Final Notice
FINAL NOTICE
To:
Peter Douglas Miller
FSA Individual Reference Number:
PDM01120
TAKE NOTICE: The Financial Services Authority, of 25 The North Colonnade,
Canary Wharf, London E14 5HS gives you final notice about the following action:
1.
ACTION
1.1.
The Financial Services Authority (“the FSA”) served on you, Peter Miller, a Decision
Notice on 18 January 2012 which notified you that, for the reasons set out below and
pursuant to:
(1)
section 123 (Power to impose penalties in cases of market abuse);
(2)
section 66 (Disciplinary powers); and
(3)
section 56 (Prohibition orders);
of the Financial Services and Markets Act 2000 (“the Act”), the FSA had decided to
impose on you:
(1)
a financial penalty of £200,000 for:
(a)
engaging in market abuse as defined by section 118(7) of the Act
(dissemination); and
(b)
being knowingly concerned in the failure of Welcome Financial
Services Limited (“Welcome”) to take reasonable care to organise and
control its affairs responsibly and effectively in breach of Principle 3
(Management and control); and
(2)
a prohibition order prohibiting you from performing any function in relation to
any regulated activity carried on by any authorised person, exempt person or
exempt professional firm, on the grounds that you are not a fit and proper
person as your conduct described in more detail later in this Notice
demonstrates a lack of integrity.
1.2.
The financial penalty would have been £400,000 but for evidence that imposing such
a penalty would have caused you serious financial hardship.
1.3.
You have not referred the matter to the Upper Tribunal (Tax and Chancery Chamber).
1.4.
Accordingly, for the reasons set out below, the FSA hereby imposes on you:
(1)
a financial penalty of £200,000; and
(2)
a prohibition order prohibiting you from performing any function in relation to
any regulated activity carried on by any authorised person, exempt person or
exempt professional firm.
2.
SUMMARY REASONS FOR THE ACTION
2.1.
Between August 2007 and February 2009 (“the Relevant Period”), you were the
Finance Director at Welcome, the principal subsidiary of Cattles Limited, then known
as “Cattles plc” (“Cattles”), a subprime lender. As a director of an authorised firm,
you were also approved to perform the director function (CF1).
3
The false and misleading statements
2.2.
Welcome published false and misleading information about the credit quality of its
loan book in its Annual Report and Financial Statements for the year ending 31
December 2007 (“Welcome’s 2007 Annual Report”) by stating that:
(1)
as at 31 December 2007, around £2.1 billion of its approximately £3 billion
loan book was “neither past due nor impaired” (ie not in contractual arrears);
(2)
it treated a loan account as impaired when the account was 120 days in
contractual arrears; and
(3)
it had made a pretax profit of £130 million for the year to 31 December 2007.
2.3.
Welcome’s 2007 Annual Report containing this false and misleading information,
approved by Welcome’s Board including yourself, was consolidated into Cattles’
Annual Report and Financial Statements for the period ending 31 December 2007
(“Cattles’ 2007 Annual Report”). This was published on 28 February 2008, reporting
a pretax profit of £165.2 million.
2.4.
The same misleading information was also published in the Cattles’ rights issue
prospectus dated 23 April 2008 (“the Rights Issue Prospectus”) that raised £200
million.
The true position in respect of the loan book
2.5.
In fact, deferments had been routinely employed in the business and a correct
application of International Financial Reporting Standard 7 (“IFRS 7”) would have
resulted in loans which had been deferred being treated either as past due or as re
negotiated. Because deferments had not been stripped out of the ‘neither past due nor
impaired’ category, around £2.1 billion of the loan book was disclosed as not being in
contractual arrears, creating the impression that far more customers were repaying
their loans on time than was actually the case. The level of a lender’s contractual
arrears as a proportion of its loan book is a key measure of financial performance.
2.6.
£445 million of the loan book was more than 120 days in contractual arrears and
treated as unimpaired.
2.7.
Impairing on a contractual basis, Cattles restated the figures in its 2007 Annual
Report showing that it made a pretax loss of £96.5 million instead of the originally
reported profit of £165.2 million (a reduction of £261.7 million). On the same basis,
Welcome made a loss of £94.9 million (a reduction of £224.9 million).
Your responsibilities
2.8.
As a director of Welcome you had a duty to exercise care, skill and diligence in the
performance of your duties.
2.9.
In particular, and in relation to the auditor, the directors’ report had to contain a
statement that in the case of each director, so far as you as Finance Director were
aware, there was no relevant audit information of which the auditor was unaware; that
each director had taken all steps that he ought to have taken to make himself aware of
that information; and that he had taken all steps to establish that the auditor was aware
of that information.
Approval of the Annual Report
2.10. On 18 March 2008, the financial statements in Welcome’s 2007 Annual Report were
approved by the board of directors and signed on its behalf by you.
Your knowledge
2.11. You knew that the business made extensive use of ‘deferments’, whereby missed
contractually due payments could be deferred to the end of the loan period, usually
without contacting the relevant customer, and a deferment was deemed to either re
start or pause the arrears clock, depending on the circumstances. This had the effect
that a loan on which interest payments had been deferred might be deemed by the
business to be:
(1)
uptodate and not in arrears despite a number of contractually due payments
having been missed; or
(2)
in arrears but not impaired (ie not more than 120 days in arrears) despite more
than four contractual monthly payments having been missed.
The contraventions and financial penalty
2.12. By approving Welcome’s 2007 Annual Report in the knowledge that the information
in it would be disseminated to the market, and signing it on behalf of the Board, you
committed market abuse.
2.13. By failing to discharge your duty to ensure the accuracy of the credit quality of
Welcome’s loan book, you were knowingly concerned in Welcome’s breach of
Principle 3.
2.14. In the light of all the circumstances, the FSA considers it appropriate to impose on
you a financial penalty of £200,000 which would have been £400,000 but for your
personal circumstances.
Integrity and prohibition
2.15. In failing to ensure that there was a full and open discussion on the treatment of
deferments with all concerned leading to a proper application of IFRS 7 in the
accounts, and for the reasons given more fully in paragraphs 6.3 to 6.8, the FSA
considers that you failed to act with integrity in discharging your responsibilities.
2.16. The FSA makes no finding that you deliberately set out to conceal the true position,
either on your own part or jointly with others.
2.17. The FSA concludes that you are not a fit and proper person to perform any function in
relation to any regulated activity and that it should make a prohibition order
accordingly.
3.
LEGISLATION, RULES AND GUIDANCE
3.1.
The provisions set out below are those applicable during the Relevant Period.
Relevant legislative provisions
3.2.
The FSA has the power, pursuant to section 56 of the Act, to prohibit an individual
from performing any function in relation to any regulated activity where it appears to
the FSA that that individual is not a fit and proper person.
3.3.
The FSA has the power, pursuant to section 66 of the Act, to impose a financial
penalty on a person if, while an approved person, he has been knowingly concerned
in a contravention by the relevant authorised person of a requirement imposed on that
authorised person by or under the Act.
3.4.
The FSA has the power, pursuant to section 123(1) of the Act, to impose a financial
penalty where it is satisfied that a person has engaged in market abuse.
3.5.
Section 118(1) of the Act defines “market abuse” as behaviour (whether by one
person alone or by two or more persons jointly or in concert) which:
“occurs in relation to ... qualifying investments admitted to trading on a
prescribed market; … and … falls within any one or more of the types of
behaviour set out in subsections (2) to (8).”
3.6.
Section 118A(1) of the Act provides that:
“[b]ehaviour is to be taken into account for the purposes of … [sections 118 to
131A of the Act] … if it occurs in the United Kingdom or … in relation to
qualifying investments which are admitted to trading on a prescribed market
situated in, or operating in, the United Kingdom ...”
3.7.
Section 130A of the Act provides that the Treasury may by order specify markets and
investments which are “prescribed markets” and “qualifying investments” for the
purposes of any or all of sections 118 to 131A of the Act.
3.8.
The London Stock Exchange (“the LSE”) is a prescribed market for the purposes of
section 118(7) of the Act by reason of the Financial Services and Markets Act 2000
(Prescribed Markets and Qualifying Investments) Order 2001. Shares are, by reason
of the same Order and relevant European legislation, qualifying investments.
3.9.
Section 118(7) of the Act defines as a form of market abuse behaviour which:
“… consists of the dissemination of information by any means which gives, or
is likely to give, a false or misleading impression as to a qualifying investment
7
by a person who knew or could reasonably be expected to have known that the
information was false or misleading.”
Relevant regulatory provisions
3.10. Principle 3 of the FSA’s Principles for Businesses provides (in PRIN 2.1.1R) that:
“A firm must take reasonable care to organise and control its affairs
responsibly and effectively, with adequate risk management systems.”
3.11. PRIN 3.2.3R provides, amongst other things, that Principle 3 applies with respect to
the carrying on of unregulated activities in a prudential context, ‘prudential context’
being defined as:
“in relation to activities carried on by a firm, the context in which the activities
have, or might reasonably be regarded as likely to have, a negative effect on:
(a)
confidence in the financial system; or
(b)
the ability of the firm to meet either:
(i)
the "fit and proper" test in threshold condition 5 (Suitability);
or
(ii)
the applicable requirements and standards under the regulatory
system relating to the firm's financial resources.”
3.12. Paragraph 5 to Schedule 6 of the Act sets out threshold condition 5 which states that:
“The person concerned must satisfy the [FSA] that he is a fit and proper
person having regard to all the circumstances, including:
(a)
his connection with any person;
(b)
the nature of any regulated activity that he carries on or seeks to carry
on; and
(c)
the need to ensure that his affairs are conducted soundly and
prudently.”
3.13. COND 2.5.4G(2)(a) sets out that in determining whether a firm will satisfy and
continue to satisfy threshold condition 5, the FSA will have regard to all relevant
matters including but not limited to whether a firm conducts its business with integrity
and in compliance with proper standards.
3.14. MAR 1.2.3G makes clear that the Act does not require the person engaging in the
behaviour in question to have intended to commit market abuse.
3.15. Further regulatory provisions are set out in the Annex to this Notice.
4.
FACTS AND MATTERS RELIED ON
4.1.
This Notice concerns your misconduct in the Relevant Period, during which time
Cattles was a publicly listed financial services company, having been admitted to the
Official List of the LSE in 1963. Cattles’ shares were qualifying investments for the
purposes of section 118 of the Act.
4.2.
Welcome is a wholly owned subsidiary of Cattles, and is authorised and regulated by
the FSA (FSA registration no. 305742). Welcome’s principal business (which was
not a regulated activity) was retail consumer lending, providing low value secured,
unsecured and hire purchase loans to subprime borrowers at high levels of interest.
The significance of this part of the business within the Cattles Group is indicated by
figures taken from the Cattles 2007 Annual Report, which showed that it represented
approximately 89.5% of Cattles’ revenue.
4.3.
You are an experienced qualified chartered accountant and joined Welcome in 1994
where you were Finance Director until June 2009. As Finance Director of Welcome,
you were the director primarily responsible for Welcome’s financial statements
(which you knew formed by far the most significant part of Cattles’ financial
statements) and for ensuring that all relevant audit information was provided to
Welcome’s auditors (PricewaterhouseCoopers – “PwC”).
Whilst you did not
generally attend Cattles’ Audit Committee meetings, you were, as Finance Director of
Cattles’ principal subsidiary, aware of their significance. To the extent that you were
aware that relevant information was not being made available on a proactive basis, or
that misleading information was being provided to, Cattles’ Audit Committee or PwC
(or both), you should have taken steps to remedy the position.
Management of customer arrears within Welcome
4.4.
In 2006, Welcome developed an operational structure whereby:
(1)
a loan that was less than 60 days in arrears was managed by an ‘Operational
Branch’;
(2)
a loan that was more than 60 days but less than 120 days in arrears was
managed by a Local Management Branch (“LMB”). The LMBs were
described in Welcome’s 2007 Annual Report as comprising:
“specialist collectors who work with customers to ensure regular
payments resume so as to enable the account to be transferred back to
the Operational Branch and to prevent the account from falling into
more serious arrears”; and
(3)
a loan that was more than 120 days in arrears was considered impaired and
was transferred to a ‘Local Collection Unit’ (“LCU”).
4.5.
Importantly, within Welcome the arrears status of a loan (and therefore whether it sat
within an Operational Branch, an LMB or an LCU) was not a simple calculation done
on the basis of the number of contractually due payments missed (on which basis, for
example, two missed monthly payments would equate to a loan being 60 days in
arrears). Instead, Welcome’s internal calculation of arrears allowed for the deferment
of missed payments in certain circumstances, with the application of a deferment to a
loan being treated within Welcome as either restarting or pausing the calculation of
arrears, depending on the circumstances.
4.6.
A loan showing as uptodate (ie not in arrears) in Welcome’s internal management
information might therefore be a loan on which a number of contractually due
payments had been missed but deferred. Similarly, a loan showing as unimpaired (ie
not more than 120 days in arrears) might be a loan on which more than four
contractually due payments had been missed but in respect of which some of those
payments had been deferred.
4.7.
As you were aware, the financial impact of the setting up of the LMBs in 2006 was
considerable. In 2006, but for the LMBs, around £260 million of loans would have
been expected to be transferred to the LCUs and therefore classified as impaired.
However, in fact only around £164 million was transferred to the LCUs. A substantial
amount of this £96 million improvement was due to debt being held back from
impairment through the use of deferments by the LMBs (ie deferments were used to
pause debt at between 60 and 120 days that would otherwise have been impaired). As
profit was calculated by reference to impairment, there was a corresponding £45
million improvement to Cattles’ reported profit for that year. Within Welcome, this
impact was justified on the basis that holding debt as unimpaired in the LMBs would
allow specialist collectors time to work with customers. However, you were also
aware that within the business certain individuals referred to the impact deferments
used in the LMBs as an “overdraft” that had allowed Cattles to hit its profit target.
The requirements of International Financial Reporting Standard 7
4.8.
As you were aware, Cattles’ 2007 Annual Report was required to comply with IFRS 7
for the first time. The introduction of IFRS 7 states:
“The International Accounting Standards Board believes that users of
financial statements need information about an entity’s exposure to risks and
how those risks are managed. Such information can influence a user’s
assessment of the financial position and financial performance of an entity or
of the amount, timing and uncertainty of its future cash flows. Greater
transparency regarding those risks allows users to make more informed
judgments about risk and return.”
4.9.
Paragraph 31 of IFRS 7 requires an entity to:
“disclose information that enables users to evaluate the nature and extent of
risks arising from financial instruments to which the entity is exposed”
4.10. In disclosing the nature and extent of the risks, entities are required to give both
qualitative information on the risks (how they have changed in the period and how
they are managed) as well as quantitative disclosures in respect of the risks. IFRS 7
sets out the risks to include, but not be limited to, credit risk, liquidity risk and market
risk. The quantitive disclosures for credit risk should include:
(1)
“information about the credit quality of financial assets that are neither past
due nor impaired” (paragraph 36(c));
(2)
the carrying amount of financial assets that would otherwise be past due or
impaired, whose terms have been renegotiated” (paragraph 36(d)); and
(3)
“an analysis of the age of financial assets that are past due as at the
reporting date but are not impaired” (paragraph 37(a).
4.11. “Past due” is defined in IFRS 7 as when a counterparty has failed to make a payment
when contractually due, for example failing to pay interest or principal payments due
in the time period specified in the contract.
4.12. Under IFRS 7 a loan that is contractually overdue (but not impaired) but to which a
deferment has been applied should be treated as:
(1)
“past due but not impaired” where the deferment has not been agreed with the
customer, which cannot have happened if there has been no contact with the
customer); or
(2)
“renegotiated” where the deferment has been agreed with the customer.
4.13. A loan on which interest payments have been deferred should be disclosed
accordingly to give important information about credit quality.
4.14. International Accounting Standard 39 requires loans to be treated as impaired where
there is objective evidence that a loan asset is impaired. As referred to above,
Welcome treated loans that were more than 120 days in arrears (importantly after the
application of deferments) as impaired.
Events prior to publication of Welcome’s and Cattles’ 2007 Annual Reports
4.15. The information required to be disclosed by IFRS 7 was not information that Cattles
had previously made public and therefore, in April 2007, Cattles and Welcome
formed a project team to consider the impact of the new requirements.
The meeting in June 2007
4.16. Early on in its deliberations, the IFRS 7 project team informed you that it “would
appear a challenge to argue that debt having deferments is neither renegotiated nor
in arrears” and took the correct view that deferments fell to be disclosed as either
past due or renegotiated loans but you, aware that this would have involved disclosing
a significant proportion of the loan book as renegotiated, told the project team that
you were reluctant to accept this view.
4.17. In light of the clear steer being given by you and others within senior management,
the project team sought to develop arguments to support the position that a deferred
loan was neither renegotiated nor past due. At a meeting in June 2007 between the
project team and certain of Cattles’ directors and John Blake (which meeting you did
not attend), the project team reported that classifying deferments as either renegotiated
or as past due was “unacceptable” because it would mean disclosing 34% of the loan
book as either renegotiated or as past due. The arguments suggested by the project
team to avoid disclosure had not been fully and openly debated. Nonetheless the
Cattles directors present and John Blake endorsed the approach.
4.18. The clear inference is that such a disclosure was deemed “unacceptable” to the
business because it would reveal significant negative information about the credit
quality of the loan book.
The reference to the impact of LMBs as an “overdraft” and the use of AMBs
4.19. As noted at paragraph 4.5 above, you were aware that within the business certain
individuals referred to the impact of the LMBs as an “overdraft” that had allowed
Cattles to hit its profit target for 2006. In mid2007, John Blake instructed staff at
Welcome to refrain from using the term “overdraft” in respect of the debt held back
from impairment by the LMBs. Around the same time, as you were aware, Welcome
set up the Asset Management Branches (“AMBs”), a subset of the LMBs, to
specialise in the collection of contractual payments on hire purchase and secured
loans.
Their primary activity was to work with the customer to reestablish
contractual payment performance.
4.20. It was deemed appropriate for loans to remain in the AMBs for up to a year without
being treated as impaired, even if contractually due payments were not being received
during that period. This was achieved by the application of multiple deferments
which had a significant financial impact by holding back debt from impairment.
The two versions of the IFRS 7 progress report and the report of a meeting in
September 2007
4.21. On 20 September 2007, certain members of the IFRS 7 project team met with PwC to
discuss the IFRS 7 disclosures. In advance of that meeting, the project team had
produced two versions of an IFRS 7 progress report. The first version was for the
Cattles Board and outlined the arguments to be used as to why deferments should not
be classified as renegotiated or past due. The second version, sent to PwC, made no
mention of deferments at all. The progress report sent to PwC made no mention of
deferments, despite their fundamental importance to the question of what disclosures
should be made.
4.22. Following the 20 September 2007 meeting, a member of the IFRS 7 project team
updated another member of the team (as well as James Corr, among others) and
reported that:
“IFRS 7 meeting with PWC also went very well … there was absolutely no
mention of deferments … as they did not raise any challenge re deferments, we
did not raise it either. I feel that deferments are not particularly on their
radar screen either re IFRS 7 or generally and I suggest we keep it that way.
…
The one challenge they did come back on was around excluding 129 days
arrears from the past due category. …
… we got a really good result today and should be prepared to concede the 1
29 days point in the interests of the bigger prize. Can you run these thoughts
by Peter [Miller – the Finance Director of Welcome] and John [Blake] when
you are back next week?”
4.23. You were aware in the months leading up to signing Welcome’s 2007 Annual Report
that deferments were not on PwC’s “radar screen” but you did not ensure that they
were properly informed.
4.24. As you were aware, in November 2007 there was around £120 million of unimpaired
debt in the AMBs and a Welcome employee who reported to you sent you a document
titled “Key Audit Risks 2007”, in which he stated that:
“… the major area of audit risk at the yearend again related to impairment
provisions … as at 31/10/07, the amount of debt at the AMBs totalled £120M
… this debt is classified as nonimpaired … the AMB debt could be queried as
to its nature, its recent payment performance and deferment activity”.
4.25. By November 2007 at the latest, you, John Blake and James Corr were receiving
information in the form of contractual delinquency graphs that clearly distinguished
between Welcome’s “contractual arrears” and “deferred arrears” impairment
positions. The distinction between contractual and deferred arrears, and the potential
implications of an unfavourable IFRS 7 interpretation, was therefore appreciated by
you.
The draft paper to the Cattles Board in December 2007 on the use of deferments
4.26. In late December 2007, you were involved in drafting a paper to brief the full Cattles
Board on IFRS 7 disclosures. An initial draft was prepared which claimed that
“collection tools such as … deferments are available for use in the LMBs, in
restricted circumstances”. No other mention of deferments was made. Given that
over a third of the book had had a deferment applied, it was, as you were aware,
highly misleading for the paper to claim that deferments were used in restricted
circumstances. The paper also stated that Welcome’s impairment trigger was “120
days arrears”. However, the paper made no mention of:
(1)
the role of deferments in calculating the number of days in arrears for
purposes of the impairment trigger and therefore the level of impairment;
(2)
the approach being adopted on the treatment of deferments under IFRS 7
despite, as you were aware, the issue not having been raised with PwC who
were unaware of the significance of deferments; and
(3)
the fact that deferments were used as more than simply a “collection tool” ie
the impact of deferments on what needed to be disclosed under IFRS 7 and on
Welcome’s arrears calculation was not explained.
4.27. However, rather than flag up the wholly inadequate explanation of deferments in the
draft paper, John Blake emailed one of your colleagues working on the draft to say
“do we need to mention deferments? … rewrites are fairly self explanatory but
deferments are not!” and was told that you had already made the same point. The
single reference to deferments in the draft paper was therefore deleted and the paper
that went to the Cattles Board made no reference to deferments at all, despite their
fundamental importance to what needed to be disclosed under IFRS 7 and to
Welcome’s internal arrears calculation.
The £169 million in the AMBs in January 2008
4.28. In January 2008, you were sent a further “Key Audit Risks 2007” document. This
explained that there was now £169 million in the AMBs and (under the heading
“Work Performed by PwC”) that:
“the risk still remains that as a part of other testing, the AMB … debt could be
queried as to its nature, its recent payment performance and deferment
activity … were we pushed into exactly how these accounts are prevented from
reaching impairment it could highlight the level of deferments used as
opposed to actual cash collected”.
From this it is clear that you knew that PwC were not fully aware of Welcome’s use
of deferments and that there were concerns over the amount of cash being collected on
the unimpaired debt in the AMBs. However, despite knowing this, you did not ensure
that PwC were properly informed.
The Audit Committee meeting February 2008
4.29. On 21 February 2008, Cattles’ Audit Committee reviewed a draft internal audit report
that it had commissioned to consider whether a 120 day impairment trigger remained
appropriate when mainstream banks impaired after 90 days.
4.30. The draft report stated that:
“The ageing of accounts is based on the “contractual arrears calculation” …
options to stop the customer becoming impaired are limited to … deferring
payment … management has noted that … deferments … start the “clock”
again with regard to ageing … deferments occur where it has been agreed
with the customer that missed payments (necessary because of short term
payment difficulties) can be made up at the end of the contract ….”
4.31. It is clear from this that the internal auditors had not been accurately informed about
Welcome’s use of deferments. In contrast to what the report stated, deferments were
mostly applied without agreement with the customer. In addition to “restarting the
clock”, deferments were also used to keep loans in arrears but not impaired as
described in paragraph 4.5 above. Moreover, in making this comparison, the internal
auditors were unaware of the extent to which Welcome’s impairment trigger allowed
for deferments, having been told at a meeting with yourself and others that deferments
were “tightly controlled”. This lack of understanding severely limited the value of the
comparison being made.
The Welcome Annual Report February and March 2008
4.32. A draft of Welcome’s 2007 Annual Report was approved by you and the rest of the
Welcome Board on 25 February 2008 which stated that IFRS 7 had been adopted and
contained the following figures:
Loans and receivables
£ ’000
Neither past due nor impaired
2,184,553
Past due but not impaired (total)
458,158
Past due up to 29 days (but not impaired)
142,657
Past due 30 59 days (but not impaired)
118,945
Past due 60 89 days (but not impaired)
102,008
Past due 90 119 days (but not impaired)
94,548
Past due 120 days or more (but not impaired)
4.33. The impairment trigger statement referred to in paragraph 4.37 below was not
contained in the approved draft. However, as shown by the table above the draft
stated that there were no loans “Past due 120 days or more” that were unimpaired, by
implication stating that any loans over 120 days in contractual arrears were treated as
impaired (which was untrue).
The draft of Welcome’s 2007 Annual Report
acknowledged that the directors were required to “Make judgements and estimates
that are reasonable and prudent”.
4.34. The draft of Welcome’s 2007 Annual Report contained highly misleading information
in relation to the credit quality of Welcome’s loan book because it:
(1)
stated that IFRS 7 had been adopted but, in fact, the arrears figures provided
failed to strip out deferments, giving the impression that far more of
Welcome’s customers were repaying their loans on time than was actually the
case. It stated that around £2.1 billion of Welcome’s approximately £3 billion
loan book was “neither past due nor impaired” (ie not in contractual arrears)
when, in fact, calculated on the contractual basis required by IFRS 7, only
around £1.5 billion of the book was “neither past due nor impaired”;
(2)
implied that any loans more than 120 days in contractual arrears were treated
as impaired when in fact £445 million of the loan book was more than 120
days in contractual arrears and treated as unimpaired;
(3)
Welcome had made a pretax profit of £130 million for the year to 31
December 2007 whereas, in fact, on the implied basis that all loans more than
120 days in contractual arrears were impaired, Welcome had made a loss of
£94.9 million (a reduction of £224.9 million).
4.35. Bearing in mind, for example, the ‘Key Audit Risks 2007’ document in January 2008
(see paragraph 4.28), you knew, or ought reasonably to have known, that IFRS 7 had
not been complied with and you knew that a very significant number of loans were
more than 120 days in contractual arrears being treated as unimpaired. You also
knew, or ought reasonably to have known, that cash collection was poor in relation to
a significant amount of unimpaired debt. Consequently, you knew, or ought
reasonably to have known, that the draft of Welcome’s 2007 Annual Report contained
information which was false and misleading, and that in preparing them you had made
judgments which were neither reasonable nor prudent.
You knew, or ought
reasonably to have known, that the information contained in the draft of Welcome’s
2007 Annual Report would be disseminated by means of being consolidated into
Cattle’s 2007 Annual Report (published on Cattle’s website on 28 February 2008).
Consequently, you also knew, or ought reasonably to have known, that Cattles’ 2007
Annual Report contained false and misleading information.
4.36. On 18 March 2008, you signed a representation letter to PwC in connection with its
audit of the financial statements of Welcome for the year ended 31 December 2007 in
which, among other representations, you made the following representations:
(1)
“Each director has taken all the steps that he or she ought to have taken as a
director in order to make himself or herself aware of any relevant audit
information and to establish that [PWC] are aware of that information,
including that … All other records and related information which might affect
the truth and fairness of, or necessary disclosure in, the financial statements
… and no such information has been withheld”;
(2)
“So far as each director is aware, there is no relevant audit information of
which [PWC is] unaware.”; and
(3)
“… the financial statements are free from material misstatement, including
omissions.”;
without having made adequate enquiries to satisfy yourself that these statements were
true.
4.37. The letter also stated that “we acknowledge our responsibility for the design and
implementation of internal control to prevent and detect error.”
4.38. On 18 March 2008, you, and the rest of Welcome Board, also approved the Welcome
2007 Annual Report which was filed at Companies House on 29 May 2008.
4.39. Welcome’s 2007 Annual Report stated that it complied with IFRS 7 and contained the
same information as the table at paragraph 4.32 and also acknowledged that the
directors were required to “Make judgements and estimates that are reasonable and
prudent”. It also stated that:
“Welcome Financial Services determines that there is objective evidence of an
impairment loss at the point at which they are not prepared to offer any
further credit to a customer who has encountered serious repayment
difficulties. In Welcome Finance this is assessed by reference to the number of
days an account is contractually in arrears. When an account has reached
120 days in arrears, there is an acceptance that the original contractual
relationship has broken down.”
4.40. You were aware that this was not an accurate description of the impairment trigger as
it made no mention of the role of deferments in calculating the impairment trigger and
therefore the level of impairment. Instead, the statement reinforced the impression
given by the IFRS 7 disclosures that Welcome calculated arrears simply on the basis
of the number of contractual payments missed. This was further reinforced by
Welcome’s statement that it had no loans “Past due 120 days or more” that were
unimpaired (see table at paragraph 4.43 below), which gave the impression that all
loans that were more than 120 days in contractual arrears were treated as impaired.
4.41. Welcome’s 2007 Annual Report contained highly misleading information in relation
to the credit quality of Welcome’s loan book because it stated that:
(1)
IFRS 7 had been adopted but, in fact, the “neither past due nor impaired”
figures provided failed to strip out deferments, giving the impression that far
more of Welcome’s customers were repaying their loans on time than was
actually the case. It stated that around £2.1 billion of Welcome’s
approximately £3 billion loan book was “neither past due nor impaired” (ie
not in contractual arrears) when, in fact, calculated on the contractual basis
required by IFRS 7, only around £1.5 billion of the book was “neither past
due nor impaired”;
(2)
Welcome treated a loan account as impaired when the account was 120 days in
contractual arrears and that on this basis around £450 million of Welcome’s
loan book was “past due but not impaired” (when, in fact, with deferments of
less than four monthly payments treated as past due loans over £600 million of
the loan book was “past due but not impaired”) and £441 million of
Welcome’s loan book was impaired (when, in fact, with deferments of more
than four monthly payments treated as impaired loans over £886 million of the
book was impaired);
(3)
Welcome had made a pretax profit of £130 million for the year to 31
December 2007 whereas, in fact, on the basis of the stated impairment trigger,
Welcome had made a pretax loss of £94.9 million (a reduction of £224.9
million).
4.42. At the time you approved and signed Welcome’s 2007 Annual Report, you were
aware of the requirements of IFRS 7. In addition, you knew, or ought reasonably to
have known, that the stated approach to impairment was not reflected in the figures
contained in Welcome’s 2007 Annual Report. Consequently, Welcome’s 2007
Annual Report contained information which was false and misleading.
4.43. The table below shows the original IFRS 7 and impairment disclosures relating to
Welcome taken from Cattles’ 2007 Annual Report as against the corrected figures
calculated on a contractual basis and restated in Cattles’ 2008 Annual Report
(published on 12 May 2010):
Loans and receivables (Welcome)
Original 2007 Restated 2007
(£m)
(£m)
Neither past due nor impaired
2,184.5
1,572.4
Past due but not impaired (total)
458.2
601.2
Past due up to 29 days (but not impaired)
142.7
143.1
Past due 30 59 days (but not impaired)
119.0
221.3
Past due 60 89 days (but not impaired)
102.0
139.0
Past due 90 119 days (but not impaired)
94.5
97.8
Past due 120 days or more (but not impaired)
4.44. It is clear that the original figures for 2007 gave a misleading impression as to
Welcome’s credit quality. As a result of the adjustments made to those figures,
Welcome’s reported pretax profit figure was reduced by £224.9 million, resulting in a
reported pretax loss for Welcome of £94.9 million. As a result, Cattles was required
to reduce its overall pretax profit figure by £261.7 million, resulting in a reported pre
tax loss to Cattles of £96.5 million.
Events after publication of Cattles’ 2007 Annual Reports
4.45. On 23 April 2008, Cattles issued a Rights Issue Prospectus. Like Welcome’s and
Cattles’ 2007 Annual Reports, it contained misleading information because it
contained the same statement as that set out in paragraph 4.39 above regarding the
basis for impairment and the financial statements in Cattles’ 2007 Annual Report
(which were stated to have adopted IFRS 7) were incorporated by reference.
4.46. Although you were not involved in approving the Rights Issue Prospectus, you were
aware of its contents (even if only after it was made public) and therefore aware, or
ought reasonably to have been aware, that it contained information which was false
and misleading. The rights issue was fully subscribed and raised £200 million. Had
Cattles’ shareholders been aware that the application of deferments impacted on the
calculation of the level of contractual arrears and the impairment to the extent it did, it
is likely that they would have regarded this as highly material and been significantly
less likely to subscribe to the rights issue.
4.47. On 19 August 2008, you received an internal audit report highlighting the lack of
management information as to the aggregate level of deferments and detailing
concerns over the impact of a £42 million ‘bulk deferment’ (which had been approved
by Welcome’s management in May 2008 despite not meeting standard policy
requirements) on reported profit.
4.48. On 20 August 2008, you received an email setting out an estimate of the impact of
removing all deferments from Welcome’s impairment figure as at June 2008, which
you forwarded to James Corr and John Blake. The estimate showed that such a
calculation would move £611 million of debt from nonimpaired to impaired,
requiring a provision of £488 million. In addition to the concerns raised by the
internal audit report described in the above paragraph, you knew that certain Cattles’
directors were seeking information on the level of deferments within Welcome (in
your own words “any differences over … contractual and deferred arrears [had]
dawned on” one of the directors) but you failed to satisfy yourself that the overall
level of deferments, and their impact on reported profit, was fully understood.
4.49. By October 2008, the value of loans held within the AMBs had reached £230 million.
On 24 October 2008, you, amongst others, received by email a draft Compliance
Review of the AMBs. The first issue identified by the Compliance Review was
“Potential baddebt on accounts held within AMB” with the recommendation that:
“In line with current policy a/cs held within AMB are not subject to
provisioning. However, where it is identified that no asset exists, or the asset
is insufficient to settle the customers balance, management should review the
appropriateness of retaining the a/c within AMD or whether such a/cs should
be transferred to the LCU and provided against”.
Attached to the Compliance Review was a schedule entitled “AMD Account Review
(Random Sample)”. By way of example only, this schedule showed the following
accounts which were unimpaired despite being considerably greater than 120 days in
contractual arrears:
(1)
an account on which £9,878.72 was owed which had had 87 deferments
applied and where it was not known that there was an asset in place;
(2)
an account on which £57,431.12 was owed which had had 22 deferments
applied and where it was known that “House repossessed by 1 st lender – no
(3)
an account on which £35,000.42 was owed which had had 34 deferments
applied and where it was known that “House repossessed by 1 st lender – no
equity. Notes indicate customer confirmed bankrupt 29/5/08.”
4.50. On 27 October 2008, a colleague emailed it to you and John Blake to say, “Now that
[the Compliance Director] is on holiday you might find this report looking a lot nearer
reality by the time he returns – trust me”. You confirmed your trust in the sender, and
described the draft as “bizarre”.
4.51. On 10 November 2008, the same colleague sent to you and John Blake a revised
version of the Compliance Review, saying “I think you will find the updated version
more accurate than the first”. This version made no mention of the first issue
previously identified (ie in relation to potential bad debt in the AMBs and the lack of
assets to use as security). In addition, the “AMD Account Review (Random Sample)”
schedule had been deleted in its entirety. As a result, you failed to ensure that a reader
would be aware of the true state of the debt housed within the AMBs.
4.52. By this stage, concerns as to provisioning on the loan book and in particular on debt
housed within the AMBs had been raised directly with PwC by a member of Cattles’
management team who had learned that none of the debt housed within that division
was provided for. Accordingly, a paper was drafted by you, among others, to provide
further explanation. The paper was distributed at a Cattles Audit Committee meeting
on 4 December 2008. The paper informed the Audit Committee, for the first time,
that the 120 days arrears trigger in fact allowed for multiple deferments, albeit that it
claimed these were only allowed “within strictly controlled circumstances”. In fact,
as you were aware from the “Random Sample” attached to the Welcome Compliance
Review (but deleted from the final version), it was misleading to describe the use to
deferments as “strictly controlled”. In addition, the paper claimed that “The
establishment of the AMBs has provided greater visibility of collections performance,
as well as an improvement in cash recoveries and compliance (internal and
regulatory).” when you knew that cash collection in the AMBs was poor and had
been declining during 2008.
4.53. The Audit Committee was very concerned to learn that debt that was more than 120
days in contractual arrears could remain unimpaired and without a provision. It
arranged for a further meeting on 15 December 2008 to discuss the AMBs, which as
at October 2008 held £230 million of unimpaired debt. You attended the meeting,
specifically convened to address the Audit Committee’s concerns over the level of
deferments in the AMBs and the effect on impairment, but at no stage did you explain
the true extent to which deferments were used in the business, namely that there was
in fact over £600 million of debt (approximately 20% of Welcome’s loan book) that
was only unimpaired because of the application of deferments.
4.54. The Audit Committee also sought an explanation as to why there appeared to be
unsecured loan accounts housed within the AMBs and was assured by John Blake that
each loan was secured by an asset, such as a car or property charge. You knew this to
be untrue, as the Welcome Compliance Review document made clear, but did nothing
to correct John Blake’s assertion. John Blake also gave assurances to the Audit
Committee that AMBs were “designed to collect cash and reduce impairment”
without any indication of the systems difficulties faced by the AMBs in collecting
cash. You did nothing to correct the misleading impression given by John Blake.
4.55. After further investigation, PwC refused to sign off Cattles’ 2008 Annual Report and
on 20 February 2009 it was announced that publication of the 2008 Annual Report
would be delayed. The market reaction to this announcement was a 74% drop in the
share price from 13.25 pence on 19 February 2008 to 3.5 pence the next day.
4.56. On 1 April 2009, Cattles announced that it would need to make a provision of around
£700 million in excess of that originally anticipated for 2008. On 23 April 2009,
Cattles announced that, in light of its inability to publish its 2008 Annual Report by
the requisite deadline, it had requested a suspension of trading in its shares. Trading
in Cattles’ shares was duly suspended on the same day.
5.
REPRESENTATIONS
5.1.
You made a number of representations principally in writing on 24 June 2011 and
orally on 8 September 2011. What follows is a brief summary of the key
representations on liability.
Causation
5.1.
You said that there was no causation from the compiling of Welcome’s draft accounts
to their subsequent incorporation into the accounts of Cattles following consideration
by the Cattles Group Finance Department, the Audit Committee, the auditors and the
Cattles Board. You did not commit market abuse because the actions were not done
with your express or implied authority. You did not have ‘ultimate authority’ for the
actions. The actions of Cattles were not caused by Welcome.
General observations
5.2.
You denied all the allegations but accepted that:
(1)
the figures that were published to support the Cattles’ 2007 year end results
were incorrect;
(2)
they were false and misleading;
(3)
the notes to the accounts were not precisely drafted; and
(4)
PwC were not aware of any deviations from policy in respect of deferments
and rewrites.
5.3.
The figures were incorrect because under a strict interpretation of IFRS 7 the figures
in the published accounts should have stripped out deferments as past due but not
impaired. The approach ultimately adopted by the project team was incorrect. The
extent that impairment was assessed after the application of deferments should have
been mentioned in the accounts.
5.4.
The figures were also incorrect because the standard operating procedures within
Welcome were not being followed with the result that the debt was treated as
unimpaired when it was impaired. There was a catastrophic failure in Operations
coupled with a catastrophic failure by Compliance to identify and probe through
exception reports.
5.5.
The notes to the accounts were not precisely drafted because the published policy on
impairments within the accounts made no reference to the use of deferments. The
notes should have explained the use of deferments in the context of the 120 day
impairment trigger to provide greater clarity.
Market abuse
5.6.
You denied committing market abuse. You were not aware (and were not reckless to
whether) the Welcome 2007 Annual Report contained false or misleading
information. In particular, you were not aware of the operational failures. As you did
not have a detailed knowledge of the IFRS 7 issues, you relied on others and took
comfort from the ‘through the eyes of management approach’ as explained to you by a
colleague on the Project Team. On this basis, it would have been reasonable for a
deferred loan not to be treated as renegotiated or past due as that was the way in
which the business viewed them and had always viewed them. It reinforced the view
that the policy relating to deferments was acceptable and appropriate.
5.7.
You signed off the draft 2007 accounts in good faith, having applied all reasonable
skill, care and attention to the oversight of their compilation. Before doing so, you
asked the Welcome Board whether there was any reason why you should not do so
and no one raised any issue with you.
5.8.
James Corr signed off on the Cattles’ 2007 Annual Report on 27 February 2008 and
the announcement was made the following day. You were not asked to sign off the
Welcome’s 2007 Annual Report until 18 March 2008.
5.9.
You were not aware of the Rights Issue Prospectus until it was announced.
Your role
5.10. Your job profile was ‘inward looking’. You did not attend the Cattles Board or
committees and were not part of project teams such as in particular the IFRS 7 Project
Team. There was some evidence to suggest that you may have been marginalised
within the business. You were not the traditional finance director but were more of a
management accountant involved in planning, forecasting and performance against
that planning and forecasting. It was a daytoday role limited to internal management
and organisation.
The notes to the accounts
5.11. You were not responsible for the fact that the notes to the accounts omitted to mention
deferments. You had no role in drafting them. Although they had been reviewed by
the Board, the Audit Committee and PwC, you had not been asked to review them,
and you had no opportunity to see them before they were published. When you did
sign them, the notes were not drawn to your attention, including in particular the note
relating to impairment.
5.12. As you viewed the external presentation of financial data as a matter for Group it was
not an issue to which you paid close attention.
5.13. The notes may have been drafted in the way that they were because the terms
‘contractual
delinquency’
and
‘deferred
contractual
delinquency’
were
interchangeable within Welcome and PwC.
IFRS 7 and deferments
5.14. You were not aware that IFRS 7 required the figures in the published accounts to strip
out deferments past due but not impaired. The responsibility for ensuring compliance
with IFRS 7 was delegated by Cattles to the IFRS 7 project team which was a group
level project including PwC. You were not part of the project.
5.15. It is unreasonable for the FSA to say that you knew or should have known, or was
reckless, that the account should have stripped out the impact of deferments in
assessing IFRS 7. You were entitled to rely on the judgement of others.
Welcome’s Standard Operating Policies and Procedures
5.16. You were not aware that there had been a fundamental breakdown of internal controls
within Operations and Compliance and that Welcome’s Standard Operating Policies
and Procedures (“SOPPs”) were not being routinely followed. You relied on what
you were told by others. Management relied on compliance exception reports and
your recollection was that they did not put you on notice that deferments were not
being complied with.
5.17. As an internal review dated 19 August 2008 noted:
“In this context we note that at this time there is presently no fully developed
MI to support management oversight or the volume of deferments and rewrites
and insufficient and effective exception reporting to evidence when items are
being processed outside of the standard policy.”
5.18. The conclusion of the Review was that, in your own words, there was “a whole raft of
deficiencies, undoubtedly, in the MI” but you questioned whether that should be put at
your door. There was an inability within the management information (“MI”) to
distinguish between deferments which had been applied within the SOPPs and those
that had not been. When the MI was available to you, you showed it to management
and it was escalated to John Blake.
Knowing concern
5.19. You accept that Welcome failed to organise and control its affairs effectively in
contravention of PRIN 3 but you deny that you were knowingly concerned in the
breach. At all times you acted with due skill, care and diligence in relating to the area
of business for which you were responsible based on the MI available to you and the
assurances you received from those with responsibility for the operation of the
business areas where the controls broke down.
5.20. You have been badly served by colleagues and you should not be liable for their acts
or omissions and the systemic failures within other parts of the business for which you
had no oversight responsibility.
6.
FINDINGS AND CONCLUSIONS
6.1.
You accept that market abuse happened and that there were management and control
failings. However, you say, in essence, that you did not know what was going on
either operationally in terms of the use of deferments in the business or theoretically
in terms of the precise requirements of IFRS 7. You were in effect a management
accountant and should not be visited with the failings of others either within Welcome
or Cattles.
6.2.
This is a denial of your responsibilities as a director and in particular the Finance
Director of Welcome.
Your responsibilities and integrity
6.3.
In considering all the circumstances, the FSA noted in particular your statutory
responsibilities, in relation to a firm with a loan book valuation of in excess of £3
billion, to which IFRS 7 had particular relevance, which was capable of generating a
stated pretax profit of £130 million to be consolidated into the accounts of a listed
company capable of generating a stated pretax of £164.2 million.
6.4.
In these circumstances, the right thing for a person in your position to do would be:
(1)
to rely on and assert his position and authority as an experienced Finance
Director;
(2)
to ensure a culture of transparency and openness in relating to the financial
statements which properly balanced the aims of the business, including, to the
extent relevant to a subsidiary, the group business, the with the needs of the
market; and
(3)
to take a particularly close and rigorous interest in the treatment of deferments
and their impact on impairment, both from a policy point of view and the
delivery of the policy and to ensure that there was a full and open discussion
on the relevant issues;
so that he can, with integrity, satisfy himself that the figures for which he has
responsibility are true and fair.
6.5.
Measured against such actions, the FSA noted your assumption of a role which bore
no resemblance to that which would have discharged your responsibilities. The
circumstances demanded substantially more than the attention of someone focussed
on planning, forecasting and internal management who was not attending or taking an
interest in relevant committees, discussions or decisions. The fact that you may have
been, in your own words, ‘marginalised’ did not lessen your responsibilities. Neither
does the fact that you feel that you have been badly served by your colleagues. You
continued to accept your responsibilities in your stated role as Finance Director and
chose to do so.
6.6.
During the Relevant Period, you distanced yourself from the formation of the policy
and the practice relating to deferments, or allowing yourself to be distanced from
these matters. In particular, you failed to respond appropriately to papers on audit risk
and you signed Welcome’s 2007 Annual Report some while after signature of the
Cattles accounts and public announcement – both clear abdications of responsibility.
In signing the accounts, you gave your approval not only to the figures within the
financial statements but to the explanations to them in the notes and the combined
picture of risk which they presented.
6.7.
The demonstration of trust in, and reliance on, your colleagues is, at best, not
something recognised in your responsibilities, however much it reflects the practice
within the Cattles Group and the attitude of others. Similarly, the honest and candid
assessment in hindsight of the state of affairs within Welcome does not avoid or
diminish your part in being responsible for the catastrophic failure of Welcome and
Cattles.
6.8.
In these circumstances, the FSA concludes that you failed to act with integrity in not
doing what you, as the Finance Director, should have done.
Causation
6.9.
The issue for the FSA is whether you disseminated the false and misleading
information – not whether you caused others to do so. Dissemination is ‘by any
means’ (see paragraph 3.9). You approved and signed off the Welcome accounts
knowing that the information would be reflected in the Cattles’ 2007 Annual Report.
Market abuse
6.10. The issue for the FSA was not whether you were aware of the false and misleading
information in the Welcome 2007 Annual Report or reckless as to whether it
contained such information but whether you could reasonably have been expected to
have known that it would do. Neither is it relevant to the allegation of market abuse,
the extent to which you knew (if at all) of the operational failures within Welcome.
6.11. For the reasons given above, the FSA is satisfied that you could reasonably have been
expected to have known that the information given in the Welcome 2007 Annual
Report in relation to the loan book was false and misleading.
IFRS 7 and deferments
6.12. Part of your submissions was an expert’s report arguing that there was no increase in
the credit risk arising from two missed payments on a loan. In response the FSA also
submitted an expert’s report and a supplementary report following your
representations. The FSA prefers the evidence of their report in response to yours.
The fact of a missed payment is still evidence that the loan is past due and may be
impaired. It would therefore be a higher risk. It is clearly important to be able to
compare risk across the markets on a consistent basis.
6.13. The principles based approach of IFRS 7 did not give licence to Welcome to ignore its
mandatory requirements. In seeking to hold to the approach to the treatment of
deferments before the introduction of IFRS 7, Welcome (and therefore Cattles) may
have closed its mind to the changes that it should have made under the new standard.
The use of deferments as a management tool was not in issue: what mattered was the
impact of the use of deferments on the figures for which you were responsible.
6.14. You say that you were not part of the implementation of IFRS 7 which the FSA
accepts. But your submission of the expert report in support of the effect of IFRS 7
on credit risk places the FSA in something of a dilemma since responding to it seems
to suggest that the FSA accepts that you were involved in the IFRS 7 discussions and
wish, at this stage, to engage in the debate. The FSA’s position is that it accepts that
you were not involved in the discussions but is satisfied that your responsibilities
included being satisfied that the figures generated by its implementation were
accurate.
Knowing concern
6.15. The allegation is that you were knowingly concerned in the breach of Principle 3
(Management and control) (see paragraph 3.10), not that you failed to act with due
skill, care and diligence relating to your area of business based on the information you
had and the assurances you were given. Given your responsibility as a director, you
were concerned with the obligation of the firm to take reasonable care to organise and
control its affairs responsibly and effectively. As the Finance Director, you had a
particular responsibility to ensure that it did so with adequate risk management
systems.
6.16. There is very little evidence of challenge on your part to the way in which Welcome’s
affairs were organised and controlled despite your responsibility for the accuracy of
the figures generated by the activities of the firm. You were prepared to accept what
you were told on trust. This was an approach that you knowingly adopted. At all
times during the Relevant Period, you were aware, in general terms, of the discussions
surrounding the implementation of IFRS 7, if not the details of them. Similarly, you
were aware of the importance of the SOPPs and that a deviation from them would
produce corrupt figures. It is no defence to seek to limit your statutory and regulatory
responsibilities and then claim no knowledge of what is happening outside those
limits.
7.
ANALYSIS OF SANCTION
7.1.
The FSA views your conduct as particularly serious because:
(1)
you are an experienced chartered accountant and, as Finance Director, you
held a very senior position at Welcome and the significant influence function
of director (CF1);
(2)
your misconduct rendered misleading the arrears and profit figures within
Welcome’s 2007 Annual Report, which fell directly within your area of
expertise and responsibility, and also resulted in Cattles’ 2007 Annual Report
and the Rights Issue Prospectus containing misleading arrears and profit
figures;
(3)
your misconduct took place over a sustained period (approximately 18
months);
(4)
you had numerous opportunities, over a sustained period, to provide full
details to PwC of Welcome’s use of deferments and to seek advice as to the
correct accounting treatment of deferments;
(5)
there was a very serious impact on Cattles’ shareholders, who have lost all or
virtually all of their investment, and on market confidence. During the
period of your misconduct, Cattles was a member of the FTSE 250 and at its
height had a market capitalisation of over £1 billion. When the true state of
Welcome’s loan book emerged in early 2009, trading in Cattles’ shares was
suspended and on 16 December 2009 Cattles announced that its shares “are
likely to have little or no value”. In Cattles’ 2008 Annual Report published
on 12 May 2009, the 2007 arrears and impairment figures contained in
Cattles’ 2007 Annual Report were restated, as a result of which Cattles’ pre
tax profit figure for 2007 was adjusted from a pretax profit of £165.2 million
to a pretax loss of £96.5 million. It is likely that the rights issue in April
2008, which raised £200 million, would have been significantly less
successful had the market known the true state of Welcome’s loan book.
7.2.
The FSA considers it appropriate to impose a financial penalty of £200,000 against
you, reduced from £400,000 in view of your financial circumstances, in addition to
making the prohibition order in accordance with EG 9.23.
7.3.
The FSA has taken all of the circumstances of the case into account in deciding that
the imposition of a financial penalty is appropriate and the level of the penalty
imposed is proportionate, including its regulatory objectives and the penalties
imposed in other market abuse and analogous cases. The FSA has had particular
regard to the contemporaneous provisions of the Decision Procedures and Penalties
Manual set out in the Annex to this Notice, the aggravating factors set out in
paragraph 7.1 above and the mitigating factor that the FSA has not previously taken
any disciplinary action against you.
7.4.
The FSA is satisfied that you failed to act with integrity in discharging your
responsibilities and are therefore not a fit and proper person to perform regulated
activities. In deciding that a prohibition order, prohibiting you from performing any
function in relation to any regulated activity, is appropriate, the FSA has had regard to
the guidance in chapter 9 of the Enforcement Guide (“EG”).
8.
DECISION MAKER
8.1
The decision which gave rise to the obligation to give this notice was made by the
Regulatory Decisions Committee.
9.
IMPORTANT
9.1.
This Final Notice is given under, and in accordance with, section 390 of the Act.
Manner of and time for Payment
9.2.
The financial penalty must be paid by Peter Miller to the FSA in the following
instalments and on the following dates:
(1)
£60,000 no later than 11 April 2012, 14 days from the date of the Final Notice;
and
(2)
£140,000 no later than 28 February 2013.
If the financial penalty is not paid
9.3.
If payment is not made in accordance with paragraph 9.2, the FSA may recover the
full outstanding amount as a debt owed by Peter Miller and due to the FSA.
9.4.
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.
9.5.
The FSA intends to publish such information about the matter to which this Final
Notice relates as it considers appropriate.
FSA contacts
9.6.
For more information concerning this matter generally, you should contact Celyn
Armstrong (direct line: 020 7066 2818) or Dan EnraghtMoony (direct line: 020 7066
Jamie Symington
Head of Department
FSA Enforcement and Financial Crime Division
ANNEX
Relevant Regulatory Guidance
1. The provisions quoted below are those in force at the time of all the material events, acts
and omissions described above.
Code of Market Conduct
2. The FSA issued MAR pursuant to section 119 of the Act, which requires the FSA to
“prepare and issue a code containing such provisions as the … [FSA] … considers will
give appropriate guidance to those determining whether or not behaviour amounts to
market abuse.” Under section 122 of the Act, MAR may be relied on “so far as it
indicates whether or not particular behaviour should be taken to amount to market
abuse.”
3. MAR 1.8.3E provides examples of conduct which amount, in the opinion of the FSA, to
behaviour falling within section 118(7) of the Act. Those examples include:
“knowingly or recklessly spreading false or misleading information about a qualifying
investment through the media, including in particular through an RIS or similar
information channel.”
4. MAR 1.8.4E adds as follows:
“… if a normal and reasonable person would have known or should have known in all
the circumstances that the information was false or misleading, that indicates that the
person disseminating the information knew or could reasonably be expected to have
known it was false or misleading.”
5. MAR 1.8.6E states further that, in the FSA’s opinion, the following is an example of
market abuse falling within the terms of section 118(7) of the Act:
“a person responsible for the content of information submitted to … [an RIS] … submits
information which is false or misleading as to qualifying investments and that person is
reckless as to whether the information is false or misleading.”
COND
6. COND 2.5.6G sets out that that in determining whether a firm will satisfy, and continue
to satisfy, threshold condition 5 in respect of conducting its business with integrity and in
compliance with proper standards, the relevant matters may include but are not limited to
whether:
(a) the firm has been open and cooperative in all its dealings with the FSA and any
other regulatory body (see Principle 11 (Relations with regulators)) and is ready,
willing and organised to comply with the requirements and standards under the
regulatory system and other legal, regulatory and professional obligations (COND
2.5.6G(1)); and
(b) the firm has contravened, or is connected with a person who has contravened, any
provisions of the Act or any preceding financial services legislation, the regulatory
system or the rules, regulations, statements of principles or codes of practice of other
regulatory authorities, clearing houses or exchanges, professional bodies, or
government bodies or agencies or relevant industry standards; the FSA will,
however, take into account both the status of codes of practice or relevant industry
standards and the nature of the contravention (for example, whether a firm has
flouted or ignored a particular code) (COND 2.5.6G(4)).
Decision Procedure and Penalties Manual (DEPP)
7. In deciding to take the action described above, the FSA has had regard to the policy it
has published, in Chapter 6 of DEPP, under section 124 of the Act, which requires the
FSA to “issue a statement of its policy with respect to the imposition of penalties under
section 123 and the amount of” such penalties.
The FSA has also had regard to the
provisions of the Enforcement Manual (“ENF”), which were in force for the early part of
the Relevant Period. The extracts from DEPP reflect the provisions as they were in effect
between 28 August 2007 and 5 March 2010.
8. The principal purpose of imposing a financial penalty is to promote high standards of
regulatory conduct by deterring firms and approved persons who have breached
regulatory requirements from committing further contraventions, helping to deter other
firms and approved persons from committing contraventions and demonstrating,
generally, to firms and approved persons, the benefit of compliant behaviour (DEPP
6.1.2G).
9. DEPP 6.2.1G sets out a number of factors to be taken into account when the FSA decides
whether or not to impose a financial penalty. They are not exhaustive but include:
“(1) the nature, seriousness and impact of the suspected breach, including:
(a) whether the breach was deliberate or reckless;
(b) the duration and frequency of the breach;
(e) the impact or potential impact of the breach on the orderliness of markets
including whether confidence in those markets has been damaged or put at risk;
(f) the loss or risk of loss caused to consumers or other market users;
(2) The conduct of the person after the breach, including the following:
(a) how quickly, effectively and completely the person brought the breach to the
attention of the FSA or another relevant regulatory authority;
(b) the degree of cooperation the person showed during the investigation of the
(c) any remedial steps the person has taken in respect of the breach;
(d) the likelihood that the same type of breach (whether on the part of the person
under investigation or others) will recur if no action is taken.
(3) The previous disciplinary record and compliance history of the person…
(5) Action taken by the FSA in previous similar cases
10. DEPP 6.2.2G sets out additional factors specific to the decision whether to take action
for market abuse or for requiring or encouraging it. These include:
“The impact, having regard to the nature of the behaviour, that any financial penalty
or public censure may have on the financial markets or on the interests of consumers:
(a) a penalty may show that high standards of market conduct are being enforced
in the financial markets, and may bolster market confidence;
(b) a penalty may protect the interests of consumers by deterring future market
abuse and improving standards of conduct in a market.”
11. In enforcing the market abuse regime, the FSA's priority is to protect prescribed markets
from any damage to their fairness and efficiency caused by the manipulation of shares in
relation to the market in question. Effective and appropriate use of the power to impose
penalties for market abuse will help to maintain confidence in the UK financial system
by demonstrating that high standards of market conduct are enforced in the UK financial
markets. The public enforcement of these standards also furthers public awareness and
the FSA's protection of consumers objective, as well as deterring potential future market
abuse.
12. DEPP 6.4.1G states, more generally, that the “FSA will consider all the relevant
circumstances of a case when deciding whether to impose a penalty or issue a public
censure.”
Relevant guidance as to level of penalty
13. DEPP 6.5.1G states that the “FSA will consider all the relevant circumstances of a case
when it determines the level of a financial penalty (if any) that is appropriate and in
proportion to the breach concerned.”
14. DEPP 6.5.2G sets out a nonexhaustive list of factors which might be relevant to the
level of financial penalty imposed by the FSA, as follows:
“(1)
Deterrence
When determining the appropriate level of 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
38
from committing further breaches and helping to deter other persons from committing
similar breaches, as well as demonstrating generally the benefits of compliant business.
(2)
The nature, seriousness and impact of the breach in question
The FSA will consider the seriousness of the breach in relation to the nature of the rule,
requirement or provision breached. The following considerations are among those that
may be relevant:
(a)
the duration and frequency of the breach;
(c)
in market abuse cases, the FSA will consider whether the breach had an
adverse effect on markets and, if it did, how serious that effect was, which
may include having regard to whether the orderliness of, or confidence in, the
markets in question has been damaged or put at risk …;
(d)
the loss or risk of loss caused to consumers, investors or other market users;
(3) The extent to which the breach was deliberate or reckless
The FSA will regard as more serious a breach which is deliberately or recklessly
committed. The matters to which the FSA may have regard in determining whether a
breach was deliberate or reckless include, but are not limited to, the following:
(a) whether the breach was intentional, in that the person intended or foresaw the
potential or actual consequences of its actions;
If the FSA decides that the breach was deliberate or reckless, it is more likely to impose a
higher penalty on a person than would otherwise be the case.
(4) Whether the person on whom the penalty is to be imposed is an individual
When determining the amount of a penalty to be imposed on an individual, the FSA will
take into account that individuals will not always have the resources of a body corporate,
that enforcement action may have a greater impact on an individual, and further, that it
may be possible to achieve effective deterrence by imposing a smaller penalty on an
individual than on a body corporate. The FSA will also consider whether the status,
position and/or responsibilities of the individual are such as to make a breach committed
by the individual more serious and whether the penalty should therefore be set at a higher
level.
(8) Conduct following the breach
The FSA may take the following factors into account:
(a) the conduct of the person in bringing (or failing to bring) quickly, effectively and
completely the breach to the FSA's attention (or the attention of other regulatory
authorities, where relevant);
(b) the degree of cooperation the person showed during the investigation of the
breach by the FSA…
(c) any remedial steps taken since the breach was identified, ... .
(9) Disciplinary record and compliance history
(10)Other action taken by the FSA…”
Enforcement Guide (EG)
15. EG 9.39.7 sets out the FSA’s general policy in deciding whether to make a prohibition
order and/or withdraw an individual’s approval.
16. EG 9.3 provides that the FSA will consider all the relevant circumstances including
whether other enforcement action should be taken or has been taken already against that
individual by the FSA. In some cases the FSA may take other enforcement action against
the individual in addition to seeking a prohibition order.
17. EG 9.4 provides that the FSA has the power to make a range of prohibition orders
depending on the circumstances of each case and the range of regulated activities to
which the individual’s lack of fitness and propriety is relevant. Depending on the
circumstances of each case, the FSA may seek to prohibit individuals from performing
any class of function in relation to any class of regulated activity, or it may limit the
prohibition order to specific functions in relation to specific regulated activities. The
FSA may also make an order prohibiting an individual from being employed by a
particular firm, type of firm, or any firm.
18. EG 9.5 provides that the scope of a 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 the risk which he poses to
consumers or to the market generally.
19. EG 9.89.14 sets out additional guidance on the FSA’s approach to making prohibition
orders against approved persons and/or withdrawing such persons’ approvals.
20. EG 9.8 provides that when the FSA has concerns about the fitness and propriety of an
approved person, it may consider whether it should prohibit the person from performing
functions in relation to regulated activities, withdraw its approval, or both. In deciding
whether to withdraw its approval and/or make a prohibition order, the FSA will consider
in each case whether its regulatory objectives can be achieved adequately by imposing
disciplinary sanctions or by issuing a private warning.
21. EG 9.9 provides that when it decides whether to make a prohibition order against an
approved person and/or withdraw its approval, the FSA will consider all the relevant
circumstances of the case. These may include, but are not limited to, these extracts from
that paragraph.
(2) Whether the individual is fit and proper to perform 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).
(3) Whether, and to what extent, the approved person has:
(a)
failed to comply with the Statements of Principle issued by the FSA with
respect to the conduct of approved persons; or
(b)
been knowingly concerned 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).
(4) Whether the approved person has engaged in market abuse.
(5) The relevance and materiality of any matters indicating unfitness.
(6) The length of time since the occurrence of any matters indicating unfitness.
(7) 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.
(8) The severity of the risk which the individual poses to consumers and to confidence
in the financial system.
(9) The previous disciplinary record and general compliance history of the individual
including whether the FSA, any previous regulator, designated professional body
or other domestic or international regulator has previously imposed a disciplinary
sanction on the individual.
22. EG 9.10 provides that the FSA may have regard to the cumulative effect of a number of
factors which, when considered in isolation, may not be sufficient to show that the
individual is fit and proper to continue to perform a controlled function or other function
in relation to regulated activities. It may also take account of the particular controlled
function which an approved person is performing for a firm, the nature and activities of
the firm concerned and the markets within which it operates.
23. EG 9.11 states that it is not possible to produce a definitive list of matters which the FSA
may take into account when considering whether an individual is not a fit and proper
person to perform a particular, or any, function in relation to a particular, or any, firm.
EG 9.12 sets out a list of examples of types of behaviour which have previously resulted
in the FSA deciding to issue a prohibition order or withdraw the approval of an approved
person, including:
(3) severe acts of dishonesty, e.g. which may have resulted in financial crime.
(4) serious lack of competence.
(5) serious breaches of the Statements of Principle for approved persons, such as
providing misleading information to clients, consumers or third parties.
24. EG 9.13 provides that certain matters which do not fit squarely, or at all, within the
matters referred to above may also fall to be considered and that in these circumstances
the FSA will consider whether the conduct or matter in question is relevant to the
individual’s fitness and propriety.
25. EG 9.23 provides that in appropriate cases, the FSA may take other action against an
individual in addition to making a prohibition order and/or withdrawing its approval,
including the use of its powers to impose a financial penalty.
Fit and Proper Test for Approved Persons
26. The purpose of the part of the FSA Handbook entitled Fit and Proper Test for Approved
Persons ("FIT") is to outline the main criteria for assessing the fitness and propriety of a
candidate for a controlled function. In this instance the criteria set out in FIT are relevant
in considering whether the FSA will exercise its powers to make a prohibition order in
respect of an individual in accordance with the EG 9.9.
27. FIT 1.3.1G provides that the FSA will have regard to a number of factors when assessing
the fitness and propriety of a person, including the person’s honesty and integrity. FIT
2.1.1G provides that, in determining a person’s honesty and integrity, the FSA will have
regard to matters including, but not limited to, those set out in FIT 2.1.3G.
28. FIT 2.1.3G refers to various matters, including: whether the person has contravened any
of the requirements and standards of the regulatory system (FIT 2.1.3G(5)); whether the
person has been a director, partner, or concerned in the management, of a business that
has gone into insolvency, liquidation or administration while the person has been
connected with that organisation (FIT 2.1.3G(9)); whether the person has been
dismissed, or asked to resign and resigned, from employment or from a position of trust,
fiduciary appointment or similar (FIT 2.1.3G(11)); or whether, in the past, the person has
been candid and truthful in all his dealings with any regulatory body and whether the
person demonstrates a readiness and willingness to comply with the requirements and
standards of the regulatory system and with other legal, regulatory and professional
requirements and standards (FIT 2.1.3G(13)).