FINAL NOTICE

To:
Cricket Hill Financial Planning Limited

Address:
Unit 8a, Maple Estate, Stocks Lane, Barnsley, South Yorkshire S75 2BL

Date:
16 February 2011



TAKE NOTICE: The Financial Services Authority of 25 The North Colonnade, Canary
Wharf, London E14 5HS (“the FSA”) gives you final notice about a requirement to pay
a financial penalty.


1.
PENALTY

1.1.
The FSA gave Cricket Hill Financial Planning Limited (“Cricket Hill”) a Decision
Notice on 3 February 2011 which notified it that pursuant to section 206 of the
Financial Services and Markets Act 2000 (the “Act”), the FSA had decided to impose
a financial penalty of £70,000 on Cricket Hill in respect of breaches of Principles 3, 8
and 9 of the FSA’s Principles for Businesses (the “Principles”) between 6 April 2006
and 7 August 2009 (the “relevant period”).

1.2.
Cricket Hill agreed to settle at an early stage of the FSA’s investigation and therefore
qualified for a 30% (stage 1) discount under the FSA’s executive settlement
procedures. The FSA would have otherwise imposed a financial penalty of £100,000
on Cricket Hill.

1.3.
As part of the settlement, Cricket Hill will write to its pension switching customers
explaining that they may have been given unsuitable advice and informing them that
their pensions will be reviewed in priority order and, where appropriate, redress paid.

1.4.
Cricket Hill agreed on 1 February 2011 that it will not be referring this matter to the
Upper Tribunal (Tax and Chancery Chamber).

1.5.
Accordingly, for the reasons set out below, the FSA imposes a financial penalty on
Cricket Hill in the amount of £70,000.

2.
REASONS FOR ACTION

2.1.
On the basis of the facts and matters described below, the FSA has decided to impose
a financial penalty on Cricket Hill for breaches of the Principles within the relevant
period. In summary, the FSA has concluded that:

(1)
Cricket Hill failed to take reasonable care to organise and control its affairs
responsibly and effectively, with adequate risk management systems, in breach
of Principle 3 (Management and control). In particular, Cricket Hill failed to
take reasonable steps to:

(a)
ensure that both it and its appointed representative, Firm A, had
adequate systems and controls in place to comply with the relevant
requirements and standards of the regulatory system in relation to their
pension switching business. Specifically, its pension switching sales
process was tailored towards recommending a specific risk
management service (“the RMS”);

(b)
identify that its initial verbal communications with its pension
switching customers constituted financial promotions and ensure that
these were compliant with the financial promotions rules. Specifically,
it did not identify that this communication breached rules.

(2)
Cricket Hill failed to take reasonable steps to identify and manage potential
conflicts of interest, in breach of Principle 8 (Conflicts of interest).

(3)
Cricket Hill failed to take reasonable steps to demonstrate the suitability of
advice given to customers in relation to pension switches, in breach of
Principle 9 (Customers: relationships of trust). In particular, Cricket Hill
failed to:

(a)
obtain and record adequate information about customers’ circumstances
in order to assess the suitability of its advice and support the
recommendations to switch;

(b)
demonstrate that it had undertaken adequate and independent product
research to support the recommendations; and

(c)
ensure that its advice to customers, particularly in suitability reports,
was clear, fair and not misleading and explained why recommendations
were suitable. Specifically, it failed to demonstrate that it gave
balanced and impartial advice and clearly explained the main
consequences, including the costs and charges, of its recommendations.

2.2.
The FSA regards these failings as particularly serious because Cricket Hill’s principal
customers were unsophisticated investors, many of whom had small pension pots.

2.3.
The FSA has taken into account the following points, which are regarded as
mitigating factors:

(1)
Cricket Hill appointed an external compliance consultant to review and update
its pension switching business processes when it became aware of the FSA’s
concerns;

(2)
Cricket Hill co-operated fully with the FSA’s investigation and past business
review; and

(3)
Cricket Hill has agreed that an external compliance consultant will review a
sample of its regulated pension business for a period of six months to
demonstrate to the FSA that the quality of its advice meets regulatory
standards.

2.4.
During the relevant period, the RMS average performance appears to be higher than
its selected benchmarks. In practice, this means that although the FSA has found
significant levels of potentially unsuitable advice, the RMS has performed well and
many of the affected customers may not have suffered financial detriment. In the
small number of pension switches that had been reviewed at the time of this Final
Notice, no customers had suffered financial detriment as a result of their pension
switch.

3.
RELEVANT STATUTORY PROVISIONS, REGULATORY REQUIREMENTS
AND FSA GUIDANCE

3.1.
The relevant statutory provisions, regulatory requirements, and FSA Guidance are set
out at Annex A to this notice.

4.
FACTS AND MATTERS RELIED ON

4.1.
On 6 April 2006 (“A-Day”), the government introduced changes to simplify the tax
rules for personal and occupational pensions in the UK. In particular, limits to the
amount that could be paid into a personal pension were removed, although restrictions
on the amount of tax-free cash that could be taken from personal pensions remained.
Additionally, from A-Day alternatives to drawing a pension as an annuity became
available. Following these changes many advisers reviewed their customers’ existing
pension arrangements. These reviews lead to a significant increase in advice given to
customers to transfer their existing pension arrangements into Personal Pension Plans
(“PPPs”) or Self Invested Personal Pensions (“SIPPs”).

4.2.
In light of the significant increase in pension switches, the FSA became concerned
that consumers may have been switched into pension products which carried high
charges and had features or additional flexibility that they did not need. The FSA was
also concerned about whether firms’ controls, management oversight and compliance
monitoring of this type of advice were robust enough to detect and prevent unsuitable
advice and ensure fair outcomes for customers.

3

4.3.
In the summer of 2008, the FSA commenced phase 1 of a thematic review of pension
switching advice, looking at pension switches made since A-Day. For the purposes of
the FSA thematic review a pension switch was defined as advice to switch from any
occupational or individual pension scheme to an individual PPP or SIPP.

4.4.
In December 2008, the FSA published a report on the findings of phase 1 of the
thematic review. The report noted that the FSA had visited 30 firms and assessed 500
customer files. A quarter of the firms visited were assessed as providing unsuitable
advice in a third or more of the cases sampled. Overall, unsuitable advice was found
in 16% of cases reviewed.

4.5.
In January 2009, Cricket Hill was referred to the Enforcement and Financial Crime
Division of the FSA for investigation as a result of concerns that Cricket Hill
appeared to be advising a significant proportion of its customers to switch their
pensions to one provider, which used a particular RMS. The referral took place at
around the same time as other referrals resulting from the FSA’s thematic review of
pension switching.

4.6.
In February 2009, the FSA published guidance on assessing the suitability of pension
switches, setting out the standards expected in relation to pension switches and the
action firms should take to ensure that customers receive suitable advice.

4.7.
The FSA wrote to over 4,500 firms to summarise its findings, to ask those firms to
consider past and future sales in light of the findings and to take remedial action
where necessary. The FSA then undertook a further programme of firm assessments
in the latter half of 2009 in phase 2 of the thematic review.

4.8.
Cricket Hill is a small IFA which is based in Barnsley, Yorkshire. The majority of its
business comprises the provision of pension switching advice. Cricket Hill became
authorised and regulated by the FSA on 2 November 2004 and, during the relevant
period, was authorised to carry on the following regulated activities:

(1)
advising on investments (except on pension transfers and pension opt outs);

(2)
agreeing to carry on a regulated activity;

(3)
arranging (bringing about) deals in investments; and

(4)
making arrangements with a view to transactions in investments.

4.9.
During the relevant period, Cricket Hill’s personnel included a controlling director,
one non-executive director and up to nine customer advisers at any one time.

4.10. Cricket Hill has two appointed representatives of which only one, Firm A, is active. It
has been an appointed representative of Cricket Hill since 27 March 2007.

4.11. Cricket Hill and Firm A used the same sales advisers. Cricket Hill transacted all the
pension switching business until July 2007; Firm A transacted the majority of the
business thereafter.

4.12. During the relevant period, Cricket Hill and Firm A conducted 1,864 pension
switches. Cricket Hill and Firm A actively promoted a type of discretionary
management service (the RMS), which was managed and administered by a third
party (the “RMS Operator”). The RMS provides investment management for
customers’ pension funds, which includes regular monitoring of the funds and asset
reallocation where appropriate. There is a 1% annual charge for this service, which is
paid by the product provider from the customer’s pension fund and is divided between
either Cricket Hill or Firm A (depending on which entity advised on the switch) and
the RMS Operator.

4.13. Of the 1,864 pension switches completed by Cricket Hill and Firm A during the
relevant period, 1,858 customers opted to use the RMS.

Cricket Hill’s previous regulatory conduct

4.14. Prior to this investigation, the FSA had conducted a review of Cricket Hill’s pension
income drawdown business and had produced a report, dated 6 June 2006, detailing
significant failings in Cricket Hill’s sales processes and systems and controls. Many
of the FSA’s findings in relation to Cricket Hill’s pension switching business are
similar to the FSA’s findings in relation to Cricket Hill’s business in 2006.

The FSA’s investigation

4.15. The FSA reviewed a total of 46 customer files from the relevant period, in which
Cricket Hill or Firm A recommended to customers that they switch their pensions.
The FSA found deficiencies in Cricket Hill’s pension switching sales including the
fact that its fact finding, product research and recommendation processes were
tailored towards recommending the RMS, its communications with customers were
not clear, fair and not misleading and it failed to identify, manage and disclose
appropriately conflicts of interest.

4.16. The FSA required Cricket Hill to instruct a skilled person to produce a report in
relation to Cricket Hill’s pension switching business during the relevant period. The
skilled person produced an interim report of its findings following a review of four
customer files in September 2010 and these findings supported the FSA’s wider
findings set out below.

Systems and controls

4.17. Cricket Hill did not have adequate and appropriate systems and controls, compliance
arrangements and risk management systems. Specifically, Cricket Hill:

(1)
had significant failings in its advice and sales processes. Cricket Hill and Firm
A had a standardised approach to fact finding, product research and
recommendation processes, which led to insufficient tailoring of pension
switching advice to customers’ needs. As part of its investigation, the FSA
reviewed 46 pension switching customer sales. In all sales reviewed, the
standardised sales process was followed and in 44 of the 46 sales the RMS was
recommended;

(2)
suggested the RMS as being potentially suitable for a customer before having
researched alternative products. In all sales reviewed, Cricket Hill’s notes from
its initial meeting with the customer explain that the RMS was potentially
suitable for the customer, despite Cricket Hill not having undertaken any
product research before making this assertion. In 34 of 46 files reviewed, the
product provider eventually selected was recommended in the initial fact find
meeting;

(3)
inappropriately used standard phrases for customers’ objectives, which were
not specific to the individual customer. In 44 of 46 files reviewed, the initial
meeting note recorded that the customer wanted “to consider an alternative
plan with an alternative…provider who would have the potential to improve
on fund growth/benefits”;

(4)
could not demonstrate that it had adequately checked the accuracy of the
information gathered. An example of this is that, of the files 46 reviewed by
the FSA, two had basic and fundamental errors in the fact find process in
relation to the age of retirement, which meant the basis on which the advice
was given was incorrect; and

(5)
failed to recognise that initial verbal communications with customers about
switching pensions constituted financial promotions and were therefore subject
to regulatory requirements. In breach of these requirements, the scripts on
which these communications were based failed to provide a fair and prominent
indication of the relevant risks and disadvantages of the proposed pension
switch and omitted keys facts on the payment of fees.

4.18. Cricket Hill’s failure to control its business with adequate and appropriate compliance
arrangements and risk management systems exposed customers to the risk of
receiving unsuitable advice, in breach of Principle 3.

Conflicts of interest

4.19. Cricket Hill did not adequately identify, manage and, where necessary, disclose
potential conflicts of interest between the firm, including its managers, employees and
appointed representatives, and customers of the firm. Specifically, it failed to
identify, manage and, where appropriate, disclose to customers the following potential
conflicts:

(1)
that Cricket Hill’s controlling director held shares (up until July 2007) in the
RMS Operator. In the same period, this director and other Cricket Hill
advisers advised customers to invest in the RMS Operator’s RMS; and

(2)
that during the relevant period, Firm A was ultimately controlled by
individuals who also controlled the RMS Operator.

4.20. The FSA has found no evidence that payments, such as salaries, fees, commission, or
dividends to shareholders, were made by the RMS Operator to Cricket Hill or Firm
A’s directors and employees.

4.21. However, Cricket Hill failed to identify, manage and, where appropriate, disclose this
potential conflict of interest. Cricket Hill failed to take reasonable steps to manage
this conflict of interest between itself and its customers, in breach of Principle 8.

Suitability of advice

4.22. Cricket Hill was unable to demonstrate that it had taken reasonable care to ensure the
suitability of its advice. Specifically, it failed to:

(1)
demonstrate that it had obtained and retained sufficient personal and financial
information
about
its
customers
to
assess
the
suitability
of
its
recommendations. In 38 of 46 files reviewed, there was insufficient evidence
that it had assessed the customer’s knowledge and experience to support the
recommendations made. In 45 out of 46 sales, the customer’s pension needs in
retirement were not identified;


(2)
demonstrate that it had adequately assessed and described each customer’s
attitude to risk (“ATR”). In all sales reviewed, Cricket Hill assessed
customers’ future ATR at the fact finding stage using only the RMS profiler
tool. This indicated Cricket Hill was already disposed towards recommending
the RMS even though it had not yet considered whether other products could
be more suitable for the customer;

(3)
demonstrate that it had undertaken and/or retained adequate product or
provider research to support its recommendations. Cricket Hill’s product
provider analysis involved using an external personal pension projection
system to select the best funds for the customers. It input customers’ data into
the system and the results were subsequently listed in projected maturity value
order. In 34 out of 46 sales, Cricket Hill limited its research to only those
product providers who could accommodate an annual management charge to
cover the cost of the RMS, and did not research any other providers. It
therefore excluded stakeholder pensions, which could have been a suitable
option for a number of its customers. In 44 of the 46 sales, the recommended
RMS fund was not the best fund in terms of projected maturity values, there
was no evidence on the files of research into the other relevant alternative
products providers;

(4)
obtain sufficient information from the customer’s ceding scheme. In all sales
there was insufficient information, particularly in relation to costs, to enable a
meaningful comparison between the ceding system and the recommended
product. This meant that it was difficult for the customer to make an objective
and balanced decision as to whether to accept Cricket Hill’s recommendation
to switch to a new pension arrangement and use the RMS;

(5)
ensure that suitability reports were clear, fair and not misleading and explained
sufficiently why recommendations were suitable. In all files reviewed, the
suitability reports were unclear, did not contain sufficient information in
relation to costs. Cost illustrations (which purported to show when the
recommended product would outperform the ceding scheme) were included in
appendices at the back of the report. This meant that customers’ attention was
not sufficiently drawn to the illustrations, even though they provided

7

fundamental information as to whether or not the customers would benefit
from the proposed switch;

(6)
demonstrate that it had explained the main consequences, including costs,
charges and risks, associated with its recommendations. In 42 out of 46 sales,
the projected value of the receiving scheme at retirement on a cost basis was
lower than the projected value of the ceding scheme. The suitability reports did
not explain the total cost of the recommended scheme or compare the total cost
in a clear way with the total cost of the ceding scheme. Although the
suitability reports indicated that the recommended scheme would cost more,
they did not clearly set out by how much, taking into account the RMS charge,
the provider’s charges, Cricket Hill’s commission, any penalty charge imposed
by the ceding scheme provider and any loss of guaranteed benefits under the
ceding scheme. These failings made it difficult for customers to make an
objective and balanced decision as to whether to accept Cricket Hill’s
recommendation to switch to a new pension arrangement and use the RMS;

(7)
issue suitability reports which accurately compared the customer’s ceding
scheme with the recommended scheme. In 36 out of 46 sales reviewed,
customers were wrongly informed that on a costs basis, they would be better
off if they switched their pension into the recommended pension plan utilising
the RMS. However, in each of these cases Cricket Hill had compared the
customer’s ceding scheme with a balanced managed fund, which was not
recommended and did not include the costs of the RMS, and therefore wrongly
concluded that the customer would be better off on a cost basis by switching
their pension;

(8)
ensure that suitability reports were tailored sufficiently to the circumstances of
each customer. The suitability reports used standard paragraphs, for example
in all the files reviewed the following standard customer objective was stated:
“To maximise your income in retirement by a combination of contributions,
charges and investment performance”. Also, in relation to different
customers, standard wording was used to recommend three different RMS
pension providers, on the basis of “…financial strength, product features,
value for money and fund performance…”.

(9)
ensure that suitability reports were balanced as all were heavily weighted
towards the use of the RMS, and did not contain sufficient information on
other products to enable customers to make an informed and balanced
decision.

5.
ANALYSIS OF BREACHES

5.1.
As a result of the facts and matters referred to in paragraphs 4.17 to 4.18 above, the
FSA has determined that Cricket Hill failed to take reasonable care to organise and

control its affairs responsibly and effectively, with adequate risk management systems
in breach of Principle 3 and the associated Conduct of Business Sourcebook1
(“COBS”) rules and Senior Management Arrangements, Systems and Controls
(“SYSC”) rules listed in Annex A.

5.2.
As a result of the facts and matters referred to in paragraphs 4.19 and 4.21 above, the
FSA has determined that Cricket Hill failed to take reasonable care to ensure that it
identified and managed conflicts of interest between Cricket Hill and its customers, in
breach of Principle 8 and the associated COBS and SYSC rules listed in Annex A.

5.3.
As a result of the facts and matters referred to in paragraph 4.22 above, the FSA has
determined that Cricket Hill failed to take reasonable care to ensure the suitability of
its advice to its customers in breach of Principle 9 and the associated COBS rules
listed in Annex A. Specifically, Cricket Hill failed to provide balanced pension advice
to customers (as its sales process was tailored to sell the RMS), obtain and retain
sufficient personal and financial information about its customers, undertake adequate
or independent product research, ensure that suitability reports were clear, fair and not
misleading and explain the suitability, as well as the main consequences and risks, of
its recommendations.

6.
ANALYSIS OF PROPOSED SANCTION

6.1.
The FSA's policy on the imposition of financial penalties as at the date of this notice
is set out in Chapter 6 of the Decision Procedures and Penalties Manual (“DEPP”),
which forms part of the FSA Handbook. In addition, the FSA has had regard to the
corresponding provisions of Chapter 13 of the Enforcement Manual (“ENF”) in force
during the relevant period until 27 August 2007 and Chapter 7 of the Enforcement
Guide (“EG”), in force thereafter.

6.2.
The principal purpose of imposing a financial penalty is to promote high standards of
regulatory conduct by deterring firms who have committed regulatory breaches from
committing further breaches, and helping to deter other firms from committing similar
breaches, as well as demonstrating generally the benefits of compliant behaviour.

Financial penalty

6.3.
In determining whether a financial penalty is appropriate the FSA is required to
consider all the relevant circumstances of a case. Applying the criteria set out in
DEPP 6.2.1 and 6.4.2, the FSA has determined that a financial penalty is an
appropriate sanction, given the serious nature of the breaches, the risks created for
customers of Cricket Hill and the need to send out a strong message of deterrence to
other firms.

1 Applicable from 1 November 2007 and substituting the Conduct of Business (“COB”).

6.4.
DEPP 6.5.2G sets out a non-exhaustive list of factors which may be relevant to
determining the appropriate level of a financial penalty. The FSA considered that the
following factors were particularly relevant in this case.

Deterrence (DEPP 6.5.2(1))

6.5.
A financial penalty will deter Cricket Hill from committing further breaches and deter
other firms from committing similar breaches, as well as demonstrating generally the
benefits of compliant behaviour. The fine will reinforce the message that the FSA
expects firms to give impartial pension switching advice and be able to evidence the
suitability of their advice to customers.

The nature, seriousness and impact of the breach in question (DEPP 6.5.2(2))

6.6.
In determining the appropriate sanction, the FSA has had regard to the seriousness of
the breaches, the duration and frequency of the breaches, and whether the breaches
revealed serious failings in Cricket Hill’s systems and controls and the number of
customers who were affected and or placed at risk of loss.

6.7.
Cricket Hill’s failings in the relevant period are viewed as being particularly serious
because Cricket Hill’s principal customers were unsophisticated investors, many of
whom had small pension pots. The failure to gather sufficient information at the fact
finding stage, undertake adequate product research and ensure that its
communications were clear, fair and not misleading therefore exposed unsophisticated
customers to the risk of receiving unsuitable advice.

The extent to which the breach was deliberate or reckless (DEPP 6.5.2(3))

6.8.
The FSA has found no evidence to show that Cricket Hill acted in a deliberate or
reckless manner.

The size, financial resources and other circumstances of Cricket Hill (DEPP
6.5.2(5))

6.9.
In determining the level of penalty, the FSA has considered the following issues:

(1)
Cricket Hill’s latest financial statements;

(2)
the cost of the past business review to be conducted; and

(3)
the potential need for Cricket Hill to be able to afford the cost of paying
financial redress to any customers identified during the past business review as
having suffered financial detriment as a result of Cricket Hill’s pension
switching advice.

6.10. Having considered these issues, the FSA has determined that the level of financial
penalty is appropriate and proportionate.

Conduct following the breach (DEPP 6.5.2(8))

6.11. The FSA has also taken into account the following steps taken by Cricket Hill which
have served to mitigate its failings:

(1)
Cricket Hill was proactive in appointing an external compliance consultant to
review and update its pension switching business processes when it became
aware of the FSA’s concerns;

(2)
Cricket Hill has co-operated fully with the FSA’s investigation and the FSA’s
past business review; and

(3)
Cricket Hill has agreed that an external compliance consultant will review a
sample of regulated pension business for a period of six months to demonstrate
to the FSA that the quality of its advice meets the required regulatory
standards.

6.12. During the relevant period, the RMS average performance appears to be higher than
its selected benchmarks. In practice, this means that although the FSA has found
significant levels of potentially unsuitable advice, many of the affected customers
may not have suffered financial detriment. The FSA has required Cricket Hill to test
this through the past business review and to pay redress where appropriate.

Disciplinary record and compliance history (DEPP 6.5.2(9))

6.13. Cricket Hill has not been the subject of previous disciplinary action, but similar
systems failings were identified by the FSA during a visit in 2006 in relation to its
sale of pension income drawdown products.

Other action taken by the FSA (DEPP 6.5.2(10))

6.14. In determining the level of financial penalty, the FSA has taken into account penalties
imposed on other authorised persons for similar behaviour.

7.
DECISION MAKERS

7.1.
The decision which gave rise to the obligation to give this notice was made by the
Settlement Decision Makers on behalf of the FSA.

8.
IMPORTANT

8.1.
This Final Notice is given to Cricket Hill in accordance with section 390 of the Act.

Manner of and time for payment

8.2.
The financial penalty must be paid in full by Cricket Hill to the FSA in accordance
with the terms of the settlement agreement dated 1 February 2011.

8.3.
If all or any of the financial penalty is outstanding on the day after the due date for
payment as expressed in the settlement agreement dated 1 February 2011, the FSA
may recover the outstanding amount as a debt owed by Cricket Hill and due to the
FSA.

8.4.
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 FSA must
publish such information about the matter to which this notice relates as the FSA
considers appropriate. The information may be published in such manner as the FSA
considers appropriate. However, the FSA may not publish information if such
publication would, in the opinion of the FSA, be unfair to Cricket Hill or prejudicial
to the interests of consumers.

FSA contacts

8.5.
For more information concerning this matter generally, you should contact Anna
Hynes of the Enforcement and Financial Crime Division of the FSA (direct line: 0207
066 9464; fax: 0207 066 9465).

Tom Spender

FSA Enforcement and Financial Crime Division

ANNEX A

RELEVANT STATUTORY PROVISIONS, REGULATORY REQUIREMENTS
AND GUIDANCE

1.
Statutory provisions

1.1.
The FSA’s statutory objectives are set out in section 2(2) of the Act. In relation to this
case, the most relevant statutory objective is the protection of consumers.

1.2.
Section 138 of the Act provides that the FSA may make such rules applying to
authorised persons as appear to it to be necessary or expedient for the purpose of
protecting consumers.

1.3.
The FSA has the power, pursuant to section 206 of the Act, to impose a financial
penalty of such amount as it considers appropriate where the FSA considers an
authorised person has contravened a requirement imposed on him by or under the Act.

2.
Relevant Handbook provisions

2.1.
In exercising its power to impose a financial penalty, the FSA must have regard to
relevant provisions in the FSA Handbook of rules and guidance (“the FSA
Handbook”). The main provisions relevant to the action specified above are set out
below.

Principles for Businesses

2.2.
Under the FSA’s rule-making powers as referred to above, the FSA has published in
the FSA Handbook the Principles for Business (“Principles”) which apply either in
whole, or in part, to all authorised persons.

2.3.
The Principles are a general statement of the fundamental obligations of firms under
the regulatory system and reflect the FSA’s regulatory objectives. A firm may be
liable to a disciplinary sanction where it is in breach of the Principles.

2.4.
The Principles relevant to this matter are:

(1)
Principle 3 (management and control) which states that “a firm must take
reasonable care to organise and control its affairs responsibly and effectively,
with adequate risk management systems.”

(2)
Principle 8 (conflicts of interest) which states that “A firm must manage
conflicts of interest fairly, both between itself and its customers and between a
customer and another client.”

(3)
Principle 9 (customers: relationships of trust) which states that “a firm must
take reasonable care to ensure the suitability of its advice and discretionary
decisions for any customer who is entitled to rely upon its judgment.”

Conduct of Business Rules

2.5.
Guidance on the Conduct of Business Rules is set out in the Conduct of Business
manuals of the FSA handbook.

Conduct of Business

2.6.
Conduct of Business Rules (“COB”) applied to firms until 31 October 2007.

2.7.
COB 2.1.3R requires a firm to take reasonable steps to communicate with its
customers in a way which is clear, fair and not misleading.

2.8.
COB 3.2.4R extends the scope of COB 3.8.4 to certain unsolicited real time financial
promotions approved by a firm.

2.9.
COB 3.8.4R requires that a firm must be able show that it has taken reasonable steps
to ensure that a financial promotion is clear, fair and not misleading.

2.10. COB 3.10.3R requires that a firm must not make an unsolicited financial promotion
unless:

(1)
the recipient has an established existing customer relationship with the firm;
or;

(2)
the financial promotion relates to a generally marketable packaged product; or

(3)
the financial promotion:

(a)
relates to a controlled activity to be carried out by the firm; and

(b) the only investments involved are or which reasonably could be

involved are:

(i)
readily realisable securities: and

(ii)
generally marketable non-geared packaged products.

2.11. COB 5.2.5R requires that before a firm gives a personal recommendation concerning
a designated investment to a private customer, it must take reasonable steps to ensure
that it is in possession of sufficient personal and financial information about that
customer relevant to the services that the firm has agreed to provide.

2.12. COB 5.2.9R requires that a firm must make and retain a record of a private customer’s
personal and financial circumstances that it has obtained in satisfying COB 5.2.5R.

2.13. COB 5.3.5R requires that a firm must take reasonable steps to ensure that a personal
recommendation concerning a designated investment to a private customer business is
suitable for the customer.

2.14. COB 5.3.16R requires that the suitability letter must: (1) explain why the firm has
concluded that the transaction is suitable for the customer, having regard to his

personal and financial circumstances, (2) contain a summary of the main
consequences and any possible disadvantages of the transaction, and (3) in the case of
a personal pension scheme which is not a stakeholder pension scheme, explain the
reasons why the firm considers the personal pension scheme to be at least as suitable
as a stakeholder pension scheme.

2.15. COB 5.3.18R requires that in the case of a pension contract or stakeholder scheme,
where the cancellation rules require notification of the right to cancel, a firm must
provide a suitability letter no later than the fourteenth day after the contract is
concluded, and in any other case, when, or as soon as possible after, the transaction is
effected.

2.16. COB 5.4.3R requires that a firm must not, amongst other things, make a personal
recommendation of a transaction to a private customer unless it has taken reasonable
steps to ensure that the private customer understands the nature of the risks involved.

2.17. COB 5.7.3R requires that before a firm conducts investment business with a private
customer it must disclose in writing the basis or amount of its charges for conducting
that business and the nature or amount of any other income receivable by it.

2.18. COB 5.7.5R requires that when a firm recommends or arranges the sale of a packaged
product the firm must disclose to the customer in cash terms any commission
receivable by it in connection with the transaction.

2.19. COB 7.1.3R (2) requires that when a firm has or may have a relationship that gives or
may give rise to a conflict of interest in relation to a transaction to be entered into with
or for a customer, the firm must not knowingly advise in relation to that transaction
unless it takes reasonable steps to ensure fair treatment for the customer.

Conduct of Business Sourcebook

2.20. Conduct of Business Sourcebook (“COBS”) applied to firms, with effect from 1
November 2007.

2.21. COBS 4.2.1R requires a firm to ensure that a communication is fair, clear and not
misleading.

2.22. COBS 4.5.2R requires that information is accurate and, in particular, does not
emphasise any potential benefits of an investment without also giving a fair and
prominent indication of any relevant risks.

2.23. COBS 4.5.6R requires that if information compares investments a firm must ensure
that the comparison is meaningful and presented in a fair and balanced way.

2.24. COBS 9.2.1R requires that a firm must take reasonable steps to ensure that a personal
recommendation or decision to trade, is suitable for its customer.

2.25. COBS 9.2.2R requires that a firm must obtain from the customer such information as
is necessary for the firm to understand the essential facts about him.

2.26. COBS 9.2.6R requires that if a firm does not obtain the necessary information to
assess suitability it must not make a personal recommendation to the customer.

2.27. COBS 9.4.1R requires that a firm must provide a suitability report to a retail customer
if the firm makes a personal recommendation to the client and the client buys, sells,
surrenders, converts or cancels rights under, or suspends contributions to, a personal
pension scheme or a stakeholder pension scheme or elects to make income
withdrawals or enters into a pension transfer or pension opt-out.

2.28. COBS 9.4.7R requires that the suitability report must at least (i) specify the client’s
demands and needs; (ii) explain why the firm has concluded that the recommended
transaction is suitable for the client having regard to the information provided by the
client; and (iii) explain any possible disadvantages of the transaction for the client.

Senior Management Arrangements, Systems and Controls

2.29. SYSC 3.1.1R provides that a firm must take reasonable care to establish and maintain
such systems and controls as are appropriate to its business.

2.30. SYSC 3.2.6R provides that a firm must take reasonable care to establish and maintain
effective systems and controls for compliance with applicable requirements and
standards under the regulatory system.

2.31. SYSC 10.1.3R, provides that a firm to which SYSC 10 applies must take all
reasonable steps to identify any conflict of interest between the firm, including its
managers, employees and appointed representatives, or any person directly or
indirectly linked to them by control, and a client of the firm that arise or may arise in
the course of providing a relevant service.

2.32. SYSC 10.1.4R provides that a firm should consider, as a minimum, whether the firm
or a relevant person, or a person directly or indirectly linked by control to the firm:

(1) is likely to make a financial gain, or avoid a financial loss, at the expense of the
client;

(2) has an interest in the outcome of a service provided to the client or of a transaction
carried out on behalf of the client, which is distinct from the client’s interest in
that outcome;

(3) has a financial or other incentive to favour the interest of another client or group of
clients over the interests of the client;

(4) carries on the same business as the client; or

(5) receives or will receive from a person other than the client an inducement in
relation to a service provided to the client, in the form of monies, goods or
services, other than the standard commission or fee for that service.