FCA Compliance News | Dec 2019

Posted by

Sharon Williams

on 17 Dec 2019

FCA Compliance News - December 2019

This month's FS roundup includes Henderson fine, operational resilience, tax dodge CEO banned, CMA prompted refunds from HSBC/Santander and more...

Our pick of the biggest compliance news in FS this month

Henderson fined £1.9m for failing to treat retail customers fairly

The Financial Conduct Authority (FCA) has fined Henderson Investment Funds Limited (HIFL) £1,867,900 for failing to treat fairly more than 4,500 retail investors.

In November 2011, HIFL’s appointed investment manager, Henderson Global Investors Limited (HGIL), decided to reduce the level of active management of its Japan and North American Funds. The FCA has found that the subsequent treatment of retail investors in these funds was substantially different from its treatment of the institutional investors in the same funds.

HGIL informed nearly all of the institutional investors who were affected by this change and offered to manage these two funds for those investors without charge. However, HGIL did not communicate the change in investment strategy to any of the retail customers either by amending the funds’ prospectus or otherwise. This meant that for nearly five years HGIL charged these investors the same level of fees as it had before the decision was made without providing the same level of active management.

HIFL charged investors £1,784,465.32 more than if they had invested in a passive fund. The situation revealed serious weaknesses in HIFL’s systems and controls in relation to the management, oversight and governance of an area of its business which included the Japan and North American Funds. These weaknesses resulted in the issue not being identified and resolved for a considerable amount of time.

Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, said: “The FCA requires firms to treat all its customers fairly, not just some customers.” He added: “The matter is aggravated by the length of time HIFL took to identify the harm being caused to the retail investors and to fix it.”

HIFL has now disclosed the matter to all affected customers and compensated them for the additional costs they incurred.

Bank of England, PRA and FCA join forces to strengthen Operational Resilience

The Bank of England, PRA and FCA have published a package of publications on new requirements to strengthen operational resilience in the financial services sector.

The proposals will require firms and financial market infrastructures (FMIs) to:

  • Identify their important business services that if disrupted could cause harm to consumers or market integrity, threaten the viability of firms or cause instability in the financial system;
  • Set impact tolerances for each important business service which quantify the maximum level of disruption they would tolerate;
  • Identify and document the people, processes, technology, facilities and information that support their important business services; and
  • Take actions to be able to remain within their impact tolerances through a range of severe but plausible disruption scenarios.

The proposals are set out in the package of publications:

  • A shared Policy Summary entitled 'Building operational resilience: Impact tolerances for important business services
  • PRA Consultation Paper CP29/19, which includes draft rules, a draft Statement of Policy (SoP), and a draft Supervisory Statement (SS). The PRA has also published CP30/19 which includes a draft SS on outsourcing and third party risk management which is a key part of operational resilience, and firms are encouraged to read this alongside the PRA’s operational resilience CP;
  • FCA CP 19/32 which includes draft rules, draft guidance and a chapter on outsourcing; and
  • Individual CPs and draft SSs issued by the Bank for central counter-parties, and central securities depositories. The Bank is also publishing a CP, draft SS and draft operational resilience chapter of the Code of Practice for recognised payment system operators and specified service providers.

FCA £291k confiscation order against convicted fraudster

The FCA has secured a £291,070.36 confiscation order against the convicted fraudster, Mark Starling.

In November 2018, Mr Starling was sentenced to 5 years’ imprisonment for defrauding investors of just under £3 million in relation to unauthorised investment schemes he operated between 2008 and 2017.

Mr Starling was never authorised by the FCA to carry out any regulated activity, however, over a period of 9 years (between 2008 and 2017), he purported to run investment funds and obtained investment monies from his friends and acquaintances. Mr Starling would sometimes pay money back to his investors on request to sustain the illusion of running a successful investment business. However, the payments were funded from other victims’ investment monies.

In determining the level of the confiscation order Southwark Crown Court established that Mr Starling had derived a benefit of £3,010,982.18 from his criminal conduct, but that the total realisable assets for confiscation was £291,070.36.

The monies will be used to compensate the 14 victims of his crimes who lost around £1.8 million in total. If Mr Starling doesn’t pay the confiscation order on time, he is liable to spend a further 2 and a half years in prison.

Free Fraud Prevention Good Practice Guide

Regulators ban former mutual insurer CEO over tax dodge

The FCA and the PRA have banned and fined Stuart Forsyth, the former CEO of a small mutual insurer, for transferring large amount of his remuneration to his wife to reduce his tax liability.

As CEO of Scottish Boatowners Mutual Insurance Association (SBMIA), Mr Forsyth paid his wife a proportion of his own salary in compensation for providing some out of hours administrative support and occasional hospitality at home. Up until 2010, Mrs Forsyth was paid between £5,000 and approximately £10,000 per annum, which was not considered unreasonable for the work she was undertaking.

However, from 2010, Mr Forsyth transferred increasing amounts of his salary, and in most years all or part of his own bonus, to Mrs Forsyth in order to reduce his tax liability. Between 2010 and 2016, Mr Forsyth transferred just over £200,000 of his pay to Mrs Forsyth, and by the 2015/16 tax year, Mrs Forsyth’s remuneration was just over £52,000, more than any other SBMIA employee save Mr Forsyth. As a result of these arrangements, Mr Forsyth paid approximately £18,000 less in income tax than he should have done.

Both regulators concluded that Mr Forsyth understood that his actions were not permissible and that he knew he was paying his wife “unjustifiable” sums for a limited amount of administrative work.

SBMIA’s Board and Remuneration Committee were aware that Mr Forsyth paid a proportion of his salary to Mrs Forsyth but were not aware how much Mrs Forsyth was paid. Mr Forsyth concealed the level of payments from SBMIA’s Board and others.

In addition to the ban, Forsyth has been ordered to pay a £78,318 fine to the FCA and £76,180 to the PRA. Mr Forsyth is appealing against the regulators’ conclusions and has referred the Decision Notices to the Upper Tribunal.

Learn how tax evasion & avoidance differ

FCA to ban promotion of speculative mini-bonds to retail consumers

The FCA has announced it will ban the mass marketing of speculative mini-bonds to retail customers. The ban is being implemented without consultation using the regulator’s product intervention powers. The FCA has acted ahead of the upcoming Individual Savings Account (ISA) season.

The restriction will come into force on the 1 January 2020 and last for 12 months while the FCA consults on making permanent rules.

The ban, follows an extensive programme of work undertaken by the FCA in the last year to tackle the risks for investors from mini-bonds, which includes investigating more than 80 cases of regulated activities potentially being carried out without having the right FCA authorisation; and assessing over 200 cases of financial promotions that appeared not to have complied with the FCA rules.

Andrew Bailey, Chief Executive of the FCA said: “We remain concerned at the scope for promotion of mini-bonds to retail investors who do not have the experience to assess and manage the risks involved. This risk is heightened by the arrival of the ISA season at the end of the tax year, since it is quite common for mini-bonds to have ISA status, or to claim such even though they do not have the status.”

The FCA ban will mean that unlisted speculative mini-bonds can only be promoted to investors that firms know are sophisticated or high net worth. Marketing material produced or approved by an authorised firm will also have to include a specific risk warning and disclose any costs or payments to third parties that are deducted from the money raised from investors.

Firms which approve financial promotions are already required to ensure that those promotions comply with FCA rules. The FCA has also published guidance on the requirements on firms when approving the financial promotions of unauthorised persons. The FCA believes that many promotions still fall short of existing requirements and firms which approve the financial promotions of unauthorised persons may not be taking adequate steps to ensure that they comply with our rules before approving them.

Free Vulnerable Customers Checklist

HSBC and Santander to refund customers after CMA action

HSBC and Santander have agreed to refund customers following action by the Competition and Market Authority (CMA), in response to breaches of the CMA’s Retail Banking Market Investigation Order.

HSBC was found to have twice broken Part 6 of the Order and is refunding £8 million across 115,000 customers. Santander broke the Order 6 times and has agreed to issue a refund but has yet to confirm the number of customers affected and how much it will refund.

Part 6 of the Order ensures customers receive text alerts before banks charge them for going into an unarranged overdraft, giving them time to take action to avoid any charges. Both banks failed to send alerts in all of the circumstances required by the CMA. The breaches first occurred in February 2018, when Part 6 of the Order came into force.

Free Competition Law Training Presentation

The refunds paid by the banks cover all fees incurred by customers from going into unarranged overdrafts where they had not been warned beforehand by the required text alerts.

The CMA has also directed HSBC and Santander to undertake an independent check of their compliance with Part 6 between February 2018 and December 2019.

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