FINAL NOTICE

Firm

1.
ACTION

1.1.
For the reasons given in this notice, the Authority hereby publishes, pursuant to

section 205 of the Financial Services and Markets Act 2000 (the “Act”), a

statement that Arch Financial Products LLP (”AFP”) has contravened regulatory

requirements.

1.2.
This action is in respect of breaches of Principles 1, 3 and 8 of the Authority’s

Principles for Businesses (“the Principles”) and breaches of rules relating to Senior

Management Arrangements, Systems and Controls (“SYSC”) and Conduct of

Business (“COB”).

1.3.
Were it not for AFP’s financial position the Authority would have imposed on AFP a

financial penalty of £9 million.

1.4.
A public censure will be issued and takes the form of this Final Notice, which will

be published on the Authority’s website.

2.
REASONS

2.1.
On 14 September 2012 the Authority gave AFP a Decision Notice that it had

decided to publish a statement to the effect that AFP had contravened regulatory

requirements in respect of breaches of Principles 1, 2, 3 and 8 and breaches of

rules relating to SYSC and COB pursuant to section 205 of the Act which occurred

between July 2006 and March 2009 (the “Relevant Period”).

2.2.
The Decision Notice stated that were it not for AFP’s financial position, the

Authority would have decided to impose on AFP a financial penalty of £9 million.

2.3.
On 12 October 2012, AFP referred this decision to the Upper Tribunal (the

“Tribunal”). The Tribunal, in a written decision dated 19 January 2015,

determined that the Authority should publish a statement to the effect that AFP

had contravened Principles 1, 3 and 8 (and in the latter two cases related SYSC

and COB Rules) and, but for the financial position, a financial penalty of £9 million

would have been imposed in respect of such contraventions.

2.4.
The Tribunal’s written decision sets out fully the Tribunal’s reasons and should

therefore be read in full. Those reasons are incorporated herein by reference.

Systems and controls in relation to management of conflicts

2.5.
The Tribunal found that AFP had failed, in breach of Principle 8 and associated

SYSC and COB Rules in force at the relevant times, to have in place appropriate

policies and procedures to manage conflicts fairly and to record them (paragraph

2.6.
At paragraph 134 of its decision, the Tribunal set out a number of general

principles as to how to approach the management of conflicts – these relate to:

identification of and understanding the conflict; mitigating factors; disclosure and

consent; and record-keeping. The Tribunal found that:

“a record of the steps taken to manage a conflict establishes an audit trail

and gives a “corporate memory” so that the firm can see how to handle

conflicts in a particular situation…records do not have to be in any

particular form and can be in a series of different documents, although

their value will be much diminished if they are not easily accessible,

coherent and comprehensible and made soon after the event. They also

need to be accurate. If they are made much later they are less likely to be

accurate.”

2.7.
The Tribunal’s conclusions in relation to AFP included the following at paragraph

“…conflicts were managed and recorded on an ad hoc basis and decisions

were not made and recorded within a tailored framework of systems and

controls as required by the relevant regulatory provisions.”

Lack of integrity in approach to managing specific conflicts

2.8.
The Tribunal upheld the Authority’s findings that the firm failed in breach of

Principle 1 to act with integrity in managing the conflicts arising in respect of the

AGL Transaction, the Cru Transaction, the Lonscale Transaction and the Nice

Transaction (“the Four Transactions”).

2.9.
The Tribunal found that there was an unacceptable risk that the conflicts arising

in respect of the Four Transactions would not be managed fairly (paragraphs 262,

309, 336 and 371). Further, it found that AFP had failed to take adequate steps

to manage the conflicts arising, despite the risk being obvious to them

(paragraphs 263, 264, 310, 311, 312, 337 and 373).

2.10. The Tribunal found that, given the serious nature of the conflicts in the Four

Transactions and in light of the failings as found by the Tribunal to manage the

conflicts of interest, in failing to decline to enter into the Four Transactions, AFP

had failed to act with integrity in breach of Principle 1 (paragraphs 267, 313, 338

and 374).

2.11. Specifically, in relation to the Lonscale Transaction the Tribunal held at paragraph

336 to 338 that:

“The conflict arising in this case was as serious as could be imagined,

involving the payment of a substantial fee to AFP where that fee would

only be payable if the transaction completed and where AFP procured that

the Guernsey Cells make the necessary investment to enable the

transaction to proceed at a time when no other alternative sources were

available... In these circumstances, and there being no serious attempt to

manage the conflict, there was in our view an unacceptable risk that the

Guernsey Cells and the UK Funds would be disadvantaged by the Lonscale

Transaction and accordingly that the risk had not been managed fairly.

…In these circumstances in our view the only right course of action to take

in the absence of any other meaningful steps to manage the conflict would

be to decline to enter into the transaction.”

Failure to have a formal compliance monitoring programme in place

2.12. The Tribunal further found that AFP had failed during the Relevant Period to

implement an adequate, formal and independent compliance monitoring

programme (paragraph 389). Accordingly, in breach of Principle 3 and associated

SYSC rules, AFP had failed to take reasonable care to organise and control its

affairs responsibly and effectively.

2.13. The Tribunal held at paragraph 388 that:

“a formal compliance monitoring programme provides discipline to the

frequency, depth, breadth and reporting of compliance monitoring and is

especially important in firms with complex or novel business models or

which are growing over time, all of which applied to AFP. Regular reporting

to a firm’s governing body is also a good discipline as it will prompt the

compliance officer to consider whether the firm’s systems and controls

need review regardless of whether there is anything specific to report.”

Inadequate systems for segregating and controlling non-public information

2.14. The Tribunal found that AFP had failed from February 2007 to ensure that there

were adequate systems for segregating and controlling access to non-public

information about the Guernsey Cells and to recognise and manage fairly the

conflicts of interest between the interests of the Guernsey Cells, their

shareholders and the UK Funds resulting from the risk of use by AFP of such non-

public information (paragraph 404). Accordingly, in breach of Principle 3, AFP

had failed to take reasonable care to organise its affairs responsibly and

effectively.

2.15. The Tribunal held at paragraph 403 that:

“…there was no reason in theory or practice why in February 2007 AFP

could not have taken the following steps:

(1) Established separate and distinct investment committees;

(2) Placed controls over the provision of indicative prices to

Winterflood [i.e. the market-maker in the Guernsey Cells’ shares] so

that persons responsible for providing those prices did not have access

to material non-public information; and

(3) Restricted access to AFP’s servers and records management

systems to ensure that those involved in decision making for the UK

Funds did not have access to material non-public information.

Inevitably, such arrangements may have involved some duplication of

staff beyond what was necessary for an integrated structure thereby

having costs implications but we see no reason why a firm should be

allowed to compromise on the necessary standards simply on the grounds

of cost.”

Findings on the Authority’s assertions as to liquidity risk management

2.16. The Tribunal did not uphold the Authority’s finding in the Decision Notice that AFP

had failed to meet the requisite standard required under Principle 2, with regard

to its management of the liquidity of the property of the UK Funds (paragraph

3.
DEFINITIONS

The definitions below are used in this Final Notice:

“the Act” means the Financial Services and Markets Act 2000

“the Authority” means the body corporate previously known as the Financial

Services Authority and renamed on 1 April 2013 as the Financial Conduct

“AFP” (or the “Firm”) means Arch Financial Products LLP

“AGL Transaction” means the transaction whereby in February and March 2007

certain Guernsey Cells invested in Arch Group (UK) Limited

“COB” that part of the Authority’s Handbook in force prior to 1 November 2007

relating to the conduct of business by persons regulated by the Authority

“Cru Transaction” means the transaction whereby between February 2007 and

March 2009 certain Guernsey Cells made investments in Cru Investment

Management Ltd

“Diversified Funds” means CF Arch cru Diversified Funds, an OEIC in respect of

which AFP was the investment manager

“Guernsey Cells” means the 22 cells incorporated by Arch Guernsey ICC Limited

“Investment Funds” means CF Arch cru Investment Funds, an OEIC in respect of

which AFP was the investment manager

“Lonscale Transaction” means the loans made by certain Guernsey Cells in order

to facilitate the acquisition of the Clubeasy group of companies by Lonscale

“Nice Transaction” means the transaction in respect of which debt and equity

investments were made by certain Guernsey Cells in Nice Group Limited and Nice

“Principles” means the Authority’s Principles for Businesses

“Relevant Period” means July 2006 to March 2009 inclusive

“SYSC” means that part of the Authority’s Handbook setting out its rules relating

to Senior Management Arrangements, Systems and Controls

“the Four Transactions” means the AGL Transaction, the Cru Transaction, the

Lonscale Transaction and the Nice Transaction

“Tribunal” means the Upper Tribunal (Tax and Chancery Chamber)

“UK Funds” means the “Investment Funds” and the “Diversified Funds” together.

4.
PROCEDURAL MATTERS

4.1.
This Final Notice is given under, and in accordance with, section 390 of the Act.

4.2.
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of

information about the matter to which this notice relates. Under those

provisions, the Authority must publish such information about the matter to which

this notice relates as the Authority considers appropriate. The information may

be published in such manner as the Authority considers appropriate. However,

the Authority may not publish information if such publication would, in the opinion

of the Authority, be unfair to AFP or prejudicial to the interests of consumers or

detrimental to the stability of the UK financial system.

4.3.
The Authority intends to publish such information about the matter to which this

Final Notice relates as it considers appropriate.

Authority contacts

4.4.
For more information concerning this matter generally, contact Stephen Robinson

(direct line: 020 7066 1338 / fax: 020 7066 1339) of the Enforcement and

Market Oversight Division of the Authority.

Financial Conduct Authority, Enforcement and Market Oversight Division