SEE FINAL NOTICE ISSUED ON 2 OCTOBER 2012


___________________________________________________________________________



DECISION NOTICE


___________________________________________________________________________

To:

Martin Edward Rigney
Topps Rogers Financial Management

Address:


Smithy Cottage



Station Road



Hope



Hope Valley



Derbyshire



S33 6RR



FSA reference:
MLR01041


210105

Date:

16 November 2011

TAKE NOTICE: The Financial Services Authority of 25 The North Colonnade, Canary
Wharf, London, E14 5HS (the “FSA”) has decided to take the following action:

1.
ACTION

1.1.
For the reasons set out in this notice, the FSA has decided to take the following action
against Martin Edward Rigney:

(1) impose a financial penalty of £117,330 on him, pursuant to section 66 of the
Financial Services and Markets Act 2000 (“FSMA”), for failing to comply with
Statements of Principle 1, 2 and 7 of the Statements of Principle for Approved
Persons (the “Statements of Principle”);

(2) withdraw the approval granted to him, pursuant to section 63 of FSMA, to
perform controlled functions; and

(3) make an order, pursuant to section 56 of FSMA, prohibiting him from performing
any function in relation to any regulated activity carried on by any authorised
person, exempt person or exempt professional firm (the “Prohibition Order”).

2.
REASONS FOR THE ACTION

2.1.
On the basis of the facts and matters described below, the FSA considers that Mr
Rigney’s conduct, while acting in his capacity as a partner and an adviser at Topps
Rogers Financial Management (“Topps Rogers”), fell short of the standards expected
of approved persons. Specifically, when performing controlled functions in
connection with Topps Rogers’ investment business in the period from May 2004 to
June 2010 (the “relevant period”), he contravened the Statements of Principle.

2.2.
Mr Rigney breached Statement of Principle 1 as he failed to act with integrity in
carrying out his controlled functions in that he arranged a transaction in an
unregulated collective investment scheme (“UCIS”) on behalf of a customer despite a
requirement imposed on Topps Rogers’ Part IV permission not to arrange new UCIS
business.

2.3.
Mr Rigney also breached Statement of Principle 2 as he failed to act with due skill,
care and diligence in carrying out his controlled functions. Specifically, while acting
as an adviser, he did not take adequate steps to ensure that he had:

(1) established that an appropriate exemption from the statutory restriction on the
promotion of UCIS in section 238 of FSMA (the “section 238 restriction”) was
applicable before promoting UCIS. Customer files did not explain whether or
how any exemption applied to each customer to whom a UCIS transaction was
recommended;

(2) obtained and recorded sufficient financial and personal information about his
customers to determine their eligibility for UCIS promotions and to assess the
suitability of his recommendations. Customer files contained limited handwritten
and file notes;

(3) adequately assessed and established his customers’ attitude to risk (“ATR”).
Some customer files contained no records that any assessment had been
conducted to establish customers’ ATR, and in some files the risk ratings did not
correlate with the stated risk profile descriptions in suitability letters;

(4) undertaken adequate research to support his recommendations. Customer files did
not contain adequate details of research on alternative products, UCIS and
providers, or record information comparing investments before UCIS fund
switches were made;

(5) explained adequately why his recommendations were suitable with regard to his
customers’ personal and financial circumstances. Suitability letters were template
driven with standard phrases, and were not issued in respect of UCIS fund
switches; and

(6) explained adequately the costs associated with his recommendations. Customer
files contained no record that customers had been notified of the fees or

commission Topps Rogers would receive as a result of his recommendation or the
charges which would be associated with their investments.

2.4.
In addition, Mr Rigney breached Statement of Principle 7 as he failed to take
reasonable steps to ensure that the business for which he was responsible in his
controlled functions complied with the relevant requirements and standards of the
regulatory system. Specifically, while acting as a senior manager, he did not
implement adequate compliance arrangements to ensure that Topps Rogers could:

(1) identify and manage risks to its business. In particular, he did not put in place
adequate arrangements to ensure that Topps Rogers could ensure that it had
applied an exemption when promoting UCIS business in breach of the section
238 restriction, and he over-relied on guidance provided by external compliance
consultants; and

(2) ensure the suitability of its advice. In particular, he did not identify record
keeping deficiencies during customer file reviews.

2.5.
Further, Mr Rigney failed to act with integrity in that he arranged investments in
UCIS without obtaining his customers’ signatures and without their knowledge and
consent and thereby conducted discretionary portfolio management outside the scope
of Topps Rogers’ Part IV permission

2.6.
Mr Rigney’s conduct demonstrates a failure to understand the statutory restriction
associated with promoting UCIS as well as a failure to ensure that Topps Rogers
complied with regulatory requirements aimed at ensuring that customers received
suitable advice in Chapter 5.2 of the Conduct of Business manual (“COB”) for the
period up to 31 October 2007 and Chapter 9.2 of the Conduct of Business Sourcebook
(“COBS”) for the period from 1 November 2007, and were treated fairly.
Consequently, customers might have received unsuitable advice or made unsuitable
investments in UCIS.

2.7.
The impact of these failures was serious. Topps Rogers promoted to and advised 94
customers to invest over £12 million in UCIS, either directly with UCIS providers or
indirectly through a self invested personal pension or a wrap platform. It did so
without proper regard to the section 238 restriction.

2.8.
As with many speculative investments, a customer investing in a UCIS could lose
some or all of their money. However, this risk is likely to be particularly relevant to
UCIS because they frequently invest in assets that are riskier or less liquid than other
investments. A number of UCIS that Topps Rogers’ customers invested in have been
suspended or wound up, resulting in potential financial losses for customers. The
situation was aggravated by the fact that customers were advised by Mr Rigney to
invest large proportions of their investment portfolios in UCIS. In some instances,
customers were not aware that they had invested in UCIS, or of the associated risks.

2.9.
In relation to Mr Rigney’s failings while performing controlled functions as an
approved person at Topps Rogers, as described in paragraphs 2.2 to 2.4 above, the
FSA is able to impose a financial penalty and it is appropriate to do so. The FSA has
therefore decided to impose a financial penalty of £117,330 on him for breach of
Statements of Principle 1, 2 and 7.

2.10. The FSA has concluded that, as a result of the seriousness, nature and extent of Mr
Rigney’s misconduct, as described in paragraphs 2.2 to 2.4 and 2.5 above, he is
failing to meet the minimum regulatory standards required in terms of integrity and
competence and capability, and is not fit and proper to perform any function in
relation to any regulated activity carried on by any authorised person, exempt person
or exempt professional firm. Accordingly the FSA has decided to withdraw his
approval to perform controlled functions and to make the Prohibition Order against
him.

2.11. This action supports the FSA’s regulatory objectives of market confidence and the
protection of consumers.

3.
STATUTORY PROVISIONS, REGULATORY GUIDANCE AND POLICY

3.1.
Relevant statutory provisions, regulatory guidance and policy are set out in Annexes
A and B.

4.
FACTS AND MATTERS

4.1.
Mr Rigney was approved by the FSA on 29 April 2002 to perform the following
controlled functions at Topps Rogers: CF4 (Partner), CF8 (Apportionment and
oversight), CF10 (Compliance oversight) and CF11 (Money laundering reporting). In
addition, he has been approved to perform the controlled function of CF30 (Customer)
since 1 November 2007, has been responsible for insurance mediation since 11 July
2005 and is the only adviser at Topps Rogers.

4.2.
Topps Rogers is a small independent financial advisory firm based in Sheffield. It is a
partnership with two partners. Topps Rogers was authorised by the FSA on 25 April
2002 to conduct investment business. With effect from 25 April 2002, Topps Rogers
was granted permission by the FSA to carry out 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.

4.3.
On 24 and 25 February 2009, the FSA visited Topps Rogers to assess the adequacy of
its sales process and systems and controls. As part of the assessment, the FSA
reviewed documents relating to 11 customer files. The FSA identified a number of
concerns, including, amongst other things:

(1) that Topps Rogers might have advised customers to invest in UCIS in breach of
the section 238 restriction and without assessing adequately whether they fell
within any of the relevant exemptions;

(2) about the suitability of Topps Rogers’ advice to customers to invest in UCIS as
there appeared to be weaknesses, amongst other things, in its customer
information gathering and recording processes, product research and suitability
letters; and

(3) with the adequacy of Topps Rogers’ systems and controls to monitor its business
activities.

4.4.
With effect from 21 May 2009, Topps Rogers voluntarily varied its Part IV
permission to stop arranging new business connected with UCIS.

4.5.
With effect from 20 January 2011, Topps Rogers voluntarily varied its Part IV
permission such that it could not carry on any of the regulated activities in its
permission.

4.6.
Following an investigation, the FSA considers that Mr Rigney failed to promote UCIS
business in compliance with the section 238 restriction and respective exemptions,
take adequate steps to ensure the suitability of his recommendations, exercise
adequate management oversight over Topps Rogers and act with due regard to
regulatory requirements and standards, as set out in further detail below.

UCIS promotion

4.7.
Material held on customer files did not evidence that Mr Rigney had established and
relied on an appropriate exemption before promoting UCIS business in breach of the
section 238 restriction and regulatory requirements in COB 3.11 and COBS 4.12.

The section 238 restriction

4.8.
The section 238 restriction prohibits an authorised firm from communicating an
invitation or inducement to participate in a UCIS. There are a number of exemptions
to the section 238 restriction which an authorised firm could rely on to promote UCIS
to its customers. These exemptions are contained in the Financial Services and
Markets Act 2000 (Promotion of Collective Investment Schemes (Exemptions) Order
2001 (the “PCIS Order”) and listed in the tables at COB 3 Annex 5 (for the period up
to 31 October 2007) and COBS 4.12.1R(4) (for the period from 1 November 2007).
Relevant provisions relating to the promotion of UCIS are summarised in Annex B.

4.9.
UCIS are often characterised by high levels of volatility and illiquidity which can in
turn entail a higher degree of risk for consumers. Further, as UCIS fall outside the
regulatory regime, consumers who invest in UCIS may have limited recourse to the
Financial Ombudsman Service (the “FOS”) and the Financial Services Compensation
Scheme (the “FSCS”). For these reasons there is a restriction on the categories of
investor to whom UCIS can be promoted.

Application of COBS 4.12

4.10. Mr Rigney stated that he relied on an exemption under COBS 4.12 to promote UCIS
to his customers. However, material held on customer files did not demonstrate that
he had relied on an applicable exemption under COBS 4.12 before promoting UCIS

business. In fact, none of the customer files showed that an exemption had been
considered, let alone applied.

4.11. Although Mr Rigney had obtained some personal and financial information about his
customers, there was no evidence of an adequate assessment of the customers’
investment experience and knowledge, or of whether the investment in the UCIS was
suitable for the customer. Nor was there any explanation of how he had established
that his customers were capable of making their own investment decisions and that
they understood the risks associated with investing in UCIS. Except for one customer,
there was no record on the customer files demonstrating that Mr Rigney had given his
customers clear written warning that Topps Rogers could promote UCIS business to
them. In addition, the customer files did not show that he had obtained any documents
from customers confirming their awareness that Topps Rogers could promote UCIS
business to them.

4.12. Mr Rigney indicated that with some customers no formal assessment was conducted
to check their eligibility to invest in UCIS. He stated that in relation to long standing
customers of Topps Rogers, because he already had a thorough knowledge of their
personal circumstances, he considered that a formal assessment of eligibility was
unnecessary.

Application of PCIS Order

4.13. Despite stating that he relied on an exemption under COBS 4.12 to promote UCIS
business, information recorded on customer files suggested that Mr Rigney might
have been seeking to rely upon the exemption relating to “high net worth individuals”
under the PCIS Order.

4.14. A number of customer files contained signed statements purporting to confirm the
customers’ status as high net worth individuals. Mr Rigney could not have relied on
this exemption as the UCIS funds that he recommended to his customers did not
invest in unlisted securities. In any event, even if he could have relied on this
exemption, the customer files did not demonstrate that the exemption had been
applied properly because the statements did not comply with the necessary
requirements stipulated by the PCIS Order (although they appeared to try to mirror
the language). The statements referred to incorrect legislation and did not warn
customers that they could lose their property and other assets. They also did not state
that customers should seek independent advice if they had any doubts about investing
in UCIS.

4.15. When communicating information relating to UCIS, the exemption relating to high
net worth individuals also requires a warning about the risk involved when investing
in the UCIS to be given to the customer, both orally and in writing, within two
business days of the communication. In addition, any communication has to be
accompanied by an indication that it is exempt from the section 238 restriction.
However, customer files did not demonstrate that Mr Rigney had given his customers
either the warning or the indication, whether orally or in writing, when promoting
UCIS business.

4.16. Mr Rigney stated that he was not aware of the specific requirements for high net
worth individuals under the PCIS Order. In addition, he could not explain why he
requested his customers to sign statements to confirm their status as high net worth
individuals when he relied on an exemption under COBS 4.12 to promote UCIS
except that he thought it was good practice.

Report by a skilled person

4.17. The FSA required Topps Rogers to engage a skilled person to review ten customer
files. The purpose of the review was to assess whether historical instances of Topps
Rogers’ promotion of UCIS were compliant with the section 238 restriction.

4.18. The skilled person produced a report, which concluded as its key finding, that two
cases were not UCIS but, in the eight UCIS cases reviewed, Topps Rogers had been
communicating UCIS to its customers without ensuring that each customer fell within
an exemption in the PCIS Order or COBS 4.12 (or COB 3.1 for the period up to 31
October 2007). The individual promotions were consequently all non-compliant.

Suitability of recommendations

Eligibility for UCIS promotion

4.19. The skilled person’s report indicated that, while acting as an adviser, Mr Rigney
failed to ensure that he had adequately assessed his customers’ eligibility for UCIS
promotions and established whether an exemption was applicable in accordance with
the PCIS Order or COBS 4.12 before promoting UCIS business to them. By
promoting UCIS business to retail customers without establishing whether an
appropriate exemption was applicable, he breached the section 238 restriction, and
may have promoted UCIS to customers who were not eligible for such investments.

Recording customer information

4.20. Mr Rigney stated that he gathered more information on customers who indicated that
they were potentially interested in investing in UCIS to gauge their reaction before
deciding whether to make a recommendation. In addition, he stated that he obtained
further information from customers before conducting UCIS fund switches.

4.21. Although customer files showed that Mr Rigney had obtained some personal and
financial details about his customers, the customer files did not demonstrate that he
had explored whether his customers understood the risks involved with investing in
UCIS or could financially bear any risks associated with such investments before
recommending UCIS investments or conducting UCIS fund switches.

4.22. Mr Rigney stated that a lot of information was based on his own personal knowledge
and dealings with customers and that such information was retained mentally. He did
not appreciate that a third party, such as the FSA or the FOS, might request Topps

7


Rogers’ customer files for review and the importance of recording sufficient
information.

Assessing and establishing ATR

4.23. Mr Rigney used a standard ATR form to record his customers’ reaction to a number
of different investment scenarios. Where the ATR form was used, the customer files
did not demonstrate that he had used the information gathered to assess and determine
his customers’ ATR, or to make his recommendations.

4.24. Mr Rigney stated that he re-assessed his customers’ ATR before recommending
further investments in UCIS and that the details of any re-assessments were
sometimes recorded on new ATR forms and retained on the customer files. However,
material held on customer files showed no re-assessment of his customers’ ATR
before each separate UCIS transaction or additional investment into an existing UCIS.

4.25. The customer files also did not evidence that Mr Rigney had assessed the risk of
exposing a proportion of his customers’ investment portfolios to UCIS, or applied any
diversification policy in respect of his customers’ investment portfolios to mitigate the
risks associated with investing in UCIS. In particular, the customer files did not
demonstrate that Mr Rigney had assessed whether his customers could financially
bear the risk of investing a substantial proportion of their money into UCIS, or
explain how such an approach met their ATR.

4.26. Suitability letters also contained inconsistent descriptions of risk categories. They
confirmed risk ratings which were not defined and did not match the risk categories
described in the suitability letters. Mr Rigney stated that he was not aware of the
inconsistent risk descriptions because he did not check or proof read the suitability
letters.

4.27. Further, suitability letters confirmed two different risk ratings for each customer. Mr
Rigney stated that where UCIS investments were made through a wrap platform, it
was possible for customers to have a different risk appetite towards the product and
UCIS fund. However, the suitability letters did not explain the relationship between
the two different risk ratings or clarify that the customers’ ATR had been assessed
separately in respect of the product and UCIS fund. In addition, the customer files
contained no evidence that Mr Rigney had conducted any assessments to determine
his customers’ risk appetite in respect of the product or UCIS fund.

4.28. As the risk ratings assigned to his customers were not explained and did not match the
risk categories described in the suitability letters, Mr Rigney provided unclear
information to his customers.

Due diligence

4.29. When conducting due diligence on specific UCIS and providers, Mr Rigney relied
mainly on research produced by a third party who also promoted UCIS funds on
behalf of the providers. In addition, he spoke to a number of UCIS fund managers and
conducted site visits in response to their invitations to check the underlying assets.

4.30. Given that the third party and UCIS fund managers were actively involved in
marketing and promoting UCIS funds, research material produced by these parties
may have contained biased information. Mr Rigney relied heavily on information
provided by these parties, and the FSA has seen no evidence that he obtained the
necessary impartial knowledge to be able to assess objectively and identify concerns
relating to specific UCIS funds.

4.31. To the extent that Mr Rigney conducted independent due diligence of UCIS, his
research was inadequate because he focussed on reviewing investment performance
and returns rather than on establishing the regulatory status of products.
Consequently, he promoted UCIS without ensuring that he had an adequate
knowledge of the regulatory status and the associated requirements attached to such
investments. In fact, he promoted at least two products in the erroneous belief that
they were UCIS.

4.32. Customer files also did not evidence that Mr Rigney had researched and considered
alternative products, UCIS funds and providers before making recommendations. The
customer files did not explain why the UCIS recommended was the most suitable, or
why the provider selected was the most appropriate, compared to any alternatives. Mr
Rigney stated that he did not always record details of his research on the customer
files because he took the view that as UCIS were unregulated, there was no
requirement to provide the level of evidence which he normally associated with
regulated products. Mr Rigney’s view was incorrect.

4.33. Further, in respect of customers who invested through a wrap platform, where their
initial investments were subsequently switched into UCIS funds, the customer files
did not evidence that Mr Rigney had conducted any research before moving the
investments into UCIS funds. In particular, the customer files did not demonstrate that
he had compared the advantages and disadvantages of investing in UCIS funds with
the customers’ existing investments.

4.34. As customer files did not contain adequate details of research on alternative products,
UCIS funds and providers, or record comparison information between investments
before UCIS fund switches were made, it is unclear whether investments in UCIS
made on behalf of customers were suitable.

Confirming advice

4.35. Although authorised firms are not required to issue suitability letters in respect of
UCIS recommendations, firms that choose to do so are required by Principle 7
(Communications with customers) of the FSA’s Principles for Businesses to
communicate information to customers in a way that is clear, fair and not misleading.

4.36. Mr Rigney issued suitability letters, which were based on a standard template. The
FSA found that the suitability letters were not tailored to each customer and Mr
Rigney did not remove parts of the letters which were not relevant. For example, he
included standard phrases to describe his customers’ investment objectives which in
some cases were inconsistent with other information recorded on the customer files.

4.37. Suitability letters suggested that Mr Rigney had considered regulated investments for
his customers. However, the suitability letters did not explain adequately why
regulated investments had been discounted in favour of UCIS with reference to the
customers’ personal and financial circumstances. Instead, the suitability letters
included standard reasons for dismissing investments in regulated products but the
reasons encompassed concerns that were not noted on the customer files.

4.38. Where customers invested in UCIS through a wrap platform, the suitability letters did
not specifically highlight that the products could invest in UCIS funds or the general
risks involved with investing in UCIS. In fact, the suitability letters did not evidence
that Mr Rigney had explained what a UCIS was or that he had discussed investing in
UCIS with his customers; this is of particular concern given that investments in UCIS
might not be covered by the FOS or the FSCS and therefore would be important
information to the customers.

4.39. In respect of customers’ who switched from other investments into UCIS funds
through a wrap platform, Mr Rigney stated that he did not issue any suitability letters.
The FSA has seen no evidence that Mr Rigney confirmed his advice and
communicated key information to his customers, given that the customer files did not
evidence any discussions he had with his customers, or any other written
communications about the suitability of UCIS fund switches before they were made.

4.40. As those suitability letters which were issued (i) contained inaccurate, generic and
often misleading information; and (ii) did not contain certain key information about
Mr Rigney’s recommendations (for example, as to the fact the recommendation could
involve investment in UCIS and the associated risks), the FSA considers that
customers were not able to make informed investment decisions.

Disclosure of fees

4.41. Topps Rogers typically received a fee from the wrap platform and an introductory fee
from the UCIS provider. In addition, Topps Rogers received trail commission
depending on the UCIS fund.

4.42. In respect of customers who invested in UCIS and other investments through a wrap
platform, the suitability letters did not contain information about the charges imposed
by the wrap platform or the fund providers, nor did they provide details of fee and
commission payments that would be made to Topps Rogers. In fact, the customer files
did not demonstrate that Mr Rigney had notified customers either orally or in writing
of the total fees that Topps Rogers would receive as a result of his recommendations.

4.43. Further, Mr Rigney stated that he had discussed the cost implications with customers
before recommending fund switches. The customer files contained no record that any
discussions about the cost implications had taken place with customers, or that he had
compared the costs between different funds before recommending fund switches. The
customer files also did not demonstrate that he had notified customers either orally or
in writing of the total costs associated with any fund switches, or of any related fees.

4.44. Given that Mr Rigney did not confirm in writing the total charges associated with
setting up investments through a wrap platform or fund switches, or disclose details of
the fees and commission received by Topps Rogers from the wrap platform and fund
providers, the FSA considers there is a serious risk that customers might not have
understood or been aware of the important cost implications associated with their
investments.

Discretionary portfolio management

4.45. Mr Rigney previously notified the FSA that he had conducted fund switches for 14
customers without obtaining their signatures to make such transactions. In his view,
he had not conducted discretionary portfolio management services. Although he had
not obtained his customers’ signatures before conducting fund switches, Mr Rigney
stated that he had discussed potential fund switches with his customers and obtained
verbal authority to switch funds. Further, he stated that he had notified his customers
of the fund switches after they were made.

4.46. Mr Rigney’s explanation differed from the recollection of a number of his customers.
In particular, four customers have confirmed to the FSA that they had no discussions
with him before their initial investments were switched into UCIS funds. Of these,
one customer stated that Mr Rigney had asked them to sign blank switching forms
(“dealing instruction forms”) so that he could manage their investments.

4.47. The remaining three customers stated that they did not authorise Mr Rigney to
manage their investment portfolios and that switches of their initial investments into
UCIS funds were made without their knowledge and consent. In addition, they
queried the appearance of their signatures on the dealing instruction forms that were
submitted by Mr Rigney on their behalf as they had no recollection of signing them
and their signatures were identical on every dealing instruction form. Two of these
customers noted that they were away on holiday on the date that the dealing
instruction forms were submitted and therefore could not have signed the forms. In
addition, one customer queried why her aunt’s signature appeared on a dealing
instruction form given that she had an enduring power of attorney over her aunt’s
affairs.

4.48. Mr Rigney admitted that he had conducted fund switches for 14 customers without
obtaining their signatures to make such transactions. As he arranged UCIS fund
switches when he was aware that he did not have the mandate to do so, and without
his customers’ knowledge and consent, the FSA considers that Mr Rigney has
conducted discretionary portfolio management outside the scope of Topps Rogers’
Part IV permission.

Restriction on Topps Rogers’ Part IV permission

4.49. Mr Rigney agreed on behalf of Topps Rogers to stop writing new UCIS business and
applied to vary Topps Rogers’ Part IV permission on 21 May 2009. Despite the
requirement that was placed on Topps Rogers to cease writing any new UCIS
business, he arranged a new UCIS transaction for a customer.

4.50. In May 2010, Mr Rigney attempted to redeem money on behalf of two existing
customers by transferring their holdings in a UCIS fund to a new customer. The UCIS

fund had been suspended since September 2008, and was not taking new subscriptions
or making redemptions. Given the suspended status of the UCIS fund, one way for
investors to redeem their money was to transfer their holdings in the UCIS fund to
other investors. By arranging for the transfer of holdings in the UCIS fund on behalf
of the two existing customers to the new customer, Mr Rigney was arranging a new
UCIS transaction, in breach of the restriction placed on Topps Rogers’ permission.

4.51. Despite recommending an investment into the UCIS fund, Mr Rigney did not disclose
relevant key information to the customer. In particular, he did not mention to the new
customer that the investment was a UCIS, that it was an existing fund or that it had
been suspended in September 2008.

4.52. As Mr Rigney was arranging a UCIS transaction for the new customer despite the
requirement on Topps Rogers’ Part IV permission not to conduct any new UCIS
business, his conduct demonstrated a total disregard for regulatory requirements and
standards.

Management oversight

4.53. Mr Rigney was responsible for compliance at Topps Rogers. He did not implement
adequate systems and controls to ensure that Topps Rogers complied with relevant
regulatory requirements and standards.

Risk identification and management

4.54. Mr Rigney did not put in place adequate arrangements to identify and manage risks to
his business. Specifically, he did not put in place formal or documented compliance
procedures until January 2009. The FSA therefore considers that he was not able to
monitor and rectify issues arising from his business adequately.

4.55. In addition, Mr Rigney did not introduce any measures to ensure that Topps Rogers
applied an appropriate exemption under the PCIS Order or COBS 4.12 (or COB 3.11
up to 31 October 2007) when promoting UCIS business. There was no specific
provision within Topps Rogers’ sales and compliance procedures explaining the steps
to be taken to comply with the section 238 restriction. Procedures which were
implemented after January 2009 did not include any specific steps for transacting
unregulated investments.

4.56. Mr Rigney relied heavily on external compliance consultants for guidance and
support and to ensure that Topps Rogers met its regulatory obligations. However, he
did not consider the adequacy of their advice and whether it was reasonable for him to
rely on them. Instead, he stated that he did not have the ability to question their
advice.

4.57. The FSA’s view is that Mr Rigney could and should have identified some of the
issues observed on the customer files himself independently of any guidance or
support provided by his external compliance consultants, but he did not do so. For
example, he could have referred to the FSA’s Handbook for information on the
application of rules and required procedures.

4.58. As Mr Rigney did not put in place adequate compliance arrangements, or take
adequate steps to equip himself with the basic knowledge to assess effectively the
advice given by his external compliance consultants and to monitor his business, he
was not in a position to identify and manage risks that might have arisen in
connection with activities undertaken by Topps Rogers.

Ensuring suitability of recommendations

4.59. Mr Rigney’s customer file reviews were not sufficiently robust, as evidenced by the
unacceptably high number of errors, inconsistencies and omissions contained in his
suitability letters, which were not routinely identified.

4.60. As mentioned above, suitability letters contained inconsistent descriptions of risk
ratings. In addition, where customers invested through a wrap platform, the suitability
letters confirmed funds that were not reflected on the application forms. Mr Rigney
accepted that the suitability letters contained incorrect information because they had
not been checked.

4.61. Authorised firms are required to take reasonable steps to ensure the suitability of their
advice. Although the FSA does not prescribe the manner and format in which to store
information, firms are nevertheless required to maintain adequate records to support
their recommendations. Mr Rigney did not put in place adequate arrangements at
Topps Rogers to ensure that customer files recorded sufficient information about
customers’ financial and personal circumstances and recommendations to ensure that
their advice was suitable.

4.62. Topps Rogers’ external compliance consultants identified concerns relating to its lack
of record keeping. Compliance reports relating to investment transactions that Mr
Rigney had arranged during the period from 1 July 2008 to 31 July 2009 noted that
the customer files for these transactions recorded insufficient information to evidence
the advice given. Mr Rigney accepted that the findings in the compliance reports were
a fair reflection of Topps Rogers’ record keeping weaknesses.

4.63. As Mr Rigney did not conduct robust independent file checks, or put in place
adequate record keeping arrangements at Topps Rogers, he did not take reasonable
steps to ensure the suitability of his UCIS recommendations.

5.
FAILINGS

5.1.
The facts and matters described above lead the FSA, having regard to its regulatory
objectives which include market confidence and the protection of consumers, to
conclude that, while performing controlled functions as an approved person at Topps
Rogers, Mr Rigney has failed to comply with the Statements of Principle.

5.2.
Mr Rigney breached Statement of Principle 1 as he failed to act with integrity in
carrying out his controlled functions. As described in paragraphs 4.49 to 4.52 above,
he arranged a UCIS transaction despite Topps Rogers being subject to a requirement
not to arrange new UCIS business. Mr Rigney’s conduct demonstrated a total
disregard for regulatory requirements and standards.

5.3.
Mr Rigney also breached Statement of Principle 2 as he failed to act with due skill
care and diligence in carrying out his controlled functions. On the basis of the facts
and matters described in paragraphs 4.10 to 4.44 above, he failed to:

(1) demonstrate a fundamental understanding and awareness of the statutory
restriction and risks associated with promoting UCIS business;

(2) establish that customers were eligible to invest in UCIS (which have significant
risks due to their illiquidity);

(3) ensure that UCIS recommendations were (i) made on the basis of an adequate
assessment of customers’ personal and financial circumstances and (ii) based on
adequate research; and

(4) provide customers with adequate information to make informed investment
decisions.

5.4.
In addition, Mr Rigney breached Statement of Principle 7 as he failed to take
reasonable steps to ensure that the business for which he was responsible in his
controlled functions complied with the relevant requirements and standards of the
regulatory system. On the basis of the facts and matters described in paragraphs 4.53
to 4.63 above, he failed to exercise appropriate control over, or maintain adequate
regulatory knowledge about, his business.

5.5.
Consequently, the FSA considers there is a serious risk that customers might have
received unsuitable advice and/or made unsuitable investments in UCIS.

5.6.
Further, the FSA considers that Mr Rigney is not a fit and proper person as he failed
to act with integrity. As described in paragraphs 4.45 to 4.52 above, Mr Rigney (i)
conducted discretionary portfolio management outside the scope of Topps Rogers’
permission and (ii) arranged a UCIS transaction despite being subject to a requirement
not to arrange new UCIS business. His conduct failed to demonstrate a readiness and
willingness to observe and comply with requirements and standards of the regulatory
system.

6.
SANCTION

Imposition of financial penalty

6.1.
The financial penalty to be imposed on Mr Rigney is considered in two parts. His
breach of Statements of Principle 2 and 7 occurred before 6 March 2010, when a new
policy framework came into force for determining financial penalties. The financial
penalty for this breach is therefore considered under the previous policy framework
that applied up to 5 March 2010. His breach of Statement of Principle 1 occurred after
6 March 2010. The financial penalty for this breach is determined under the new
policy framework in place from 6 March 2010.

Financial penalty for breach of Statements of Principle 2 and 7

6.2.
The FSA’s previous policy framework for the imposition of financial penalties that
applied from 28 August 2007 to 5 March 2010 (the majority of the relevant period)

was set out in Chapter 6 of the Decision Procedure and Penalties Manual (“DEPP”),
which forms part of the FSA Handbook. The relevant sections of DEPP are set out in
more detail in Annex A. In addition, the FSA has had regard to the corresponding
provisions of Chapter 13 of the Enforcement Manual which were in force during part
of the relevant period up to 27 August 2007.

6.3.
The principal purpose of imposing a financial penalty is to promote high standards of
regulatory conduct by deterring persons who have committed breaches from
committing further breaches, helping to deter other persons from committing similar
breaches and demonstrating generally the benefits of compliant behaviour. A financial
penalty is a tool that the FSA may employ to help it achieve its regulatory objectives.

6.4.
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 6.2.1G (regarding whether or not to take action for a financial penalty or public
censure) and 6.4.2G (regarding whether to impose a financial penalty or a public
censure), the FSA considers that a financial penalty is an appropriate sanction, given
the serious nature of the breaches.

6.5.
DEPP 6.5.2G sets out a non-exhaustive list of factors that may be of relevance in
determining the level of a financial penalty. The FSA considers that the following
factors are particularly relevant in this case.

Deterrence

6.6.
In determining whether to impose the financial penalty, the FSA has had regard to the
need to ensure those who are approved persons must act with integrity and
appropriate levels of competence and capability and in accordance with regulatory
requirements and standards. The FSA considers that a financial penalty should be
imposed to demonstrate to Mr Rigney and others the seriousness with which the FSA
regards such behaviour.

The nature, seriousness and impact of the breach in question

6.7.
The purpose of the section 238 restriction is to protect customers from the risks
associated with potentially high risk, speculative and sophisticated investments which
they may not properly understand.

6.8.
As a result of Mr Rigney’s failings, Topps Rogers’ customers were exposed to a risk
of investing in UCIS for which they did not have adequate knowledge or experience.
Consequently, these customers may have invested significant proportions of their
assets in UCIS that are not suited to their circumstances, ATR or level of
understanding.

6.9.
A number of UCIS have been suspended or wound up, resulting in crystallised or
potential financial losses for customers. Customers also face difficulties and potential
financial losses in disinvesting from illiquid and/or underperforming UCIS which
were not suitable for them.

The extent to which the breach was deliberate or reckless

6.10. The FSA does not consider that Mr Rigney acted in a deliberate or reckless manner in
failing to establish the eligibility of his customers to invest in UCIS, in demonstrating
the suitability of his recommendations and in managing Topps Rogers. Instead, the
FSA considers that he has acted without competence and capability in respect of these
failings.

Whether the person on whom the penalty is to be imposed is an individual

6.11. The FSA recognises that the financial penalty imposed on Mr Rigney is likely to have
a significant impact on him as an individual but it is considered to be proportionate in
relation to the seriousness of the misconduct and given his position as an approved
person performing significant influence functions at Topps Rogers.

The size, financial resources and other circumstances of the person on whom the
penalty is to be imposed

6.12. The FSA considers that a financial penalty of the level set out above is appropriate,
having taken account of all relevant factors.

Conduct following the breach

6.13. The FSA has taken into account Mr Rigney’s co-operation with the FSA’s
investigation.

Previous action taken by the FSA

6.14. The FSA has taken action against other approved persons for similar conduct.

6.15. The FSA has decided to impose a financial penalty of £70,000 on Mr Rigney for
breaching Statements of Principle 2 and 7.

Financial penalty for breach of Statement of Principle 1

6.16. The FSA’s new policy framework for determining financial penalties that came into
force on 6 March 2010 is set out in Chapter 6 of DEPP. In respect of conduct
occurring on or after 6 March 2010, in accordance with DEPP 6.5, the FSA applies a
five-step framework to determine the appropriate level of financial penalty. DEPP
6.5B sets out the details of the five-step framework that applies in respect of financial
penalties imposed on individuals in non-market abuse cases. The relevant sections of
DEPP are set out in more detail in Annex A.

Step 1 – disgorgement

6.17. Pursuant to DEPP 6.5B.1G, the FSA will seek to deprive an individual of the financial
benefit derived directly from the breach where it is practicable to quantify this.

6.18. In this case Mr Rigney did not derive any financial benefit directly from the breach
given that the UCIS transaction he arranged on behalf of his customer did not
proceed. No disgorgement therefore applies.

Step 2 – relevant income and the seriousness of the breach

6.19. Pursuant to DEPP 6.5B.2G(1) and (4), the FSA will determine a figure that reflects
the seriousness of the breach and will base the figure on a percentage of the
individual’s relevant income. The relevant income will be the gross amount of all
benefits received by the individual from the employment in connection with which the
breach occurred and for the period of the breach.

6.20. The period selected to determine Mr Rigney’s relevant income is 26 May 2009 to 25
May 2010 as this represents the 12 month period preceding the end of the breach. The
FSA estimates Mr Rigney’s relevant income to be £131,474 for this period.

6.21. DEPP 6.5B.2G(4) provides that having determined the relevant income, the FSA will
then decide on the percentage of that income which will form the basis of the penalty.
In making this determination the FSA will consider the seriousness of the breach and
choose a percentage between 0% and 40%. DEPP 6.5B.2G(5) explains that this range
is divided into five fixed levels which reflect, on a sliding scale from level 1 to 5, the
seriousness of the breach; the more serious the breach, the higher the level.

6.22. DEPP 6.5B.2G(7) provides that in deciding which level is most appropriate to a case
against an individual, the FSA will take into account various factors. These include
factors that: (i) relate to the impact of the breach; (ii) relate to the nature of the breach;
(iii) show whether the breach was deliberate; and (iv) show whether the breach was
reckless. DEPP 6.5B.2G(8) to (11) lists types of conduct by an individual that fall
within these factors.

6.23. DEPP 6.5B.2G(12) sets out factors that are likely to be considered seriousness level 4
or 5 (i.e. very serious) and DEPP 6.5B.2G(13) sets out factors that are likely to be
considered seriousness level 1, 2 or 3 (i.e. less serious).

6.24. In assessing the seriousness of the breach, the FSA considers the following factors to
be relevant:

(1) Mr Rigney did not disclose relevant key information to his customer of which he
was aware when arranging the new UCIS transaction, including the fact that the
recommendation was to invest in UCIS and that it had been suspended;

(2) had the UCIS transaction proceeded, the investment could have caused significant
risk of loss to the customer;

(3) Mr Rigney acted without integrity by arranging the new UCIS transaction when
he was aware that Topps Rogers was subject to a requirement not to conduct new
UCIS business; and

(4) Mr Rigney set out deliberately to circumvent the requirement on Topps Rogers’
permission.

6.25. Based on the above factors, the FSA considers the seriousness of the breach to be
level 4 and that a percentage of 30% is therefore appropriate. The penalty at Step 2 is
therefore £39,442.

Steps 3 – mitigating and aggravating factors

6.26. Pursuant to DEPP 6.5B.3G(1), the FSA may increase or decrease the amount of the
financial penalty arrived at after Step 2 to take into account factors which aggravate or
mitigate the breach. Any such adjustment will be made by way of a percentage
adjustment to the figure determined at Step 2.

6.27. In assessing whether the financial penalty should be increased or decreased, the FSA
has taken into account the following aggravating factors:

(1) Mr Rigney did not bring the breach quickly, effectively or completely to the
FSA’s attention;

(2) the FSA had previously notified Mr Rigney of its concerns relating to Topps
Rogers’ UCIS sales; and

(3) Mr Rigney had agreed on behalf of Topps Rogers not to arrange new UCIS sales
but then failed to observe the requirement on Topps Rogers’ permission.

6.28. Due to these aggravating factors, the FSA considers that the penalty at Step 2 should
be increased by 20%. The penalty at Step 3 is therefore £47,330.

Step 4 – adjustment for deterrence

6.29. Pursuant to DEPP 6.5B.4G(1), if the FSA considers the penalty arrived at after Step 3
is insufficient to deter the individual who committed the breach, or others, from
committing further or similar breaches, then the FSA may increase the penalty.

6.30. The FSA considers that the penalty of £47,330 represents a sufficient deterrent to Mr
Rigney and to others from arranging transactions in breach of requirements on a
firm’s permission. No adjustment for deterrence applies. The penalty at Step 4
therefore remains £47,330.

Step 5 – settlement discount

6.31. Pursuant to DEPP 6.5B.5G, if the FSA and the individual seek to agree the amount of
any financial penalty, in recognition of such agreements, DEPP 6.7 provides that the
amount of financial penalty will be reduced to reflect the stage at which the FSA and
individual reached agreement.

6.32. No settlement discount applies. The penalty at Step 5 therefore remains £47,330.

6.33. Having regard to the five-step penalty framework, the FSA has decided to impose a
financial penalty of £47,330 on Mr Rigney for breaching Statement of Principle 1.

Total penalty to be imposed

6.34. The FSA has therefore decided to impose a total financial penalty of £117,330 on Mr
Rigney for breaching Statements of Principle 1, 2 and 7.

Withdrawal of approval and prohibition

6.35. The FSA has had regard to the guidance in Chapter 9 of the Enforcement Guide
(“EG”) in proposing to withdraw Mr Rigney’s approval and to impose the Prohibition
Order on him.

6.36. Given the nature and seriousness of the failures summarised in paragraph 5 above, the
FSA has concluded that Mr Rigney’s conduct demonstrates a lack of integrity and
competence and capability and he is therefore not fit and proper to perform any
function in relation to any regulated activity carried on by any authorised person,
exempt person or exempt professional firm.

6.37. It is therefore necessary and proportionate, in order for it to achieve its regulatory
objectives, for the FSA to exercise its powers to withdraw Mr Rigney’s approval and
make the Prohibition Order against him.




7.
REPRESENTATIONS AND FINDINGS

7.1.
Below is a brief summary of the key written and oral representations made by Mr

Rigney and how they have been dealt with. In making the decision which gave rise to

the obligation to give this notice, the FSA has taken into account all of Mr Rigney’s

representations, whether or not explicitly set out below.

Representations

7.2.
Mr Rigney admitted attempting to arrange a transaction in a UCIS, despite the

requirement imposed on Topps Rogers not to arrange UCIS business. He denied

doing so dishonestly but stated that, even though he knew it was not permitted, he

wanted to assist two of his customers, bearing in mind their personal circumstances.

7.3.
Mr Rigney admitted that he promoted UCIS to customers who were not eligible to

receive such promotions, but made representations that:

(1)
the rules regarding the restriction on promotion of UCIS and the exemptions to

it are extremely complex. His breach of the restriction was inadvertent and

was a result of the ‘confusing and conflicting’ regulations regarding UCIS

investments;

(2)
although he was not aware of the restriction or the exemptions to it, he was

aware that there were substantive differences in the nature of UCIS

investments from those within the regulated market. For that reason he

engaged the services of external compliance consultants; and

(3)
in promoting UCIS to his customers he relied and acted, in good faith, on the

advice he received from his compliance consultants, who had advised him that

he was acting within the rules.

7.4.
Mr Rigney admitted that he did not record adequate information on his files to

demonstrate compliance with the FSA’s rules, but made representations that:

(1)
he did obtain sufficient financial and personal information about his customers

– his knowledge of his customers far superseded the handwritten notes in the

files;

(2)
he did adequately assess and establish his customers’ attitude to risk;

(3)
adequate research was taken into consideration and due diligence on the UCIS

funds themselves was carried out;

(4)
the suitability of each UCIS fund chosen for each customer was explained and

discussed at length with the customer, although this was not fully recorded in

the files. All customers were made aware of the breakdown of the specific

funds in which they were investing. Mr Rigney’s detailed knowledge of his

customers and their investments enabled him to assess suitability; and

(5)
all customers were provided with full details of fees and commissions in the

information memoranda with which they were provided, and these were

explained to them.

7.5.
Mr Rigney admitted that he undertook discretionary management without being

authorised to do so, although he noted that he had informed the FSA of this when he

realised that he might have done so.

7.6.
Mr Rigney made representations that:

(1)
the imposition of the financial penalty is completely out of proportion with the

breaches committed and does not reconcile with fines imposed by the FSA in

similar cases. The imposition of a significant penalty is disproportionate to the

circumstances of the case;

(2)
Mr Rigney is the subject of a bankruptcy petition which he will not be

contesting, and is unable to pay any financial penalty. The imposition of any

fine will therefore cause Mr Rigney serious financial hardship, especially if his

approval is withdrawn, thereby depriving him of the means to earn a living;

and

(3)
it would be disproportionate, and unduly harsh and oppressive, both to

withdraw Mr Rigney’s approval and to prohibit him from performing any

function in relation to any regulated activity. At most his approval should be

withdrawn, with no prohibition being imposed and any penalty being waived

due to the serious financial hardship it would cause him.

7.7.
In relation to Mr Rigney’s arrangement of transactions outside the scope of Topps

Rogers’ permissions, the FSA has found that he deliberately breached the requirement

imposed on Topps Rogers not to do so. Although Mr Rigney states that he was acting

in his clients’ best interests, his behaviour nevertheless demonstrates a deliberate

disregard of regulatory requirements and therefore a lack of integrity.

7.8.
The FSA does not agree that the rules regarding the restriction on promotion of UCIS

and the exemptions to it are ‘conflicting’. The rules are necessarily complex in

dealing with products which should not be promoted to consumers except in specific

limited circumstances. It was not sufficient for Mr Rigney to act on advice without

even the most rudimentary understanding of the applicable rules. Mr Rigney should

have satisfied himself, taking into consideration the advice he had received, that he

fully understood the applicable rules, and should have ensured that Topps Rogers had

arrangements in place to ensure that UCIS were not promoted in breach of the

restriction. Since Mr Rigney did not understand the rules, he should not have

promoted UCIS to Topps Rogers’ customers, irrespective of the advice he received.

As an approved person he was required to inform himself of the relevant regulatory

requirements and take reasonable steps to equip himself with the basic knowledge to

identify and manage risks arising from UCIS business before engaging in it.

7.9.
The evidence, in particular that contained in Topps Rogers’ customer files, and the

evidence of customers themselves, does not support Mr Rigney’s claims, as set out in

paragraph 7.4 above, regarding his compliance with the relevant requirements. In fact

the evidence supports the opposite conclusion. The FSA considers that the relevant

facts are accurately set out in the “Facts and Matters” section of this notice,

evidencing significant failings in this regard.

7.10. Mr Rigney admitted that he undertook discretionary management without being

authorised. Although he informed the FSA of this at an early stage, this does not

exonerate him of the responsibility for doing so.

7.11. In relation to the sanctions, the FSA has found that:

(1)
taking into account Mr Rigney’s breaches of the Statements of Principle, both

as a result of his lack of competence and capability, and his lack of integrity,

the financial penalty is appropriate;

(2)
the bankruptcy proceedings against Mr Rigney are ongoing and have yet to

conclude. Despite being given the opportunity to do so, Mr Rigney has

provided insufficient evidence to prove that the imposition of a financial

penalty will cause him serious financial hardship; and

(3)
taking into account all of the circumstances, including Mr Rigney’s behaviour

demonstrating a lack of integrity, and the need to protect consumers, the FSA

considers it appropriate, in addition to imposing a financial penalty on him,

both to withdraw Mr Rigney’s approval and to prohibit him from performing

any function in relation to any regulated activity carried on by any authorised

person, exempt person or exempt professional firm.

8.
DECISION MAKER

8.1.
The decision which gave rise to the obligation to give this Decision Notice was made
by the Regulatory Decisions Committee.

9.
IMPORTANT

9.1.
This Decision Notice is given to Mr Rigney under sections 57, 63 and 67 of FSMA
and in accordance with section 388 of FSMA. The following statutory rights are
important.

The Upper Tribunal

9.2.
Mr Rigney has the right to refer the matter to which this Decision Notice relates to the
Upper Tribunal (the “Tribunal”). Under paragraph 2(2) of Schedule 3 of the Tribunal
Procedure (Upper Tribunal) Rules 2008, Mr Rigney has 28 days from the date on
which this Decision Notice is given to him to refer the matter to the Tribunal. A
reference to the Tribunal is made by way of a reference notice (Form FTC3) signed by
Mr Rigney and filed with a copy of this Notice. The Tribunal’s address is: The Upper
Tribunal, Tax and Chancery Chamber, 45 Bedford Square, London WC1B 3DN (tel:
020 7612 9700; email financeandtaxappeals@tribunals.gsi.gov.uk). Further details
are contained in “Making a Reference to the UPPER TRIBUNAL (Tax and Chancery
Chamber)” which is available from the Upper Tribunal website:

9.3.
Mr Rigney should note that a copy of the reference notice (Form FTC3) must also be
sent to the FSA at the same time as filing a reference with the Tribunal. A copy of the
reference notice should be sent to Rachel West at the FSA, 25 The North Colonnade,
Canary Wharf, London E14 5HS.

Access to evidence

9.4.
Section 394 of FSMA applies to this Decision Notice. In accordance with section
394, Mr Rigney is entitled to have access to:

(1) the material upon which the FSA has relied in deciding to give Mr Rigney this
notice; and

(2) any secondary material which, in the opinion of the FSA, might undermine that
decision.

Confidentiality and publicity

9.5.
Mr Rigney should note that this Decision Notice may contain confidential information
and should not be disclosed to a third party (except for the purpose of obtaining
advice on its contents). The effect of section 391 of FSMA is that Mr Rigney may not
publish the notice or any details concerning it unless the FSA has published the notice
or those details. The FSA may publish such information about the matter to which a
decision notice or final notice relates as it considers appropriate. Mr Rigney should be

aware, therefore, that the facts and matters contained in this Decision Notice may be
made public.

9.6.
For more information concerning this matter generally, Mr Rigney should contact
Rachel West (direct line: 020 7066 0142) of the Enforcement and Financial Crime
Division at the FSA.

……………………………………………………
Tim Herrington
Chairman, Regulatory Decisions Committee

ANNEX A

STATUTORY PROVISIONS, REGULATORY GUIDANCE AND POLICY

1.
STATUTORY PROVISIONS

1.1.
The FSA’s regulatory objectives are set out in section 2(2) of FSMA and include
market confidence and the protection of consumers.

1.2.
Section 56 of FSMA provides that the FSA may make a prohibition order if it appears
to the FSA that an individual is not a fit and proper person to perform functions in
relation to a regulated activity carried on by an authorised person. Such an order may
relate to a specific regulated activity, an activity falling within a specified description
or all regulated activities.

1.3.
Section 63 of FSMA provides that the FSA may withdraw an approval given under
section 59 of FSMA if it considers that the person in respect of whom it was given is
not a fit and proper person to perform the function to which the approval relates.

1.4.
Section 66 of FSMA provides that the FSA may take action to impose a penalty on an
individual of such amount as it considers appropriate where it appears to the FSA that
the individual is guilty of misconduct and it is satisfied that it is appropriate in all the
circumstances to take action. Misconduct includes failure, while an approved person,
to comply with a statement of principle issued under section 64 of FSMA or to have
been knowingly concerned in a contravention by the relevant authorised person of a
requirement imposed on that authorised person by or under FSMA.

2.
REGULATORY PROVISIONS

2.1.
The FSA’s Enforcement Guide (“EG”) and Decision Procedure and Penalties Manual
(“DEPP”) came into effect on 28 August 2007. Although the references in this
Decision Notice are to DEPP and EG, the FSA has also had regard to the appropriate
provisions of the FSA’s Enforcement Manual, which preceded DEPP and EG and
applied during part of the relevant period.

2.2.
The guidance and policy that the FSA considers relevant to this case is set out below.

Statements of Principle and the Code of Practice for Approved Persons
(“APER”)

2.3.
APER sets out the Statements of Principle as they relate to approved persons and
descriptions of conduct which, in the opinion of the FSA, do not comply with a
Statement of Principle. It further describes factors which, in the opinion of the FSA,
are to be taken into account in determining whether or not an approved person’s
conduct complies with a Statement of Principle.

2.4.
APER 3.1.3G states that when establishing compliance with or a breach of a
Statement of Principle, account will be taken of the context in which a course of
conduct was undertaken, including the precise circumstances of the individual case,

the characteristics of the particular controlled function and the behaviour to be
expected in that function.

2.5.
APER 3.1.4G provides that an approved person will only be in breach of a Statement
of Principle where he is personally culpable, that is in a situation where his conduct
was deliberate or where his standard of conduct was below that which would be
reasonable in all the circumstances.

2.6.
APER 3.1.6G provides that APER (and in particular the specific examples of
behaviour which may be in breach of a generic description of conduct in the code) is
not exhaustive of the kind of conduct that may contravene the Statements of Principle.

2.7.
The Statements of Principle relevant to this matter are:

(1) Statement of Principle 1 which provides that an approved person must act with
integrity in carrying out his controlled function;

(2) Statement of Principle 2 which provides that an approved person must act with
due skill, care and diligence in carrying out his controlled function; and

(3) Statement of Principle 7 which provides that an approved person performing a
significant influence function must take reasonable steps to ensure that the
business of the firm for which he is responsible in his controlled function
complies with the relevant requirements and standards of the regulatory system.

2.8.
APER 4.1 lists types of conduct which, in the opinion of the FSA, do not comply with
Statement of Principle 1.

2.9.
APER 4.1.3E(1) states that deliberately misleading (or attempting to mislead) a
customer by act or omission is conduct that does not comply with Statement of
Principle 1. APER 4.1.4E(9) states that such conduct includes, but is not limited to,
deliberately providing false or inaccurate information.

2.10. APER 4.1.10E states that deliberately misusing the assets or confidential information
of a customer is conduct that does not comply with Statement of Principle 1. APER
4.1.11E(2) states that such conduct includes, but is not limited to, deliberately
carrying out unjustified trading on customer account.

2.11. APER 4.2 lists types of conduct which, in the opinion of the FSA, do not comply with
Statement of Principle 2.

2.12. APER 4.2.3E(1) states that failing to inform a customer of material information in
circumstances where he was aware, or ought to have been aware, of such information,
and of the fact that he should provide it is conduct that does not comply with
Statement of Principle 2. APER 4.2.4E states that such conduct includes, but is not
limited to:

(1) failing to explain the risks of an investment to a customer (APER 4.2.4E(1); and

(2) failing to disclose to a customer details of the charges of investment products
(APER 4.2.4E(2)).

2.13. APER 4.2.6E states that undertaking, recommending or providing advice on
transactions without a reasonable understanding of the risk exposure of the transaction
to a customer is conduct that does not comply with Statement of Principle 2.

2.14. APER 3.3.1E states that in determining whether or not the conduct of an approved
person performing a significant influence function complies with Statements of
Principle 5 to 7, the following are factors which, in the opinion of the FSA, are to be
taken into account:

(1) whether he exercised reasonable care when considering the information available
to him;

(2) whether he reached a reasonable conclusion which he acted on;

(3) the nature, scale and complexity of the firm’s business;

(4) his role and responsibility as an approved person performing a significant
influence function; and

(5) the knowledge he had, or should have had, of regulatory concerns, if any, arising
in the business under his control.

2.15. APER 4.7 lists types of conduct which, in the opinion of the FSA, do not comply with
Statement of Principle 7.

2.16. APER 4.7.3E states that failing to take reasonable steps to implement (either
personally or through a compliance department or other departments) adequate and
appropriate systems of control to comply with the relevant requirements and standards
of the regulatory system in respect of its regulated activities is conduct that does not
comply with Statement of Principle 7.

2.17. APER 4.7.4E states that failing to take reasonable steps to monitor (either personally
or through a compliance department or other departments) compliance with the
relevant requirements and standards of the regulated system in respect of its regulated
activities is conduct that does not comply with Statement of Principle 7.

Fit and Proper Test for Approved Persons (“FIT”)

2.18. The FSA has issued specific guidance on the fitness and propriety of individuals in
FIT. The purpose of FIT is to outline the main criteria for assessing the fitness and
propriety of a candidate for a controlled function and FIT is also relevant in assessing
the continuing fitness and propriety of approved persons.

2.19. FIT 1.3.1G provides that the FSA will have regard to a number of factors when
assessing a person’s fitness and propriety. Two of the most important considerations
will be a person’s honesty, integrity and reputation and competence and capability.

2.20. FIT 1.3.3G provides that it would be impossible to produce a definitive list of all the
matters which would be relevant to a determination of a particular person’s fitness
and propriety.


2.21. FIT 1.3.4G provides that if a matter comes to the FSA’s attention which suggests that
the person might not be fit and proper, the FSA will take into account how relevant
and how important it is.

2.22. FIT 2.1.1G provides that in determining a person’s honesty, integrity and reputation,
the FSA will have regard to all relevant matters including, but not limited to, those set
out in FIT 2.1.3G, including:

(1) whether the person has contravened any of the requirements and standards of the
regulatory system (FIT 2.1.3G(5)); and

(2) whether the person demonstrates a readiness and willingness to comply with the
requirements and standards of the regulatory system and with other legal,
regulatory and professional requirements and standards (FIT 2.1.3G(13)).

2.23. FIT 2.2.1G(2) provides that in determining a person’s competence and capability, the
FSA will have regard to all relevant matters including, but not limited to, whether the
person has demonstrated by experience and training that the person is suitable to
perform controlled function.

Decision Procedure and Penalties Manual (“DEPP”)

Policy on financial penalties up to 5 March 2010

2.24. Guidance on the imposition and amount of penalties up to 5 March 2010 was set out
in Chapter 6 of DEPP. The FSA has had regard to the appropriate provisions of DEPP
that applied during the majority of the relevant period.

2.25. DEPP 6.1.2G provides that the principal purpose of imposing a financial penalty is to
promote high standards of regulatory and/or market conduct by deterring persons who
have committed breaches from committing further breaches, helping to deter other
persons from committing similar breaches, and demonstrating generally the benefits
of compliant behaviour. Financial penalties are therefore tools that the FSA may
employ to help it to achieve its regulatory objectives.

2.26. DEPP 6.2.1G provides that the FSA will consider the full circumstances of each case
when determining whether or not to take action for a financial penalty.

2.27. DEPP 6.5.1G(1) provides that the FSA will consider all the relevant circumstances of
a case when it determines the level of financial penalty (if any) that is appropriate and
in proportion to the breach concerned.

2.28. DEPP 6.5.2G sets out a non-exhaustive list of factors that may be relevant to
determining the appropriate level of financial penalty to be imposed on a person under
FSMA. The following factors are relevant to this case:

Deterrence: DEPP 6.5.2G(1)

2.29. When determining the appropriate level of financial penalty, the FSA will have regard
to the principal purpose for which it imposes sanctions, namely to promote high

standards of regulatory and/or market conduct by deterring persons who have
committed breaches from committing further breaches and helping to deter other
persons from committing similar breaches, as well as demonstrating generally the
benefits of compliant business.

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

2.30. The FSA will consider the seriousness of the breach in relation to the nature of the
rule, requirement or provision breached, which can include considerations such as the
duration and frequency of the breach, whether the breach revealed serious or systemic
weaknesses in the person’s procedures or of the management systems or internal
controls relating to all or part of a person’s business and the loss or risk of loss caused
to consumers, investors or other market users.

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

2.31. The FSA will regard as more serious a breach which is deliberately or recklessly
committed, giving consideration to factors such as whether the breach was intentional,
in that the person intended or foresaw the potential or actual consequences of its
actions. If the FSA decides that the breach was deliberate or reckless, it is more likely
to impose a higher penalty on a person than would otherwise be the case.

Whether the person on whom the penalty is to be imposed is an individual: DEPP
6.5.2G(4)

2.32. When determining the amount of penalty to be imposed on an individual, the FSA
will take into account that individuals will not always have the resources of a body
corporate, that enforcement action may have a greater impact on an individual, and
further, that it may be possible to achieve effective deterrence by imposing a smaller
penalty on an individual than on a body corporate. The FSA will also consider
whether the status, position and/or responsibilities of the individual are such as to
make a breach committed by the individual more serious and whether the penalty
should therefore be set at a higher level.

The size, financial resources and other circumstances of the person on whom the
penalty is to be imposed: DEPP 6.5.2G(5)

2.33. The purpose of a penalty is not to render a person insolvent or to threaten a person’s
solvency. Where this would be a material consideration, the FSA will consider,
having regard to all other factors, whether a lower penalty would be appropriate.




The amount of benefit gained or loss avoided: DEPP 6.5.2G(6)

2.34. The FSA may have regard to the amount of benefit gained or loss avoided as the
result of the breach, for example the FSA will impose a penalty that is consistent with
the principle that a person should not benefit from the breach, and the penalty should

also act as an incentive to the person (and others) to comply with regulatory standards
and required standards of market conduct.

Conduct following the breach: DEPP 6.5.2G(8)

2.35. The FSA may take into account the degree of co-operation the person showed during
the investigation of the breach by the FSA.

Other action taken by the FSA (or a previous regulator): DEPP 6.5.2G(10)

2.36. The FSA seeks to apply a consistent approach to determining the appropriate level of
penalty. The FSA may take into account previous decisions made in relation to similar
misconduct.

Policy on financial penalties from 6 March 2010

2.37. Guidance on the imposition and amount of penalties from 6 March 2010 is also set out
in Chapter 6 of DEPP. DEPP 6 applies a five-step framework to determine the
appropriate level of financial penalty.

2.38. DEPP 6.5.2G provides that the FSA’s penalty setting regime is based on the following
principles:

(1) disgorgement – a firm or individual should not benefit from any breach;

(2) discipline – a firm or individual should be penalised for wrongdoing; and

(3) deterrence – any penalty imposed should deter the firm or individual who
committed the breach, and others, from committing further or similar breaches.

2.39. DEPP 6.5.3G(1) provides that the total amount payable by a person subject to
enforcement action may be made up of two elements: (i) disgorgement of the benefit
received as a result of the breach; and (ii) a financial penalty reflecting the seriousness
of the breach. These elements are incorporated in a five-step framework, which can be
summarised as follows:

(1) Step 1 – the removal of any financial benefit derived directly from the breach;

(2) Step 2 – the determination of a figure which reflects the seriousness of the
breach;

(3) Step 3 – an adjustment made to the Step 2 figure to take account of any
aggravating and mitigating circumstances;

(4) Step 4 – an upwards adjustment made to the amount arrived at after Steps 2 and
3, where appropriate, to ensure that the penalty has an appropriate deterrent
effect; and

(5) Step 5 – if applicable, a settlement discount will be applied. This discount does
not apply to disgorgement of any financial benefit derived directly from the
breach.

Step 1 – disgorgement

2.40. DEPP 6.5B.1G provides that the FSA will seek to deprive an individual of the
financial benefit derived directly from the breach (which may include the profit made
or loss avoided) where it is practicable to quantify this. The FSA will ordinarily also
charge interest on the benefit. Where the success of a firm’s entire business model is
dependent on breaching FSA rules or other requirements of the regulatory system and
the individual’s breach is at the core of the firm’s regulated activities, the FSA will
seek to deprive the individual of all the financial benefit he has derived from such
activities.

Step 2 – the seriousness of the breach

2.41. DEPP 6.5B.2G(1) provides that the FSA will determine a figure which will be based
on a percentage of an individual’s “relevant income”. “Relevant income” will be the
gross amount of all benefits received by the individual from the employment in
connection with which the breach occurred (the “relevant employment”), and for the
period of the breach. In determining an individual’s relevant income, “benefits”
includes, but is not limited to, salary, bonus, pension contributions, share options and
share schemes; and “employment” includes, but is not limited to, employment as an
adviser, director, partner or contractor.

2.42. DEPP 6.5B.2G(2) provides that where the breach lasted less than 12 months, or was a
one-off event, the relevant income will be that earned by the individual in the 12
months preceding the end of the breach. Where the individual was in the relevant
employment for less than 12 months, his relevant income will be calculated on a pro
rata basis to the equivalent of 12 months’ relevant income.

2.43. DEPP 6.5B.2G(4) provides that having determined the relevant income, the FSA will
then decide on the percentage of that income which will form the basis of the penalty.
In making this determination the FSA will consider the seriousness of the breach and
choose a percentage between 0% and 40%.

2.44. DEPP 6.5B.2G(5) explains that this range is divided into five fixed levels which
reflect, on a sliding scale, the seriousness of the breach; the more serious the breach,
the higher the level. For penalties imposed on individuals there are the following five
levels:

(1) level 1 – 0%;

(2) level 2 – 10%;

(3) level 3 – 20%;

(4) level 4 – 30%; and

(5) level 5 – 40%.

2.45. DEPP 6.5B.2G(7) provided that in deciding which level is most appropriate to a case
against an individual, the FSA will take into account various factors which will
usually fall into the following four categories:

(1) factors relating to the impact of the breach;

(2) factors relating to the nature of the breach;

(3) factors tending to show whether the breach was deliberate; and

(4) factors tending to show whether the breach was reckless.

2.46. DEPP 6.5B.2G(8) lists the factors relating to the impact of a breach committed by an
individual. This includes:

(1) the level of benefit gained or loss avoided, or intended to be gained or avoided,
by the individual from the breach, either directly or indirectly (DEPP
6.5B.2G(8)(a)); and

(2) the loss or risk of loss caused to individual consumers, investors or other market
users (DEPP 6.5B.2G(8)(c)).

2.47. DEPP 6.5B.2G(9) lists the factors relating to the nature of a breach by an individual.
This includes:

(1) the nature of the rules, requirements or provisions breached (DEPP
6.5B.2G(9)(a));

(2) the frequency of the breach (DEPP 6.5B.2G(9)(b));

(3) whether the individual failed to act with integrity (DEPP 6.5B.2G(9)(e));

(4) whether the individual held a senior position with the firm (DEPP
6.5B.2G(9)(k));

(5) the extent of the responsibility of the individual for the product or business areas
affected by the breach, and for the particular matter that was the subject to the
breach (DEPP 6.5B.2G(9)(l)); and

(6) whether the individual took any steps to comply with FSA rules, and the
adequacy of those steps (DEPP 6.5B.2G(9)(n)).

2.48. DEPP 6.5B.2G(10) lists the factors tending to show the breach was deliberate. This
includes:

(1) the breach was intentional, in that the individual intended or foresaw that the
likely or actual consequences of this actions or inaction would result in a breach
(DEPP 6.5B.2G(10)(a));

(2) the individual intended to benefit financially from the breach, either directly or
indirectly (DEPP 6.5B.2G(10)(b)); and

(3) the individual knew that his actions were not in accordance with his firm’s
internal procedures (DEPP 6.5B.2G(10)(c)).

2.49. DEPP 6.5B.2G(11) lists the factors tending to show the breach was reckless. This
includes:

(1) the individual appreciated there was a risk that his actions or inaction could result
in a breach and failed adequately to mitigate that risk (DEPP 6.5B.2G(11)(a));
and

(2) the individual was aware there was a risk that his actions or inaction could result
in a breach but failed to checked if he was acting in accordance with internal
procedures (DEPP 6.5B.2G(11)(b)).

2.50. DEPP 6.5B.2G(12) lists the factors which are likely to be consider “level 4 factors” or
“level 5 factors”. This includes:

(1) the breach caused a significant loss or risk of loss to individual consumers,
investors or other market users (DEPP 6.5B.2G(12)(a));

(2) the individual failed to act with integrity DEPP 6.5B.2G(12)(d)); and

(3) the breach was committed deliberately or recklessly DEPP 6.5B.2G(12)(g)).

2.51. DEPP 6.5B.2G(13) lists the factors which are likely to be consider “level 1 factors”,
“level 2 factors” or “level 3 factors”. This includes:

(1) little, or no, profits were made or losses avoided as a result of the breach, either
directly or indirectly (DEPP 6.5B.2G(13)(a)); and

(2) there was no or little or no risk of loss to consumers, investors or other market
users individually and in general (DEPP 6.5B.2G(13)(b)).

Step 3 – mitigating and aggravating factors

2.52. DEPP 6.5B.3G(1) provides that the FSA may increase or decrease the amount of the
financial penalty arrived at after Step 2, but not including any amount to be disgorged
as set out in Step 1, to take into account factors which aggravate or mitigate the
breach. Any such adjustments will be made by way of a percentage adjustment to the
figure determined at Step 2.

2.53. DEPP 6.5B.3G(2) lists factors that may have the effect of aggravating or mitigating
the breach. This includes:

(1) the conduct of the individual in bringing (or failing to bring) quickly, effectively
and completely the breach to the FSA’s attention (DEPP 6.5B.3G(2)(a));

(2) the degree of cooperation the individual showed during the investigation of the
breach by the FSA (DEPP 6.5B.3G(2)(b));

(3) whether the individual took any steps to stop the breach, and when these steps
were taken (DEPP 6.5B.3G(2)(c));

(4) whether the individual had previously been told about the FSA’s concerns in
relation to the issue, either by means of a private warning or in supervisory
correspondence (DEPP 6.5B.3G(2)(f)); and

(5) whether the individual had previously undertaken not to perform a particular act
or engage in particular behaviour (DEPP 6.5B.3G(2)(g)).

Step 4 – adjustment for deterrence

2.54. DEPP 6.5B.4G(1) provides that if the FSA considers the figure arrived at after Step 3
is insufficient to deter the individual who committed the breach, or others, from
committing further or similar breaches then the FSA may increase the penalty.
Circumstances where the FSA may do this include:

(1) Where the FSA considers the absolute value of the penalty too small in relation to
the breach to meet its objective of credible deterrence (DEPP 6.5B.4G(1)(a)); and

(2) Where the FSA considers it is likely that similar breaches will be committed by
the individual or by other individuals in the future (DEPP 6.5B.4G(1)(c)).

Step 5 – settlement discount

2.55. DEPP 6.5B.5G provides that the FSA and the individual on whom a penalty is to be
imposed may seek to agree the amount of any financial penalty and other terms. In
recognition of the benefits of such agreements, DEPP 6.7 provides that the amount of
the financial penalty which might otherwise have been payable will be reduced to
reflect the stage at which the FSA and the individual concerned reached an agreement.
The settlement discount does not apply to the disgorgement of any benefit calculated
at Step 1.

Enforcement Guide (“EG”)

2.56. The FSA’s approach to exercising its power to withdraw approval and to make a
prohibition order under sections 56 and 63 of FSMA is set out in Chapter 9 of EG.
The FSA has had regard to the appropriate provisions of EG that applied during the
relevant period.

2.57. EG 9.1 states that the FSA’s power under section 56 of FSMA to prohibit individuals
who are not fit and proper from carrying out controlled functions in relation to
regulated activities helps the FSA to work towards achieving its regulatory objectives.
The FSA may exercise this power to make a prohibition order where it considers that,
to achieve any of those objectives, it is appropriate either to prevent an individual
from performing any functions in relation to regulated activities, or to restrict the
functions which he may perform.

2.58. EG 9.2 states that the FSA’s effective use of the power under section 63 of FSMA to
withdraw approval from an approved person will also help to ensure high standards of
regulatory conduct by preventing an approved person from continuing to perform the
controlled function to which the approval relates if he is not a fit and proper person to
perform that function. Where it considers this is appropriate, the FSA may prohibit an
approved person, in addition to withdrawing their approval.

2.59. EG 9.4 sets out the general scope of the FSA’s power in this respect. The FSA has
the power to make a range of prohibition orders depending on the circumstances of
each case and the range of regulated activities to which the individual’s lack of fitness
and propriety is relevant.

2.60. EG 9.5 provides that the scope of the prohibition order will depend on the range of
functions which the individual concerned performs in relation to regulated activities,
the reasons why he is not fit and proper and the severity of risk which he poses to
consumers or the market generally.

2.61. EG 9.9 provides that when deciding whether to make a prohibition order against an
approved person and/or withdraw approval, the FSA will consider all the relevant
circumstances of the case. These may include, but are not limited to, the following:

(1) whether the individual is fit and proper to perform the functions in relation to
regulated activities. The criteria for assessing the fitness and propriety of
approved persons are set out in FIT 2.1 (honesty, integrity and reputation), FIT
2.2 (competence and capability) and FIT 2.3 (financial soundness) (EG 9.9(2));

(2) whether, and to what extent, the approved person has failed to comply with the
Statements of Principle issued by the FSA with respect to the conduct of
approved persons, or been knowingly involved in a contravention by the relevant
firm of a requirement imposed on the firm by or under the Act (including the
Principles and other rules (EG 9.9(3)(a) and (b));

(3) the relevance and materiality of any matters indicating unfitness (EG 9.9(5));

(4) the length of time since the occurrence of any matters indicating unfitness (EG
9.9(6));

(5) the particular controlled function the approved person is (or was) performing, the
nature and activities of the firm concerned and the markets in which he operates
(EG 9.9(7)); and

(6) the severity of the risk which the individual poses to consumers and to confidence
in the financial system (EG 9.9(8)).

2.62. EG 9.12 provides a number of examples of types of behaviour which have previously
resulted in the FSA deciding to issue a prohibition order or withdraw the approval of
an approved person. The examples include:

(1) serious lack of competence (EG 9.12(4)); and

(2) serious breaches of the Statements of Principle for approved persons, such as
acting without regard to instructions, providing misleading information to
customers, giving customers poor or inaccurate advice and failing to ensure that a
firm acted within the scope of its permission (EG 9.12(5)).

2.63. EG 9.23 provides that in appropriate cases the FSA may take other action against an
individual in addition to making a prohibition order and/or withdrawing its approval,
including the use of its power to impose a financial penalty.

ANNEX B

CONDUCT OF BUSINESS PROVISIONS

1.
PROMOTION OF UCIS

1.1.
Section 238(1) of FSMA provides that an authorised person must not communicate an
invitation or inducement to participate in a collective investment scheme (“CIS”), and
therefore also an UCIS.

1.2.
Section 238 goes on expressly to carve out circumstances where this prohibition will
not apply. These include:

(1) where the CIS in question is an authorised unit trust/open-ended investment
company or a recognised scheme (section 238(4));

(2) the Treasury may by order specify circumstances (section 238 (6)) (there is a
statutory exemption in an order made by the Treasury - the PCIS Order);

(3) the financial promotion is permitted under FSA rules exempting the promotion of
UCIS under certain circumstances (section 238 (5)) (the FSA has made rules
exempting the promotion of UCIS in COB 3.11 for the period up to 31 October
2007 and COBS 4.12 for the period from 1 November 2007).

2.
EXEMPTIONS UNDER THE PCIS ORDER

2.1.
The PCIS Order provides for authorised firms to promote UCIS to individuals if they
fall within a particular category of exemption set out in the PCIS Order.

2.2.
These exemptions pertain to a certain category of individuals, for example certified
high net worth individuals (article 21), certified sophisticated investors (article 23) or
self-certified sophisticated investors (article 23A).

Certified high net worth individuals

2.3.
Article 21(2) defines a certified high net worth individual as being an individual who
has signed a statement complying with Part I of the Schedule to the PCIS Order in the
past 12 months. Essentially this requires that at least one of the following sets of
circumstances apply:

(1) the person had, during the previous financial year immediately preceding the date
of the statement, an annual income of £100,000 or more; and/or

(2) the person held, throughout the previous financial year immediately preceding the
date of the statement, net assets to the value of £250,000 or more, not including
that person’s primary residence or any loan secured on that residence; that
person’s rights under a qualifying contract of insurance within the meaning of the
Financial Services and Markets Act 2000 (Regulated Activities) Order 2001; or
any benefits (in the form of pensions or otherwise) which are payable on the

termination of that person’s service or on that person’s death or retirement and to
which that person is (or that person’s dependants are), or may be, entitled.

2.4.
The statement also requires that the person signs a statement to indicate he accepts
that he can lose his property and other assets from making investment decisions based
on financial promotions and is aware it is open to him to seek specialist advice.

2.5.
If the person making the communication believes on reasonable grounds that he is
making it to a certified high net worth individual, then the section 238 restriction will
not apply as long as the communication:

(1) is a non-real time communication or a solicited real time communication;

(2) relates only to units in a UCIS which invests wholly or predominantly in the
shares in or debentures of one or more unlisted companies;

(3) does not invite or induce the recipient to enter into an agreement under the terms
of which he can incur a liability or obligation to pay or contribute more than he
commits by way of investment;

(4) a specified warning in the following terms is given both orally (in respect of a
real-time communication) and in writing in the manner prescribed in article 21:

“Reliance on this promotion for the purpose of buying the units to which the
promotion relates may expose an individual to a significant risk of losing all of
the property or other assets invested”; and

(5) is accompanied by an indication that the promotion is exempt from section 238
on the grounds that it is communicated to a certified high net worth individual,
together with details of the requirements for certified high net worth investors and
a reminder that the individual should consult a specialist if in any doubt about
participating in a UCIS.

3.
EXEMPTIONS UNDER COBS 4.12

3.1.
A firm may communicate an invitation or inducement to participate in a UCIS without
breaching the section 238 restriction if the promotion falls within an exemption listed
in the tables at:

(1) COB 3 Annex 5 of COB 3.11 for the period up to 31 October 2007; and

(2) COBS 4.12.1R(4) of COBS 4.12 for the period from 1 November 2007.

3.2.
The inducement or invitation must be made only to recipients whom the firm has
taken reasonable steps to establish are persons in that category or be directed at
recipients in such a way as to reduce, as far as possible, the risk of participation in the
CIS by persons not in that category. There is no provision for these steps to be taken
retrospectively.

3.3.
Category 1 covers people who are already participants in a UCIS or have been so in
the last 30 months. An authorised person can promote to these persons the UCIS in
which they are already participants (and any successor scheme) or one whose
underlying property and risk profile are both “substantially similar” to those of the
UCIS in which they participate.

3.4.
Category 2 deals with those persons for whom the firm has taken reasonable steps to
ensure that investment in the UCIS is suitable and who is an “established” or “newly
accepted” customer of the firm or a company in its group.

3.5.
Category 7 provides that if a customer is categorised as a professional customer or
eligible counterparty under COBS 4.12 (or, for the period up to 31 October 2007, a
market counterparty or intermediate customer under COB 3 Annex 5) then an
authorised person can promote to that customer any UCIS in relation to which the
customer is so categorised.

3.6.
Category 8 under COBS 4.12 only allows financial promotion of UCIS to a person:

(1) in relation to whom the firm has undertaken an adequate assessment of his
expertise, experience and knowledge and that assessment gives reasonable
assurance, in light of the nature of the transactions or services envisaged, that the
person is capable of making his own investment decisions and understanding the
risks involved;

(2) to whom the firm has given a clear written warning that this will enable the firm
to promote UCIS to the customer; and

(3) who has stated in writing, in a document separate from the contract, that he is
aware of the fact the firm can promote certain UCIS to him.

4.
ENSURING SUITABILITY OF ADVICE

4.1.
The fact that a customer is eligible to receive a communication promoting a UCIS
under one or more exemption does not mean that UCIS will be automatically suitable
to that customer.

4.2.
Principle 9 (Customers: relationships of trust) of the FSA’s Principles for Businesses
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.

4.3.
Before making a personal recommendation, a firm is required to obtain and document
information about a specific customer to assess the suitability of an investment for
that customer. The relevant provisions that applied during the relevant period were set
out at:

(1) COB 5.2 up to 31 October 2007; and

(2) COBS 9.2 from 1 November 2007.

4.4.
COBS 9.2.1R(2) provides that when making the personal recommendation or
managing his investments, the firm must obtain the necessary information regarding
the customer’s:

(1) knowledge and experience in the investment field relevant to the specific type of
designated investment or service;

(2) financial situation; and

(3) investment objectives

so as to enable the firm to make the recommendation, or take the decision, which is
suitable for him.

4.5.
COBS 9.2.2R(1) provides that a firm must obtain from the customer such information
as is necessary for the firm to understand the essential facts about him and have a
reasonable basis for believing, giving due consideration to the nature and extent of the
service provided, that the specific transaction to be recommended, or entered into in
the course of managing:

(1) meets his investment objectives;

(2) is such that he is able financially to bear any related investment risks consistent
with his investment objectives; and

(3) is such that he has the necessary experience knowledge in order to understand the
risks involved in the transaction or in the management of his portfolio.

4.6.
COBS 9.2.3R clarifies that the information regarding a customer’s knowledge and
experience in the investment field includes the nature and extent of the service to be
provided and the type of product or transaction envisaged, including its complexity
and the risks involved. In addition consideration needs to be given to the:

(1) types of service, transaction and investments with which the customer is familiar;

(2) nature, volume and frequency of the customer’s transactions in investments and
the period over which they have been carried out; and

(3) level of education, profession or relevant former profession of the customer.

4.7.
There is no direct equivalent COB rule to COBS 9.2.1R(2), COBS 9.2.2R(1) and
COBS 9.2.3R but COB 5.2.11G(1)(a) provides that information collected from a
customer should at a minimum provide an analysis of a customer’s personal and
financial circumstances leading to a clear identification of his needs and priorities so
that, combined with attitude to risk, a suitable investment can be recommended.

4.8.
COBS 9.2.6R provides that if a firm does not obtain the necessary information to
assess suitability, it must not make a personal recommendation to the customer or take
a decision to trade for him. There is no direct equivalent COB rule but COB 5.2.7G
provides that where a customer declines to provide sufficient information a firm
should not proceed to make a personal recommendation without promptly advising

the customer that the lack of such information may adversely affect the quality of the
services which it can provide.

4.9.
A firm is also required to maintain adequate records to support its recommendations.
The provision that applied during the relevant period from 1 November 2007 is set out
in COBS 9.5.2R which provides minimum periods that a firm must retain its records
relating to suitability. The equivalent provision that applied during the relevant period
up to 31 October 2007 is set out in COB 5.2.9R which provides that a firm must make
and retain a record of a private customer’s personal and financial circumstances that it
has obtained.