THIS DECISION NOTICE WAS REFERRED TO THE UPPER TRIBUNAL IN ORDER TO
DETERMINE THE APPROPRIATE ACTION FOR THE FSA TO TAKE. HOWEVER,
BEFORE THE MATTER COULD BE HEARD BY THE UPPER TRIBUNAL, MR
PATTISON DIED AND THE FSA SUBSEQUENTLY DISCONTINUED ITS ACTION.

DECISION NOTICE

Lathom Coach House
2 The Office Village

Individual ref:
TSP00004


Firm ref: 435205

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 listed below, the FSA has decided:

(1)
pursuant to section 66 of the Financial Services and Markets Act (“the Act”),

to impose on Timothy Simon Pattison (“Mr Pattison”), director of Pave

Financial Management Limited (“Pave”), a financial penalty of £90,000 for

failing to comply with Statements of Principle 1, 2 and 7 of the FSA’s

Statements of Principle for Approved Persons (“Statements of Principle”);

(2)
pursuant to section 63 of the Act, to withdraw the approval given to Mr

Pattison to perform the controlled functions CF1 (Director), CF10

(Compliance Oversight), CF11 (Money Laundering Reporting) and CF30

(Customer) at Pave, because Mr Pattison lacks integrity and the competence

and capability to perform these functions; and

(3)
to make an order, pursuant to section 56 of the Act, prohibiting Mr Pattison

from performing any function in relation to any regulated activity carried on

by any authorised person, exempt person or exempt professional firm because

he is not a fit and proper person in terms of a lack of integrity and a lack of

competence and capability.

2.
SUMMARY OF THE REASONS FOR THE ACTION

2.1.
Between 15 November 2005 and 4 August 2010 (“the relevant period”) Mr Pattison

failed to act with integrity and competence and capability in relation to Pave’s

dealings with customers and failed to take reasonable steps to ensure that Pave

complied with the requirements and standards of the regulatory system. His conduct

was also reckless because the sales model and sales practices of Pave exposed

customers to a very significant risk of financial loss despite no evidence that they

could sustain such losses. Even after these risks were pointed out to him by Pave’s

external compliance consultant, and even after the risks to customers started to

crystallise, he made no material changes to Pave’s sales model and sales practices. If

the FSA had not intervened he would have continued to make unsuitable unregulated

collective investment schemes (“UCIS”) recommendations to customers of Pave.

2.2.
Mr Pattison failed to take reasonable steps to understand the statutory restrictions

associated with promoting UCIS before he started to promote and recommend them to

customers. Specific warnings about these restrictions were contained in the UCIS

marketing material which Mr Pattison should have read before recommending highly

concentrated investment in these UCIS to his customers.

2.3.
Mr Pattison closed his mind to the risks associated with advising Pave’s customers to

invest so heavily in UCIS. For example:

3

(1)
Pave’s sales model, which Mr Pattison introduced, included the use of a

spreadsheet to project customers’ expenditure and the performance of their

investments to illustrate when they might run out of liquid capital (the

“Lifeplanner”). This Lifeplanner tool encouraged customers to accept very

high levels of investment risk in return for potentially high gains. It

operated as a sales tool and as a substitute for gathering hard and soft facts

about the customers, including their attitude to investment risk. As a

result of the inadequacy of Pave’s fact find or know your customer

(“KYC”) process Pave did not have sufficient and necessary personal and

financial information about their customers. This in turn meant that

Pave’s inadequate KYC process impacted on its assessment of suitability.

(2)
Pave failed to provide clear, fair and balanced explanations of the risks

and characteristics of the UCIS investments that it recommended. This

was a particularly relevant issue as none of Pave’s customers had been

categorised as sophisticated investors, and they had no relevant knowledge

or prior experience of investing in UCIS. Pave’s customers were reliant

on Pave’s explanations and descriptions of the investments (and on

technical explanations contained in UCIS marketing literature which Pave

asked the customers to read).

(3)
At least 65 of Pave’s customers were advised to invest in UCIS, often

being advised to place large proportions of their investment portfolios (up

to 80 percent) in UCIS, with no proper consideration of the concentration

risk or of these customers’ capacity to sustain losses.

(4)
Some of Pave’s customers were advised to re-mortgage their homes to

raise funds to invest in UCIS with no documented assessment of their

capacity to sustain losses. Some of Pave’s customers were also advised to

switch from existing pension schemes and to establish self-invested

personal pensions where the underlying investments included high

concentrations of UCIS (including on one occasion when contrary to the

advice of an external pension transfer specialist).

2.4.
Mr Pattison also failed to ensure that the basis on which Pave was remunerated was

disclosed to customers in a way which was clear, fair and not misleading. Pave

indicated in its Initial Disclosure Document (“IDD”) that it was remunerated on a fee-

only basis. In practice, however, Pave charged customers several types of fee and it

contrived to retain all commission received from providers. It did so by recording the

time its employees spent on each customer’s portfolio on a notional account. The

notional account should have functioned as follows: if the value of the total time

recorded on the notional account was less than the amount of commission Pave

received then Pave, having set off the commission against the value of the total time

recorded on the account, should have then provided a rebate of the excess commission

to the customer. However, no customer spoken to by the FSA had ever received a

rebate of commission.

2.5.
Mr Pattison also failed to ensure that Pave acknowledged and investigated customers’

complaints fairly and in accordance with its own complaints handling procedures or

with regulatory requirements.

2.6.
Mr Pattison was personally responsible for Pave’s failure to comply with regulatory

requirements aimed at ensuring that customers were treated fairly. Mr Pattison must

have appreciated, at some level, the risks to customers posed by Pave’s sales model

and sales practices, not least the concentration risk from exposing large proportions of

customers’ portfolios in UCIS. The impact of these failures was serious. Pave

promoted and advised at least 65 (of around 200) of its retail customers to invest a

total of £9.7 million in UCIS. At least £1.2 million of these customers’ assets were

invested in UCIS that have since been suspended or liquidated due to the schemes in

question running into problems, resulting in crystallised or potential financial losses

for customers.

2.7.
The failings identified in this case have been mitigated to some extent by:

(1)
the fact that Pave obtained advice from an external compliance consultant in

respect of the statutory and regulatory restrictions on the promotion of UCIS

(although this advice was only sought after Pave had already recommended

UCIS to at least 25 customers); and

5

(2)
Mr Pattison’s co-operation with the FSA’s investigation including his decision

to voluntarily vary Pave’s Part IV permission in relation to UCIS advice.

3.
RELEVANT STATUTORY AND REGULATORY PROVISIONS

Provisions related to UCIS

3.1.
UCIS are defined in the glossary to the FSA Handbook of Rules and Guidance (“the

“a collective investment scheme which is not a regulated collective investment

scheme.”

Unless a collective investment scheme (“CIS”) falls within the narrow Glossary

definition of a regulated CIS, it will be a UCIS. Whilst a UCIS does not carry the

same level of regulatory oversight as a regulated CIS, it is still subject to regulation,

notably around the extent to which it may be marketed and the persons to whom it

may be marketed.

3.2.
UCIS investments can seem attractive as they typically aim to generate high returns

and they are not subject to the same restrictions as regulated CIS. For example, the

latter are restricted in the underlying assets that can be held, their ability to borrow

funds, and they are required to spread their investments whilst UCIS are not so

restricted. The risks typically associated with UCIS investments include many of those

that exist with regulated mainstream investments. However, there are a number of

additional risks that are often inherent in a UCIS which an adviser should consider

when making a recommendation.

3.3.
The inherent risks of the UCIS recommended by Pave were very high when compared

with mainstream investments. They variously involved high levels of risk in respect of

liquidity, valuation, currency, gearing, transparency, management, enterprise and other

factors that could influence their success or failure.

3.4.
Furthermore, individuals who invest in UCIS have no recourse to the Financial

Ombudsman Service (“FOS”) or the Financial Services Compensation Service

(“FSCS”) in respect of the UCIS themselves or the providers of those schemes.

However, they may have recourse to the FOS or the FSCS in respect of personal

recommendations made by authorised firms to invest in UCIS.

3.5.
There is a restriction on the categories of investor to whom such schemes can be

promoted.

3.6.
Section 238 of the Act states that an authorised person must not communicate an

invitation or inducement to participate in a collective investment scheme although

there are exceptions including:

(1)
those exemptions set out in the Financial Services and Markets Act 2000

(Promotion of collective investment schemes) (Exemptions) Order 2001

(“the PCIS Order”). 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 order. The exemptions tend to be narrow in scope

and subject to specific requirements including reasonable checks, disclosure

of appropriate warnings, the investments of the underlying fund, and the

certification of the investor’s status. These exemptions pertain to individuals

classed as certified high net worth individuals, certified sophisticated

investors or self-certified sophisticated investors; and

(2)
those exemptions set out in the FSA Handbook, namely COBS 4.12.1(4)R

(COB 3 Annex 5 prior to 1 November 2007). In order to be exempt under

the COBS rules 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.

3.7.
The fact that a customer is eligible to receive a communication promoting a UCIS

under one or more exemption does not mean that the UCIS will be suitable for that

customer.

7

3.8.
Principle 9 of the FSA’s Principles for Businesses states 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.

3.9.
Before 1 November 2007, a firm was required by COB 5.2.5R to take reasonable steps

to ensure it had sufficient personal and financial information about a customer before

giving a personal recommendation.

3.10. From 1 November 2007, in considering the suitability of a particular scheme for a

specific customer, a firm is required by COBS 9.2.2R to obtain the necessary

information to understand the essential facts about the customer. 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.

3.11. Further detail and guidance in relation to the above is set out in the Annex to this

Notice, together with other relevant statute and regulatory provisions.

4.
FACTS AND MATTERS RELIED ON

The Firm

4.1.
Pave operated as a small firm of independent financial advisers based in Bath. It has

been a Capital Adequacy Directive (“CAD”) exempt firm since 12 December 2007.

4.2.
Mr Pattison established Pave in 2005 and it was authorised by the FSA on 15

November 2005.

4.3.
Mr Pattison has been the majority shareholder and also the CF1 Director, CF10

Compliance oversight and CF11 Money laundering reporting officer of Pave since its

inception. Mr Pattison was approved to perform the CF30 Customer function on 1

November 2007 (prior to which Mr Pattison was a CF21 Investment adviser). Mr

Pattison has been the main decision maker at Pave since it was established. Mr

Pattison sourced the majority of Pave’s business and he is responsible for the

structure, organisation and sales model and practices at Pave along with the

underlying investment strategy. Pave’s sales model was structured around what was

advertised as a tax efficient wealth creation strategy and lifestyle planning service.

Promotion of UCIS in breach of section 238 of the Act

4.4.
Pave started to promote and recommend UCIS to its customers in 2005. It started to

receive advice from its external compliance consultant about the regulatory

restrictions on the promotion of UCIS in March 2007, by which time it had already

promoted UCIS to at least 25 customers. Mr Pattison was responsible for Pave’s

failure, prior to March 2007, to take any steps to consider and apply the regulatory

restrictions relating to the promotion of UCIS. To the extent that he undertook due

diligence on UCIS before recommending them to customers in this period, he did not

have regard to the warnings contained in marketing material produced by UCIS

scheme providers, at least one of which contained explicit warnings about the section

238 restriction on its first page. As such he did not apply his mind to the restrictions

on the promotion of UCIS to retail customers contained in marketing material, which

he was obliged to read as part of his due diligence, and which he directed his

customers to read in the course of making personal recommendations to them to invest

in UCIS.

4.5.
The external compliance consultant advised Pave, incorrectly, in March 2007 that the

restriction on the promotion of UCIS did not apply because Pave advised its customers

to invest in UCIS as part of its sales process and that as such Pave was not issuing

financial promotions. Pave continued to breach section 238 after March 2007 but Mr

Pattison was no longer culpable for this failure from that date.

Sales process

Pave’s approach to KYC (the Lifeplanner)

4.6.
When Pave applied to the FSA for authorisation its proposed sales process included

the use of a personal customer questionnaire, the purpose of which was to obtain hard

facts about each customer’s personal and financial circumstances and soft facts such

as their needs and objectives and risk appetites. This document was referred to as an

essential part of the planning process which should be kept up-to-date. In practice,

these customer questionnaires were either only partially completed or not used at all

within Pave’s sales process from 2005.

4.7.
In practice Pave did not therefore use a standalone fact find form to establish and

record all relevant KYC information in one place. Some KYC information was

recorded on detailed minutes of meetings with clients. Pave’s practice was to input

information including a customer’s current income, assets and expenditure on a

spreadsheet which it called the “Lifeplanner”, which was used as an alternative to

completing its personal customer questionnaire.

4.8.
In its initial meetings with a customer, or at least at any early stage in the customer’s

relationship with Pave, Pave introduced the customer to the Lifeplanner tool.

Customers were then asked to provide information about matters such as their current

income, assets and expenditure, which Pave staff then entered on the Lifeplanner.

4.9.
The Lifeplanner is an Excel spreadsheet which extrapolated the inputted data and

projected a customer’s current expenditure and income and the value of their assets

into the future (up to age 100 and in one instance to age 135) using percentage uplift

assumptions about inflation and investment growth. Pave could change the variables

in many ways to show the customer the impact of changes on their future wealth and

to help them think about financial planning and the impact on their lifestyle of

different inputs and outcomes. The Lifeplanner plotted any future changes in the

customer’s income and expenditure on a chart and showed at what age, based on the

relevant assumptions, the customer’s outgoings would start to exceed their income or,

in Pave’s words, it showed when they “are likely to run out of liquid capital”.

4.10. The main purpose of the Lifeplanner was to identify the rate of growth from the

customer’s assets deemed to be necessary to maintain their current income, and

therefore to maintain or enhance their current lifestyle through to retirement and up to

their death. As a customer’s investment strategy changed, for example by replacing

current investments with those recommended by Pave, the Lifeplanner would

recalculate the projections based on the new assumed rates of return, which were

based on headline rates advertised in the UCIS marketing materials and were as high

as 35% per annum for some UCIS.

4.11. If the Lifeplanner calculations showed a customer that their existing savings and

investment portfolio, when matched against their projected expenditure, would lead to

cash shortages in future years, consideration would be given to alternative investments

offering potentially higher returns.

4.12. The versions of the Lifeplanner reviewed by the FSA assumed that the customers’

lifestyles and expenditure would remain the same (indexed for inflation) to the age of

100 (and in one instance to age 135), and took no account of planned changes in

lifestyle (e.g. health, working arrangements, active and later retirement phases, tax

status and inheritance issues).

4.13. The Lifeplanner was used to project anticipated returns on investments in one or more

UCIS and other potential investments. However, the Lifeplanner was not used to

project the future impact on a customer’s assets (liquid or otherwise) of the failure of

any of the investments recommended by Pave. Nor did it factor in the impact of fees

and charges and therefore the level of growth required for the customer to achieve the

projected returns illustrated in the tool.

4.14. Pave used the outputs from the Lifeplanner to quantify a customer’s attitude to risk by

effectively working back from the projected age that the customers were expected to

run out of liquid capital. In essence, if the customer wanted to maintain their lifestyle

goals and objectives, this tool showed the level of risk that the customer needed to

take to stand a chance of funding these aspirational goals. It did not assess either the

customer’s attitude to risk or their risk tolerance.

4.15. In its introductory meetings with customers, Pave explained to the customers the

guiding principles that underpinned its service to them. The following guiding

principles were found in various client files:

(1)
“Never run out of money;

(2)
Don’t die with too much;

(3)
Achieve financial independence.”

4.16. Mr Pattison confirmed that these high level objectives were common to most of

Pave’s customers and they were the words of Pave and not the customer, on to which

would be added more customer-specific objectives such as:

“…lifestyle requirements to be maintained inflation-proofed until attaining age 100,

and number three ensure that both income and appreciation of capital assets are tax

4.17. Mr Pattison explained that:

“In the evolution of Pave, what we wanted to try and do at headline level was, from

our research those three statements encapsulate at very headline level what most

people are aspiring to do… Then below that is the individual objectives that people

might have. After all, nobody ever wants to run out of money, we don’t know when

you’re going to die but 100 seems like a realistic assumption because if we said 62 we

would be well wrong, and most people will want to actually avoid or maximise their

investment opportunities through tax or using tax efficient ways…. it was just

something that sort of encapsulated for all our clients a common theme…So you will

see these three points coming through quite a bit through our clients records”.

4.18. Pave did not produce any single document described or referred to as a suitability

report or any other document which contained in one place its reasons for its

recommendations. Pave’s advice was instead recorded in documents such as meeting

agendas, minutes of meetings, and executive summaries. Pave’s executive summaries

generally included the following introductions:

“This proposal is considered in conjunction with our discussions and the financial

planning cash flow document which details your assets and liabilities plus detailed

income and expenditure information.”

“This report should be read in conjunction with the key facts information, provider

profiles and literature supplied”.

4.19. Pave produced an executive summary for each investment that it recommended, which

included information from the marketing literature for the UCIS that it recommended.

Customers were also given copies of the underlying marketing literature and advised

to read them. If a customer was recommended to invest in five UCIS (accessed via an

investment platform and held within a SIPP), then they would be given an executive

summary for each UCIS and copies of the underlying product literature and executive

summaries for the platform and the SIPP.

4.20. The executive summaries did not contain statements in which it was made explicit

that the UCIS in question was recommended by Pave as being suitable. Instead, the

executive summaries used a form of words which implied that the customer had

decided, based on their discussions with Pave, that such an investment fitted in with

their aspirational objective of creating wealth:

“Having discussed attitude to risk you have confirmed that you wish to expose this

proportion of your investment portfolio to a high risk and illiquid asset class.”

4.21. Mr Pattison said that Pave’s business model was such that it provided its customers

with information so that they could decide for themselves whether the investment was

suitable.

4.22. Pave’s executive summaries for customers contained the same generic references to

attitude to risk and investment objectives; that is to say, they were not tailored to

reflect each customer’s individual circumstances or objectives. Of 44 executive

summaries reviewed that pertained to UCIS recommendations, 35 did not confirm the

customer’s attitude to risk. In these cases, the summaries stated that the customer’s

attitude to risk had been discussed and documented elsewhere.

4.23. Pave adopted an inconsistent approach when setting out in executive summaries the

general and specific risk warnings associated with each investment that it

recommended. By way of example, Pave’s executive summary template for one fund

contained detailed risk warnings over four pages. Its template for another fund had

limited general risk warnings (three lines of text) and referred the customer to the

offering memorandum for confirmation of the full associated risks.

4.24. 15 of the 44 executive summaries pertaining to UCIS contained very limited or no risk

warnings. For example, Pave’s executive summary template for one fund stated that

the fund was a UCIS, but mentioned no other risks. Whilst Pave stated that the

summary should be read in conjunction with the product fact sheet, the summary itself

highlighted the advantages but made no reference to the risks of investing in this fund.

4.25. Some written communications with customers about UCIS contained inconsistent

information about the level of risks, for example in relation to the same UCIS, the

customers would sometimes be warned about “higher levels of volatility” and

sometimes be told the fund offered “low volatility”.

Pave’s claim that it provided whole of market service

4.26. Pave communicated to customers in its initial disclosure that it provided a whole of

market service, which was not the case. In practice, Pave selected from a narrow

range of investments and adopted a similar investment strategy (for each of the

customers whose files were reviewed by the FSA). Pave appeared to have a shortlist

of preferred investments mainly comprising UCIS which constituted the majority of

recommended investments to certain customers, and recommended the same

investment platform and SIPP provider to its customers.

4.27. There were seven schemes which Pave regularly recommended to customers. Pave

also recommended UCIS that offered higher rates of return. The schemes were

represented by Pave as being the best investments in their respective sectors (e.g. East

European property, fine wines, Mexican resorts, etc) on the basis of analysis of the

marketing literature, meetings with the funds’ distributors and Pave’s own ‘asset &

provider assessment selection tool’, which was an Excel spreadsheet in which funds

were scored according to factors such as “has to be an area where returns are likely”

and “essential that the underlying investments are clear and can be understood”.

Wealth creation strategy, gearing and concentration of risk

4.28. When asked to comment on the risks to customers associated with investing in UCIS

Mr Pattison referred frequently to volatility in the context of risk and a customer’s

attitude to risk. Mr Pattison explained Pave’s decision to recommend UCIS over other

investments; in his view one of the main risks associated with more traditional

investments was their high volatility compared to the volatility of the UCIS identified

“We were trying to look for investments that we as advisors could understand and

that provided a logical process that wasn’t going to change dramatically on a day

to day basis which is this volatility. We saw volatility as not risk but as a separate

threat to a client portfolio…

Volatility for me is about, beyond, its about trying to plan for something but

because of things that are beyond my control because its got a sharp point up and

very sharp point down over a very short time scale that makes uncertainty in

planning and I’ll describe it and I can probably endorse it.”

4.29. Included within Pave’s wealth creation strategy was a recommendation that some

customers should establish a SIPP (and access and switch investments via a platform)

on the basis that this would provide a more cost effective and flexible means of

managing their pension investments. In practice, Pave recommended long term and

illiquid investments which undermined the logic of its use of a SIPP.

4.30. In circumstances where some customers did not have the liquid assets to invest in

UCIS, Pave recommended that they borrow against properties and liquidate other

investments. Where it made pension switching recommendations, it recommended

high concentrations of UCIS in the underlying investments held within SIPPs.

4.31. The FSA found no evidence of any guidance within Pave on the use of gearing (such

as borrowing against residential properties to raise funds to invest), such as for

example when and for which customer profile gearing might be considered

appropriate, or what limits on the level of gearing might be appropriate. Pave’s

external compliance consultant reported on 25 March 2008 that the use of gearing

within Pave’s wealth creation strategy was “inherently high risk and not at all typical

of the approach taken by other wealth management firms”. Pave made no changes to

its sales model or sales practices after receiving this advice.

4.32. Customer files show that there was little if any limit in practice on how much of a

customer’s portfolio should be invested in UCIS in general, or into a particular fund.

In several customer files customers had been advised to invest between 70% and 80%

of their available assets in UCIS. One elderly and vulnerable customer was advised to

hold 70% of her investable assets in two UCIS.

Summary of Mr Pattison’s responsibility for Pave’s failures

Suitability of advice

4.33. Pave breached Principle 9 in the relevant period because it failed to take reasonable

steps to ensure the suitability of its advice to customers who were entitled to rely on

its judgment in relation to UCIS.

4.34. Mr Pattison is mainly responsible for Pave’s breaches in this regard because he:

(1)
failed up to March 2007 to take reasonable steps to ensure that Pave did not

breach the restriction on the promotion of UCIS with the consequence that

Pave started to recommend UCIS to retail customers in breach of section 238

of the Act;

(2)
failed to communicate clearly to customers the risks involved in investing in

UCIS. Mr Pattison promoted the benefits and misled customers about the

risks of investing in UCIS, for example, by focussing inappropriately on the

concept of low volatility. He also failed to give due weight to the fact that

UCIS fund valuations are subjective and made typically by or on the

instructions of the fund managers). He did not model the effect of the

suspension or liquidation of one or more UCIS in the Lifeplanner during

discussions with customers until such schemes had failed;

(3)
failed to recognise and explain clearly the risks associated with gearing and

transferring out of existing pension schemes to invest in UCIS;

(4)
failed to undertake and/or record appropriate assessments of customers’

attitudes to risk which took into account their historic risk profile and

investment approaches;

(5)
failed to ensure that the customers’ objectives and their own understanding of

their attitude to risk were consistent. In practice, customers failed to

understand that the loss of capital could result in loss of their retirement

income and repossession of their residential properties; and

(6)
failed to take into account customers’ objectives and capacity to sustain

losses when recommending UCIS investments.

4.35. These failings are serious because Pave’s records indicate that around 65 customers

invested a total of approximately £9.7 million in UCIS for which their eligibility was

never properly assessed. At least £1.2 million of these customers’ assets were invested

in UCIS that have since been suspended or liquidated, resulting in crystallised or

potential financial losses for customers.

Misleading information about fees and commission

4.36. Pave provided what it described as a fee-based service and maintained a notional

account for all customers. The notional account was a record of credits and debits that

a customer had accrued through investment commission (credits) and the cost of the

advice service they received from Pave (debits). The debits were service charges

calculated according to the time spent by Pave’s staff, and credits were fees and

commission received by Pave. The fee was charged on the understanding that Pave

would not derive any income from commissions and any commissions received would

be offset against the fees.

4.37. Pave’s approach to charging fees and taking commission was not communicated

clearly to customers. On the key facts document relating to Pave’s charges, the

following option was ticked:

“Paying by fee. Whether you buy a product or not, you will pay us a fee for our

advice and services. If we also receive commission from the product provider

when you buy a product, we will pass on the full value of that commission to you in

one or more ways. For example, we could reduce our fee; or reduce your product

charges; or increase your investment amount; or refund the commission to you.”

4.38. Pave’s introductory Powerpoint presentations to customers included the following

“We do not derive our income from commissions.”

“Not commission orientated endorsing the independence of the advice and

recommendations – Truly Independent advice cannot be remunerated by a sales

commission”

“We endeavour to obtain commissions, arrangement fees on your behalf:”

“We credit all income received on your behalf: Retainers, commission etc”.

4.39. However, section 13 of Pave’s operations manual, dated February 2005, headed

“Timesheet and Commission Recording” made it clear to staff of Pave that it provided

a service to its customers on the basis of charging for its time and achieving profit.

All recorded time was to be charged to the customer’s notional account. In this

section of the manual Pave described the relationship between fees and commission as

“Pave offsets costs of providing the service against retention fees and all

commissions received. Commission receipts are entered from commission

statements received from Institutions.

NOTE: This account is a notional account utilised for the purposes of establishing

profit contribution to Pave. It is a notional account and therefore is not issued to

clients without sanction from a Director.” (emphasis added)

4.40. Two former advisers at Pave said that Mr Pattison made retrospective adjustments to

the notional accounts to avoid the customer having a credit balance. The FSA found

some evidence of retrospective adjustments to some customers’ notional accounts

some 12 months after the cost would have been incurred which, at the very least,

suggested a lack of transparency in the way that notional accounts were maintained by

Mr Pattison. Although Pave told the FSA that it provided a copy of notional accounts

to customers at every annual review, four customers told the FSA that they had not

received a copy of their notional accounts. Three other customers did not understand

how the notional account worked. The FSA did not see evidence in any customer file

that the balance of a notional account was paid to the customer.

4.41. In some cases the notional account included significant credits to the customers. When

the customers enquired about their notional account and/or sought repayment of the

balance, such requests were not met and/or the balance on the notional account was

belatedly reduced by the imposition of backdated or previously unrecorded time.

4.42. The lack of transparency in the way that the notional account operated meant that

customers did not appreciate the true cost of Pave’s investment advice, as illustrated in

the three examples below.

(a)
Between July 2008 and April 2009 Pave charged a total of £11,393 for

attending five meetings with a married couple who were customers. The

customers started with an investment portfolio of £170,700, meaning that in

10 months they had effectively surrendered an amount equivalent to 6.7

percent of their portfolio in payment for those meetings.

(b)
Between 2 May 2008 and 17 June 2009 Pave collected £30,106 through fees

and commission which constituted an amount equivalent to 17 percent of a

customer’s investment portfolio.

(c)
One customer calculated, retrospectively, that over a ten year period an

amount equivalent to 25 percent of their portfolio had been surrendered to

cover Pave’s fees and charges.

4.43. By failing adequately to inform customers of the existence, nature and amount of the

commissions, in a manner that was comprehensive, accurate and understandable,

before making the investments for which the commission was received, Mr Pattison

caused Pave to breach COBS 2.3.1R (COB 5.7.3R prior to 1 November 2007).

Complaint handling

4.44. Pave produced a leaflet which it sent to complainants when it acknowledged receipt of

their complaints. Pave’s complaint handling ethos is summarised in that document as:

“The handling of complaints is of great importance to our business. We take

customer feedback very seriously, striving to improve our business and service for

the benefit of our clients. Our goal is to treat each case impartially,

sympathetically and in a consistent manner with minimal delay. Where it is not

possible to resolve the problem to the client’s satisfaction, we aim to act in a

courteous, reasonable and prompt manner. When disputes cannot be resolved

satisfactorily we fully support and work with independent dispute resolution

schemes, such as the Financial Ombudsman Service (“FOS”).”

4.45. According to its complaints procedure, dated 6 September 2007, Pave undertook to

acknowledge complaints within seven days of receipt and in that acknowledgement

letter it would outline its understanding of the nature of the complaint and ask the

complainant to confirm that its understanding of the complaint is correct. Pave also

undertook to write to the complainant with an update or decision at 20 and 40 working

days and to inform the complainant in its final response of their right to refer the

matter to the FOS.

4.46. Mr Pattison told the FSA that all complaints were dealt with in a fair and impartial

manner. However, Mr Pattison was ultimately responsible for decisions relating to all

complaints even when the complaints were made by his own customers against him.

Mr Pattison failed to deal with the complaints in a fair and impartial manner in that,

on more than one occasion, Mr Pattison dealt with complaints relating to his own

advice. Furthermore, Pave has rejected all complaints about alleged unsuitable advice

to invest in UCIS.

4.47. In one instance, Mr Pattison failed to make the customer aware about his right to refer

his complaint to the FOS.

4.48. Mr Pattison failed to send a 20-day update letter to one customer and failed to send a

20-day update or 40-day update letter to another customer which were required by

Pave’s complaints handling procedure.

4.49. On two occasions a letter of acknowledgement sent by Mr Pattison contained emotive

language with regard to the validity of the complaint. In one acknowledgement Mr

Pattison wrote:

“I was extremely disappointed to receive the latest communication as I thought our

relationship was closer and deeper than that.”

This language does not convey an impartial assessment of the customer’s complaint.

4.50. On two occasions, Mr Pattison contravened Pave’s complaints handling process by

failing to invite the complainants to confirm whether Pave had correctly understood

the nature of the complaints.

4.51. Consequently, the FSA has concluded that Mr Pattison caused Pave to fail to comply

with DISP 1.3.1R, 1.4.1R, 1.6.1R and 1.6.2R.

Overview of Mr Pattison’s conduct

Suitability of advice

4.52. Mr Pattison is largely responsible for the failures identified at Pave because he

implemented the sales model and sales practices.

4.53. Pave’s sales process was fundamentally flawed. Its sales practices did not comply

with a number of regulatory requirements. For example it failed to obtain essential

information about clients’ circumstances, and it undertook inadequate assessments of

customers’ attitude and tolerance to investment risk. In some instances customers

were recommended to invest in UCIS without any meaningful assessment of their risk

profile and ability to sustain financial losses. In other cases the recommendation was

inconsistent with the customers’ established risk profiles. Large proportions of

customers’ assets were exposed to UCIS investments and therefore to the high risk of

financial loss.

4.54. Mr Pattison failed to provide a clear, fair and balanced explanation of the risks and

characteristics of the UCIS investments that Pave recommended. His descriptions of

the recommended UCIS investments were insufficient to enable customers to

understand the inherent risks and characteristics. He unfairly placed the onus on

customers to assess for themselves the risks by asking them to read the executive

summaries (which in themselves were not clear, fair or balanced) and also to read the

lengthy and detailed technical information and marketing material produced by the

UCIS providers.

4.55. Mr Pattison’s emphasis on low volatility as a rationale for recommending UCIS to

Pave’s customers was flawed. Volatility is a term used to describe the extent and

speed with which the price of an investment rises and falls over time. It is commonly

used to compare price characteristics of, for example, listed equity investments where

reliable pricing data is available at regular and frequent intervals. It is not a term that

should be used to describe for the benefit of retail customers the risks of a UCIS

because of the normal lack of reliable, objective and frequent pricing data. Even if

pricing data is available for a particular UCIS it would be wrong to suggest to

customers that price volatility was a dominant or material risk of a UCIS (compared to

the many other risks associated with investing in UCIS). Even if arithmetically a

UCIS has demonstrated price characteristics that mean it has low volatility, that does

not make the UCIS low risk.

Misleading information about fees and commission

4.56. Pave’s approach to charging fees and taking commission was not communicated

clearly to customers. The lack of transparency in the way that the notional account

operated meant that customers did not appreciate the true cost of Pave’s investment

advice.

Complaint handling

4.57. It was not evident how Mr Pattison ensured that Pave met its stated commitment to

customers to “treat each case impartially, sympathetically and in a consistent manner

with minimal delay”. In many respects Pave failed to comply with the standards

described in its own complaint handling procedure in respect of independence and

impartiality, acknowledging complaints and dealing with and communicating with

customers’ complaints in a timely way. It also failed to record information about its

complaints accurately and consequently it misrepresented to the FSA the nature and

number of complaints it had received about UCIS. Furthermore, it rejected every

UCIS complaint.

5.
REPRESENTATIONS, FINDINGS AND CONCLUSIONS

Representations

5.1.
Mr Pattison made oral and written representations in conjunction with Mr Hocking

and Pave. In his representations Mr Pattison denied the allegations made against him.

However he did concede that he had made mistakes at Pave, though he denied that

these minor failings were of sufficient seriousness as to justify the conclusion that he

either lacked integrity or competence and capability.

5.2.
Mr Pattison submitted that the evidence presented by the investigation team failed, on

the balance of probabilities, to disclose a case that was sufficient to discharge the

burden of proof upon the FSA, particularly when his unblemished history in the

financial services industry was taken into account. He submitted that the FSA had not

put forward compelling evidence sufficient to demonstrate that he had acted without

integrity or that he lacked competence and capability. Furthermore Mr Pattison

criticised the conduct of the FSA investigation team and alleged that their partiality

was demonstrated by the fact that they had put forward a case founded upon hearsay,

innuendo and speculation.

The conduct of the FSA

5.3.
Mr Pattison criticised the conduct of those from the FSA who had investigated this

matter. He submitted that they had not acted in a fair or balanced manner and that this

had caused them to misinterpret evidence and to use evidence very selectively. He

asserted that their bias had resulted in an unbalanced investigation which had been

conducted without integrity. He further submitted that the investigative team had been

so fixated upon demonstrating that he had engaged in misconduct that they had

overlooked evidence which was exculpatory for him. He submitted that as a result of

these failings the investigation had been wholly inadequate and it had resulted in a

very weak case which was characterised by “innuendo, guesswork, misquotation,

deliberate misrepresentation and subjective opinion” which he submitted did not

“constitute cogent and persuasive evidence”.

The breach of section 238

5.4.
Mr Pattison accepted that Pave had promoted UCIS in breach of section 238 of the

Act. However he submitted that this breach had been inadvertent and hence it was his

submission that the FSA should make no findings adverse to him as a result of what

he characterised as being a purely technical breach of the act. Mr Pattison submitted

that the FSA should accept that at no stage had he been culpable for Pave’s breach of

section 238 because at all times he had acted in reliance upon advice. He noted that

the FSA does not criticise him for his conduct relating to the promotion of UCIS by

Pave in the period after March 2007 when the firm had received incorrect advice from

an external compliance consultant concerning the restrictions applicable to the sale of

UCIS. Mr Pattison submitted that having made this late concession, the FSA should

go further and concede that Mr Pattison was not culpable for the unlawful promotion

of UCIS in the period prior to March 2007. He contended that having engaged others

to advise on issues relating to Pave’s regulatory compliance he was entitled to expect

them to provide advice about the Firm’s unlawful promotion of UCIS. It was

submitted that in the absence of any concerns having been raised by those who had

been engaged to assist with such matters Mr Pattison was entitled to assume that Pave

was acting lawfully when it promoted UCIS. Thus, it was argued, Mr Pattison was

not culpable for Pave’s breach of section 238 prior to March 2007 much as the FSA

agreed that he was not considered to be liable for the breach after March 2007.

The advice given to customers

5.5.
Despite accepting that Pave had unlawfully promoted UCIS to its customers Mr

Pattison defended the quality of the advice that had been given to former customers of

Pave. He asserted that he had ensured both when acting as a director and as a CF30

customer adviser that Pave’s customers had received a good service and he submitted

that the advice that had been given to the firm’s customers had reflected that fact. He

submitted that when UCIS had been promoted to customers this was because they

were the most suitable products. He denied that UCIS were ever promoted to

customers because they offered more favourable commission to Pave. Indeed he

commented that the level of commission which the firm received in relation to UCIS

did not “significantly vary from the level of commission that could be earned from

recommending regulated investments”. He also noted that as staff had been salaried

they were not incentivised to promote products on the basis of the commission that

might be earned.

5.6.
Mr Pattison submitted that because Pave did not seek to promote UCIS because of any

financial incentive to the firm, it could not be suggested that the Lifeplanner had been

designed to provide a scenario for customers that would inevitably result in their

seeking to invest in UCIS. Instead he contended that the Lifeplanner, far from being a

sales tool, was rather a tool that helped Pave to learn about the needs of their

customers and to present them with “what if” scenarios.

5.7.
Mr Pattision added that though Pave did not actively seek to promote UCIS over other

products they would recommend carefully selected UCIS to clients where these were

the best products to meet the aspirations of particular customers. He noted that many

regulated products had failed to outperform inflation, and that it was therefore

unsurprising if Pave had advised customers about the possibility of investing in UCIS.

He argued that it was far too simplistic to suggest that because something was a UCIS

that would make it an inherently bad product. As a corollary of the foregoing he also

submitted that it was wrong to assert that Pave was necessarily giving customers poor

advice when it had advised individuals about investing in UCIS.

5.8.
In the light of the foregoing submissions Mr Pattison rejected the conclusions that the

FSA sought to draw about the allegedly poor advice given by Pave to its former

customers. Instead Mr Pattison submitted that on a proper analysis of the

circumstances for the advice given to each of Pave’s former customers it was clear

that Pave had provided fair and balanced advice which was informed by the

knowledge Pave’s customer advisers had of their clients. He complained that the FSA

had not only made minor factual errors in its analysis of Pave’s conduct towards

various former clients, but he also submitted that the FSA had overlooked pertinent

facts, such as the sophistication of some investors, whilst it had also overstated other

matters such as the alleged infirmity of one particular client. He further submitted that

the investment decisions which had been taken by the customers of Pave had been

ones that they had taken of their own volition in an attempt to achieve their financial

goals. He argued that, whilst it was not for Pave to “tell people that they (were) being

too ambitious in life”, the advice that had been given to Pave’s customers had been

good advice tailored to their aspirations.

Pave’s policy on fees and commissions

5.9.
Mr Pattison submitted that Pave had treated its former clients fairly and that it had not

misled them about the fees which the firm charged and the commissions it had

received from product providers. He asserted that the FSA had no basis upon which

to allege that Pave’s fees were excessive as there were no rules governing the level of

fees. He therefore submitted that the fee structure at Pave could not be said to be

unfair whilst he also rejected the suggestion that Pave had sought to mislead about the

use of the notional account. He submitted that the notional accounts which had been

maintained for all of Pave’s customers had operated in a transparent way. He argued

that the transparency of how Pave dealt with fees, commissions and the notional

accounts was illustrated by the telling absence of any clear evidence from former

customers of Pave. Mr Pattison submitted that the FSA could not maintain that

Pave’s customers were confused by the operation of the notional account without

putting forward evidence from these former customers supporting this allegation.

Instead he submitted that it was the FSA who had become confused about this issue as

it had failed to distinguish between a notional account and a real account. Mr Pattison

thus submitted that in the light of the foregoing it was not possible to conclude that he

had acted without integrity.

Complaints handling

5.10. Mr Pattison rejected the suggestion that he had failed to ensure that Pave had properly

dealt with complaints it had received. He submitted that Pave had acknowledged and

investigated customer’s complaints fairly and in accordance with Pave’s own

complaints handling procedure and with the regulatory requirements in DISP.

The definition of integrity

5.11. When disputing the allegations made against him Mr Pattison criticised the FSA for

having failed to properly define what amounted to conduct lacking in integrity. He

submitted that the FSA had incorrectly characterised behaviour lacking in integrity as

being constituted by reckless conduct. Instead he asserted that behaviour lacking in

integrity was characterised by deliberate and wilful breaches of the law. Mr Pattison

argued that the FSA did not have evidence that he, an individual of previously

blameless character, had engaged in conduct amounting to deliberate and wilful

breaches of the law and therefore he submitted that the FSA could not allege that he

lacked integrity.

5.12. Mr Pattison accepted that as a consequence of Pave’s unlawful promotion of UCIS it

was appropriate for the FSA to impose some form of sanction upon him. However he

submitted that the proposed financial penalty and prohibition were far too harsh.

Furthermore he submitted that the proposed financial penalty was beyond his means.

Mr Pattison thus argued that the FSA should instead allow him to resign all of his

authorisations. He argued that this would achieve the regulatory outcome which the

FSA were seeking and it would be a proportionate response to the very limited failings

which he had accepted.

5.13. The FSA rejects Mr Pattison’s submissions having taken all relevant factors including

his previously unblemished character into account. Instead the FSA finds that there is

compelling evidence to demonstrate that he has breached Statements of Principle 1, 2

and 7 and that he is not a fit and proper person because of his lack of integrity and his

lack of competence and capability. The FSA notes that Mr Pattison did accept that he

had made some mistakes; however the FSA finds that his misconduct went

significantly further than he had conceded.

The conduct of the FSA

5.14. The FSA rejects the suggestion that Mr Pattison’s many and varied criticisms of the

conduct of the investigation team demonstrate that the evidence in this matter is of

limited probative value. As is noted above the FSA considers that there is clear

evidence showing that Mr Pattison had engaged in the alleged misconduct.

Furthermore the FSA does not agree that evidence has been ‘cherry picked’ or that it

may have been misinterpreted to Mr Pattison’s detriment. The FSA thus considers

that Mr Pattison’s criticisms of the investigation team have no impact on this notice.

The breach of section 238

5.15. The FSA considers that though Pave may have had external compliance support in the

period prior to March 2007 Mr Pattison is culpable for Pave’s breach of section 238 of

the Act at this time. Mr Pattison was responsible for Pave’s compliance with

regulatory obligations and therefore he was also responsible for Pave’s failure to take

any steps to consider and apply the restrictions relating to the promotion of UCIS.

Whilst the FSA accepts that Mr Pattison is not culpable for the continuing promotion

of UCIS after he had sought advice about these products, the FSA finds that he can not

rely on the absence of advice prior to this point to absolve him of responsibility for the

breach of section 238. The FSA considers that it was Mr Pattison’s responsibility to

ensure regulatory compliance and that he should have proactively sought advice about

the promotion of such products particularly in the light of the clear warnings which

were contained in much of the UCIS marketing material to the effect that it was

unlawful to distribute the material beyond limited categories of potential investors.

The advice given to customers

5.16. The FSA rejects Mr Pattison’s submissions concerning the standard of advice given

by Pave, and by him when carrying out his CF30 Customer Function, to former

customers. The FSA considers that former customers received poor advice resulting

from a number of failures at Pave.

5.17. The FSA finds that, regardless of the breach of section 238 by Pave, it was

inappropriate to have promoted UCIS to the firm’s customers to the extent that it did.

There is significant risk to investing in UCIS and these risks were magnified by the

fact that Pave advised retail customers to invest large proportions of their wealth

directly in UCIS, and in some cases this was through gearing and as part of their

pension provision. Indeed Mr Pattison made personal recommendations to customers

to invest in UCIS having failed to take reasonable care to ensure the suitability of that

advice and that consequently he made sales which were not in fact suitable in the light

of factors such as; the customers’ investment history; the customers’ previous

attitudes to investment risk; Pave’s methods of raising finance for some of these

investments; and the high concentration of UCIS in each customer’s portfolio. The

inappropriateness of this advice was compounded by the fact that written

communications were sent to customers about UCIS which contained inaccurate and

inconsistent information about the nature and level of risks associated with these

products. These poor communications were also mirrored in the firm’s failure to

make clear, during the sales process, the level of investment growth required to offset

the costs of a particular scheme, and the impact of a failing or underperforming

scheme.

5.18. The quality of the sales process at Pave was also severely undermined by the use of

the Lifeplanner, which the FSA considers to have been ineffective in facilitating

Pave’s understanding of their customers. The FSA finds that the Lifeplanner was used

as a sales tool; it did not provide realistic assessments of the projected returns from

particular products. Instead the Lifeplanner, which modelled dangerously optimistic

projected returns, had the effect of persuading customers, about whom the firm had

conducted flawed assessments of their attitudes to risk, to accept very high levels of

investment risk because it sought to project a scenario in which an individual’s

lifestyle necessitated the investment in such products.

5.19. The FSA finds that Pave gave poor advice to customers and that Mr Pattison is

culpable for this. The FSA considers that Pave failed to provide realistic assessments

of the suitability of certain products and the attainability of certain clients aspirations.

Instead the firm, and Mr Pattison acting as a client adviser, who failed to take

reasonable care when assessing clients suitability, advised clients to invest in high risk

products when these were unsuitable.

Pave’s policy on fees and commissions

5.20. The FSA finds that it is clear on the evidence that Pave did not communicate clearly to

its customers about the fees it charged and the commissions it received. The FSA

accepts that a firm is entitled to charge fees at whatever level it considers appropriate

which have been agreed with the customer. However the FSA considers that a firm

must be open and transparent with its customers about the levels of these fees. The

FSA finds that Pave was not open with its customers on this topic and the FSA

considers that Mr Pattison is culpable for the firm’s lack of transparency in this area.

Indeed the FSA considers that the operation of the notional account was so lacking in

transparency that it demonstrates that Mr Pattison acted without integrity as he sought

to conceal the true cost of Pave’s investment services.

Complaints handling

5.21. The FSA finds that Pave failed to comply with the relevant requirements and

standards of the regulatory system as it failed to acknowledge and investigate

customers’ complaints fairly and in accordance with the firm’s own complaints

handling procedures. The FSA considers that Mr Pattison is at fault for this failure as

it was he who was responsible for the decisions relating to all complaints.

Furthermore the FSA also considers that Mr Pattison is personally culpable for Pave’s

failings in this area because he caused Pave to breach certain specific requirements

such as the need to inform a customer of his right to refer his complaint to the FOS.

The definition of integrity

5.22. The FSA rejects Mr Pattison’s submissions concerning the definition of integrity. The

FSA considers that that conduct lacking in integrity is not marked by “deliberate and

wilful breaches of the law”. Instead the FSA finds that conduct lacking in integrity is

marked by recklessness. Indeed the FSA notes that in the excerpt from paragraph 49

of Fox Hayes v. FSA [2009] EWCA Civ 76, upon which Mr Pattison sought to rely in

support of his submission, Longmore LJ made clear that there was a distinction

between reckless and deliberate misconduct. The FSA considers that reckless

conduct, as seen in this matter, clearly equates to conduct lacking in integrity.

5.23. In the light of the foregoing findings the FSA considers that the proposed sanctions are

merited in this case. Whilst Mr Pattison argued for an alternative outcome the FSA

notes that he did so on the basis that he only accepted responsibility for one aspect of

the overall case against him (and this admission was made with a significant caveat).

The FSA rejects Mr Pattison’s submissions about the appropriate sanctions in this

case and considers that the proportionate response in this case is to impose a financial

penalty, withdraw his approval and to prohibit him (in the terms set out in paragraph

1(3) of this notice). The FSA considers that the financial penalty set out at paragraph

1(1) of this notice properly reflects the seriousness of Mr Pattison’s misconduct.

Additionally the FSA notes that it has seen no evidence of verifiable financial

hardship. Therefore the FSA does not consider that the financial penalty should be

reduced in his case. In relation to the other two sanctions; the FSA considers that it is

necessary to withdraw Mr Pattison’s approval and to prohibit him as he has engaged

in serious misconduct and the FSA considers that he continues to pose a risk to the

FSA’s objectives.

5.24. On the basis of the facts and matters and analysis set out in this Notice the FSA has

therefore concluded that:

(1)
Mr Pattison acted recklessly and thus failed to act with integrity in carrying

out his controlled functions in contravention of Statement of Principle 1 by:

(a)
failing to inform himself of the statutory and regulatory restrictions on

the promotion of UCIS before starting to promote and recommend

them to Pave’s customers (and ignored warnings, which he ought to

have read as part of his due diligence, in the UCIS marketing material

that he duly passed on to Pave’s customers);

(b)
using the Lifeplanner as a sales tool which modelled dangerously

optimistic projected returns and which had the effect of persuading

customers to accept very high levels of investment risk;

(c)
closing his mind to the risks associated with retail customers investing

large proportions of their wealth in UCIS directly, through gearing

and as part of their pension provision; and

(d)
concealing the true cost of Pave’s investment service from customers

through the opaque operation of its notional account;

(2)
Mr Pattison failed to act with due skill, care and diligence in carrying out the

CF30 Customer function in contravention of Statement of Principle 2 by:

(a)
carrying out flawed assessments of customers’ attitudes to investment

risk in a sales process which included increasing customers’ attitude

to risk scores in line with Pave’s understanding of the risks associated

with the UCIS on its shortlist without adequate regard to the

customers’ investment history and their previously documented

attitudes to investment risk;

(b)
producing and sending written communications to customers about

UCIS (e.g. the executive summaries) which contained inaccurate and

inconsistent information about the nature and level of risks associated

with the UCIS;

(c)
failing during the sales process to make clear to customers the level of

investment growth required to offset the costs and/or disclose to

customers the impact of a failing or underperforming scheme; and

(d)
making personal recommendations to customers to invest in UCIS

which were not suitable, taking into account, for example, the

customers’ previous attitudes to investment risk, Pave’s methods of

raising finance for some of these investments (which included gearing

of some customers’ residential properties), and pension switching,

with a high concentration of UCIS (up to 80%) in each customer’s

portfolio; and

(3)
Mr Pattison failed to take reasonable steps to ensure that Pave complied with

the relevant requirements and standards of the regulatory system, in breach of

(a)
implementing Pave’s sales model and sales practices which contained

inherent flaws in the approach to KYC and which led to systemic

failures in the way that Pave made investment recommendations to

customers that failed to comply with the rules in COBS, and

(b)
failing to ensure that Pave acknowledged and investigated customers’

complaints fairly and in accordance with Pave’s own complaints

handling procedure and with regulatory requirements in DISP.

5.25. In the light of the foregoing the FSA concludes that it is appropriate to impose a

financial penalty of £90,000, withdraw Mr Pattison’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. A further analysis of

these sanctions is provided below.

6.
ANALYSIS OF THE SANCTIONS

Imposition of the financial penalty

6.1.
The FSA's policy on the imposition of financial penalties relevant to the misconduct

detailed in this notice is set out in Chapter 6 of the version of the Decision Procedure

and Penalties Manual (“DEPP”) in force prior to 6 March 2010, which formed part of

the FSA Handbook. All references to DEPP in this section are references to that

version of DEPP. The FSA has also had regard to the provisions of the Enforcement

Manual (“ENF”), which were in force for the early part of the Relevant Period.

6.2.
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 providing an incentive for compliant behaviour.

6.3.
In determining whether a financial penalty is appropriate the FSA is required to

consider all the relevant circumstances of a case.

6.4.
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 (DEPP 6.5.2(1))

6.5.
In determining the level of the financial penalty, the FSA has had regard to the need to

ensure those who are approved persons exercising significant influence functions act

in accordance with regulatory requirements and standards. The FSA considers that a

penalty should be imposed to demonstrate to Mr Pattison and others the seriousness of

failing to meet these requirements.

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

6.6.
As a result of Mr Pattison’s failings, Pave exposed retail customers (including his own

customers) to a risk of investing in schemes for which they did not have adequate

knowledge or experience. Consequently, these customers have invested significant

proportions of their assets, sometimes geared by raising additional borrowing, in

schemes that are not suited to their circumstances, attitude to risk or level of

understanding.

6.7.
Some of the unsuitable schemes have been wound up or suspended, resulting in

crystallised or potential financial losses for customers, many of whom could not

absorb these losses and in some cases may be facing financial ruin. Customers may

also face difficulties and potential financial losses in disinvesting from UCIS which

were not suitable for them in the first place.

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

6.8.
The FSA has concluded that in certain specified respects (see paragraph 5.6(1) above)

Mr Pattison’s conduct was reckless. Given his long experience in the financial

services industry Mr Pattison must have been aware of the risks associated with

Pave’s sales model and sales practices, dependent as it was on the Lifeplanner to

encourage customers to enter into high risk aspirational wealth creation programmes.

Mr Pattison must also have been aware of the opaque method used to conceal from

customers the true cost of Pave’s services.

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

6.9.
When determining the appropriate level of financial penalty, the FSA will take into

account that individuals will not always have the same resources as 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 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.

6.10. The FSA recognises that the financial penalty imposed on Mr Pattison is likely to have

a significant impact on him as an individual but considered it to be proportionate in

relation to the seriousness of his misconduct and as an approved person performing a

significant influence function at Pave.

The size, financial resources and other circumstances of the person on whom the

penalty is to be imposed (DEPP 6.5.2(5))

6.11. The FSA considers that a financial penalty of the level proposed is appropriate, having

taken account of all relevant factors. Mr Pattison has been given the opportunity to

submit a statement of means form to the FSA but has not done so. The FSA has no

evidence that Mr Pattison would be unable to pay such a financial penalty.

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

6.12. The FSA is aware that Mr Pattison received dividends as a result of his shareholding

in Pave, and therefore stood to gain benefit from the increased revenue produced by

Pave’s sales model.

Conduct following the breach (DEPP 6.5.2G(8))

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

investigation.

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

6.14. The FSA has taken into account the fact that Mr Pattison has not been the subject of

previous disciplinary action by the FSA.

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

6.15. The FSA has taken into account action against other approved persons for similar

conduct.

6.16. Taking into account the above factors, the FSA has decided to impose a financial

penalty of £90,000 on Mr Pattison.

Withdrawal of approval and prohibition

6.17. Given the nature and seriousness of the failures outlined above the FSA having had

regard to the guidance in Chapter 9 of the Enforcement Guide (“EG”), has decided

that Mr Pattison lacks integrity and is not competent and capable, and is therefore not

fit and proper and thus it is appropriate in this case to prohibit Mr Pattison from

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

authorised person, exempt person or exempt professional firm and to withdraw his

approval. The relevant provisions of EG are set out in the Annex to this notice.

7.
DECISION MAKER

7.1.
The decision which gave rise to the obligation to give this Decision Notice was made

by the Regulatory Decisions Committee.

8.
IMPORTANT

8.1.
This Decision Notice is given to Mr Pattison and Pave under sections 57, 63 and 67

and in accordance with section 388 of the Act. The following information is

important.

The Upper Tribunal

8.2.
Mr Pattison 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 Pattison 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 on his behalf 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:

8.3.
Mr Pattison 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 Chris Walmsley at the FSA, 25 The North

Colonnade, Canary Wharf, London, E14 5HS.

Access to evidence

8.4.
Section 394 of the Act applies to this Decision Notice. In accordance with section

394, Mr Pattison is entitled to have access to:

(1)
the material upon which the FSA has relied in deciding to give him this

Decision Notice; and

(2)
any material other than material falling within sub-paragraph (1) which was

considered by the FSA in reaching the decision that gave rise to the obligation

to give this notice or was obtained by the FSA in connection with the matter to

which this notice relates but which was not considered by it in reaching that

decision (“secondary material”), which, in the opinion of the FSA, might

undermine that decision.

8.5.
A schedule of the material upon which the FSA has relied in deciding to give Mr

Pattison this Decision Notice was sent to him with the Warning Notice. There is no

secondary material to which the FSA must grant Mr Pattison access.

Interested party

8.6.
This Notice is given to Pave as an interested party in accordance with section 63(3) of

the Act.

Confidentiality and publicity

8.7.
Mr Pattison 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 the Act is that neither

Mr Pattison nor any other person to whom a Decision Notice is given or copied, may

publish the notice or any details concerning it unless the FSA has published the notice

or those details.

8.8.
Mr Pattison should also be aware that, in addition to publishing the Decision Notice or

any details concerning it, the FSA must publish such information about the matter to

which a Final Notice relates as it considers appropriate. Mr Pattison therefore should

be aware that any Final Notice may contain reference to the facts and matters

contained in this Notice.

FSA contacts

8.9.
For more information concerning this matter generally Mr Pattison should contact

Chris Walmsley at the FSA (direct telephone line: 020 7066 5894).

Tim Herrington

Chairman, Regulatory Decisions Committee

ANNEX

RELEVANT STAUTORY PROVISIONS, REGULATORY REQUIREMENTS AND

FSA GUIDANCE

1.
Statutory provisions

1.1.
The FSA’s statutory objectives, set out in section 2(2) of the Act, include the

protection of consumers.

1.2.
The FSA has the power, by virtue of section 66 of the Act, to impose a financial

penalty on Mr Pattison of such amount as it considers appropriate where it appears to

the FSA that he is guilty of misconduct and it is satisfied that it is appropriate in all the

circumstances to take action against him.

1.3.
Mr Pattison is guilty of misconduct if, while an approved person, he fails to comply

with a statement of principle issued under section 64 or has been knowingly concerned

in a contravention by the relevant authorised person of a requirement imposed on that

authorised person by or under the Act.

1.4.
Pursuant to section 63 of the Act, the FSA has the power to withdraw the approval

given to Mr Pattison under section 59 of the Act – to perform the significant

controlled functions of CF10 Compliance Oversight and CF11 Money Laundering

Reporting – if it considers that Mr Pattison is not a fit and proper person to perform

them.

2.
Statements of Principle for Approved Persons

2.1.
The Statements of Principle are issued pursuant to section 64 of the Act. The section

sets out Statements of Principle with which approved persons are required to comply

when performing a controlled function for which approval has been sought and

granted. They are general statements of the fundamental obligations of approved

persons under the regulatory system. The Statements of Principle also contain

descriptions of conduct which, in the opinion of the FSA, constitutes a failure to

comply with a particular Statement of Principle and describe factors which the FSA

will take into account in determining whether an approved person’s conduct complies

with it.

2.2.
APER 3.1.3G states, as guidance, that when establishing compliance with, or breach

of, a Statement of Principle, account will be taken of the context in which a course of

conduct was undertaken, the precise circumstances of the individual case, the

characteristics of the particular controlled function and the behaviour expected in that

function.

2.3.
APER 3.1.4G states, as guidance, that an approved person will only be in breach of a

Statement of Principle if they are personally culpable, that is in a situation where their

conduct was deliberate or where their standard of conduct was below that which

would be reasonable in all the circumstances.

2.4.
In this case, the FSA considers the most relevant Statements of Principle to be

Statements of Principle 1, 2 and 7.

2.5.
Statement of Principle 1 requires that an approved person must act with integrity in

carrying out his controlled function.

2.6.
Statement of Principle 2 requires that an approved person must act with due skill, care

and diligence in carrying out his controlled function.

2.7.
Statement of Principle 7 requires 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 4.1.2E to 4.1.15E provide examples of the types of behaviour that, in the

opinion of the FSA, do not comply with Statement of Principle 1. These include:

(1)
Deliberately misleading (or attempting to mislead) by act or omission a client

(APER 4.1.3(1)E);

(2)
deliberately misleading a client about the likely performance of investment

products by providing inappropriate projections of future investment returns

(APER 4.1.4(4)E); and

(3)
deliberately recommending an investment to a customer where the approved

person knows that he is unable to justify its suitability for that customer

(APER 4.1.5E).

2.9.
APER 4.2.2E to 4.2.13E provide examples of the types of behaviour that, in the

opinion of the FSA, do not comply with Statement of Principle 2. These include:

(1)
failing to inform a customer of material information in circumstances where

the approved person ought to have been aware of such information and of the

fact that he should provide it, including failing to explain the risks of an

investment to a customer (APER 4.2.3E and 4.2.4E);

(2)
recommending an investment to a customer where the approved person does

not have reasonable grounds to believe that it is suitable for that customer

(APER 4.2.5E); and

(3)
recommending transactions without a reasonable understanding of the risk

exposure of the transaction to a customer including where that

recommendation is made without a reasonable understanding of the liability

(either potential or actual) of the transaction (APER 4.2.6E and 4.2.7E).

2.10. APER 4.7.2E to 4.7.10E provide examples of the types of behaviour that, in the

opinion of the FSA, do not comply with Statement of Principle 7. These include:

(1)
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 standards of the regulatory

system in respect of the relevant firm’s regulated activities (APER 4.7.3E);

(2)
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 regulatory system in respect of the relevant

firm’s regulated activities (APER 4.7.4E); and

(3)
failing to take reasonable steps to ensure that procedures and systems of

control are reviewed and, if appropriate, improved, following the

identification of significant breaches (whether suspected or actual) of the

relevant requirements and standards of the regulatory system relating to its

regulated activities, including but not limited to:

(a)
unreasonably
failing
to
implement
recommendations
for

improvements in systems and procedures; or

(b)
unreasonably
failing
to
implement
recommendations
for

improvements to systems and procedures in a timely manner;

(APER 4.7.7E and 4.7.8E).

3.
FSA’s policy on exercising its power to impose a financial penalty

3.1.
The FSA's statement of policy with respect to the imposition and amount of penalties

under the Act, as required by sections 69(1), 93(1), 124(1) and 210(1) of the Act, and

guidance on those matters is provided in Chapter 6 of the FSA’s Decision Procedure

and Penalties Manual (“DEPP”), entitled “Penalties”, which is part of the FSA’s

Handbook. In summary, Chapter 6 of DEPP states that the FSA will consider the full

circumstances of each case when determining whether or not to take action for a

financial penalty, and sets out a non-exhaustive list of factors that may be relevant for

this purpose.

3.2.
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.

3.3.
The FSA will consider the full circumstances of each case when determining whether

or not to take action for a financial penalty. DEPP k6.2.1G sets out guidance on a non-

exhaustive list of factors that may be of relevance in determining whether to take

action for a financial penalty, which include the following.

(1)
DEPP 6.2.1G(1): The nature, seriousness and impact of the suspected breach.

(2)
DEPP 6.2.1G(2): The conduct of the person after the breach.

(3)
DEPP 6.2.1G(3): The previous disciplinary record and compliance history of

the person.

(4)
DEPP 6.2.1G(4): FSA guidance and other published materials.

(5)
DEPP 6.2.1G(5): Action taken by the FSA in previous similar cases.

4.
Determining the level of the financial penalty

4.1.
The FSA will consider all the relevant circumstances of a case when it determines the

level of financial penalty. DEPP 6.5.2G sets out guidance on a non exhaustive list of

factors that may be of relevance when determining the amount of a financial penalty.

4.2.
Factors that may be relevant to determining the appropriate level of financial penalty

(1)
whether the breach revealed serious or systematic weaknesses in the person's

procedures or of the management systems or internal controls relating to all

or part of a person's business (DEPP 6.5.2G(2)(b)); and

(2)
the general compliance history of the person, including whether the FSA has

previously brought to the person’s attention, issues similar or related to the

conduct that constitutes the breach in respect of which the penalty is imposed

(DEPP 6.5.2(9)(d)).

5.
Fit and Proper Test for Approved Persons

5.1.
The part of the FSA Handbook entitled “FIT” sets out the Fit and Proper Test for

Approved Persons. The purpose of FIT is to outline the main criteria for assessing the

fitness and propriety of a candidate for a controlled function. FIT is also relevant in

assessing the continuing fitness and propriety of an approved person.

5.2.
FIT 1.3.1G provides that the FSA will have regard to a number of factors when

assessing a person’s fitness and propriety. One of the considerations will be the

person’s competence and capability.

5.3.
As set out in FIT 2.2, in determining a person’s competence and capability, the FSA

will have regard to matters including but not limited to:

(1)
whether the person satisfies the relevant FSA training and competence

requirements in relation to the controlled function the person performs or is

intended to perform; and

(2)
whether the person has demonstrated by experience and training that the

person is able, or will be able if approved, to perform the controlled function.

6.
FSA’s policy for exercising its power to make a prohibition order and withdraw

a person’s approval

6.1.
The FSA’s approach to exercising its powers to make prohibition orders and withdraw

approvals is set out at Chapter 9 of the Enforcement Guide (“EG”).

6.2.
EG 9.1 states that the FSA’s power to make prohibition orders under section 56 of the

Act helps it work towards achieving its regulatory objectives. The FSA may exercise

this power 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.

6.3.
EG 9.4 sets out the general scope of the FSA’s powers in this respect, which include

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. EG 9.5 provides that the scope of a prohibition order will

vary according to 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 posed by him to consumers or the market generally.

6.4.
In circumstances where the FSA has concerns about the fitness and propriety of an

approved person, EG 9.8 to 9.14 provide guidance. In particular, EG 9.8 states that the

FSA may consider whether it should prohibit that person from performing functions in

relation to regulated activities, withdraw that person’s approval or both. In deciding

whether to withdraw approval and/or make a prohibition order, the FSA will consider

whether its regulatory objectives can be achieved adequately by imposing disciplinary

sanctions.

6.5.
EG 9.9 states that the FSA will consider all the relevant circumstances when deciding

whether to make a prohibition order against an approved person and/or to withdraw

that person’s approval. Such circumstances may include, but are not limited to, the

following factors:

(1)
whether the individual is fit and proper to perform functions in relation to

regulated activities, including in relation to the criteria for assessing the

fitness and propriety of an approved person in terms of competence and

capability as set out in FIT 2.2;

(2)
the relevance and materiality of any matters indicating unfitness;

(3)
the length of time since the occurrence of any matters indicating unfitness;

(4)
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;

(5)
the severity of the risk which the individual poses to consumers and to

confidence in the financial system; and

(6)
the previous disciplinary record and general compliance history of the

individual.

6.6.
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 serious lack of competence.

7.
Complaints handling rules

7.1.
DISP 1.3.1 R in the part of the Handbook entitled Dispute Resolution: Complaints

(“DISP”) requires that effective and transparent procedures for the reasonable and

prompt handling of complaints must be established, implemented and maintained by

the respondent.

7.2.
DISP 1.4.1 R requires that once a complaint has been received by a respondent, it

must:

(1)
investigate the complaint competently, diligently and impartially; and

(2)
assess fairly, consistently and promptly the subject matter of the complaint,

whether the complaint should be upheld, what remedial action or redress (or

both) may be appropriate and, if appropriate, whether it has reasonable

grounds to be satisfied that another respondent may be solely or jointly

responsible for the matter alleged in the complaint.

7.3.
DISP 1.6.1 R requires that on receipt of a complaint:

(1)
a respondent must send the complainant a prompt written acknowledgement

providing early reassurance that it has received the complaint and is dealing

with it, and

(2)
ensure the complainant is kept informed thereafter of the progress of the

measures being taken for the complaint’s resolution.

7.4.
DISP 1.6.2 R requires that the respondent must, by the end of eight weeks after its

receipt of the complaint, send the complainant:

(1)
a final response; or

(2)
a written response which explains why it is not in a position to make a final

response and indicate when it expects to be able to provide one, inform the

complainant that he may now refer the complaint to the FOS, and enclose a

copy of the FOS standard explanatory leaflet.

8.1.
COBS 2.3.1R, in force since 1 November 2007, states that a firm which carries out

designated investment business (e.g. arranging deals in units in CIS) must not pay or

accept any fee or commission in relation to designated investment business carried on

for a customer other than:

(1)
a fee or commission paid or provided to or by the customer or a person on

behalf of the customer; or

(2)
a fee or commission paid or provided to or by a third party or a person acting

on behalf of a third party, if:

(a)
the payment of the fee or commission does not impair compliance

with the firm's duty to act in the best interests of the customer; and

(b)
the existence, nature and amount of the fee or commission or, where

the amount cannot be ascertained, the method of calculating that

amount, is clearly disclosed to the customer, in a manner that is

comprehensive, accurate and understandable, before the provision of

the service;

(c)
in relation to MiFID or equivalent third country business (e.g. making

a personal recommendation in relation to units in collective

investment undertakings), the payment of the fee or commission is

designed to enhance the quality of the service to the customer; or

(3)
proper fees which enable or are necessary for the provision of designated

investment business or ancillary services, such as custody costs, settlement

and exchange fees, regulatory levies or legal fees, and which, by their nature,

cannot give rise to conflicts with the firm’s duties to act honestly, fairly and

professionally in accordance with the best interests of its customers.

8.2.
COBS 2.3.2R states that a firm will satisfy this disclosure obligation if it:

(1)
discloses the essential arrangements relating to the fee or commission in

summary form;

(2)
undertakes to the customer that further details will be disclosed on request;

and

(3)
honours the undertaking in (2).

8.3.
Prior to 1 November 2007, COB 5.7.3R contained similar rules about disclosing

charges to customers. In particular, COB 5.7.3 R(1) stated that a firm, before

conducting designated investment business for a private customer, must disclose in

writing to that private customer the basis or amount of its charges for conducting that

business and the nature or amount of any other income receivable by it.

9.
UCIS

The Glossary defines a UCIS as a CIS which is not a regulated CIS. A regulated CIS is

defined in the Glossary as:

(1)
an investment company with variable capital (a body incorporated under the

Open Ended Investment Companies Regulations 2001 or the equivalent

Northern Ireland regulations);

(2)
an authorised unit trust scheme (a unit trust scheme which is authorised for

the purposes of the Act by an FSA authorisation order; or

(3)
a recognised scheme, i.e. a scheme under:

(a)
section 264 of the Act (schemes constituted in other EEA states);

(b)
section 270 of the Act (schemes authorised in designated countries or

territories); or

(c)
section 272 of the Act (individually recognised overseas schemes);

whether or not the units are held within a PEP, ISA or personal pension scheme.

9.2.
Section 238(1) of the Act provides that an authorised person must not communicate an

invitation or inducement to participate in a CIS, and therefore also an UCIS. Section

21 of the Act imposes an equivalent restriction in relation to unauthorised persons.

9.3.
Section 238 goes on expressly to carve out circumstances where this prohibition will

not apply. These include the following.

(1)
Where the CIS in question is an authorised unit trust/open ended investment

company.

(2)
The circumstances set out in the Financial Services and Markets Act 2000

(Promotion of collective investment schemes)(Exemptions) Order 2001 (“the

PCIS Order”).

(3)
The exemptions listed in table 4.12.1R(4) of the Conduct of Business

Sourcebook (see COB 3 Annex 5 for the exemptions that applied prior to 1

November 2007)

9.4.
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 order.

9.5.
These exemptions pertain to individuals classed as certified high net worth

individuals, certified sophisticated investors or self-certified sophisticated investors

(articles 21, 23 and 23A of the PCIS Order).

The PCIS Order exemptions - Certified high net worth individuals

9.6.
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. Part I of the Schedule to the PCIS Order sets out the form and content

which such a statement must have. This includes confirmation that at least one of the

following sets of circumstances applies:

(1)
the person had, during the previous financial year, an annual income of

£100,000 or more; and/or

(2)
the person held, throughout the previous financial year, assets to the value

of
£250,000
or
more,
not
including
that
person’s
primary

residence/mortgage, life insurance or death in service benefits.

9.7.
The statement must also contain a confirmation that the individual 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.

9.8.
If the person making the communication (i.e. the promotion) 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)
includes a specified warning in the following terms which 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 individuals and a reminder that the individual should consult a

specialist if in any doubt about participating in a UCIS.

9.9.
There are similar provisions for high net worth companies and associations at Article

22.

The PCIS Order exemptions - Sophisticated investors

9.10. There are two sorts of sophisticated investors referred to in the PCIS Order – certified

and self-certified.

Certified sophisticated investors

9.11. A certified sophisticated investor is defined in Article 23(1) as someone:

(1)
who has a current certificate (signed and dated in the past three years) in

writing or other legible form signed by an authorised person to the effect that

he is sufficiently knowledgeable to understand the risks associated with

participating in a UCIS; and

(2)
who has signed, within the previous 12 months, a statement in the following

terms:

“I make this statement so I can receive promotions which are exempt from the

restriction on promotion of unregulated schemes in the Financial Services

and Markets Act 2000. The exemption relates to certified sophisticated

investors and I declare that I qualify as such. I accept that the schemes to

which the promotions will relate are not authorised or recognised for the

purposes of that Act. I am aware that it is open to me to seek advice from an

authorised person who specialises in advising on this kind of investment.”

9.12. The communication must be accompanied by an indication that section 238 does not

apply, of the requirements to be a certified sophisticated investor, a prescribed risk

warning and a reminder to seek independent advice.

9.13. Provided all this is met, and the communication is not to participate in a UCIS carried

on by the person who certified the investor as sophisticated, then the section 238

restriction will not apply.

Self-certified sophisticated investors

9.14. Article 23A defines a self-certified sophisticated investor as an individual who has

signed a statement complying with Part II of the Schedule to the PCIS Order in the

past 12 months. Part II of the Schedule to the PCIS Order sets out the form and

content which such a statement must have. This includes confirmation that at least one

of the following sets of circumstances applies to the investor:

(1)
he is a member of a network or syndicate of “business angels” and has been

so for at least the last six months;

(2)
he has made more than one investment in an unlisted company in the past

two years;

(3)
he is working, or has worked in the past two years, in a professional capacity

in the private equity sector, or in the provision of finance for small and

medium enterprises;

(4)
he is currently, or has been in the two years before signing the statement, a

director of a company with an annual turnover of at least £1 million.

9.15. As with certified high net worth individuals, the statement also contains a

confirmation that the investor accepts he can lose his property and assets from making

investment decisions based on financial promotions and that he is aware that it is open

to him to seek specialist advice.

9.16. If the person making the communication (i.e. the promotion) believes on reasonable

grounds that he is making it to a self-certified sophisticated investor, then the section

238 restriction will not apply as long as the communication:

(1)
relates only to units in a UCIS which invests wholly or predominantly in the

shares in or debentures of one or more unlisted companies;

(2)
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;

(3)
includes a specified warning in the following terms which is given both orally

(in respect of real time communications) and in writing in the manner

prescribed in Article 23A:

“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

(4)
is accompanied by an indication that the promotion is exempt from section 238

on the ground that it is made to a self-certified sophisticated investor, together

with details of the requirements for self-certified sophisticated investors and a

reminder that the individual should consult a specialist if in any doubt about

participating in a UCIS.

The relevant COBS and COB exemptions

9.17. 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 table at 4.12.1R(4) of the Conduct of Business Sourcebook (COBS), which has

been in force since 1 November 2007. These exemptions mirror (except where

indicated below) those set out in COB 3 Annex 5, which was in force prior to 1

November 2007.

9.18. 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.

9.19. 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.

9.20. 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 a customer of the firm or a

company in its group.

9.21. Category 7 provides that if a customer is categorised as a “professional customer” or

“eligible counterparty” (known as an “intermediate customer” and “market

counterparty, respectively, prior to 1 November 2007) then an authorised person can

promote to that customer any UCIS in relation to which the customer is so

categorised.

9.22. Category 8 (which was not previously included in COB 3 Annex 5) 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.

10.
Suitability of advice

10.1. The fact that a customer is eligible to receive a communication promoting an

unregulated scheme under one or more exemptions does not mean that the unregulated

scheme will be automatically suitable for that customer.

10.2. Principle 9 of the FSA’s Principles for Businesses states 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.

In force until 31 October 2007

10.3. COB 5.2.5R requires that before a firm gives a personal recommendation concerning a

designated investment to a private customer, it must take reasonable steps to ensure

that it is in possession of sufficient personal and financial information about that

customer relevant to the services that the firm has agreed to provide; and

10.4. COB 5.4.3R requires that a firm must not, amongst other things, make a personal

recommendation of a transaction to a private customer unless it has taken reasonable

steps to ensure that the private customer understands the nature of the risks involved.

In force from 1 November 2007

10.5. COBS 9.2.2R provides that:

(1)
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:

(a)
meets his investment objectives;

(b)
is such that he is able financially to bear any related investment risks

consistent with his investment objectives; and

(c)
is such that he has the necessary experience and knowledge in order to

understand the risks involved in the transaction or in the management

of his portfolio.

(2)
The information regarding the investment objectives of a customer must

include, where relevant, information on the length of time for which he wishes

to hold the investment, his preferences regarding risk taking, his risk profile,

and the purposes of the investment.

(3)
The information regarding the financial situation of a customer must include,

where relevant, information on the source and extent of his regular income, his

assets, including liquid assets, investments and real property, and his regular

financial commitments.

10.6. 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.