Decision Notice
DECISION NOTICE
To:
Paul Reynolds (formerly known as Paul Brian Reynolds)
ACTION
1.
For the reasons given in this Decision Notice, the Authority has decided to take
the following action:
a.
impose on Mr Reynolds a financial penalty of £290,344 pursuant to section
66 of the Act, for breaches of Statement of Principle 1; and
b.
make an order, pursuant to section 56 of the Act, prohibiting Mr Reynolds
from performing any function in relation to any regulated activities carried
on by any authorised person, exempt person, or exempt professional firm
on the basis that he is not fit and proper because he lacks honesty and
integrity.
REASONS FOR THE ACTION
2.
Mr Reynolds' conduct, whilst he was an approved person (and significant
influence function holder) at Aspire, breached Statement of Principle 1 because
he:
a.
recklessly recommended high risk UCIS and GTEPs to eight retail clients,
who subsequently invested in the products, when he knew that he could
not justify their suitability;
This decision notice was superseded by a Final Notice dated
19 May 2015.
b.
deliberately attempted to mislead the Authority by retrospectively creating
various documents, including fact finds and suitability reports, and
misrepresenting that they were contemporaneous documents/client
records;
c.
deliberately made false and misleading statements to the Authority,
including during a compelled interview;
d.
deliberately made investments on behalf of two clients without their
knowledge or authorisation;
e.
was knowingly involved in the falsification of the signatures of two clients
on sophisticated investor certificates to suggest that UCIS products could
legitimately be promoted to them;
f.
deliberately produced inflated valuations of clients’ investments in an
attempt to mislead them and conceal the poor performance of the
investments he had recommended; and
g.
deliberately submitted loan facility and investment applications, on behalf
of a number of his clients, which contained inflated incomes and other
false and misleading information.
3.
The impact of Mr Reynolds’ conduct on his clients was particularly serious for the
following reasons:
a.
Mr Reynolds advised six of the eight clients with which this case is
concerned to invest a total of approximately £1.5 million in GTEPs and
seven of those clients to invest at least £591,480 in UCIS, either directly
with providers or indirectly (through a self-invested personal pension or a
wrap platform). A number of the UCIS in which Mr Reynolds’ clients
invested have been suspended, resulting in financial losses.
b.
Six of these clients had low incomes and/or little or no investment
experience and these complex and high risk products were likely to be
unsuitable for their needs. In addition, in some instances clients were not
aware that they had invested in unregulated investments, or of the
associated risks.
c.
Mr Reynolds recommended that the six clients to whom he recommended
GTEPs take out a significant amount of highly-geared finance to fund
these. In reliance on this advice, clients re-mortgaged their residential
properties, three of which were mortgage-free at the time of seeking
advice from Mr Reynolds, to fund these high risk investments.
d.
Of the seven clients who invested in UCIS, three were within ten years of
retirement age and were encouraged to invest a significant proportion of
their pension funds (more than 80%) in these products, with little or no
means to make up any shortfall in the event of a loss.
4.
In light of Mr Reynolds’ misconduct, it appears to the Authority that he is not a fit
and proper person, in terms of his honesty and integrity, to perform any function
in relation to any regulated activity carried on by any authorised person, exempt
person or exempt professional person.
5.
The Authority has therefore decided to impose a financial penalty on Mr Reynolds
in the amount of £290,344 pursuant to section 66 of the Act and make a
prohibition order pursuant to section 56 of the Act.
6.
The Authority considers that this action is necessary and proportionate and that it
supports the Authority’s operational objective of securing an appropriate degree
of protection for consumers.
DEFINITIONS
7.
The definitions below are used in this Decision Notice.
“the Act” means the Financial Services and Markets Act 2000;
“Aspire” means the body corporate previously known as Positive Financial
Strategies Limited and renamed on 19 February 2008 as Aspire Personal Finance
Limited (now dissolved);
“ATR” means attitude to risk;
“the Authority” means the body corporate previously known as the Financial
Services Authority and renamed on 1 April 2013 as the Financial Conduct
Authority;
“COBS” means the Conduct of Business Sourcebook section of the Authority’s
Handbook;
“COB” means Conduct of Business, the predecessor version of COBS that existed
prior to 1 November 2007;
“DEPP” means the Authority’s Decision Procedure & Penalties Manual;
“Firm A” means the authorised firm of which Aspire was formerly an appointed
representative;
“FOREX” means foreign exchange traded currency;
“FOS” means the Financial Ombudsman Service;
“FSCS” means the Financial Services Compensation Scheme;
“GTEPs” means geared traded endowment policies;
“PCIS Order” means the Financial Services and Markets Act 2000 (Promotion of
Collective Investment Schemes) (Exemptions) Order 2001;
“Mr Reynolds” refers to Paul Reynolds (formerly known as Paul Brian Reynolds),
the subject of this Decision Notice. At all material times, Mr Reynolds was one of
two directors at Aspire and owned 50% of the shares.
“the section 238 restriction” means the statutory restriction on the promotion of
UCIS in section 238(1) of the Act;
“Statements of Principle” means the Authority’s Statements of Principle and Code
of Practice for Approved Persons;
“TEPs” means traded endowment policies;
“the Tribunal” means the Upper Tribunal (Tax and Chancery Chamber); and
“UCIS” means unregulated collective investment scheme.
RELEVANT STATUTORY AND REGULATORY PROVISIONS
8.
The relevant statutory and regulatory provisions relevant to this Decision Notice
are contained in Annex A to this Decision Notice.
FACTS AND MATTERS
9.
Aspire was a small independent financial advisory firm which, between 9 June
2005 and 31 March 2007, operated as an appointed representative of another
authorised firm, Firm A. It advised mainly in the areas of mortgages, pensions
and investments (both regulated and unregulated). From 21 June 2005 until 31
March 2007, Mr Reynolds was approved by the Authority to perform the CF1
Director (Appointed Representative) controlled function. He also held the CF22
Investment Adviser (Trainee), followed by the CF21 Investment Adviser
controlled functions at Firm A.
10.
On 2 April 2007, Aspire became directly authorised by the Authority. Aspire had
approximately 160 clients.
11.
From 2 April 2007 until 20 January 2013, Mr Reynolds was approved by the
Authority to perform the CF1 (Director), CF3 (Chief Executive), CF10 (Compliance
Oversight) CF11 (Money Laundering Reporting) controlled functions and was
responsible for insurance mediation at Aspire. Whilst at Aspire, he also initially
performed the CF8 (Apportionment and Oversight) and the CF21 (Investment
Adviser) function and later the CF30 (Customer) function.
12.
With effect from 6 September 2010, Aspire voluntarily varied its permission by
removing all its regulated activities. Aspire was placed into voluntary liquidation
on 7 September 2010 and dissolved on 20 January 2013. Aspire’s permission
was, accordingly, cancelled with effect from that date.
13.
On 18 March 2011, Mr Reynolds was declared bankrupt as a result of a petition
issued by the liquidator of Aspire for the sum of £255,740, the amount by which
Aspire’s directors’ loan account was overdrawn when it went into liquidation. Mr
Reynolds’ bankruptcy was automatically discharged after one year, on 18 March
2012.
UCIS
14.
A UCIS does not fall within the narrow definition of a recognised collective
investment scheme. UCIS are often characterised by high levels of volatility and
illiquidity which can in turn entail a higher degree of risk for consumers.
Accordingly, the Authority’s view is that they are unlikely to be suitable for the
vast majority of retail clients. As UCIS fall outside the regulatory regime,
consumers who invest in them may also have limited recourse to the FOS and the
FSCS.
15.
For these reasons there is a restriction on the categories of investors to whom
UCIS can be promoted in the UK. The section 238 restriction provides that an
authorised firm must not communicate an invitation or inducement to participate
in a collective investment scheme (including UCIS) unless an exemption applies.
The relevant regulatory provisions and exemptions relating to the promotion of
UCIS are set out in Annex A to this Decision Notice.
16.
There are a number of exemptions that may be applied to the section 238
restriction. For example, under the PCIS Order, UCIS may be promoted to
persons defined as certified “high net worth individuals” or certified “sophisticated
investors”. The PCIS Order defines:
a.
“high net worth individuals” as persons who have, during the previous
financial year, received an annual income of £100,000 or more and/or
held, throughout the previous financial year, net assets to the value of
£250,000 or more, not including their primary residence or any loan
secured on that residence; and
b.
“sophisticated investors” as individuals who have the appropriate
investment expertise, experience and knowledge to understand the risks
associated with participating in unregulated schemes.
17.
Firms should document the exemption on which they are relying when promoting
a UCIS and be able to demonstrate that they have complied with the certification
requirements.
18.
Mr Reynolds recommended UCIS products to his clients. The UCIS most
commonly recommended by Mr Reynolds were funds that chiefly invested in
“right to purchase” contracts in overseas property developments in Spain, Cape
Verde, Mexico and Morocco. The “right to purchase” contracts gave the UCIS
funds the right and obligation to purchase properties when the developments
completed. These contracts were generally purchased at a 20-30% discount to
the anticipated market value at completion, with a view to selling the contracts on
at a later date for a profit. Between January 2007 and November 2009, Mr
Reynolds, acting on behalf of Aspire, advised on at least 171 transactions in
which UCIS products were recommended to clients. These clients invested a total
of approximately £12.8 million in UCIS funds during this period. In addition, some
clients ultimately invested in multiple UCIS funds following Mr Reynolds’
recommendation.
GTEPs
19.
TEPs form the basis of a typical GTEPs plan. TEPs are with-profits endowment
policies which are no longer required by their original holders and have been sold
on the secondary market. The purchaser of such policies agrees to pay the
remaining premiums on the policy and in return receives the value of the policy at
maturity (or when the original owner dies, if this occurs first) together with
applicable bonuses, though not all such bonuses are guaranteed.
20.
Investment in GTEPs involves gearing and is typically funded by the investor
using cash savings, funds raised through a mortgage on the investor's home or a
charge on an investment already owned by the investor. These funds are used
together with a GTEPs loan facility taken out by the investor to purchase a
portfolio of TEPs. The TEPs are then used as security for the loan facility, and
part of the loan is used to fund the TEP premiums and sometimes purchase
additional TEPs. The GTEPs loan is used to fund the TEP premiums, annual
review fees payable on the TEPs, and monthly withdrawals of income payable to
the investor (often used to pay monthly mortgage payments) where required.
The GTEPs loan facility and mortgage (if one is taken out to raise capital to
invest) is designed to be repaid by the maturity values of the TEPs within the
portfolio. The investment rationale is that by the time the final TEP matures, the
loan and mortgage will be repaid and any additional capital remaining can be
taken as profit by the holder of the GTEPs or used to pay any mortgage that
remains outstanding.
21.
The gearing element introduces an interest rate risk and increased exposure to
the usual risks of the investment (such as fluctuations in the performance of the
underlying TEPs and secondary market demand). These varying levels of gearing
are effectively using the strategy of borrowing to invest, which can be a high risk
strategy, particularly where clients have no other means to repay the mortgage
or loan facility if the investment return is insufficient. In order for the investor to
make a profit, the product has to outperform the interest rate payable on the
loan/mortgage.
22.
In addition, since the loan facility must be renewed on an annual basis, there is
the risk, if the loan to value ratio is not maintained within agreed parameters,
that the lending institution refuses to extend the facility. The consequence for
the client is serious, given that the loan is usually used to pay TEP premiums and,
in some cases, mortgage payments. In some circumstances, investors may be
required to inject further capital or assign additional assets to the provider of the
loan facility as security in order to maintain the required loan to value ratio.
23.
Consequently, it is the Authority’s view that GTEPs are generally only suitable for
investors who have a high risk tolerance and are able to bear the losses that may
occur.
24.
According to the key features documents of the GTEPs products which Mr
Reynolds typically recommended, the purpose of these products, amongst other
things, was to enable investors to buy a portfolio of specially selected TEPs to
meet their needs and achieve greater risk diversification as the policies could be
spread over several of the best performing life companies. The plans aimed to
produce tax efficient withdrawals of up to 10% per year and to return the original
capital invested at the end of the selected term, although neither outcome was
guaranteed. Between January 2006 and October 2008, Mr Reynolds, acting on
behalf of Aspire, advised at least 41 clients to invest a total of approximately £8.3
million in GTEPs products. The total amount of commission paid to Aspire by the
GTEPs provider was £606,824.53.
7
Mr Reynolds’ reckless recommendations of UCIS and GTEPs
25.
Mr Reynolds knew that he was unable to justify the suitability of his
recommendations of UCIS and GTEPs to the following eight of his clients.
Specifically, in all of the instances below, Mr Reynolds knew that he could not
justify the suitability of the recommendations for each of the clients in question
because the risk of the product did not match the clients’ ATR, but he proceeded
to make the recommendations anyway.
Client A
Between August 2006 and February 2008, Mr Reynolds recommended to
Client A, who had been diagnosed with prostate cancer, that he invest
£365,000 in GTEPs, arranging an interest only mortgage against his home
to raise these funds. In December 2007 he recommended that Client A
invest pension funds in a UCIS investment. Client A asserts that he told
Mr Reynolds that he was not willing to take risks, but Mr Reynolds
characterised him as a sophisticated investor and recommended GTEPs
and UCIS to him.
Client B
In or about October 2005, Mr Reynolds recommended to Client B, who was
retired with no income other than her state pension, that she re-mortgage
her house on an interest only basis in order to invest in TEPs, as well as
taking out a life insurance policy. She asserts that the risks of GTEPs were
not explained to her and that she was not told that she was taking out an
additional building society loan. In or about April 2007 Mr Reynolds also
advised Client B to transfer her pension funds into a UCIS.
In or about August 2008, Mr Reynolds recommended to Client C, a
hairdresser earning approximately £3,000 per year, that she re-mortgage
her home on an interest only basis for £130,000 and invest the proceeds
in FOREX and TEPs. He also recommended that she invest £20,000 in
UCIS. At the time of the recommendations, Client C asserts that Mr
Reynolds knew about her financial situation and that she was not willing to
take any risk. He was also knowingly involved in the forgery of her
signature on a sophisticated investor certificate, apparently after
recommending UCIS to her.
Client D
In or about March 2008, Mr Reynolds recommended to Client D, a part
time accounts assistant earning approximately £3,000 per annum and her
husband, a chef, that she take out an interest only mortgage on her home
for £507,000 and invest £500,000 of the proceeds in FOREX and TEPs. Mr
Reynolds also advised her to take out a loan facility for approximately
£15,000. He did not undertake a risk assessment and Client D asserts
that he recommended GTEPs without explaining the impact of gearing to
her.
Client E
In or about December 2005, Mr Reynolds recommended that Client E re-
mortgage his house on an interest only basis and invest £200,000 in
GTEPs.
Between
June
2007
and
November
2008,
Mr
Reynolds
recommended that Client E invest about £176,500 from his pension fund
in UCIS. Client E asserts that Mr Reynolds asked him about the level of
risk which he was willing to take and was told that Client E was not willing
to take risks. On Mr Reynolds’ fact find documentation (which was not
completed in Client E’s presence) Client E’s ATR is recorded as a medium
to high ATR. Mr Reynolds was knowingly involved in the forgery of Client
E’s signature on a sophisticated investor certificate.
In about January 2008, Mr Reynolds recommended that Client F re-
mortgage his house and invest £150,000 in FOREX and TEPs. He also
advised Client F to take out a gearing loan in order to repay the mortgage
and the premiums due on the TEPs. In addition, Mr Reynolds advised
Client F to transfer his pension funds worth approximately £57,000 into a
UCIS. Client F asserts that Mr Reynolds never assessed his attitude to risk
and did not explain the risks of the GTEP loan facility. He further did not
explain to Client F that the UCIS investment was unregulated and gave
Client F insufficient time to understand the nature of the investment. Mr
Reynolds asked Client F to sign a sophisticated investor certificate even
though he did not meet the relevant criteria, so that Mr Reynolds could
recommend UCIS to him. When Client F enquired about the reasons why
he was being asked to sign the certificate, he was told “not to worry about
it”.
Client G
In or about March 2007, Mr Reynolds recommended that Client G re-
mortgage on an interest only basis to invest approximately £100,000 in a
UCIS. He further recommended that this investment be partly encashed
and re-invested in two other UCIS funds a year later. Client G made it
clear to Mr Reynolds that she was not generally willing to take risks,
although she and her husband were prepared to take some risk with the
£300 a month they invested in a savings plan, but Mr Reynolds recorded a
medium to high ATR. The fact finds in respect of these recommendations
recorded income, expenditure, assets and liabilities as not disclosed.
Between December 2006 and August 2008, Mr Reynolds recommended
that Client H invest in several UCIS funds. Client H asserts that Mr
Reynolds did not discuss either Client H or his wife’s ATR with them, and
did not discuss the fact that UCIS are high risk investments. Instead
Client H asserts that Mr Reynolds told him that there was no risk to capital
and that there was a guaranteed 15% return. Mr Reynolds’ records
described Client H as a sophisticated investor when he did not meet the
criteria.
26.
Mr Reynolds knew that the UCIS investments were high risk, because he had read
the relevant information memoranda on which risk warnings were displayed
prominently. He was also aware, at the time that he made the GTEPs
recommendations, that his clients had limited income and modest assets apart
from their residential properties. In the circumstances raising an interest only
mortgage secured against these properties and taking on additional GTEP loan
facilities to embark on highly geared speculative investments involving TEPs
and/or FOREX was a high risk strategy, as such large amounts of gearing could
greatly magnify any potential losses in the future. As the risk of the products did
not match the relevant client’s ATR, Mr Reynolds knew that he was unable to
justify the suitability of these investment products for the clients to whom he
recommended them. Notwithstanding this, Mr Reynolds recklessly proceeded to
make the recommendations anyway (in breach of Statement of Principle 1). In
addition, Mr Reynolds classified clients A, C, E, F and H as sophisticated investors
(in two instances he was knowingly involved in forging the client’s signature on
the certificate) so that he could justify his recommendation of UCIS to them,
when in fact they did not meet the appropriate criteria defined in Article 23(1) of
the PCIS order. His actions in this regard were also reckless and breached
Statement of Principle 1. A further indicator that Mr Reynolds knew that GTEPs
products were not suitable for his clients is that he falsified details of client
income and/or assets on GTEPs and, in some cases, the associated facility
application forms for Clients A, B, C, D, E and F to enable them to make the
investments he had recommended.
Mr Reynolds’ deliberate attempts to conceal his reckless conduct
Attempting to mislead the Authority
27.
Mr Reynolds deliberately attempted to mislead the Authority and conceal the
misconduct outlined above both before and during its investigation, in that he:
a.
altered, or instructed staff to alter, client files by producing fact finds and
suitability letters retrospectively, following notice of a supervisory visit by
the Authority; and
b.
presented
these
documents
to
the
Authority
in
client
files
as
contemporaneous documents.
28.
Mr Reynolds did not always prepare full fact finds at the time when he gave
investment advice to clients and issue suitability letters to them shortly
thereafter. Ahead of the Authority’s scheduled supervisory visit to his offices in
August 2010, Mr Reynolds embarked on a process of creating these documents
retrospectively. He asked administration staff at Aspire to update client files and
produce fact finds and suitability letters. He personally dictated the fact find
documents to be produced and later started to produce these documents himself.
Further, as Mr Reynolds was unable to create these documents in time for the
supervisory visit, he asked a member of staff to telephone the Authority and
explain that the visit would have to be rearranged because he was ill.
29.
Documents found on Mr Reynolds’ clients’ files that were clearly not
contemporaneous included the following:
a.
in relation to two clients, fact finds and suitability letters that referred only
to the products which the clients ultimately invested in and did not
mention the products which Mr Reynolds recommended to the clients at
the time, as established by other contemporaneous documents; and
b.
several suitability letters that specifically referred to a dated supplemental
memorandum on key risk factors which the letters asserted had already
been sent to the clients. The specified risk memorandum did not exist at
the time the letter was purportedly sent. In two cases, the suitability
letters pre-dated it by almost five months. In one of those letters there is
a caveat about the accuracy of a valuation which had purportedly been
provided earlier, but the date of the valuation post-dates the letter by
more than two months.
30.
Further, Mr Reynolds deliberately provided false and misleading information
during a compelled interview with the Authority. In particular he said that:
a.
a full fact find was completed at all times;
b.
the risks inherent in the investments recommended were set out in
suitability letters which were issued to clients, typically within one or two
weeks of the recommendation;
c.
he had never produced documents retrospectively and/or misrepresented
when any documents had been produced;
d.
he had never made investments on behalf of clients before seeking their
authorisation or agreement to doing so; and
e.
the unauthorised investment in a FOREX product for one of his clients was
an error made by the product provider which he had no involvement in or
awareness of.
31.
These statements were not truthful for the reasons set out in this Decision Notice.
Investments made without clients’ authority
32.
Aspire was not authorised as a discretionary investment manager and Mr
Reynolds accordingly was not approved to carry out this regulated activity.
Nevertheless, Mr Reynolds deliberately applied for investments, or directed
applications for investments to be made, on behalf of at least two clients without
their prior knowledge or authorisation. He therefore acted outside the scope of
his approval and of Aspire’s authorisation. The fact that he did so without his
clients’ knowledge has led the Authority to consider that this conduct lacked
integrity.
33.
In one example, Mr Reynolds recommended that his client invest half of her
portfolio in GTEPs and the remaining half in a FOREX product. The client later
discovered that the entire value of her portfolio had been invested in the high risk
FOREX product without her knowledge or authorisation. The GTEPs application
form found on the client file showed that Mr Reynolds had himself completed the
application form and instructed that all of the amount should be invested in the
FOREX product. Mr Reynolds did not seek the client’s consent to this change.
Falsification of signatures on sophisticated investor certificates
34.
Mr Reynolds deliberately falsified, or directed the falsification, of the signatures of
two clients on sophisticated investor certificates in order to suggest that UCIS
products could legitimately be promoted to them.
Inflation of clients’ investment valuations
35.
Mr Reynolds deliberately produced, or directed the production of, inflated
valuations for at least two clients in an attempt to mislead them and conceal the
poor performance of the investments that he had recommended.
36.
In one example, the client’s investment in a UCIS fund was valued with reference
to the net asset value of another fund. As the second fund had a higher net asset
value, it meant that the client’s valuation was almost double its true value.
False and misleading information entered on loan and investment applications
37.
Mr Reynolds was knowingly involved in submitting false and misleading income
and asset related information to the providers of the GTEPs product and the
associated gearing loan facility on behalf of several clients. In particular:
a.
two applications on behalf of client D declared her income to be £85,000;
in fact it was less than a twentieth of that;
b.
an application on behalf of client E declared inaccurate income figures. Mr
Reynolds sent a follow-up email to the product provider which more than
tripled the value of his clients’ assets; and
c.
three applications on behalf of client A declared inaccurate incomes and
significantly inflated assets (e.g. cash deposits of £276,000 when the client
only had savings of approximately £5,000).
38.
These loan applications were completed by Mr Reynolds in his own handwriting
and/or were personally signed by him.
REPRESENTATIONS
39.
Annex B contains a brief summary of the key representations made by Mr
Reynolds and how they have been dealt with. In making the decision which gave
rise to the obligation to give this Decision Notice, the Authority has taken into
account all of the representations made by Mr Reynolds, whether or not set out in
Annex B.
FAILINGS
40.
For the reasons given above, Mr Reynolds' conduct, whilst he was an approved
person (and significant influence function holder) at Aspire, breached Statement
of Principle 1 because he:
a.
recklessly recommended high risk UCIS and GTEPs to eight retail clients
when he knew that he could not justify their suitability;
b.
deliberately attempted to mislead the Authority by retrospectively creating
various documents, including fact finds and suitability reports, and
misrepresenting that they were contemporaneous documents/client
records;
c.
deliberately made false and misleading statements to the Authority,
including during a compelled interview;
d.
deliberately made investments on behalf of two clients without their
knowledge or authorisation;
e.
was knowingly involved in the falsification of the signatures of two clients
on sophisticated investor certificates to suggest that UCIS products could
legitimately be promoted to them;
f.
deliberately produced inflated valuations of clients' investments in an
attempt to mislead them and conceal the poor performance of the
investments he had recommended; and
g.
deliberately submitted loan facility and investment applications, on behalf
of a number of his clients, which contained inflated incomes and other
false and misleading information.
41.
Mr Reynolds’ actions in recommending UCIS and GTEPs when he knew that he
could not justify the suitability of the personal recommendations he made and
that there was a risk of unsuitable sales were reckless and lacked integrity, in
contravention of Statement of Principle 1.
42.
Mr Reynolds’ actions in attempting to conceal his reckless selling were dishonest
and lacked integrity in breach of Statement of Principle 1.
43.
Further, from the conduct described above, it appears to the Authority that Mr
Reynolds is not a fit and proper person in terms of his honesty and integrity. In
particular, Mr Reynolds actively sought to mislead the Authority, his clients and
product providers.
SANCTION
Imposition of financial penalty
44.
The conduct at issue took place both before and after 6 March 2010. As set out at
paragraph 2.7 of the Authority’s Policy Statement 10/4, when calculating a
financial penalty where the conduct straddles penalty regimes, the Authority must
have regard both to the penalty regime which was effective before 6 March 2010
and the penalty regime which was effective after 6 March 2010.
Financial penalty under the old penalty regime
45.
The Authority’s policy on the imposition of financial penalties relevant to the
misconduct prior to 6 March 2010 is set out in the version of Chapter 6 of DEPP
that was in force prior to 6 March 2010. All references to DEPP from this
paragraph to paragraph 52 are references to that version of DEPP.
46.
The following misconduct by Mr Reynolds occurred before 6 March 2010 and falls
to be considered under the old penalty regime:
a.
being knowingly involved in the falsification of client signatures on
sophisticated investor certificates to suggest that UCIS products could
legitimately be promoted to them;
b.
making investments on behalf of two clients without their knowledge or
authorisation;
c.
deliberately submitted loan facility and investment applications, on behalf
of a number of his clients, which contained inflated incomes and other
false and misleading information; and
d.
recommended UCIS and GTEPs when he knew that he could not justify the
suitability of the personal recommendations he made and that there was a
risk of unsuitable sales.
47.
To determine whether a financial penalty is appropriate, the Authority considers
all the relevant circumstances of a case. DEPP 6.5.2G sets out a non-exhaustive
list of factors that may be relevant to determine the level of a financial penalty.
Applying those factors here, the appropriate level of penalty to be imposed under
the old penalty regime is £150,000. The Authority considers that the following
factors are particularly relevant to this case.
Deterrence (DEPP 6.5.2G(1))
48.
The Authority has had regard to the need to ensure that those who are approved
persons exercising significant influence functions act in accordance with
regulatory requirements and standards. The Authority considers that a penalty
should be imposed to demonstrate to Mr Reynolds and others the seriousness of
failing to meet these requirements.
The nature, seriousness and impact of the breaches (DEPP 6.5.2G(2))
49.
The Authority has had regard to the nature, seriousness and impact of Mr
Reynolds’ breaches (as set out above) in determining the level of the financial
penalty.
The extent to which the breach was deliberate or reckless (DEPP 6.5.2G(2))
50.
Where the Authority decides that a breach was deliberate or reckless, it is more
likely to impose a higher penalty on a person than otherwise. The Authority
considers that Mr Reynolds’ actions were reckless in that he recommended UCIS
and GTEPs when he knew that he could not justify the suitability of the personal
recommendations he made and that there was a risk of unsuitable sales. The
Authority considers that Mr Reynolds’ actions in attempting to conceal his reckless
selling were dishonest.
Whether the person on whom the penalty is to be imposed is an individual (DEPP
6.5.2G(4))
51.
When determining the appropriate level of financial penalty, the Authority will
take into account the fact that: an individual will not always have the same
resources as a body corporate; an enforcement action may have a greater effect
on an individual; and that it may be possible to achieve effective deterrence by
imposing a smaller penalty on an individual rather than a body corporate. The
Authority will also consider whether the status, position and/or responsibilities of
the individuals are such to make a breach committed by the individual more
serious and whether the penalty should therefore be set at a higher level.
52.
The Authority recognises that the financial penalty is likely to have a significant
effect on Mr Reynolds as an individual. It is aware that Mr Reynolds was declared
bankrupt on 18 March 2011 and that his bankruptcy was discharged after one
year, on 18 March 2012. However, the Authority, considers the financial penalty
to be proportionate in relation to the seriousness of Mr Reynolds’ misconduct.
Financial penalty under the new penalty regime
53.
All references to DEPP from this paragraph to paragraph 77 are references to the
version of DEPP implemented as of 6 March 2010 and currently in force.
54.
In respect of conduct occurring on or after 6 March 2010, the Authority applies a
five-step framework to determine the appropriate level of financial penalty. DEPP
6.5B sets out the details of the five-step framework that applies to financial
penalties imposed on individuals in non-market abuse cases.
55.
The following misconduct occurred after 6 March 2010 and thus falls to be
considered under the new penalty regime:
a.
deliberately attempting to mislead the Authority by creating various
documents,
including
fact
finds
and
suitability
reports,
and
misrepresenting that they were contemporaneous client records;
b.
producing an inflated valuation of a client’s investments in an attempt to
mislead them and conceal the poor performance of the investments he had
recommended; and
c.
making numerous false and misleading statements to the Authority
including during a compelled interview.
Step 1: disgorgement
56.
Pursuant to DEPP 6.5B.1G, at Step 1 the Authority seeks to deprive an individual
of the financial benefit derived directly from the breach where it is practicable to
quantify this.
57.
The period of Mr Reynolds’ breach for the purposes of calculating his penalty
under the new penalty regime was from 6 March 2010 to 31 August 2010. It is
not possible to quantify any specific sum of financial benefit that Mr Reynolds
derived directly from the breach during this period.
58.
Accordingly, the Step 1 figure is nil.
Step 2: the seriousness of the breach
59.
Pursuant to DEPP 6.5B.2G, at Step 2 the Authority determines a figure that
reflects the seriousness of the breach. That figure is based on a percentage of
the individual’s relevant income. The individual’s relevant income is the gross
amount of all benefits received by the individual from the employment in
connection with which the breach occurred, and for the period of the breach.
60.
The period of Mr Reynolds’ breach for the purposes of calculating his penalty
under the new penalty regime was from 6 March 2010 to 31 August 2010.
61.
DEPP 6.5B.2G states that where the individual was in the relevant employment
for less than 12 months, his relevant income will be calculated on a pro rata basis
to the equivalent of 12 months’ relevant income. In light of this, the Authority has
included Mr Reynolds’ income from 1 September 2009 to 31 August 2010 in the
calculation of Mr Reynolds’ relevant income. Consequently, the relevant income
for the purposes of Step 2 is £155,937.
62.
In deciding on the percentage of the relevant income that forms the basis of the
Step 2 figure, the Authority considers the seriousness of the breach and chooses
a percentage between 0% and 40%. This range is divided into five fixed levels
which represent, on a sliding scale, the seriousness of the breach; the more
serious the breach, the higher the level. For penalties imposed on individuals in
non-market abuse cases there are the following five levels:
Level 1 – 0%
Level 2 – 10%
Level 3 – 20%
Level 4 – 30%
Level 5 – 40%
63.
In assessing the seriousness level, the Authority takes into account various
factors which reflect the impact and nature of the breach, and whether it was
committed deliberately or recklessly. DEPP 6.5B.2G(12) lists factors likely to be
considered “level 4 factors” or “level 5 factors”. Of these, the Authority considers
the following factors to be relevant:
a.
Nature of breach:
i.
Mr Reynolds failed to act with integrity by preparing non-
contemporaneous documents to disguise his misconduct. Mr
Reynolds created fact finds and suitability letters retrospectively
prior to a supervisory visit by the Authority and included
information which would help justify the past recommendations he
had made and create the impression that he had fully advised
clients of the risks inherent in the high risk UCIS and GTEPs
investments that he had recommended. He then attempted to
mislead the Authority in an interview to conceal the fact that these
documents had not been produced at the relevant time. His lack of
integrity was also demonstrated by his actions in producing inflated
valuations to mislead clients.
b.
Whether the breach was deliberate:
i.
Mr Reynolds’ actions in creating non-contemporaneous fact finds
and suitability letters were calculated to disguise his misconduct
and amounted to a deliberate attempt to mislead the Authority;
ii.
Mr Reynolds’ further sought to conceal his misconduct during his
compelled interview; and
iii.
Mr Reynolds’ actions were repeated. He misled the Authority when
he created non-contemporaneous documents in August 2010 and
continued to mislead the Authority in his interview in March 2012.
64.
Guidance in DEPP notes the factors which are likely to be considered “level 4
factors” or “level 5 factors”. These include the following:
a.
the individual failed to act with integrity; and
b.
the breach was committed deliberately or recklessly.
65.
Taking all of these factors into account, the Authority considers the seriousness of
the breach to be level 4 and so the Step 2 figure is 30% of £155,937.
66.
Step 2 is therefore £46,781.
Step 3: mitigating and aggravating factors
67.
Pursuant to DEPP 6.5B.3G, at Step 3 the Authority may increase or decrease the
amount of the financial penalty arrived at after Step 2, but not including any
amount to be disgorged as set out in Step 1, to take into account factors which
aggravate or mitigate the breach.
68.
Aspire was placed into voluntary liquidation on 7 September 2010 and the
directors’ loan account was overdrawn by £255,740 as of November 2010. Mr
Reynolds drew a significant sum from the directors’ loan account in the five
months immediately before Aspire went into liquidation and the amount remains
outstanding. The Authority considers that this conduct aggravates the breach as
it suggests that Mr Reynolds arranged his resources in such a way as to avoid
payment of a financial penalty.
69.
The Authority considers that there are no factors that mitigate the breach.
70.
Having taken into account the aggravating factors, the Authority considers that
the Step 2 figure should be uplifted by 50%. Consequently, the Step 2 figure is
increased by £23,391 (50% of £46,781).
71.
Step 3 is therefore £70,172.
Step 4: adjustment for deterrence
72.
Pursuant to DEPP 6.5B.4G, if the Authority considers the figure arrived at after
Step 3 is insufficient to deter the individual who committed the breach, or others,
from committing further or similar breaches, then the Authority may increase the
penalty.
73.
As an approved person exercising significant influence functions, Mr Reynolds was
required to act in accordance with regulatory requirements and standards. One of
his key obligations was to act with honesty and integrity. He failed to discharge
this obligation.
74.
Given the seriousness of Mr Reynolds’ conduct, the Step 3 figure of £70,172 is
insufficient to meet the Authority’s credible deterrence objective. Consequently, it
is appropriate to apply a Step 4 multiple of 2 to the Step 3 figure. This also
reflects the fact that the Step 2 figure was net of tax.
75.
Step 4 is therefore £140,344 (2 x £70,172).
Step 5: settlement discount
76.
This is not applicable so the Step 5 figure remains £140,344.
Serious financial hardship
77.
Pursuant to DEPP 6.5D.4G, the Authority will consider reducing the amount of a
penalty if an individual will suffer serious financial hardship as a result of having
to pay the entire penalty. The Authority has found that Mr Reynolds has provided
insufficient evidence to demonstrate that he would suffer serious financial
hardship. The Authority considers that Mr Reynolds’ conduct is so serious that a
penalty should be imposed even if Mr Reynolds would suffer serious financial
hardship.
Proposed penalty
78.
The Authority considers that combining the two separate penalties calculated
under the old and new penalties regimes produces a figure which is proportionate
and consistent with similar fines. The Authority has therefore decided to impose
on Mr Reynolds a total financial penalty of £290,344.
79.
Under section 56 of the Act, the Authority may make a prohibition order if it
appears to it that an individual is not a fit and proper person to perform functions
in relation to a regulated activity carried on by an authorised person, a person
who is an exempt person in relation to that activity or a person to whom, as a
result of Part 20 of the Act, the general prohibition does not apply in relation to
that activity. FIT guidance sets out the criteria for assessing fitness and
propriety. The criteria include the person’s honesty and integrity.
80.
Mr Reynolds demonstrated a lack of honesty and integrity for the reasons given
above.
81.
For these reasons, Mr Reynolds is not fit and proper and it is appropriate to
prohibit him from carrying out any function in relation to any regulated activity
carried out by an authorised person, exempt person or exempt professional firm.
PROCEDURAL MATTERS
Decision maker
82.
The decision which gave rise to the obligation to give this Decision Notice was
made by the Regulatory Decisions Committee.
83.
This Decision Notice is given under sections 57 and 67 and in accordance with
section 388 of the Act. The following statutory rights are important.
The Tribunal
84.
Mr Reynolds has the right to refer the matter to which this Decision Notice relates
to the Tribunal. Under paragraph 2(2) of Schedule 3 of the Tribunal Procedure
(Upper Tribunal) Rules 2008, Mr Reynolds 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 signed reference notice (Form
FTC3) 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:
85.
Mr Reynolds 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 Rebecca Irving at the
Financial Conduct Authority, 25 The North Colonnade, Canary Wharf, London E14
5HS.
Access to evidence
86.
Section 394 of the Act applies to this Decision Notice. In accordance with section
394, Mr Reynolds is entitled to have access to:
a.
the material upon which the Authority has relied in deciding to give this
Decision Notice; and
b.
any secondary material which, in the opinion of the Authority, might
undermine that decision.
Confidentiality and publicity
87.
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). Section 391 (1A) of the Act provides that Mr Reynolds may not publish
the Decision Notice or any details concerning it unless the Authority has published
the Decision Notice or those details. The Authority must publish such information
about the matter to which a Decision Notice or Final Notice relates as it considers
appropriate. Mr Reynolds should be aware, therefore that the facts and matters
contained in this Decision Notice may be made public by the Authority.
Authority contacts
88.
For more information concerning this matter generally, contact Rebecca Irving at
the Authority (direct line: 020 7066 2334/fax: 020 7066 2335).
Andrew Long
Chairman, Regulatory Decisions Committee
ANNEX A
RELEVANT STATUTORY PROVISIONS, REGULATORY GUIDANCE AND POLICY
STATUTORY PROVISIONS
General
The Authority’s statutory objectives, set out in sections 1B to 1E of the Act, include
securing an appropriate degree of consumer protection and protecting and enhancing the
integrity of the UK financial system.
Section 66 of the Act provides that the Authority may take action to impose a penalty on
an individual of such amount as it considers appropriate where it appears to the
Authority that the individual is guilty of misconduct and it is satisfied that it is
appropriate in all the circumstances to take action. Misconduct includes failure, while an
approved person, to comply with a statement of principle issued under section 64 of the
Act.
Section 56 of the Act provides that the Authority may make a prohibition order if it
appears to the Authority that an individual is not a fit and proper person to perform
functions in relation to a regulated activity carried on by an authorised person. Such an
order may relate to a specific regulated activity, an activity falling within a specified
description or all regulated activities.
UCIS
Section 238(1) of the Act provides that an authorised person must not communicate an
invitation or inducement to participate in a collective investment scheme (“CIS”), and
therefore also a UCIS.
Section 238 goes on expressly to carve out circumstances where this prohibition will not
apply. These include:
−
the Treasury may by order specify circumstances (s238 (6)) (there is a statutory
exemption in an order made by the Treasury - the PCIS Order);
−
permitted financial promotions under Authority rules exempting the promotion of
UCIS under certain circumstances (s238 (5)) (the Authority has made rules
exempting the promotion of UCIS in COB 3.11 for the period up to 31 October
2007 and COBS 4.12 for the period from 1 November 2007).
DELEGATED LEGISLATION
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 PCIS Order. These exemptions
pertain to certain categories of individuals, for example certified high net worth
individuals (article 21), certified sophisticated investors (article 23) or self-certified
sophisticated investors (article 23A).
Certified high net worth individuals
Article 21(2) of the PCIS Order defines a certified high net worth individual as an
individual who has signed a statement complying with Part I of the Schedule to the PCIS
Order in the past 12 months. Essentially this requires that at least one of the following
sets of circumstances apply:
(1) the person had, during the previous financial year immediately preceding the
date of the statement, an annual income of £100,000 or more; and/or
(2) the person held, throughout the previous financial year immediately preceding
the date of the statement, net assets to the value of £250,000 or more, not
including that person’s primary residence or any loan secured on that residence;
that person’s rights under a qualifying contract of insurance within the meaning of
the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001; or
any benefits (in the form of pensions or otherwise) which are payable on the
termination of that person’s service or on that person’s death or retirement and to
which that person is (or that person’s dependants are), or may be, entitled.
This exemption also requires that the person signs a statement to indicate he accepts
that he can lose his property and other assets from making investment decisions based
on financial promotions and is aware it is open to him to seek specialist advice.
If the person making the communication believes on reasonable grounds that he is
making it to a certified high net worth individual, then the restriction in section 238 of
the Act will not apply as long as the communication:
(1) is a non-real time communication or a solicited real time communication;
(2) relates only to units in a UCIS which invests wholly or predominantly in the
shares in or debentures of one or more unlisted companies;
(3) does not invite or induce the recipient to enter into an agreement under the
terms of which he can incur a liability or obligation to pay or contribute more than
he commits by way of investment;
(4) a specified warning in the following terms is given both orally (in respect of a
real-time communication) and in writing in the manner prescribed in article 21:
“Reliance on this promotion for the purpose of buying the units to which the
promotion relates may expose an individual to a significant risk of losing all of the
property or other assets invested”; and
(5) is accompanied by an indication that the promotion is exempt from section 238
on the grounds that it is communicated to a certified high net worth individual,
together with details of the requirements for certified high net worth investors and
a reminder that the individual should consult a specialist if in any doubt about
participating in a UCIS.
The validity of the statement is not affected by a defect in its form or wording, provided
that the defect does not alter the statement's meaning (Article 21(3))
Certified sophisticated investors
Article 23(1) of the PCIS Order defines a “certified sophisticated investor” as a person—
(a) who has a current certificate 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 unregulated schemes; and
(b) who has signed, within the period of twelve months ending with the day on
which the communication is made, a statement in the following terms:
“I make this statement so that 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.”
The validity of the statement is not affected by a defect in its form or wording, provided
that the defect does not alter the statement's meaning (Article 23(1A))
Articles 23(2) and (3) provide that if the communication is made to a certified
sophisticated investor (and does not invite or induce the recipient to participate in an
unregulated scheme operated by the person who has signed the certificate) then the
restriction in section 238 of the Act will not apply as long as the communication is
accompanied by the following indications:
(a) that it is exempt from the section 238 restriction on the ground that it is
made to a certified sophisticated investor;
(b) of the requirements that must be met for a person to qualify as a certified
sophisticated investor;
(c) that buying the units to which the communication relates may expose the
individual to a significant risk of losing all of the property invested; and
(d) that any individual who is in any doubt about the investment to which the
invitation or inducement relates should consult an authorised person specialising in
advising on investments of the kind in question.
REGULATORY PROVISIONS
In exercising its powers the Authority must have regard to the relevant provisions in the
Authority Handbook. In deciding on the proposed action, the Authority has also had
regard to guidance set out the in the Regulatory Guides, in particular the Decision
Procedure and Penalties Manual (DEPP).
The guidance and policy that the Authority considers relevant to this case is set out
below.
Statements of Principle and the Code of Practice for Approved Persons
(“APER”)
APER sets out the Statements of Principle as they relate to approved persons and
descriptions of conduct which, in the opinion of the Authority, do not comply with a
Statement of Principle. It further describes factors which, in the opinion of the Authority,
are to be taken into account in determining whether or not an approved person’s
conduct complies with a Statement of Principle.
Statement of Principle 1 provides that an approved person must act with integrity in
carrying out his controlled function.
APER 3.1.4G provides that an approved person will only be in breach of a Statement of
Principle where he is personally culpable, that is in a situation where his conduct was
deliberate or where his standard of conduct was below that which would be reasonable in
all the circumstances.
APER 3.1.6G provides that APER (and in particular the specific examples of behaviour
which may be in breach of a generic description of conduct in the code) is not exhaustive
of the kind of conduct that may contravene the Statements of Principle.
APER 4.1 lists types of conduct which, in the opinion of the Authority, do not comply with
Statement of Principle 1. Those examples include:
−
APER 4.1.3E(1) - deliberately misleading (or attempting to mislead) a client or
the Authority by act or omission. APER 4.1.4E(9) clarifies that such conduct
includes, but is not limited to, deliberately: falsifying documents; misleading a
client about the risks of an investment; providing false or inaccurate information
to the Authority.
−
APER 4.1.5E - deliberately recommending an investment to a customer where the
approved person knows that he is unable to justify its suitability for that
customer;
−
APER 4.1.8E - deliberately preparing inaccurate or inappropriate records in
connection with a controlled function. APER 4.1.9E(1) clarifies that such conduct
includes, but is not limited to, deliberately preparing inaccurate performance
reports for transmission to customers.
−
APER 4.1.15E - deliberate acts, omissions or business practices that could be
reasonably expected to cause consumer detriment.
Conduct of Business rules in relation to ensuring suitability of advice
The fact that a customer is eligible to receive a communication promoting a UCIS under
one or more exemption does not mean that UCIS will be automatically suitable to that
customer. Before making a personal recommendation, a firm is required to obtain and
document information about a specific customer to assess the suitability of an
investment for that customer. The relevant provisions that applied during the relevant
period were set out in the Conduct of Business Sourcebook (COBS) from 1 November
2007 and the Conduct of Business (COB) which applied prior to that date:
Recommendations after 1 November 2007
COBS 9.2.1R(1) requires a firm to take reasonable steps to ensure that a personal
recommendation is suitable for its client.
COBS 9.2.1R(2) provides that when making the personal recommendation or managing
his investments, the firm must obtain the necessary information regarding the
customer’s:
(a) knowledge and experience in the investment field relevant to the specific type
of designated investment or service;
(b) financial situation; and
(c) investment objectives
so as to enable the firm to make the recommendation, or take the decision, which is
suitable for him.
COBS 9.2.2R(1) requires a firm to 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:
(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 knowledge in order to understand
the risks involved in the transaction or in the management of his portfolio.
The information regarding the investment objectives of a client 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. COBS9.2.2R(2)
COBS 9.2.3R clarifies that the extent to which a firm must obtain information regarding
a customer’s knowledge and experience in the investment field varies according to,
among other things, the type of product or transaction envisaged, including its
complexity and the risks involved.
COBS 9.2.6R provides that if a firm does not obtain the necessary information to assess
suitability, it must not make a personal recommendation to the customer or take a
decision to trade for him.
A firm is also required to maintain adequate records to support its recommendations.
SYSC 9.1.1R provides that a firm must arrange for orderly records to be kept of its
business and internal organisation, including all services and transactions undertaken by
it, which must be sufficient to enable the Authority to monitor the firm's compliance with
the requirements under the regulatory system, and in particular to ascertain that the
firm has complied with all obligations with respect to clients.
COBS 9.5.2R sets out the minimum periods that a firm must retain its records relating to
suitability.
Recommendations prior to 1 November 2007
COB 5 applies to a firm which gives advice on investments to a private customer on
packaged products. It supports Principle 6 (Customers' interests) and Principle 7
(Communications with clients) which requires firms to have due regard to the
information needs of their customers and treat them fairly. The purpose of this section is
to ensure that private customers are adequately informed about the nature of the advice
on investments which they may receive from a firm in relation to packaged products.
COB 5.2.1R provides that this section applies, inter alia, to a firm that gives a personal
recommendation concerning a designated investment to a private customer.
COB 5.2.5R provides 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.
COB 5.2.4G clarifies that Principle 9 (Customers: relationships of trust) requires a firm to
take reasonable care to ensure the suitability of its advice and discretionary decisions. To
comply with this, a firm should obtain sufficient information about its private customer to
enable it to meet its responsibility to give suitable advice.
COB 5.2.11G(1)(a) clarifies that information collected from a customer should at a
minimum provide an analysis of a customer’s personal and financial circumstances
leading to a clear identification of his needs and priorities so that, combined with attitude
to risk, a suitable investment can be recommended.
COB 5.2.7G states that where a customer declines to provide sufficient information, a
firm should not proceed to make a personal recommendation without promptly advising
the customer that the lack of such information may adversely affect the quality of the
services which it can provide.
COB 5.2.9R provides that, unless the customer does not act on the recommendation, a
firm must make and retain a record of a private customer’s personal and financial
circumstances that it has obtained in satisfying COB 5.2.5 R for a specified minimum
period.
Fit and Proper Test for Approved Persons (“FIT”)
The Authority has issued specific guidance on the fitness and propriety of individuals in
FIT. The purpose of FIT is to outline the main criteria for assessing the fitness and
propriety of a candidate for a controlled function and FIT is also relevant in assessing the
continuing fitness and propriety of approved persons.
FIT 1.3.1G provides that the Authority will have regard to a number of factors when
assessing a person’s fitness and propriety. One of the most important considerations will
be a person’s honesty, integrity and reputation.
FIT 2.1.1G provides that in determining a person’s honesty, integrity and reputation, the
Authority will have regard to all relevant matters including, but not limited to, those set
out in FIT 2.1.3G, including:
(1) whether the person has contravened any of the requirements and standards of
the regulatory system (FIT 2.1.3G(5)); and
(2) whether the person has been candid and truthful in all his dealings with any
regulatory body and demonstrates a readiness and willingness to comply with the
requirements and standards of the regulatory system and with other legal,
regulatory and professional requirements and standards (FIT 2.1.3G(13)).
Decision Procedure and Penalties Manual (DEPP) and Enforcement ENF
Guidance on the imposition and amount of penalties is set out in Chapter 6 of DEPP.
Changes to DEPP were introduced on 6 March 2010 (“the new penalties regime”). Given
that the reckless breach of Statement of Principle 1 occurred prior that date, the
Authority has had regard to the provisions of DEPP in force prior to 6 March 2010 (“the
old penalties regime”) in respect of that breach. The deliberate breaches of Principle 1
fall either before or after that date and the Authority has had regard either to the old or
new penalties regime as appropriate in respect of these breaches.
Guidance on the imposition and amount of penalties for misconduct that occurred prior
to 28 August 2007 is set out in ENF. The Authority has accordingly had regard to the ENF
provisions on penalty policy that were in force at the time of the earlier misconduct as
well as to those in Chapter 6 of DEPP.
The Old Penalties Regime
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 Authority may
employ to help it to achieve its regulatory objectives.
DEPP 6.2.1G provides that the Authority will consider the full circumstances of each case
when determining whether or not to take action for a financial penalty.
DEPP 6.5.1G(1) provides that the Authority 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.
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)
When determining the appropriate level of financial penalty, the Authority 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)
The Authority will consider the seriousness of the breach in relation to the nature of the
rule, requirement or provision breached, which can include considerations such as the
duration and frequency of the breach, whether the breach revealed serious or systemic
weaknesses in the person’s procedures or of the management systems or internal
controls relating to all or part of a person’s business and the loss or risk of loss caused to
consumers, investors or other market users.
The extent to which the breach was deliberate or reckless: DEPP 6.5.2G(3)
The Authority will regard as more serious a breach which is deliberately or recklessly
committed, giving consideration to factors such as whether the breach was intentional,
in that the person intended or foresaw the potential or actual consequences of its
actions. If the Authority decides that the breach was deliberate or reckless, it is more
likely to impose a higher penalty on a person than would otherwise be the case.
Whether the person on whom the penalty is to be imposed is an individual: DEPP
6.5.2G(4)
When determining the amount of penalty to be imposed on an individual, the Authority
will take into account that individuals will not always have the resources of a body
corporate, that enforcement action may have a greater impact on an individual, and
further, that it may be possible to achieve effective deterrence by imposing a smaller
penalty on an individual than on a body corporate. The Authority will also consider
whether the status, position and/or responsibilities of the individual are such as to make
a breach committed by the individual more serious and whether the penalty should
therefore be set at a higher level.
The size, financial resources and other circumstances of the person on whom the penalty
is to be imposed: DEPP 6.5.2G(5)
The purpose of a penalty is not to render a person insolvent or to threaten a person’s
solvency. Where this would be a material consideration, the Authority will consider,
having regard to all other factors, whether a lower penalty would be appropriate.
The amount of benefit gained or loss avoided: DEPP 6.5.2G(6)
The Authority may have regard to the amount of benefit gained or loss avoided as the
result of the breach, for example the Authority 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)
The Authority may take into account the degree of co-operation the person showed
during the investigation of the breach by the Authority.
Other action taken by the Authority (or a previous regulator): DEPP 6.5.2G(10)
The Authority seeks to apply a consistent approach to determining the appropriate level
of penalty. The Authority may take into account previous decisions made in relation to
similar misconduct.
Enforcement Guide (EG)
The Authority’s approach to taking disciplinary action is set out in Chapter 2 of EG. Its
approach to exercising its power to make a prohibition order under sections 56 of the Act
is set out in Chapter 9 of EG. The Authority has had regard to the appropriate provisions
of EG that applied during the relevant period.
EG 9.1 states that the Authority’s power under section 56 of the Act to prohibit
individuals who are not fit and proper from carrying out controlled functions in relation to
regulated activities helps the Authority to work towards achieving its regulatory
objectives. The Authority may exercise this power to make a prohibition order where it
considers that, to achieve any of those objectives, it is appropriate either to prevent an
individual from performing any functions in relation to regulated activities, or to restrict
the functions which he may perform.
EG 9.4 sets out the general scope of the Authority’s power in this respect. The Authority
has the power to make a range of prohibition orders depending on the circumstances of
each case and the range of regulated activities to which the individual’s lack of fitness
and propriety is relevant.
EG 9.5 provides that the scope of the prohibition order will depend on the range of
functions which the individual concerned performs in relation to regulated activities, the
reasons why he is not fit and proper and the severity of risk which he poses to
consumers or the market generally.
EG 9.9 provides that when deciding whether to make a prohibition order against an
approved person, the Authority will consider all the relevant circumstances of the case.
These may include, but are not limited to, the following:
−
whether the individual is fit and proper to perform the functions in relation to
regulated activities. The criteria for assessing the fitness and propriety of approved
persons are set out in FIT 2.1 (honesty, integrity and reputation), FIT 2.2
(competence and capability) and FIT 2.3 (financial soundness) (EG 9.9(2));
−
whether, and to what extent, the approved person has failed to comply with the
Statements of Principle issued by the Authority with respect to the conduct of
approved persons, or been knowingly involved in a contravention by the relevant
firm of a requirement imposed on the firm by or under the Act (including the
Principles and other rules (EG 9.9(3)(a) and (b));
−
the relevance and materiality of any matters indicating unfitness (EG 9.9(5));
−
the length of time since the occurrence of any matters indicating unfitness (EG
9.9(6));
−
the particular controlled function the approved person is (or was) performing, the
nature and activities of the firm concerned and the markets in which he operates
(EG 9.9(7)); and
−
the severity of the risk which the individual poses to consumers and to confidence
in the financial system (EG 9.9(8)).
EG 9.12 provides a number of examples of types of behaviour which have previously
resulted in the Authority deciding to issue a prohibition order to an approved person. The
examples include:
−
Providing false or misleading information to the Authority (EG 9.12(1)); and
−
serious breaches of the Statements of Principle for approved persons, such as
acting without regard to instructions, providing misleading information to
customers, giving clients poor or inaccurate advice and failing to ensure that a firm
acted within the scope of its permission (EG 9.12(5)).
EG 9.23 provides that in appropriate cases the Authority may take other action against
an individual in addition to making a prohibition order, including the use of its power to
impose a financial penalty.
ANNEX B
REPRESENTATIONS
1.
Mr Reynolds made written representations in response to the Authority’s Warning
Notice dated 31 July 2013.
2.
Below is a summary of the key written representations made by Mr Reynolds in
response to the allegations and matters in the Warning Notice and how they have
been dealt with. In making the decision which gave rise to the obligation to give
this Decision Notice, the Authority took into account all of Mr Reynolds’
representations, whether or not explicitly set out below.
3.
Mr Reynolds made representations that the Authority only began proceedings
against him after the end of the period of three years beginning with the first day
on which the Authority knew of his alleged misconduct. Knowledge for this
purpose includes information from which the alleged misconduct can reasonably be
inferred. Mr Reynolds asserted that the Authority can reasonably be inferred to
have had knowledge of his alleged misconduct by or on 29 July 2010 (through a
combination of the correspondence and complaints received by or on that date)
and therefore the Warning Notice dated 31 July 2013 was given after the three
year limitation period for taking disciplinary action against him pursuant to section
66(4) of the Act. As a result Mr Reynolds contended that the Authority’s action
against him “is time-barred in its entirety”.
4.
The Authority has found that the earliest date on which it can reasonably be
inferred to have had knowledge of Mr Reynolds’ misconduct is 4 August 2010. On
that date the Authority became aware of a very specific allegation that Mr Reynolds
was in the process of creating client related documents in an attempt to present
them as contemporaneous documents when the Authority made a supervisory visit.
This was the first allegation of a deliberate attempt to mislead the Authority. The
Authority considers that this was the evidence that raised a reasonable suspicion
that Mr Reynolds was acting without integrity, sufficient to start time running for
the three year limitation period for taking disciplinary action against him in relation
to the Statement of Principle 1 allegations against him. Accordingly, the Authority
rejects Mr Reynolds’ representations that the Warning Notice was given after the
three year limitation period for taking disciplinary action against him pursuant to
section 66(4) of the Act.
5.
Mr Reynolds made representations as to the applicable standard of proof. Mr
Reynolds asserted that in light of the seriousness of the allegations and matters set
out in the Warning Notice, as well as the very significant financial, reputational and
personal consequences of a finding of a breach of Statement of Principle 1, the
Authority should require “more” by way of proof in the circumstances of his case.
In support of this assertion, Mr Reynolds submitted that:
a. cogent evidence is required to satisfy a civil tribunal that a person has
been fraudulent or behaved in a reprehensible manner;
b. when making an inference, a court should be sure that there are no co-
existing circumstances that would weaken or destroy the inference; and
c. the more serious the charges against an individual, the more robust the
evidence must be against him to support this.
6.
The Authority has found that its administrative decision making process in the
circumstances of Mr Reynolds’ case is not subject to a higher standard of proof.
The Authority has made its decision having regard to the following:
a. the Authority, in accordance with section 66 of the Act, may impose a
penalty if it considers that Mr Reynolds has contravened a requirement
imposed on him by or under the Act;
b. the Authority, in accordance with section 56 of the Act, may make a
prohibition order if it appears to it that an individual is not a fit and proper
person; and
c. the Tribunal, in regulatory cases, applies the civil standard of proof - i.e.
the balance of probabilities (is it 'more likely than not' that what is alleged
actually occurred?).
7.
Mr Reynolds made representations that he will suffer serious financial hardship if
he has to pay any financial penalty. Mr Reynolds asserted that he has provided the
Authority with verifiable evidence (where possible) which establishes that payment
of the financial penalty will cause him serious financial hardship. Mr Reynolds
stated that: (i) he and his wife were only discharged from bankruptcy last year; (ii)
his house was repossessed on August 2011 (he and his family have been in rental
accommodation since then); and (iii) he has no capital assets which he is able to
sell to pay any financial penalty imposed on him. Mr Reynolds went on to assert
that as his annual liabilities exceed £50,000 and because he has not only to
provide for himself but also his wife and children, his income and capital will be
reduced to nil and he will be bankrupt if he has to pay any financial penalty. Mr
Reynolds also asserted that his alleged misconduct is not serious enough to
warrant the imposition of a financial penalty notwithstanding the fact it will cause
him serious financial hardship.
8.
The Authority has found that it does not accept Mr Reynolds’ representations that
he is unable to pay any financial penalty due to reasons of serious financial
hardship. The Authority rejects Mr Reynolds’ assertion that he has provided full,
frank disclosure of verifiable evidence that he will suffer serious financial hardship.
The Authority notes that Mr Reynolds has not provided a recent ‘Statement of
Means’ form (or any equivalent documentation) setting out his full financial
circumstances. At best, Mr Reynolds has only provided partial disclosure of his
financial position. Accordingly, the Authority has found that Mr Reynolds has
provided insufficient evidence to demonstrate that he would suffer serious financial
hardship. Further (and notwithstanding the foregoing), the Authority considers
that Mr Reynolds misconduct is serious enough such that a financial penalty should
be imposed on him even if it would cause him serious financial hardship.
Mr Reynolds’ recommendations of UCIS and GTEPs
9.
Mr Reynolds made representations that sought to justify the suitability of his
recommendations of UCIS and GTEPS to the eight clients whose files were
examined by the Authority. Mr Reynolds stated that all his clients received a
suitability letter from him prior to deciding to invest in products that he
recommended and that copies of the suitability letters to the eight clients whose
files were examined by the Authority were held on those clients’ files
10.
Mr Reynolds also made representations that those eight clients’ ATR were higher
than the Authority contended and that therefore the clients’ ATR did match the risk
of the products he had recommended to them. In support of his assertion, Mr
Reynolds variously alleged that those clients had undeclared income, were
investors with a high risk tolerance who fully understood the risks they were
running or have changed their account after the event/are now lying. Mr Reynolds
also suggested that the fact that his clients were long standing and sought advice
from the product providers (or were in business) was sufficient to establish that
they had a high tolerance for risk.
11.
The Authority has found that notwithstanding Mr Reynolds’ representations, he is
unable to justify the suitability of his recommendations of UCIS and GTEPS to the
eight clients whose files were examined by the Authority. The Authority accepts Mr
Reynolds’ representations that all but one of the eight client files examined by the
Authority contained copies of suitability letters. However, the Authority notes that
the allegations and matters in the Warning Notice in relation to the suitability
letters is not that they did not exist on the office files, but rather that they were
not sent to Mr Reynolds’ clients and that a number of them were prepared
retrospectively. The Authority notes that Mr Reynolds has not addressed the latter
allegation or matter in his written representations. Further, the Authority notes
that seven of the eight clients whose files were examined by the Authority
informed the Authority that they did not receive suitability letters from Mr
Reynolds. This has led the Authority to reject Mr Reynolds representations that the
eight clients whose files were examined by the Authority received a suitability letter
from him prior to deciding to invest in the products he recommended.
12.
The Authority also rejects Mr Reynolds representations in which he variously
alleges that those eight clients had undeclared income, were investors with a high
risk tolerance who fully understood the risks they were running and have changed
their account after the event/are now lying on the basis of all the information
provided to it during the course of its investigation. The Authority notes that Mr
Reynolds’ allegations against his former clients are uncorroborated whilst the eight
clients’ accounts of Mr Reynolds’ conduct are supported (amongst other things) by
other witnesses. Further, the Authority has found no documentary evidence on the
client files (other than the suitability letters which the Authority has found were
prepared retrospectively) which demonstrate that risks were explained. The
Authority rejects Mr Reynolds’ suggestion that the fact that his clients were long
standing and sought advice from the product providers (or were in business) was
sufficient to establish that they had a high tolerance for risk. Mr Reynolds’ clients
were entitled to rely on him to ensure that the recommendations he made to them
were suitable, but he recommended the products knowing that he could not justify
their suitability. It was Mr Reynolds’ responsibility to ensure that any
recommendations he made were suitable. For the foregoing reasons, the Authority
has concluded that Mr Reynolds knew he could not justify the suitability of the
recommendations he made to each of the eight clients whose files were examined
by the Authority, because the risk of the product did not match the clients’ ATR,
but he proceeded to make the recommendations anyway.
Mr Reynolds’ falsification of signatures on sophisticated investor certificates
13.
Mr Reynolds made representations that he did not falsify or direct the falsification
of the signatures of two clients on sophisticated investor certificates in order to
suggest that UCIS products could legitimately be promoted to them. Mr Reynolds
did not deny that the signatures of the two clients on the sophisticated investor
certificates were forged - he simply asserted that he did not forge them himself.
14.
The Authority has found that although there is no direct evidence that Mr Reynolds
personally falsified or directed the falsification of the signatures of the two clients
on the sophisticated investor certificates, both clients maintain that they did not
sign the certificates and that their signatures have been forged. Further, the
Authority notes that the allegations and matters in the Warning Notice in relation
to the forged signatures of the two clients on the sophisticated investor certificates
is that Mr Reynolds deliberately falsified them or directed the falsification of the
signatures. In light of the fact that both the sophisticated investor certificates are
countersigned by Mr Reynolds, the Authority has found that Mr Reynolds was
knowingly involved in the falsification of the signatures of the two clients on the
sophisticated investor certificates.
Mr Reynolds’ inflation of clients’ investment valuations
15.
Mr Reynolds made representations that he had not as alleged deliberately
produced, or directed the production of, inflated valuations for at least two clients
in an attempt to mislead them and conceal the poor performance of investments he
had recommended.
16.
The Authority has found that although there is no direct evidence that Mr Reynolds
deliberately produced, or directed the production of, inflated valuations for at least
two clients, it is clear that inflated valuations were in fact produced by Aspire. In
the circumstances set out in this Decision Notice, the Authority has found that Mr
Reynolds was knowingly involved in the production of inflated valuations for at
least two clients in an attempt to mislead them and conceal the poor performance
of investments he had recommended.