FINAL NOTICE

To:
Martin Currie Investment Management Limited (“MCIML”)
and Martin Currie Inc (“MCI”)

FSA
Reference
Numbers:
119289 (MCIML) and 122023 (MCI)

Date:
2 May 2012

1.
ACTION

1.1.
For the reasons given in this Notice, the Financial Services Authority (“the FSA”)

hereby imposes a financial penalty of £3.5 million on MCIML and MCI (together,

“Martin Currie”) in respect of breaches of Principles 2, 3 and 8 of the FSA’s Principles

for Businesses and breaches of rules contained in the part of the FSA’s Handbook

relating to Senior Management Arrangements, Systems and Controls (“SYSC”)

Sourcebook and the Conduct of Business (“COB”) Sourcebook between January 2007

and November 2010 (the “Relevant Period”).

1.2.
Martin Currie agreed to settle at an early stage of the FSA's investigation and therefore

qualified for a 30% (Stage 1) discount under the FSA's executive settlement

procedures. Were it not for this discount, the FSA would have imposed a financial

penalty of £5 million.

2

2.
SUMMARY OF REASONS

2.1.
During the Relevant Period, Martin Currie breached Principles 2, 3 and 8 in relation to

its discretionary investment management of unlisted investments made on behalf of two

client funds (“Fund A” and “Fund B”). Fund A and Fund B both focused on the China

market, and were managed by the same fund managers based in Martin Currie’s

Shanghai office.

2.2.
In particular, Martin Currie:

(1)
failed to put in place effective systems and controls to manage the risks of

managing unlisted investments;

(2)
failed to conduct sufficient due diligence and credit risk analysis when investing

in three unlisted bond investments on behalf of Fund A and B;

(3)
incorrectly classified an unlisted bond investment (which was made in 2007) as

“cash” in: (a) its portfolio risk management system; and (b) as a consequence,

the majority of its monthly updates to Fund A’s investors. This gave an

inaccurate impression to investors about the Fund’s market exposure and the

liquidity and risk of its investments;

(4)
failed to put in place effective systems and controls for unlisted investments to

recognise promptly when a proposed unlisted investment might breach a client’s

investment restrictions;

(5)
entered into a transaction on behalf of Fund A in 2007 which breached the

fund’s investment restriction for unlisted investments and failed properly to

disclose that matter to its client; and

(6)
in relation to an unlisted bond investment completed in 2009, failed to manage

fairly a conflict of interest between Fund A and Fund B, and failed to disclose

that conflict to Fund B.

2.3.
The FSA acknowledges that some of the failings detailed in this Notice resulted from

actions of fund managers with full discretionary authority to manage Fund A and Fund

3

B. However, the FSA considers that the primary responsibility for ensuring compliance

with a firm’s regulatory obligations rests with the firm itself. Martin Currie failed to

put in place effective controls and supervision over the activities of these fund

managers in relation to unlisted investments. In particular, the unlisted bond investment

transactions as structured were not appropriately challenged by Martin Currie and

Martin Currie failed to act effectively when the fund manager recommendations risked

putting Martin Currie in breach of its regulatory obligations. This lack of effective

oversight contributed to many of the failings listed above.

2.4.
The FSA considers Martin Currie’s failings to be serious because:

(1)
they exposed Fund A to a potential financial loss, and exposed Fund B to an

actual financial loss of HK$64.3 million (equivalent to approximately £5.1

million)1, which was compensated by Martin Currie;

(2)
they revealed serious weaknesses in Martin Currie’s systems and controls in

respect of unlisted investments;

(3)
Martin Currie gave the fund managers responsible for Fund A and Fund B broad

powers to make unlisted investments without putting in place appropriate

checks and controls over their actions;

(4)
after discovering that a particular transaction might give rise to a conflict of

interest between Fund A and Fund B, Martin Currie failed to take appropriate

steps to manage that conflict fairly; and

(5)
Martin Currie failed to identify certain of the failings outlined in this Notice,

even though some were in breach of Martin Currie’s own policies.

2.5.
In mitigation of the seriousness of Martin Currie’s failings, the FSA recognises that

1 (applying an exchange rate of 1 HK$ = 0.079 GBP).

(1)
promptly agreed to indemnify Fund B and subsequently paid approximately

HK$64.3 million (around £5.1 million)2 to compensate Fund B in full for the

investment loss it suffered;

(2)
took steps to improve its processes for unlisted investments during the latter

part of the Relevant Period, and no longer permits unlisted bond investments;

(3)
spent considerable time and money investigating these issues (and has shared its

findings with the FSA) and took disciplinary action against certain individuals

and reallocated fund management responsibilities in its Shanghai office; and

(4)
made improvements to its governance structure and risk control processes, and

in particular: (a) created a new Board level position of General Counsel with

management responsibility for the Legal, Risk and Compliance teams; and (b)

ensured enhanced oversight and supervision of its Shanghai office.

2.6.
When exercising its powers, the FSA seeks to act in a way it considers most

appropriate for the purpose of meeting its statutory objectives, which are set out in

section 2(2) of the Act. Having considered the nature of the breaches outlined above,

the FSA considers that imposing a financial penalty of £3.5 million meets the statutory

objectives of market confidence and consumer protection.

3.
DEFINITIONS

3.1.
The definitions below are used in this Final Notice.

“2007 Bond” means the unlisted bond entered into by Fund A in 2007;

“2008 Bond” means the unlisted bond entered into by Fund A in 2008;

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

“COB Rules” means the rules in the Conduct of Business Sourcebook;

“Company Y” means a wholly owned subsidiary of Company X;

2 (applying an exchange rate of 1 HK$ = 0.079 GBP).

5

“Company Y Transaction” means the investment made by Fund B in Company Y in
April 2009;

“Edinburgh Office” means the office in Edinburgh where Martin Currie Investment
Management Limited and Martin Currie Inc’s Scottish branch are based;

“the FSA” means the Financial Services Authority;

“Fund A” means the investment fund managed by MCIML and referred to in this
Notice;

“Fund B” means the investment fund managed by MCI and referred to in this Notice;

“Martin Currie” means Martin Currie Inc and Martin Currie Investment Management
Limited;

“MCI” means Martin Currie Inc;

“MCIML” means Martin Currie Investment Management Limited;

“Principles” means the FSA’s Principles for Businesses;

“Relevant Period” means the period from January 2007 to November 2010; and

“SYSC Rules” means the rules set out in the Senior Management Arrangements,
Systems and Controls Sourcebook.

4.
FACTS AND MATTERS

4.1.
Both MCIML and MCI’s UK branch are investment management firms authorised by

the FSA and operate from the Edinburgh Office. All employees in that office are

employed by MCIML but some are also seconded to MCI under a “double hatting

arrangement” and so, in practice, the seconded individuals work for both MCI and

MCIML.

4.2.
MCI and MCIML are both wholly owned subsidiaries of Martin Currie Limited and

form part of the Martin Currie Group. The Martin Currie Group is a specialist

investment management business and, between 2007 and 2010, managed between

£11.3 billion and £15.7 billion in assets for clients including financial institutions,

charities, pension funds, government agencies and investment funds.

4.3
As at September 2010, around 35% of the Martin Currie Group’s assets under

6

management (by value) were made in the China market. The majority of these

investments were researched and managed by a specialist China-focussed team, led by

senior and experienced fund managers who worked for MCI and MCIML and were

based in Martin Currie’s Shanghai office.

4.4
Unlisted bonds and other forms of private equity investment were a small part of

Martin Currie’s business. As at September 2010, such investments accounted for

approximately 0.7% of the assets by value under Martin Currie’s management.

Fund A and Fund B

4.5
The facts giving rise to this Notice relate to Martin Currie’s management of three

unlisted bond investments which affected two funds, Fund A and Fund B, both of

which focused on investing in the China market.

4.6
MCIML was appointed to manage Fund A in 2002. Fund A focused on listed equity

investments but permitted investments in unlisted debt and equity securities up to a

maximum amount of 5% of the Fund’s Net Asset Value. Under the terms of Fund A’s

investment management agreement, MCIML was responsible for seeking out and

evaluating investment opportunities for Fund A, and determining which investments

should be acquired or disposed of. As at 30 September 2010 the total value of Fund

A’s investment portfolio was around US$122.3 million.

4.7
MCI was appointed to manage Fund B’s portfolio of unlisted investments in 2007

(MCI had been managing the fund’s portfolio of listed investments since 2001). During

the Relevant Period, Fund B’s investment objective was long-term capital appreciation

which it sought to achieve by investing primarily in equity securities of China

companies. Fund B also permitted up to 25% of its assets to be invested in unlisted

securities and, under the terms of Fund B’s unlisted investment management

agreement, MCI had discretion, subject to fund and regulatory investment restrictions,

to enter into and manage investments in unlisted securities on Fund B’s behalf. As at 30

September 2010 the value of Fund B’s assets under management was around US$799.8

million.

4.8
Although Fund A and Fund B were managed by separate Martin Currie Group

7

companies (MCIML and MCI) as noted above, both funds were managed by the same

fund managers who worked for MCI and MCIML and were based in Martin Currie’s

Shanghai office. All investment decisions in respect of Fund A and Fund B were

implemented by MCI and MCIML (the Funds’ appointed investment managers) from

the Edinburgh Office based on the research and recommendations of the fund

managers. Considerable reliance was placed on the experience and expertise in the

China market of the fund managers and there was a culture within Martin Currie to

seek to support the fund managers in what they wanted to do.

Systems and controls around unlisted investments

4.9
Martin Currie had very limited experience of unlisted bond investments and had only

begun managing such unlisted investments in China in 2006. Martin Currie’s

operations, processes, systems and controls were configured towards a listed equity

environment and Martin Currie was slow to amend its listed equity systems and

controls to cater for unlisted investments. During the Relevant Period, Martin Currie

allowed the fund managers largely unchallenged authority to select, negotiate the terms

of, and commit to, unlisted investments on behalf of certain clients but failed to put in

place an appropriate framework (such as an oversight committee) to provide central

oversight of this unlisted investment activity.

4.10
In June 2007 and October 2008, on behalf of Fund A, MCIML entered into two

unlisted bond investments in a Chinese company, referred to in this Notice as Company

X (the “2007 Bond” and the “2008 Bond”). Fund A invested HK$78 million (around

£5 million)3 in respect of the 2007 Bond, and HK$31.2 million (around £2.37 million)4

in respect of the 2008 Bond. Fund A had invested in the listed equity of Company X

since late January 2003.

3 (applying an exchange rate of 1 HK$ = 0.064 GBP).
4 (applying an exchange rate of 1 HK$ = 0.076 GBP).

4.11
In April 2009, on behalf of Fund B, MCI entered into a transaction under which Fund

B invested in an unlisted bond issued by Company Y, a wholly owned subsidiary of

Company X. Fund B invested HK$177 million (around £15 million)5.

4.12
The deficiencies in Martin Currie’s systems and controls around unlisted investments

contributed to the following specific issues in relation to the 2007 Bond, the 2008 Bond

and the Company Y Transaction:

(1)
Prior to entering into the 2007 Bond and the 2008 Bond, Martin Currie did not

ensure that sufficient detailed due diligence and assessment of the credit risk

associated with those investments were conducted.

(2)
After providing investors with an accurate report about the transaction in its

first monthly update to investors in June 2007, Martin Currie subsequently

incorrectly classified the 2007 Bond as “cash” in its own portfolio risk

management system and, in consequence, in monthly updates sent to investors

in the period from September 2007 to November 2008. The classification as

“cash” understated to investors Fund A’s exposure to Company X and so its

market exposure and overstated its liquidity. Furthermore, the misclassification

understated the risk of the 2007 Bond to investors. Martin Currie did not rectify

this misclassification for over a year, and this reduced the visibility of the

liquidity issues in Fund A which arose towards the end of 2008 as a result of the

global financial crisis (see paragraph 4.13 below).

(3)
Martin Currie entered into the 2007 Bond transaction on behalf of Fund A even

though the size of the proposed investment exceeded the Fund’s limit for

unlisted investments. Fund A’s investment restrictions only allowed for up to

5% of the Fund’s net asset value to be invested in “unlisted debt and equity

securities”, but at the time of investment, the unlisted 2007 Bond represented

8.8% of the fund’s net asset value. The Edinburgh Office only became aware of

this issue after the 2007 Bond transaction had been substantially concluded.

5 (applying an exchange rate of 1 HK$ = 0.086 GBP).

Even once the Edinburgh Office was aware of this issue, Martin Currie did not

halt the transaction or disclose the potential breach to Fund A’s Board. Instead,

Martin Currie suggested to Fund A’s Board that the investment restriction was

ambiguous (which it was not), and sought approval for the deal on the basis that

the restriction be amended at the next Board meeting. Furthermore, Martin

Currie gave Fund A’s Board the impression that the deal was at an earlier stage

than it was. On the same day, one of the individuals involved in Edinburgh

raised serious concerns about this approach within Martin Currie.

(4)
At the time the Company Y Transaction was entered into, Martin Currie had

not: (a) ensured that the investment rationale behind the Company Y

Transaction had been scrutinised sufficiently; or crucially (b) sufficiently

challenged the fund manager decision not to revisit the valuation of the

Company Y Transaction made around nine months before the Company Y

Transaction was completed, despite Company Y’s deteriorating financial

performance and the ongoing global financial crisis.

Management of conflicts of interest

Fund A’s liquidity issues

4.13
Against the backdrop of the global financial crisis, towards the end of 2008, Fund A

experienced a significant volume of requests by investors to redeem their holdings. In

order to meet these redemption requests, Fund A needed to sell down the liquid portion

of its portfolio, which did not include the 2007 Bond or the 2008 Bond. It was

expected that once the redemptions had been processed, Fund A’s relative exposure to

Company X would increase to over 20% of Fund A’s net asset value. Such a high level

of exposure to a single entity was a matter of concern for Fund A’s Board and for

Martin Currie.

4.14
Fund A’s Board accordingly instructed Martin Currie to reduce the fund’s exposure to

Company X. In December 2008 Martin Currie set up a working group to consider

potential solutions to the liquidity and concentration issues. When considering these

issues, a number of individuals in the Edinburgh Office also raised concerns about the

investment rationale behind the 2007 Bond and the 2008 Bond and the suitability of

these investments for Fund A.

Fund B and the Company Y Transaction

4.15
In October 2008, Martin Currie reported to Fund B’s Board that it was working on a

transaction for Fund B to invest in Company Y. The papers for the Board stated that

the proceeds of the Company Y Transaction, which totalled HK$177 million (around

£15 million)6, would be used by Company Y for working capital purposes. It did not

explain to Fund B’s Board that an inherent component of the Company Y Transaction

was that 44% of the proceeds would be used by Company Y’s parent company,

Company X, to redeem the 2007 Bond held by Fund A. A consequence of the structure

of the Company Y Transaction was that it mitigated Fund A’s concentration and

liquidity issues thereby also mitigating any potential reputational damage to Martin

Currie that might arise if Fund A were to be unable to meet redemption notices.

4.16
Fund A therefore had a clear and material interest in the Company Y Transaction,

which was potentially in conflict with Fund B’s interests. Fund B bore the investment

risk of the Company Y Transaction, and in particular risked making a financial loss

given Martin Currie’s failings regarding its scrutiny and valuation of the Company Y

Transaction. Martin Currie failed to manage fairly the conflict of interest between Fund

A and Fund B, and failed to disclose appropriately that conflict to its client. The

potential disadvantage to Fund B was borne out as Martin Currie, on behalf of Fund B,

subsequently sold the investment for approximately HK$92 million, around half of the

amount originally invested. Martin Currie had earlier agreed to indemnify Fund B for

any loss on the investment and subsequently paid approximately HK$64.3 million

(around £5.1 million)7 to compensate Fund B in full for the investment loss it suffered.

4.17
Martin Currie only identified the conflict of interest and raised questions after the

Company Y Transaction had been in development for several months in Shanghai, and

had been discussed with Fund B’s Board. This is particularly concerning given that two

6 (applying an exchange rate of 1 HK$ = 0.086 GBP).
7 (applying an exchange rate of 1 HK$ = 0.079 GBP).

Martin Currie clients (Fund A and Fund B) were involved; a fact which should have

alerted Martin Currie to the potential conflict at a much earlier stage. This delay

resulted partly from the absence of a formal control framework (such as an investment

committee) around the fund manager development of the Company Y Transaction

which meant that there was no early “checkpoint” at which the transaction could be

examined for potential conflicts by the Edinburgh Office.

4.18
Once Martin Currie identified that the Company Y Transaction raised conflict issues, it

did not properly assess that conflict and did not consider with sufficient care whether

the Company Y Transaction should be abandoned. When Martin Currie reported its

intention to enter into the Company Y Transaction on behalf of Fund B, it did not

ensure that the conflict of interest was disclosed to Fund B’s Board. In particular,

Martin Currie did not ensure that the Fund B Board understood that 44% of the

proceeds of the Company Y Transaction would be used to redeem the 2007 Bond held

by Fund A. As a consequence, the conflict of interest between Fund A and Fund B was

not disclosed to Fund B’s Board, and Martin Currie did not obtain the Board’s

informed consent to continue with the Company Y Transaction.

4.19
These actions amounted to breaches of Martin Currie’s own conflict management

policies in force during the Relevant Period. Martin Currie’s conflict management

policies themselves recognised that the management of conflicts “is a key regulatory

principle and is of significant importance” and required that disclosure of conflicts

include “sufficient detail” and be made to clients in “a durable medium”.

Taking steps to remedy the issues

4.20
Although Martin Currie did take steps to address some of the problems around unlisted

investments identified in this Notice during the Relevant Period, it did not take

sufficient steps to analyse or address certain of the failings detailed in Section 5 below

until late 2010, over a year after entering into the Company Y Transaction, and, in

respect of the conflict of interest, only because Fund B had brought these issues to

Martin Currie’s attention.

4.21
Martin Currie has since conducted its own detailed investigation into the facts outlined

above and taken substantive steps to analyse and mitigate these failings. In December

2010 Martin Currie agreed to indemnify Fund B for any investment loss suffered by

Fund B on the Company Y Transaction and subsequently paid approximately HK$64.3

million (£5.1 million) in compensation. Martin Currie also: (a) created a new Board

level position of General Counsel with management responsibility for the Legal, Risk

and Compliance teams; (b) ceased to undertake unlisted bond and other forms of

private equity investment in unlisted securities; and (c) has taken disciplinary action

against certain individuals and reallocated fund management responsibilities in its

Shanghai office.

5.
FAILINGS

5.1.
The regulatory provisions relevant to this Final Notice are referred to in the Annex.

Breach of the FSA’s Principles

5.2.
By reason of the facts and matters set out above, Martin Currie breached:

(1)
Principle 2 by failing to conduct its business with due skill, care and diligence.

In particular, Martin Currie failed:

(a)
to identify for over a year that the unlisted 2007 Bond had been

misclassified as “cash” in Martin Currie’s portfolio risk system and, in

consequence, in certain monthly updates to investors (see paragraph

4.12(2) above); and

(b)
to halt the 2007 Bond transaction or properly disclose to Fund A’s

Board that the transaction would breach the Fund’s investment

restrictions (see paragraph 4.12(3) above).

(2)
Principle 3 by failing to take reasonable care to organise and control its affairs

responsibly and effectively, with adequate risk management systems. In

particular, Martin Currie failed to:

(a)
put in place adequate controls or supervision over the actions of the fund

managers responsible for Fund A and Fund B. As a consequence, Martin

Currie failed properly to scrutinise or challenge the fund manager

recommendations for the three unlisted investments for Fund A and Fund

B detailed in this Notice (see paragraphs 4.8 and 4.12(4) above) and failed

to act appropriately when they risked putting Martin Currie in breach of

its regulatory obligations;

(b)
put in place adequate risk management systems in its role as investment

manager of unlisted investments for both Fund A and Fund B with the

result that it failed to analyse or address certain of the issues identified in

this Notice until late 2010, despite the fact that: (a) some of these issues

amounted to breaches of Martin Currie’s own internal policies; and (b)

some individuals in the Edinburgh Office had expressed concerns about

certain actions at the time (see paragraphs 4.9, 4.12(3) and 4.19 above);

(c)
recognise the additional risks associated with unlisted bond investments

and adapt its listed equity systems and controls to manage fully these risks

(see paragraphs 4.9 to 4.12 above);

(d)
put in place effective systems and controls to ensure that sufficient due

diligence and credit risk analysis were performed in respect of three

unlisted bond investments (see paragraphs 4.9 to 4.12 above); and

(e)
put in place effective systems and controls for unlisted investments to

identify promptly when a proposed unlisted investment could breach

client’s investment restrictions (see paragraph 4.12(3) above).

(3)
Principle 8 by failing to take reasonable steps to manage the conflict of interest

arising in relation to the Company Y Transaction. Martin Currie failed to

prevent that conflict from giving rise to a risk of damage to its clients, and failed

to ensure that Fund B was treated fairly. Martin Currie’s conflict management

policies did not give any team or individual clear overall responsibility for

ensuring that conflicts were managed fairly. Furthermore, Martin Currie

breached its own conflicts policy in its handling of the conflict of interest which

arose in relationto the Company Y Transaction (see paragraphs 4.13 to 4.19

above).

Breach of the FSA’s Rules

5.3.
Martin Currie’s failings detailed above also amount to specific breaches of the FSA’s

SYSC and COB Rules. In particular:

(1)
MCI’s failure to take reasonable steps to ensure that Fund B was fairly treated

when entering into the Company Y Transaction amounted to a breach of COB

7.1.3R; and

(2)
Martin Currie’s failure to put in place effective systems and controls in respect

of actions of its fund managers in relation to unlisted investments, its

management of unlisted investments and its management of conflicts of interest

in relation to the Company Y Transaction amounted to a breach of SYSC

3.1.1R and SYSC 3.2.6R, and, in relation to MCIML from 1 November 2007,

SYSC 6.1.1R and SYSC 6.1.2R.

6.
SANCTION

6.1.
Having regard to the issues above, the FSA considers it appropriate and proportionate

in all the circumstances to take disciplinary action against Martin Currie for these

breaches.

6.2.
The FSA’s policy on the imposition of financial penalties and public censures is set out

in Chapter 7 of the Enforcement Guide (“EG”) and Chapter 6 of the Decision

Procedures and Penalties Manual (“DEPP”), which forms part of the FSA Handbook

and came into force on 28 August 2007. With regard to DEPP, since the majority of

Martin Currie’s failings occurred before the change in the regulatory provisions

governing the determination of financial penalties on 6 March 2010, the FSA has

applied the penalty regime set out in DEPP that was in place before 6 March 2010.

6.3.
All references to DEPP below are references to the version in place prior to 6 March

2010. The relevant sections of DEPP are set out in more detail in the Annex.

6.4.
In determining whether a financial penalty is appropriate, and if so its level, the FSA is

required to consider all the relevant circumstances of a case. Applying the criteria set

out in DEPP 6.2.1 and 6.4.2, the FSA has determined that a financial penalty in the

amount of £3.5 million is an appropriate and proportionate sanction in this case.

6.5.
DEPP 6.5.2G sets out a non-exhaustive list of criteria that may be of particular

relevance in this regard. The FSA considers the following factors to be particularly

relevant in this case.

Deterrence (DEPP 6.5.2(1))

6.6.
The principal purpose of a financial penalty is to promote high standards of regulatory

conduct by deterring firms that have breached regulatory requirements from committing

further breaches, helping to deter other firms from committing similar breaches, and

demonstrating generally to firms the benefits of compliant behaviour.

6.7.
Without detracting from the regulatory and other responsibilities of individual fund

managers themselves, the FSA considers there to be a need to send a strong message to

the industry that investment management firms must put in place effective controls and

supervision over their fund managers, and ensure that any conflicts of interests are

managed fairly and, where appropriate, are properly disclosed to clients.

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

6.8.
In determining the appropriate sanction, the FSA has had regard to the seriousness of

Martin Currie’s breaches, including the nature, number and duration of the breaches.

The FSA views Martin Currie’s failings as serious because they revealed serious failings

in Martin Currie’s unlisted investment systems and controls, exposed Fund A to a

potential financial loss, and exposed Fund B to an actual financial loss (albeit that

Martin Currie compensated Fund B for its loss).

The size, financial resources and other circumstances of the firm (DEPP 6.5.2(5))

6.9.
In determining the level of the penalty the FSA has considered Martin Currie’s size and

financial resources. There is no evidence to suggest that Martin Currie cannot pay the

financial penalty.

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

6.10.
As a result of the breaches identified in this Notice, Martin Currie may have gained a

benefit from the management fees totalling US$376,167 in respect of the 2007 Bond

and the 2008 Bond. Martin Currie refunded management fees of US$723,000 paid by

Fund B in respect of the Company Y Transaction. Martin Currie also avoided any

reputational loss (and potential consequent financial loss) which may have arisen if

Fund A had not been able to meet its redemption notices.

Conduct following the breach (DEPP 6.5.2(8))

6.11.
The FSA has taken the following issues into consideration when assessing the level of

penalty to impose upon Martin Currie:

(1)
Martin Currie promptly brought the breaches to the FSA’s attention once it

became aware of them in November 2010 and has since co-operated fully in

relation to all aspects of this matter;

(2)
Martin Currie promptly agreed to indemnify Fund B and subsequently paid

approximately HK$64.3 million (around £5.1 million) to compensate Fund B in

full for the investment loss it suffered and refunded management fees received

from Fund B in connection with the Company Y investment.

(3)
during the Relevant Period Martin Currie took significant steps to improve its

processes concerning unlisted investments including establishing a ‘Pre-IPO

Investment Committee’ and an ‘Unlisted Valuation Committee’, and on

becoming aware of the issues in late 2010 Martin Currie promptly suspended

any further unlisted bond and other forms of private equity investment in

unlisted securities (and has subsequently ceased making such investments

altogether);

(4)
Martin Currie has spent considerable time and money: (a) investigating these

issues (and has shared its detailed findings with the FSA); and (b) reviewing its

other unlisted investments to ensure there were no other similar issues;

(5)
Martin Currie has taken disciplinary action against certain individuals and

reallocated fund management responsibilities in its Shanghai office, incurring

significant costs to the firm; and

(6)
Martin Currie has made improvements to its governance structure and risk

control processes including creating a new Board level position of General

Counsel with management responsibility for the Legal, Risk and Compliance

teams.

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

6.12.
Martin Currie has not previously been the subject of disciplinary action by the FSA.

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

6.13.
In determining the level of financial penalty, the FSA has taken into account penalties

imposed by the FSA on other authorised persons for similar behaviour.

6.14.
Taking into account the seriousness of the breaches and the risks they posed to the

FSA’s statutory objectives of market confidence and the protection of consumers, the

FSA proposes to impose a financial penalty of £3.5 million on Martin Currie.

7.
PROCEDURAL MATTERS

Decision maker

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

Settlement Decision Makers.

7.2.
This Final Notice is given under, and in accordance with, section 390 of the Act.

Manner of and time for Payment

7.3.
The financial penalty must be paid in full by Martin Currie to the FSA by no later than

16 May 2012, 14 days from the date of the Final Notice.

If the financial penalty is not paid

7.4.
If all or any of the financial penalty is outstanding on 17 May 2012, the FSA may

recover the outstanding amount as a debt owed by Martin Currie and due to the FSA.

7.5.
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of information

about the matter to which this notice relates. Under those provisions, the FSA must

publish such information about the matter to which this notice relates as the FSA

considers appropriate. The information may be published in such manner as the FSA

considers appropriate. However, the FSA may not publish information if such

publication would, in the opinion of the FSA, be unfair to you or prejudicial to the

interests of consumers.

FSA contacts

7.6.
For more information concerning this matter generally, contact Anthony Monaghan of

the Enforcement and Financial Crime Division at the FSA (direct line: 020 7066 6772).

Project Sponsor
FSA Enforcement and Financial Crime Division

ANNEX

STATUTORY PROVISIONS, REGULATORY GUIDANCE AND POLICY

1.
STATUTORY PROVISIONS

1.1.
The FSA’s statutory objectives are set out in section 2(2) of the Act and include the
protection of consumers.

1.2.
Section 206 of FSMA states:

“If the Authority considers that an authorised person has contravened a requirement
imposed on him by or under this Act, it may impose on him a penalty, in respect of the
contravention, of such amount as it considers appropriate.”

1.3.
The procedures to be followed in relation to the imposition of a financial penalty are set
out in sections 207 and 208 of the Act.

1.4.
Martin Currie is an authorised person for the purposes of section 206 of the Act. The
requirements imposed on authorised persons include those set out in the FSA’s
Principles and Rules made under section 138 of the Act. Section 138 provides that the
FSA may make such rules applying to authorised persons as appear to be necessary or
expedient for the purposes of protecting the interests of consumers.

2.
REGULATORY PROVISIONS

2.1.
In exercising its power to impose a financial penalty, the FSA has had regard to the
relevant regulatory provisions and policy published in the FSA Handbook. The main
provisions that the FSA considers relevant to this case are set out below.

2.2.
Under the FSA’s rule-making powers, the FSA has published in the FSA Handbook the
Principles which apply either in whole, or in part, to all authorised persons.

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

2.4.
The Principles relevant to this case are:

(1)
Principle 2 (Skill, care and diligence) which states that:
“A firm must conduct its business with due skill, care and diligence”;

(2)
Principle 3 (Management and control) which states that:
“A firm must take reasonable care to organise and control its affairs responsibly and
effectively, with adequate risk management systems”; and

(3)
Principle 8 (Conflicts of interest) which states that:
“A firm must manage conflicts of interest fairly, both between itself and its customers

and between a customer and another client”.

Associated FSA Rules

2.5.
The applicable Rules during the Relevant Period are:

(1)
COB 7.1.3R which provides that if a firm has or may have:
(1)
a material interest in a transaction to be entered into with or for a
customer; or
(2)
a relationship that gives or may give rise to a conflict of interest in
relation to a transaction in (1); or
(3)
an interest in a transaction that is, or may be, in conflict with the interest
of any of the firm’s customers; or
(4)
customers with conflicting interests in relation to a transaction;
the firm must not knowingly advise, or deal in the exercise of discretion, in
relation to that transaction unless it takes reasonable steps to ensure fair
treatment for the customer;

(2)
SYSC 3.1.1R which provides that a firm must take reasonable care to establish
and maintain such systems and controls as are appropriate to its business;

(3)
SYSC 3.2.6R which states that a firm must take reasonable care to establish and
maintain effective systems and controls for compliance with applicable
requirements and standards under the regulatory system and for countering the
risk that the firm might be used to further financial crime;

(4)
SYSC 6.1.1R which provides that a common platform firm must establish,
implement and maintain adequate policies and procedures sufficient to ensure
compliance of the firm including its managers, employees and appointed
representatives (or where applicable, tied agents) with its obligations under the
regulatory system and for countering the risk that the firm might be used to
further financial crime; and

(5)
SYSC 6.1.2R which states that a common platform firm must, taking in to
account the nature, scale and complexity of its business, and the nature and
range of investment services and activities undertaken in the course of that
business, establish, implement and maintain adequate policies and procedures
designed to detect any risk of failure by the firm to comply with its obligations
under the regulatory system, as well as associated risks, and put in place
adequate measures and procedures designed to minimise such risks and to
enable the FSA to exercise its powers effectively under the regulatory system
and to enable any other competent authority to exercise its powers effectively
under MiFID.

3.
Decision Procedure and Penalties Manual (“DEPP”)

3.1.
The FSA’s policy in relation the imposition and amount of penalties that applied during
the majority of the Relevant Period was set out in Chapter 6 of DEPP and was in force

between 28 August 2007 and 5 March 2010.

3.2.
DEPP 6.1.2G provides that the principal purpose of imposing a financial penalty is to
promote high standards of regulatory and/or market conduct by deterring persons who
have committed breaches from committing further breaches, helping to deter other
persons from committing similar breaches, and demonstrating generally the benefits of
compliant behaviour. Financial penalties are therefore tools that the FSA may employ
to help it to achieve its regulatory objectives.

3.3.
DEPP 6.5.1G(1) provides that the FSA will consider all the relevant circumstances of a
case when it determines the level of financial penalty (if any) that is appropriate and in
proportion to the breach concerned.

3.4.
DEPP 6.5.2G sets out a non-exhaustive list of factors that may be relevant to
determining the appropriate level of financial penalty to be imposed on a person under
the Act. The following factors are relevant to this case:

Deterrence: DEPP 6.5.2G(1)

3.5.
When determining the appropriate level of financial penalty, the FSA will have regard
to the principal purpose for which it imposes sanctions, namely to promote high
standards of regulatory and/or market conduct by deterring persons who have
committed breaches from committing further breaches and helping to deter other
persons from committing similar breaches, as well as demonstrating generally the
benefits of compliant business.

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

3.6.
The FSA will consider the seriousness of the breach in relation to the nature of the rule,
requirement or provision breached, which can include considerations such as the
duration and frequency of the breach, whether the breach revealed serious or systemic
weaknesses in the person’s procedures or of the management systems or internal
controls relating to all or part of a person’s business and the loss or risk of loss caused
to consumers, investors or other market users.

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

3.7.
The degree of seriousness of a breach may be linked to the size of the firm. For
example, a systemic failure in a large firm could damage or threaten to damage a much
larger number of consumers or investors than would be the case with a small firm:
breaches in a firm with a high volume of business over a protracted period may be more
serious than breaches over similar periods in a firm with a smaller volume of business.

3.8
In addition, the size and resources of a person may also be relevant in relation to
mitigation, in particular what steps the firm took after the breach had been identified;
the FSA will take into account what it is reasonable to expect from a firm in relation to
its size and resources, and factors such as what proportion of a firm’s resources were

used to resolve a problem.

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

3.9
The FSA may have regard to the amount of benefit gained or loss avoided as the result
of the breach, for example the FSA will impose a penalty that is consistent with the
principle that a person should not benefit from the breach, and the penalty should also
act as an incentive to the person (and others) to comply with regulatory standards and
required standards of market conduct.

Conduct following the breach: DEPP 6.5.2G(8)

3.10
The FSA may take into account the degree of co-operation the person showed during
the investigation of the breach by the FSA and any remedial steps taken since the
breach was identified, including whether these were taken on the firm’s own initiative
or that of the FSA, for example, identifying whether consumers or investors or other
market users suffered loss and compensating them where they have and taking steps to
ensure that similar problems cannot arise in the future.

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

3.11
The FSA may take the previous disciplinary record and general compliance history of
the person into account.

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

3.12
The FSA may consider action that it has taken in relation to similar breaches by other
persons when deciding on the level of penalty. The FSA does not operate a tariff
system, however the FSA will seek to apply a consistent approach to determining the
appropriate level of penalty.