the PRA under their existing obligations, namely FCA Principle 11 and PRA Fundamental Rule 7, thereby helping to discharge individual senior managers' personal obligations under the new Conduct Rules.
FCA final notice issued to Peter Francis Johnson (19 May 2016).