FIRST SUPERVISORY NOTICE

ACTION

1.1
For the reasons given in this Notice, and pursuant to section 55L of the Act, the
Authority has decided to impose the requirements set out below on Organic.

Cease regulated activities


1) From 5pm on 7 December 2018, Organic (whether directly or through its

agents) must not, without the prior written consent of the Authority, carry on
the following regulated activities:

a) advising on investments (including pension transfer and pension opt outs);

b) advising on P2P agreements;

c) arranging (bringing about) deals in investments;

d) arranging safeguarding and administration of assets;

e) dealing in investments as agent;

f) making arrangements with a view to transactions in investments;

g) managing investments; and

h) agreeing to carry on any of the regulated activities listed in a) to g) above.

Notification requirements


2) By 5pm on 12 December 2018, Organic must notify in writing all its Clients

that it is not able to carry on any regulated activities, including managing
investments, without the written consent of the Authority.


3) By 5pm on 12 December 2018, Organic must notify in writing all financial

advisers which it knows or believes act as agents for its Clients that it is not
able to carry on any regulated activities, including managing investments,
without the written consent of the Authority.


4) By 5pm on 12 December 2018, Organic must notify in writing all platforms

which it uses to manage or trade assets that it is not able to carry on any
regulated activities, including managing investments, without the written
consent of the Authority.


5) By 5pm on 12 December 2018, Organic must notify the custodians of all

assets managed by Organic that it is not able to carry on any regulated
activities, including managing investments, without the written consent of the
Authority.

6) By 5pm on 12 December 2018, Organic must notify the Fund Manager that it

is not able to carry on any regulated activities, including managing
investments, without the written consent of the Authority.


7) As soon as practicable, and in advance of making the notifications referred to

in paragraphs 2), 3), 4), 5) and 6) above (together “the Notifications”),
Organic must agree the wording of the Notifications above with the Authority.


8) Once the Notifications have been made, Organic must provide to the

a) copies of the template notification sent to all Clients, financial advisers,

platforms, custodians and the fund manager;


b) a list of all parties to whom Notifications have been sent; and

c) confirmation that, to the best of its knowledge, Organic has sent the

Notifications to all relevant parties.

9) By 5pm on 12 December 2018, Organic must publish a notice on the front

page of its website, in terms, font and size to be agreed with the Authority,
stating that it is not able to carry on any regulated activities, including
managing investments, without the written consent of the Authority and
providing a link to the relevant website address of the entry in the Authority’s
register relating to Organic where the terms of these requirements will
appear.


Secure records

10) With immediate effect, Organic must secure all books and records and

preserve information and systems relating to regulated activities carried on
by it, and must retain these in a form, and at a location, to be notified to the

Authority in writing no later than 5pm on 14 December 2018, such that they
can be provided to the Authority, or to a person named by the Authority,
promptly on its request.


Assets requirement


11) Organic must not, without the prior written consent of the Authority, in any

way dispose of, deal with or diminish the value of any of its assets other than
in the ordinary and proper course of business. For the avoidance of doubt, the
following would not be in the ordinary and proper course of business for these
purposes:

a) the making of any capital distribution;

b) the payment of unusual or significant amounts to its shareholders,

employees, officers or directors or any persons connected thereto;


c) the making of any gift or any significant loan to any party; and

d) the entry into any financial reconstruction or reorganisation.

12) For the avoidance of doubt:

a) paragraph 11) above is an assets requirement within the meaning of

section 55P(4)(a) of the Act; and

b) as of 5pm on 7 December 2018, the requirements in paragraphs 1) and

11) above replace and supersede those previously imposed on Organic and
published on the Authority’s register on 20 July 2017. Until 5pm on 7
December 2018, the requirements imposed on Organic on 20 July 2017
remain in force.

REASONS FOR ACTION

2.1
Organic is a regulated investment management firm. It manages investments of
clients, principally those with SIPPS, using five model portfolios. It also manages
two UCITS funds, domiciled in Ireland. Each of the Model Portfolios invests in the
Funds.

2.2
Since December 2016, Organic has received numerous warnings from the
Compliance Consultant’s Report, from the Skilled Person and from the Authority
that its governance and compliance oversight arrangements were inadequate and
that the management of its DFM services risked causing consumer detriment. In
particular, the exposure of the Model Portfolios to illiquid, potentially high-risk,
assets was identified as a particular concern.

2.3
Despite providing assurances that it would address these problems, Organic has
failed to do so in a timely fashion. It is now managed by a single senior executive
manager, its compliance oversight resources are inadequate to oversee its business
and it has failed to take necessary steps to review the suitability of its Model

Portfolios for the customers who have invested into them and to take any
necessary steps to rebalance the allocation of assets.

2.4
On 14 November 2018, the Funds were suspended on the basis that certain assets
within them could not be accurately valued. Because each of the Model Portfolios
invests in the Funds, this impacts upon the Model Portfolios. Although the Funds
remain suspended, the Authority has been informed by Organic that this
suspension may be lifted shortly.

2.5
The Authority considers that Organic is not currently meeting the threshold
condition which requires authorised firms to have appropriate resources in relation
to the regulated activities which it carries on and that allowing it to continue to
carry on regulated activities in these circumstances may be detrimental to
consumers. In particular, the Authority considers that Organic’s management of the
Funds presents significant risks of consumer detriment in the event that the
suspension of the Funds is lifted. The effect of customers redeeming their
investments in the Funds would be to increase the exposure of those remaining
customers to illiquid, and potentially high risk, assets. This serves to increase the
risks to these customers of their investments failing to perform as anticipated and
may lead to significant consumer detriment if these assets fail to make the
anticipated returns or if they are unable to be sold readily.

2.6
Accordingly, the Authority considers it necessary to impose the Requirements on
Organic’s Part 4A Permission to prevent it from carrying on regulated activities until
it is able to satisfy the Authority that it complies with the Threshold Conditions.

DEFINITIONS

3.1
The definitions below are used in this Supervisory Notice.

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

“the Authority” means the Financial Conduct Authority;

“the Authority’s Handbook” means the Authority’s Handbook of rules and guidance;

“the Authority’s register” means the Financial Services Register, published at
https://register.fca.org.uk/;

“CF10” means the compliance oversight function, as defined in SUP 10A.7.8R of the
Authority’s Handbook;

“CF11” means the money laundering reporting function, as defined in SUP
10A.7.10R of the Authority’s Handbook;

“Clients” means the natural persons or other clients named in Organic’s records as
the underlying investors for whom it manages investments and also includes any
entity (such as trustees for SIPPs) holding, managing or administering assets on
behalf of such investors;

“the Compliance Consultant’s Report” means the report on Organic’s regulatory
risks produced by a third party consultant in December 2016;

“COND” means the part of the Authority’s Handbook entitled “Threshold
Conditions”;

“DFM” means discretionary fund management;

“the Funds” means the Organic Bond Fund and the Organic Long/Short Alpha Fund,
sub-funds of the Multi-Manager UCITS Platform Fund Plc, a fund domiciled in
Ireland;

“the Fund Manager” means the authorised fund manager of the Funds;

“MiFID Org Regulation” means Commission Delegated Regulation (EU) 2017/565 of
25 April 2016, a directly applicable EU regulation regarding the organisational
requirements and operating conditions for investment firms;

“the Model Portfolios” means the five model portfolios designed and managed by
Organic;

“NED” means non-executive director;

“the Notifications” means as set out in paragraph 1.1 7);

“Organic” means Organic Investment Management Limited;

“Part 4A Permission” means the permission granted to Organic, pursuant to Part 4A
of the Act, to carry on regulated activities;

“the Requirements” means the requirements imposed on Organic as a result of this
First Supervisory Notice, as outlined in paragraph 1.1 above;

“the RPPD” means the Authority’s Handbook guidance entitled the Responsibilities
of Providers and Distributors for the Fair Treatment of Customers – first published
in July 2007;

“SIPPs” means self-invested personal pensions;

“the Skilled Person” means the skilled person, appointed pursuant to section 166 of
the Act in April 2018 to review and assess Organic’s governance, controls,
compliance oversight and DFM service;

“SYSC” means the part of the Authority’s Handbook entitled “Senior Management
Arrangements, Systems and Controls”;

“Threshold Conditions” mean the threshold conditions set out in Part 1B of
Schedule 6 to the Act;

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

“UCITS” means undertakings for collective investment in transferable securities
that are established in accordance with the UCITS Directive; and

“the UCITS Directive” means the EU Directive on the coordination of laws,
regulations and administrative provisions relating to undertakings for collective
investment in transferable securities (2009/65/EC).

FACTS AND MATTERS

Background

4.1
Organic is a discretionary investment management firm which has been directly
regulated by the Authority since 4 January 2016. It has a Part 4A Permission to
carry out a range of regulated investment activities. Since becoming regulated, and
until 23 August 2018, Organic was managed by two executive directors.

4.2
Organic’s business involves managing clients’ investments using five Model
Portfolios, designed to provide exposure to varying levels of risk (described as
‘Defensive’, ‘Moderate’, ‘Balanced’, ‘Progressive’ and ‘Aggressive’) and two
discretionary portfolios.

4.3
Investors in the Model Portfolios were introduced to Organic by independent
financial advisers. The overwhelming majority of the investments managed by
Organic are held in SIPPs. This means that they represent clients’ pension savings.
Organic has approximately £70 million of assets under management.

4.4
Organic also acts as investment manager for the Funds (two UCITS funds domiciled
in Ireland, under an agreement with the Fund Manager which delegated
management powers to Organic). In exercising its discretion to manage the Model
Portfolios, Organic invested significant proportions of each of the Model Portfolios in
the Funds.

4.5
As investment manager of the Funds, Organic invested significant proportions of
the Funds in unrated or other financial instruments rated as lower than investment
grade. This meant that investors in the Model Portfolios, regardless of their stated
attitude to risk, were exposed to these instruments.

4.6
The Authority has held concerns for some years about the investment of pension
assets into unregulated, non-mainstream financial investments. Such investments
may be illiquid, their value may be difficult to ascertain and the prospect of
achieving the promised returns may be uncertain. In April 2014, the Authority
issued an alert which outlined the Authority’s view that “pension transfers or
switches to SIPPS intended to hold non-mainstream propositions are unlikely to be
suitable options for the majority of retail customers”.

4.7
Organic does not provide advice to clients as to the suitability of its products.
However, since publication of the RPPD, the Authority has made clear that it
considers that a product provider, such as Organic, has responsibilities to identify
its target market, including for which customers its products may or may not be
suitable, to stress test its products to ascertain how they are likely to perform in a
range of market conditions, to have in place systems and controls to manage the
risks which may be caused and to review products periodically to check whether
they are continuing to meet the needs of the target audience.

Control failures

4.8
In December 2016, Organic received the Compliance Consultant’s Report. This
identified significant weaknesses in Organic’s governance processes, including
concerns over whether the business of the firm was appropriately overseen by two
independent minds, concerns over the identification and management of conflicts of
interest and concerns over the firm’s understanding of the risk ratings of the Model
Portfolios. It also highlighted questions over the allocation of assets within the

Model Portfolios which were considered to create “a potential risk of client
detriment”. 24 items were identified as of important and serious compliance
concern, needing to be addressed immediately.

4.9
On 22 June 2017, the Authority met with Organic and on 30 June 2017 it visited
Organic. By the time of the visit, Organic had failed to address the issues identified
in the Compliance Consultant’s Report. The Authority identified serious concerns
with Organic’s ability to comply with regulatory requirements, including the
adequacy of its governance and compliance oversight arrangements, its
management of conflicts of interest and its awareness and understanding of its
responsibilities as a product provider, including the design, management and
suitability of the Model Portfolios. In particular, it was noted that the Model
Portfolio described as ‘Defensive’, invested significant proportions of the total funds
under management in unrated or other potentially high risk investments. As a
result, on 20 July 2017, Organic agreed to the imposition of requirements on its
Part 4A Permission, including ceasing to manage investments in respect of new
money. The Authority provided Organic with a detailed feedback letter, outlining its
findings, on 26 October 2017.

4.10 After the Authority’s visit, Organic provided the Authority with a number of

proposed actions to address the identified concerns, including the management of
conflicts of interest in relation to its senior management, the appointment of
further executive directors and NEDs and the reduction of the exposure of the
Model Portfolios to assets which Organic accepted to be illiquid.

4.11 On 27 April 2018, the Authority issued Organic with a requirement to appoint a

skilled person to review and assess the adequacy and effectiveness of its
governance, control, compliance oversight and DFM service. The Skilled Person
reported on 27 July 2018. Although it found that Organic had taken some steps to
address the areas of concern identified by the Authority, it considered that the
changes were either in their infancy, required further embedding work or needed to
be re-prioritised. In particular, the Skilled Person considered that the board of
directors needed strengthening, the compliance function was inadequately
resourced, conflicts of interest were not appropriately identified or documented,
due diligence processes needed improvements and the investment objectives of the
Model Portfolios should be revisited. The Skilled Person recommended that Organic
should design a process to assess the suitability of the Model Portfolios. The Skilled
Person noted that there had not been significant changes to the composition or
allocation of assets within the Model Portfolios.

Governance and non-financial resources

4.12 Despite its asserted intentions to appoint further directors to oversee its business,

Organic has failed to appoint any further directors. On 23 August 2018, one of its
two executive directors tendered his resignation as a director. This was formalised
on 11 September 2018. Since then, Organic has operated with only one director
and board member.

4.13 On 20 April 2018, Organic appointed an individual to carry out the CF10

(compliance oversight) and CF11 (money laundering reporting) controlled
functions. While this was a positive development, both the Authority and Organic
recognised at the time of the appointment that the individual lacked specific
experience of the asset management sector and would benefit from development of
knowledge of this sector.

4.14 In July 2018, the only other employee devoted to compliance at Organic resigned.

No replacement has been appointed: instead, Organic has engaged external
compliance consultants to provide support. This has impacted on the ability of the
compliance officer to perform her functions and to carry out necessary remedial
work.

4.15 The director who resigned was also the portfolio manager for the Model Portfolios

and the investment manager for the Funds. Since his resignation, Organic has
relied upon an assistant investment manager pending the appointment of a
replacement.

4.16 Since July 2018, Organic has lost six of its staff including one assistant portfolio

manager. It is now staffed by six people.

Composition of the Model Portfolios

4.17 Following the Authority’s visit, Organic accepted that the Model Portfolios’ exposure

to liquidity risk was of concern and outlined a plan to reduce the exposure of the
Model Portfolios to illiquid assets. This was to be done by a combination of reducing
the exposure of the Funds to illiquid assets and by reducing the proportion of the
Model Portfolios invested in the Funds. Despite this, the proportions of some of the
Model Portfolios, including those described as “Defensive” and “Moderate”, invested
in the Funds rose between July 2017 and November 2018. While the proportion of
assets considered to be illiquid in the Funds fell slightly (by approximately 7.7% of
the original total), overall the proportion of illiquid assets in the Model Portfolios
rose.

4.18 Organic’s failure to address the exposure of the Funds to illiquid assets presented

increasing risks to the Clients. In October 2018, requests from Clients to redeem
their holdings in the Model Portfolios rose sharply. Organic’s methodology for
redeeming the proportions of the Model Portfolios invested in the Funds was to use
the cash reserves of the Funds, while liquidating the more liquid assets where
necessary. This presented the risk that the assets in the Funds, units of which were
held by the remaining Clients, consisted of proportionately higher illiquid assets,
meaning that future requests for redemptions might be difficult or impossible to
satisfy. The Clients who did not redeem their investments were increasingly
exposed to the illiquid assets. This is colloquially known as ‘first mover advantage’.

4.19 On 14 November 2018, the Fund Manager decided to suspend the issue, valuation,

sale, purchase, redemption and conversion of shares in respect of the Funds on the
basis that it did not consider that it could promptly or accurately ascertain the
value of certain of the investments in the Funds. The Funds currently remain
suspended, meaning that Clients are unable to redeem their investments in the
Funds but Organic has informed the Authority that it expects the suspension to be
lifted shortly.

4.20 The Authority has repeatedly asked Organic to address the risks it considers are

presented to its Clients. Organic has proposed that it continue to manage the
investments within the Model Portfolios and continue to act as investment manager
for the Funds pending the transfer of its business to an identified third party.

4.21 The Authority does not consider that this is a feasible solution given Organic’s

repeated and ongoing failure to implement a strategy to manage the Model
Portfolios appropriately, its lack of non-financial resources and the fact that the

identified third party currently lacks the necessary regulatory permissions to take
on most of Organic’s business.

4.22 Implementing a robust governance structure with sufficient and appropriate

executive managers and NEDs is crucial to maintaining appropriate business
controls. Organic has been alerted to significant deficiencies in its control systems
on numerous occasions since December 2016 but has failed to take adequate steps
to remediate these concerns.

4.23 In particular, Organic has failed to put in place adequate oversight of its business

at board level and is currently operating with a single director. Despite repeated
assurances of its intentions to bolster its governance at board level, Organic has
failed to do so.

4.24 In addition, Organic’s compliance oversight is inadequate to manage the business

of the firm, particularly given the need for significant remediation action. This is
demonstrated by its reliance on external compliance support which has detracted
from the ability of the compliance officer to perform her necessary functions.

4.25 The Authority considers that Organic maintains insufficient expertise in managing

its Model Portfolios. This is demonstrated by a failure to comply with its own
assurances to review and rebalance the exposure of the Model Portfolios to assets
considered to be illiquid and to assess the suitability of the Model Portfolios for its
customers.

4.26 These failures have been exacerbated by the loss of staff at Organic and the risks

of consumer detriment have been significantly increased by requests from Clients
for redemption of their investments. Organic has failed to implement any effective
strategy for managing the risks that this presents.

4.27 Although the risks of first mover advantage are currently alleviated by the

suspension of the Funds, the Authority fears that if this suspension is lifted, there
will be immediate risks of consumer detriment presented by Organic’s methodology
for completing redemptions and its failure to implement any effective strategy to
mitigate the risks of first mover advantage.

4.28 Since Organic has informed the Authority that the suspension of the Funds may be

lifted shortly, the Authority considers that urgent action is necessary to prevent
these risks from crystallising and to protect investors in the Model Portfolios.

FAILINGS

5.1
The regulatory provisions relevant to this First Supervisory Notice are set out in
Annex A.

Failure to satisfy the threshold conditions

5.2
From the facts and matters described above, the Authority has concluded that
Organic is failing to satisfy the Threshold Conditions in that it appears not to have
appropriate non-financial resources in relation to the regulated activities which it
carries on. In particular:

a. it currently has a single senior executive managing its affairs and is not

meeting the requirement imposed by SYSC 4.2.2R;

b. its governance arrangements are inadequate for the business it is

conducting and it is not meeting the requirement imposed by SYSC
4.1.1R;

c. it has insufficient compliance oversight resources to oversee its business

and is not meeting the requirements imposed by SYSC 6.1.1R and by
article 22(3) of the MiFID Org Regulation;

d. it has insufficient expertise in investment management to manage the

Model Portfolios appropriately and it is not meeting the requirement
imposed by SYSC 4.1.2CR.

Risk to the Authority’s operational objective of consumer protection

5.3
The Authority’s objective of consumer protection requires the Authority to ensure
an appropriate degree of protection for consumers. In light of the facts and matters
above, the Authority considers that there are ongoing risks presented to consumers
from Organic’s failure to manage its Clients’ investments appropriately. In
particular, the Authority considers that if Organic continues to act as investment
manager of the Funds after the suspension of the Funds is lifted, this may lead to
immediate consumer detriment as a result of continuing Client redemptions and
the consequent risk of first mover advantage.

5.4
In the absence of any feasible strategy by Organic to address these risks, the
Authority considers that preventing Organic from carrying on any regulated
activities (without the prior written consent of the Authority) is the most effective
way of mitigating such risks. The possibly imminent lifting of the suspension means
that the Authority considers it necessary to impose the requirements on an urgent
basis.

5.5
In addition, the Authority considers it necessary to ensure that Organic’s Clients
and associated parties are notified of the terms and effects of the Requirements, to
enable them to make such alternative arrangements as they consider appropriate.

5.6
The assets restriction is a continuation of the requirement originally imposed on 20
July 2017. The Authority considers that a continuation of this requirement is
justified in order to ensure, as far as possible, that Organic’s corporate assets are
retained for the purposes of satisfying any potential redress payments which may
arise as a result of losses incurred by Clients.

PROCEDURAL MATTERS

6.1
This First Supervisory Notice is given under section 55Y(4) and in accordance with
section 55Y(5) of the Act and is being served on Organic at its place of business as
last notified to the Authority.

Decision maker

6.2
The decision which gave rise to the obligation to give this First Supervisory Notice
was made by a Deputy Chair of the Regulatory Decisions Committee.

Representations

6.3
Organic has the right to make written and oral representations to the Authority
(whether or not it refers this matter to the Tribunal).

6.4
Any written representations must be made by 20 December 2018 or such later
date as may be permitted by the Authority. Written representations should be
made to the Regulatory Decisions Committee and sent to:

Jack Williams
Decision-Making Committees Secretariat
The Financial Conduct Authority
12 Endeavour Square
London
E20 1JN

6.5
The Authority must be informed in writing of any intention to make oral
representations by 20 December 2018. If the Authority is not notified by this
date, Organic will not, other than in exceptional circumstances, be able to make
oral representations.

The Tribunal

6.6
Organic has the right to refer the matter to which this First Supervisory Notice
relates to the Tribunal. The Tax and Chancery Chamber is the part of the Tribunal
which amongst other things, hears references arising from decisions of the
Authority. Under paragraph 2(2) of Schedule 3 of the Tribunal Procedure (Upper
Tribunal) Rules 2008, Organic has 28 days from the date on which this First
Supervisory Notice is given to it to refer the matter to the Tribunal.

6.7
A reference to the Tribunal can be made by way of a reference notice (Form FTC3)
signed by or on behalf of Organic and filed with a copy of this First Supervisory
Notice. The Tribunal’s contact details are: The Upper Tribunal, Tax and Chancery
Chamber, Fifth Floor, Rolls Building, Fetter Lane, London, EC4A 1NL (telephone:
020 7612 9730; email: uttc@hmcts.gsi.gov.uk).

6.8
For further information on the Tribunal (including the power to vary time periods)
Organic should refer to the HM Courts and Tribunal Service website which will
provide guidance and the relevant form to complete. The relevant page on HM
Courts and Tribunal Service website can be accessed via the following link:

6.9
Organic should note that a copy of the reference notice (Form FTC3) must also be
sent to the Authority at the same time as filing a reference with the Tribunal. A
copy of the reference notice should be sent to Anna Couzens at the Financial
Conduct Authority, 12, Endeavour Square, London E20 1JN.

Access to Evidence

6.10 Section 394 of the Act does not apply to this First Supervisory Notice.

Confidentiality and Publicity

6.11 Organic should note that this First Supervisory Notice may contain confidential

information and should not be disclosed to a third party (except for the purpose of
obtaining advice on its contents).

6.12 Organic should note that section 391 of the Act requires the Authority, when the

First Supervisory Notice takes effect, to publish such information about the matter
as it considers appropriate.

Authority contacts

6.13 For more information concerning this matter generally, contact Anna Couzens,

Enforcement and Market Oversight Division at the Authority (direct line: 020 066
1452 or email: anna.couzens@fca.org.uk).

6.14 Any questions regarding the procedures of the Regulatory Decisions Committee

should be directed to Jack Williams of the RDC Secretariat (direct line: 020 7066
1610 or email: jack.williams@fca.org.uk).

Tim Parkes
Chair, Regulatory Decisions Committee

On behalf of Peter Hinchliffe
Deputy Chair, Regulatory Decisions Committee

ANNEX A

RELEVANT STATUTORY PROVISIONS

1. The Authority’s operational objectives established in section 1B of the Act include

securing an appropriate degree of protection for consumers (section 1C. The
integrity of the UK financial system includes its not being used for a purpose
connected with financial crime.

2. Section 55L of the Act allows the Authority to impose a new requirement, or to

vary a requirement previously imposed by the Authority under section 55L, on an
authorised person if it appears to the Authority that the authorised person is
failing, or is likely to fail, to satisfy the Threshold Conditions (section 55L(2)(a))
or it is desirable to exercise the power in order to advance one or more of the
Authority’s operational objectives (section 55L(2)(c)). This power is referred to as
the Authority’s own-initiative requirement power.

3. Section 55N of the Act allows a requirement to be imposed under section 55L of

the Act so as to require the person concerned to take specified action (section
55N(1)(a)) or to refrain from taking specified action (section 55N(1)(b)). Section
55N(2) provides that a requirement may extend to activities which are not
regulated activities.

4. Pursuant to 55P(4)(a) of the Act, an assets requirement means a requirement

prohibiting the disposal of, or other dealing with, any of the subject’s assets
(whether in the United Kingdom or elsewhere) or restricting such disposals or
dealings. If the Authority gives notice of such a requirement to any institution
with whom the subject has an account, the notice has the effects, for that
institution, set out in section 55P(6) of the Act. Those effects are that—

(a) the institution does not act in breach of any contract with A if, having been

instructed by the subject (or on the subject's behalf) to transfer any sum or
otherwise make any payment out of the subject's account, it refuses to do so
in the reasonably held belief that complying with the instruction would be
incompatible with the requirement, and

(b) if the institution complies with such an instruction, it is liable to pay to the

Authority an amount equal to the amount transferred from, or otherwise paid
out of, the subject's account in contravention of the requirement.

5. Section 55Y of the Act allows a requirement imposed under the own-initiative

requirement power to take effect immediately (or on a specified date) only if the
Authority, having regard to the ground on which it is exercising its own-initiative
requirement power, reasonably considers that it is necessary for the variation or
imposition of the requirement to take effect immediately (or on that date).

6. Section 391 of the Act provides that, when a supervisory notice takes effect, the

Authority must publish such information about the matter to which the notice
relates as it considers appropriate. However, the Authority may not publish
information if, in its opinion, publication of the information would be unfair to the
person with respect to whom the action was taken or proposed to be taken or
prejudicial to the interests of consumers.

7. The Threshold Conditions represent the minimum standards which a firm is

required to satisfy, and continue to satisfy, in order to be given and to retain a

permission to carry on regulated activities. They are set out in Part 1B of
Schedule 6 to the Act. Paragraph 2D of Schedule 6 to the Act states that:

“(1) The resources of A must be appropriate in relation to the regulated activities

that A carries on or seeks to carry on.

(2) The matters which are relevant in determining whether A has appropriate

resources include -

(a) the nature and scale of the business carried on, or to be carried on, by

A;

(b) the risks to the continuity of the services provided by, or to be provided

by, A; and

(c) A’s membership of a group and any effect which that membership may

have.”

(4) The matters which are relevant in determining whether A has appropriate

non-financial resources include-

(a) the skills and experience of those who manage A’s affairs;

(b) whether A’s non-financial resources are sufficient to enable A to comply

with-

(i) requirements imposed or likely to be imposed on A by [the

Authority] in the exercise of its functions, or

(ii) any other requirement in relation to whose contravention [the

Authority] would be the appropriate regulator for the purposes of
[disciplinary powers imposed under the Act].

8. For the purposes of Schedule 6 of the Act, “non-financial resources” of a person

include any systems, controls, plans or policies that the person maintains, any
information that the person holds and the human resources that the person has
available (paragraph 1A(2) of Schedule 6 to the Act).

RELEVANT REGULATORY PROVISIONS

9. The part of the Handbook entitled “Threshold Conditions” (COND) gives guidance

on the threshold conditions. COND 1.2.3G provides that the Authority may
exercise its own-initiative powers under section 55L of the Act if, among other
things, a firm is failing to satisfy any of the Threshold Conditions.

10. COND 2.4.2G(2) provides that, in the context of the Threshold Condition in

paragraph 2D of Schedule 6 to the Act, the Authority will interpret the term
‘appropriate’ as meaning sufficient in terms of quantity, quality and availability
and ‘resources’ as including all financial resources, non-financial resources and
means of managing its resources; for example, capital, provisions against
liabilities, holdings of or access to cash and other liquid assets, human resources
and effective means by which to manage risks.

11. COND 2.4.2G(3) provides that the Authority will consider whether the firm is

ready, willing and organised to comply with the high level systems and control
requirements in SYSC and other systems and control requirements when
assessing if it has appropriate non-financial resources.

12. COND 2.4.4G(2) provides that relevant matters to which the Authority may have

regard when assessing whether a firm will satisfy, and continue to satisfy, this
threshold condition include whether there are any indications that the firm will
not be able to meet its debts as they fall due, whether the firm has taken
reasonable steps to identify and measure any risks of regulatory concern that it
may encounter in conducting its business and has installed appropriate systems
and controls and appointed appropriate human resources to measure them
prudently at all times and whether the resources of the firm are commensurate
with the likely risks its will face.

13. By SYSC 4.1.1R, a common platform firm such as Organic must have robust

governance arrangements, which include a clear organisational structure with well
defined, transparent and consistent lines of responsibility, effective processes to
identify, manage, monitor and report the risks it is or might be exposed to, and
internal control mechanisms, including sound administrative and accounting
procedures and effective control and safeguarding arrangements for information
processing systems.

14. By SYSC 4.1.2CR, a management company such as Organic must have, and

employ effectively, the resources and procedures that are necessary for the
proper performance of its business activities.

15. By SYSC 4.2.1R, the senior personnel of a common platform firm must be of

sufficiently good repute and sufficiently experienced as to ensure the sound and
prudent management of the firm.

16. By SYSC 4.2.2R, a common platform firm must ensure that its management is

undertaken by at least two persons meeting the requirements laid down in SYSC
4.2.1R. SYSC 4.2.3G provides that, in the case of a body corporate, these should
either be executive directors or persons granted executive powers by, and
reporting immediately to, the governing body.

17. SYSC 4.2.4G provides that at least two independent minds should be applied to

the formulation and implementation of the policies of a common platform firm.
Each should play a part in the decision-making process on all significant
decisions. Both should demonstrate the qualities and application to influence
strategy, day-to-day policy and its implementation.

18. SYSC 4.3A.3R provides that a common platform firm must ensure that the

members of the management body of the firm:

(1) are of sufficiently good repute;

(2) possess sufficient knowledge, skills and experience to perform their duties;

(3) possess adequate collective knowledge, skills and experience to understand

the firm's activities, including the main risks;

(4) reflect an adequately broad range of experiences;

(5) commit sufficient time to perform their functions in the firm; and

(6) act with honesty, integrity and independence of mind to effectively assess

and challenge the decisions of senior management where necessary and to
effectively oversee and monitor management decision-making.

19. By SYSC 6.1.1R, a firm must establish, implement and maintain adequate policies

and procedures sufficient to ensure compliance of the firm including its managers,
employees and appointed representatives with its obligations under the
regulatory system and for countering the risk that the firm might be used to
further financial crime.

20. By article 21 of the MiFID Org Regulation, an investment firm must comply with

the following organisational requirements:

(a) establish, implement and maintain decision-making procedures and an

organisational structure which clearly and in documented manner specifies
reporting lines and allocates functions and responsibilities;

(b) ensure that their relevant persons are aware of the procedures which must be

followed for the proper discharge of their responsibilities;

(c) establish, implement and maintain adequate internal control mechanisms

designed to secure compliance with decisions and procedures at all levels of
the investment firm;

(d) employ personnel with the skills, knowledge and expertise necessary for the

discharge of the responsibilities allocated to them;

(e) establish,
implement
and
maintain
effective
internal
reporting
and

communication of information at all relevant levels of the investment firm;

(f) maintain adequate and orderly records of their business and internal

organisation;

(g) ensure that the performance of multiple functions by their relevant persons

does not and is not likely to prevent those persons from discharging any
particular function soundly, honestly, and professionally.

21. By article 22(2) of the MiFID Org Regulation, an investment firm is required to

establish and maintain a permanent and effective compliance function which
operates independently. By article 22(3), the compliance function must have the
necessary authority, resources, expertise and access to all relevant information, a
compliance officer must be appointed and be responsible for the compliance
function and for any reporting as to compliance in respect of certain provisions
and the relevant persons involved in the compliance function must not be
involved in the performance of the services or activities they monitor.

22. By article 23 of the MiFID Org Regulation, an investment firm must take the

following actions relating to risk management:

(a) establish, implement and maintain adequate risk management policies and

procedures which identify the risks relating to the firm's activities, processes
and systems, and where appropriate, set the level of risk tolerated by the
firm;

(b) adopt effective arrangements, processes and mechanisms to manage the

risks relating to the firm's activities, processes and systems, in light of that
level of risk tolerance;

(c) monitor the following:

(i)
the adequacy and effectiveness of the investment firm's risk
management policies and procedures;

(ii)
the level of compliance by the investment firm and its relevant persons
with the arrangements, processes and mechanisms adopted in
accordance with point (b);

(iii) the adequacy and effectiveness of measures taken to address any

deficiencies in those policies, procedures, arrangements, processes and
mechanisms, including failures by the relevant persons to comply with
such arrangements, processes and mechanisms or follow such policies
and procedures.

23. The Authority's policy in relation to its own-initiative powers is set out in chapter

8 of the Enforcement Guide (EG), certain provisions of which are summarised
below.

24. EG 8.2.1 provides that the Authority will have regard to its statutory objectives

and the range of regulatory tools that are available to it, when it considers how it
should deal with a concern about a firm. It will also have regard to the
responsibilities of a firm’s management to deal with concerns about the firm or
about the way its business is being or has been run and the principle that a
restriction imposed on a firm should be proportionate to the objectives the
Authority is seeking to achieve.

25. EG 8.2.3 provides that the Authority will exercise its formal powers under section

55L of the Act, where the Authority considers it is appropriate, to ensure a firm
meets its regulatory requirements. EG 8.2.3(1) specifies that the Authority may
consider it appropriate to exercise its powers where it has serious concerns about
a firm or the way its business is being or has been conducted.

26. EG 8.2.6 gives examples of the circumstances in which the Authority will consider

varying a firm’s Part 4A permission because it has serious concerns about a firm,
or about the way its business is being or has been conducted. These include:

“(1) in relation to the grounds for exercising the power under… section
55L(2)(a) of the Act, the firm appears to be failing, or appears likely to fail,
to satisfy the threshold conditions relating to one or more, or all, of its
regulated activities, because for instance:

(b) the firm appears not to be a fit and proper person to carry on a
regulated activity because:

(iii) it has breached requirements imposed on it by or under the Act
(including the Principles and the rules), for example in respect of its

disclosure or notification requirements, and the breaches are material in
number or in individual seriousness;

27. EG 8.3.1 provides that the Authority may impose a requirement so that it takes

effect immediately or on a specified date if it reasonably considers it necessary for
the requirement to take effect immediately (or on the date specified), having
regard to the ground on which it is exercising its own-initiative powers.

28. EG 8.3.2 provides that the Authority will consider exercising its own-initiative

power as a matter of urgency where: (1) the information available to it indicates
serious concerns about the firm or its business that need to be addressed
immediately; and (2) circumstances indicate that it is appropriate to use statutory
powers immediately to require and/or prohibit certain actions by the firm in order
to ensure the firm addresses these concerns.

29. EG 8.3.3 provides some examples of likely characteristics of situations which may

give rise to such serious concerns. These include circumstances suggesting a
serious problem within a firm or with a firm’s controllers that calls into question
the firm’s ability to meet the threshold conditions.