See Final Notice issued on 19 May 2016.

DECISION NOTICE

Date:
7 November 2014

1.
ACTION

1.1.
For the reasons set out below, the Authority has decided to:

(1)
impose on Mr Johnson, pursuant to section 66 of the Act, a financial penalty

of £200,000 for breaches of Statements of Principle 1 (integrity) and 4

(relations with regulators); and

(2)
make an order, pursuant to section 56 of the Act, prohibiting Mr Johnson

from performing any function in relation to any regulated activity carried

on by an authorised person, exempt person or exempt professional firm.

2.
SUMMARY OF REASONS

2.1.
Keydata designed, launched and, via IFAs, distributed structured investment

products to retail customers. Keydata went into administration on 8 June 2009

and was dissolved on 2 July 2014. Prior to its administration, Keydata had £2.8

billion of its own and other institutions’ investment products under administration.

During the Relevant Period (26 July 2005 to 8 June 2009) Keydata designed,

launched and distributed four investment products which invested primarily in US

2

senior life settlement policies: the SIB, the SIP, the Income Plan and the DIP.

2.2.
The Products offered retail customers an income or growth investment, by way of

ISA, personal equity plan or direct investment. The income option paid a fixed

percentage income (payable quarterly or annually) and aimed to ensure the full

return of capital to the investor at the end of a five, seven or ten year term. The

growth option rolled up and accrued the income payments to provide a compound

growth over the life of the Product and aimed to ensure the full return of capital to

the retail investor at the end of a five, seven or ten year term. Keydata

purchased, on behalf of the investors, bonds issued by a special purpose vehicle

incorporated in Luxembourg (either SLS or Lifemark). The SLS Products were

underpinned by investments in the SLS Bonds. The Lifemark Products were

underpinned by investments in the Lifemark Bonds. The SLS Bonds and the

Lifemark Bonds were to be listed on the Luxembourg Stock Exchange.

2.3.
The funds raised through the issue of the SLS Bonds would then be invested by

SLS in the SLS Portfolio, and similarly the funds raised through the issue of the

Lifemark Bonds would then be invested by Lifemark in the Lifemark Portfolio. The

structures of the SLS and Lifemark Portfolios were broadly similar: they contained

US senior life settlement policies and required an amount of the funds raised to be

kept in cash (or liquid securities) to fund the payment of fees, income and

insurance premiums. The target spread for the SLS Portfolio was 40% cash and

60% policies and for the Lifemark Portfolio was 30% cash and 70% policies.

2.4.
Mr Johnson held Controlled Functions 10 (Compliance oversight) and 11 (Money

Laundering Reporting) from the start of the Relevant Period until 1 December 2008

and held Controlled Function 30 (Customer) throughout the Relevant Period. As

Keydata’s Compliance Officer, Mr Johnson was responsible for carrying out the due

diligence, overseeing the verification and approval of the financial promotions in

respect of the Products (in particular the SIB 1 and 2 and the SIP 1) and Keydata’s

compliance with regulatory standards. In relation to the due diligence of the SIB 4

and the SIP 1, Mr Johnson was heavily involved in the collation and assessment of

the due diligence data and reported his findings to the Keydata board of directors.

After 1 December 2008 Mr Johnson was Keydata’s Operations Director but was not

appointed to the Keydata board of directors. In this role Mr Johnson retained

responsibility for Keydata’s dealings with the Authority in relation to the Products,

and the Authority considers that, as Operations Director, he continued to have

some responsibility for Keydata’s compliance with regulatory requirements in

relation to the Products.

3

2.5.
During the Relevant Period, Mr Johnson:

(1)
failed to act with integrity in carrying out his controlled functions , in breach

of Statement of Principle 1, in that he:

(a)
was aware that:

(i)
Keydata had received professional advice that its financial

promotions
contained
unclear,
incorrect
and
misleading

statements and had failed to take the steps recommended by

its advisers to address those matters;

(ii) Keydata had received professional advice that its due diligence

was inadequate and had failed to take the steps recommended

by its advisers to address the failings; and

(iii) Keydata had received professional advice regarding the risk of

the Lifemark Portfolio not performing, and that Keydata had

failed to take adequate steps to ensure that the risk was being

effectively managed and that investors and IFAs were aware of

this risk;

and, despite being increasingly aware of the significance of these

matters and of the non-performance of the SLS Products, recklessly

failed either to take adequate steps to ensure that Keydata

addressed the issues and risks that had been identified in relation to

the Lifemark Products or to take adequate steps to stop Keydata

from marketing and selling the Lifemark Products until effective

remedial steps were taken;

(b)
recklessly failed to take adequate steps to ensure that Keydata

explained or mitigated the risk to investors who had invested in the

Lifemark Products, and that material circulated to such investors

gave an accurate impression of the risks to the performance of the

Lifemark Portfolio, despite becoming increasingly aware of the

severe risks affecting the Lifemark Portfolio; and

(c)
deliberately misled the Authority by representing to the Authority in

a compelled interview that there had never been a problem with the

income payments on the SLS Products, and in a further compelled

interview that the Products (SLS and Lifemark) were on target to

meet their obligations, despite being aware that there had

previously been problems with the income payments, that there

was considerable doubt about whether SLS would make income

payments and of the severe liquidity and other risks with the

Lifemark Portfolio.

(2)
failed to deal with the Authority in an open and cooperative way, in

breach of Statement of Principle 4, in that he:

(a)
made
misleading
representations
to
the
Authority
in two

compelled interviews;

(b)
misled the Authority at a meeting by withholding from the Authority

the problems with the performance of the Products of which he was

aware;

(c)
was aware that a spreadsheet provided by Keydata to the Authority

on 5 June 2009, by an email from Keydata’s solicitors which was

copied to him, was likely to mislead the Authority by representing

that future income was expected from SLS, and failed to correct the

information provided; and

(d)
failed to notify the Authority at any stage: that the SLS Products

were not performing and that there was a risk of failure of the SLS

Portfolio; of the failure of Keydata to address its professional

advisers’ concerns over the due diligence for the Lifemark Products

and the financial promotions for the Products; or of the risk that the

Lifemark Portfolio might not perform as investors expected.

(3)
recklessly failed to take adequate steps to prevent Keydata from

continuing to market and sell the Lifemark Products as fulfilling the

conditions set out in the ISA Regulations, when he was aware that it was

highly likely that they did not do so.

2.6.
The Authority considers that Mr Johnson’s failings in this regard are of the most

serious nature in light of the significant level of consumer detriment which has

arisen from the sales of the Products and the impact which this level of

consumer detriment has had on the financial services sector. During the

Relevant Period over 37,000 investors purchased the Products, investing over

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£475 million, and the FSCS has subsequently made payments to investors in the

Products of over £330 million.

2.7.
The Authority considers that Mr Johnson’s conduct demonstrates that he is not fit

and proper to perform any function in relation to any regulated activity carried on

by an authorised person, exempt person or exempt professional firm.

2.8.
The Authority considers that the nature and seriousness of Mr Johnson’s

misconduct warrant the action set out at section 1 above.

3.
DEFINITIONS

3.1.
The following definitions are used in this Decision Notice.

(a)
“2008 Actuarial Review” means the final text of the actuarial review

conducted by the Lifemark Actuary described in paragraph 4.55;

(b)
“the Act” means the Financial Services and Markets Act 2000;

(c)
“the Authority” means the body corporate previously known as the Financial

Services Authority and renamed on 1 April 2013 as the Financial Conduct

Authority;

(d)
“Brochure Advice” has the definition set out in paragraph 4.31;

(e)
“CEO” means Chief Executive Officer;

(f)
“CRT” means CRT Capital Investment Banking Group, an SEC regulated

firm;

(g)
“DEPP” means the version of the Decision Procedure and Penalties Manual

section of the Handbook which was in force up to and including 5 March

2010;

(h)
“DIP” means the Defined Income Plan;

(i)
“Draft Lifemark Valuation Report” has the definition set out in paragraph

4.51;

(j)
“EG” means the Authority’s Enforcement Guide;

(k)
“ENF” means the Authority’s Enforcement Manual, which was in force

between 1 December 2004 and 27 August 2007;

(l)
“exempt professional firm” means a person to whom, as a result of Part XX

of the Act, the general prohibition does not apply in relation to that activity;

(m)
“February 2008 Brochure Report” has the definition set out in paragraph

4.37;

6

(n)
“FIT” means the Fit and Proper Test for Approved Persons section of the

Handbook;

(o)
“FSCS” means the Financial Services Compensation Scheme;

(p)
“Handbook” means the Authority’s Handbook of Rules and Guidance;

(q)
“HMRC” means Her Majesty’s Revenue and Customs;

(r)
“IFA” means Independent Financial Adviser;

(s)
“ISA” means Individual Savings Account;

(t)
“ISA Regulations” means the Individual Savings Account Regulations 1998

(SI 1998/1870);

(u)
“June 2008 Extract Review” has the definition set out in paragraph 4.44;

(v)
“Keydata” means Keydata Investment Services Limited;

(w)
“Lifemark” means Lifemark SA;

(x)
“Lifemark Actuary” means the actuary for the Lifemark Portfolio;

(y)
“Lifemark Bonds” means the bonds issued by Lifemark;

(z)
“Lifemark Companies” means the various companies within the Lifemark

structure described in paragraph 4.17 of which Mr Ford personally and/or

his family, through trusts he set up on behalf of his family, were the

beneficial owner(s) or from which they were entitled to the full benefit;

(aa)
“Lifemark Investment Manager” means the investment manager appointed

to manage the Lifemark Portfolio;

(bb)
“Lifemark Portfolio” means the portfolio of US senior life settlement policies

and cash in which the funds raised from investors through the issue of

the Lifemark Bonds were invested by Lifemark;

(cc)
“Lifemark Products” means issue 4 of the SIB, issues 1 to 12 of the SIP,

issues 1 to 12 and 14 of the Income Plan and issues 1 to 9 of the DIP;

(dd)
“Luxembourg Regulator” means the Commission de Surveillance du Secteur

Financier, the Luxembourg financial regulator;

(ee)
“March 2008 Due Diligence Report” has the definition set out in paragraph

4.40;

(ff)
“October 2008 Lifemark Report” has the definition set out in paragraph 4.55;

(gg)
“Offshore Arranger” means the company, incorporated in the British Virgin

Islands, which was party to a Professional Services Agreement dated 16

October 2006 with Lifemark relating to services including the negotiation

7

of contracts, introductions and support for operational matters in relation

to the Lifemark Portfolio;

(hh)
“Offshore Consultancy” means the company, incorporated in the British

Virgin Islands, which entered into a fee sharing agreement with a US

originator of life settlement policies for purchase by Lifemark;

(ii)
“Offshore Partnership” means the offshore partnership, with which Mr Ford

was a consultant, which carried out services for Keydata in relation to the

SLS Products and was subsequently engaged by Keydata to negotiate and

control the activities of all parties to the Lifemark Bonds, pursuant to a

Corporate Management Services Agreement dated 25 May 2007 with

Keydata;

(jj)
“Offshore Promoter” means the company, incorporated in Panama, which

was party to a promotion and distribution agreement with Lifemark dated

17 March 2006 in relation to the Lifemark Bonds;

(kk)
“Products” means the SIB, the SIP, the Income Plan and the DIP;

(ll)
“RAC” means Required Asset Cover;

(mm) “Relevant Period” means the period from 26 July 2005 to 8 June 2009;

(nn)
“SIB” means the Secure Income Bond;

(oo)
“SIP” means the Secure Income Plan;

(pp)
“SLS” means SLS Capital SA;

(qq)
“SLS Bonds” means the bonds issued by SLS;

(rr)
“SLS Investment Manager” means the investment manager appointed to

manage the SLS Portfolio;

(ss)
“SLS Portfolio” means the portfolio of US senior life settlement policies and

cash in which the funds raised from investors through the issue of the SLS

Bonds were invested by SLS;

(tt)
“SLS Products” means issues 1, 2 and 3 of the SIB;

(uu)
“Statement of Principle” means one of the Authority’s Statements of Principle

for Approved Persons in the Handbook;

(vv)
“Summary Report” has the definition set out in paragraph 4.43; and

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

4.
FACTS AND MATTERS

4.1.
Keydata was the wholly owned subsidiary of Keydata UK Limited, a company

incorporated in Scotland. Mr Johnson had a small shareholding in Keydata UK

Limited. Keydata had permissions under Part IV of the Act to carry on regulated

activities and was therefore an “authorised person” as defined in section 31 of the

Act.

4.2.
Keydata designed, launched and, via IFAs, distributed structured investment

products to retail customers. It launched its first investment products in 2001.

The majority of Keydata’s products were structured products involving the

purchase of bonds and it offered a range of five to six such products at any one

time. As at June 2009 Keydata had £2.8 billion of investment products under

administration (including £2.1 billion of assets held on behalf of major financial

services firms whose products Keydata administered).

4.3.
Keydata’s business in relation to the Products was primarily managed and

controlled by Stewart Ford, who held, among other controlled functions, Controlled

Function 3 (Chief Executive) (which he held throughout the Relevant Period). Mr

Ford sought to resign from his position as CEO of Keydata during 2007 and

entered into a Non-Executive Service Agreement with Keydata dated 19 July 2007,

which described him as a non-executive director. That agreement provided that

Mr Ford was not expected to devote more than 20 hours per month to Keydata’s

business. However, Mr Ford did not notify the Authority of his purported

resignation, he continued to hold Controlled Function 3, nobody replaced him as

Keydata’s CEO, and he continued to be regarded by Mr Johnson and the other

Keydata directors as Keydata’s CEO. The Authority therefore considers that Mr

Ford was Keydata’s CEO throughout the Relevant Period. Mr Ford was also a

director and the majority shareholder and controller of Keydata UK Limited.

The SLS Products

4.4.
The SLS Products were underpinned by investments in bonds issued by SLS. They

were promoted to investors as being eligible for ISA status. SLS was a special

purpose vehicle incorporated in Luxembourg. The SLS Bonds were purchased by

Keydata on behalf of investors in the SLS Products. From 26 July 2005 to 16

December 2005 £103 million was invested in the SLS Products by 6,486 retail

investors, via IFAs.

4.5.
The funds in the SLS Bonds were invested in US senior life settlement policies and

cash, which comprised the SLS Portfolio. The reason for keeping a portion of the

investments in cash was to fund the payment of fees, income and insurance

premiums. The investment mix for the SLS Portfolio was intended to be 60%

policies and 40% cash for the SLS Products. The policies and cash were intended

to produce income and a full return of capital at the end of the term of the SLS

Product (through the death of an insured individual or the re-sale of the policy in

the secondary market), although the return of capital was not guaranteed. The

terms of the SLS Products were intended to mirror the terms and conditions of the

SLS Bonds; for example the SLS Bonds paid income quarterly or annually (which

was mirrored by the investment options available for the SLS Products, although

the SLS Products had lower income rates than the SLS Bonds).

4.6.
The investors did not pay a fee to Keydata in respect of the investment in the SLS

Products. Keydata received an initial commission from SLS which was 5.5% of

the total funds invested in the SLS Products. This was not disclosed to investors

(and there was no requirement for it to be disclosed). Keydata retained 2.5% of

the initial commission and paid 3% on to IFAs. Keydata also received quarterly

fees from SLS in respect of each of the SLS Products. These payments amounted

to 1.81% per annum of the funds invested in the SLS Products. In addition, SLS

paid Keydata 0.5% in annual trail commission which Keydata paid on to IFAs. The

total amount of the fees and commission paid by SLS to Keydata in relation to the

SLS Products was £5,426,707.

4.7.
Prior to September 2007 the shareholders of SLS included BWT Capital, CRT and

David Elias, a British businessman based in Singapore, who held a minority

shareholding in SLS. However, from September 2007 Mr Elias acquired a

controlling interest in SLS as a result of purchasing CRT’s shares in the company.

It was reported in the press that Mr Elias died in Singapore on 8 May 2009.

4.8.
The SLS Products were high risk in nature and as such the returns offered to

investors, both in respect of income and the return of capital at maturity, would

be subject to a high level of risk. The high risk nature of the SLS Products

resulted from the following:

(1) the SLS Portfolio invested in assets which were highly illiquid and very

expensive to maintain. The costs of funding the premiums for the policies

were extremely high and failure to make these payments would result in

the policies lapsing and all capital value being lost; and

(2) the performance of the SLS Portfolio (and therefore the returns to investors)

was dependent on the date of death of the individuals insured under the

senior life settlement policies occurring broadly in line with the forecast life

expectancies.

4.9.
The SLS Portfolio operated on the basis of a 2:1 RAC ratio. In respect of all the

SLS Products this meant that the face/maturity value of the policies purchased

should at all times be at least twice the amount of the principal outstanding on the

SLS Bonds (the amount of subscription monies invested) minus cash. For

example, if the face value of the SLS Portfolio was £20 million and the principal

amount outstanding under the SLS Bonds was £5 million with a cash surplus of £1

million, this RAC ratio would be met as the RAC calculation would be 20 ÷ (5 - 1)

= 5.

4.10.
On or around 21 April 2008, SLS entered into an agreement with a company

owned by Mr Elias under which all the policies in the SLS Portfolio and other assets

of SLS were transferred to that company in return for a guarantee in relation to

SLS’s liabilities. From that date, the guarantee was the only asset in the SLS

Portfolio; however, RAC certificates were issued subsequently, indicating that the

RAC ratio was being met even though there was, from that date, no proper basis

for such certificates to be issued. Neither Keydata nor Mr Johnson were involved

in, or informed at the time of, the arrangements between SLS and the guarantor

to put in place the guarantee. SLS was put into liquidation on 1 October 2009.

The Lifemark Products

4.11.
Following the launch of the SIB 3, Keydata was advised by CRT that it would not

support any further issues of the SIB. The SIB 3 closed to retail investors on 16

December 2005 and, on 19 December 2005, Keydata instead started to launch the

Lifemark Products, which were underpinned by investments in bonds issued by

Lifemark, and which were also promoted to investors as being eligible for ISA

status. Lifemark was a special purpose vehicle incorporated in Luxembourg on 12

January 2006 and regulated by the Luxembourg Regulator. Lifemark was set up

by Mr Ford who was also one of its directors.

4.12.
Mr Ford advised the Authority that he had been required to be a director of

Lifemark by the Luxembourg Regulator as it wished Lifemark to have a

representative of Keydata on its board of directors. While this was correct, the

Authority discovered after Keydata went into administration that Lifemark was also

beneficially owned by Mr Ford through a structure under which the assets were

held by a Dutch “stichting” or trust arrangement set up on his behalf. Mr Ford had

no formal control over the actions of the trustees but in practice they would act in

accordance with his instructions. Under this arrangement, Mr Ford would have

benefited from any residual value in the assets of Lifemark once all holders of the

Lifemark Bonds had been paid in full.

4.13.
The Lifemark Bonds were purchased by Keydata on behalf of investors in the

Lifemark Products. Keydata designed, marketed and sold over 30 issues of the

Lifemark Products from 19 December 2005 to 8 June 2009. £373,162,684 was

invested in the Lifemark Products by 30,906 retail customers, via IFAs.

4.14.
The funds in the Lifemark Bonds were invested in US senior life settlement policies

and cash, which comprised the Lifemark Portfolio. The investment mix for the

Lifemark Portfolio was intended to be 70% policies and 30% cash for the Lifemark

Products. The policies and cash were intended to produce income and a full return

of capital at the end of the term of the Lifemark Product (through the death of an

insured individual or the re-sale of the policy in the secondary market), although

the return of capital was not guaranteed. The terms of the Lifemark Products were

intended to mirror the terms and conditions of the Lifemark Bonds.

4.15.
The investors did not pay a fee to Keydata in respect of the investment in the

Lifemark Products. Keydata was entitled under an agreement with Lifemark to a

2.5% upfront commission on the funds invested in each Lifemark Product and a

1% per annum ongoing trail commission (this does not include any fees and

commissions received by Keydata from Lifemark and passed on to IFAs). The

commissions paid by Lifemark to Keydata up to 8 June 2009 in relation to the

Lifemark Products totalled £22,791,932 (excluding fees and commissions passed

on to IFAs).

4.16.
The Lifemark Products were high risk in nature and as such the returns offered

to investors, both in respect of income and the return of capital at maturity,

would be subject to a high level of risk. The high risk nature of the Lifemark

Products resulted from the following:

(1)
the Lifemark Portfolio invested in assets which were long-term, highly

illiquid and very expensive to maintain. The costs of funding the

premiums for the policies were extremely high and failure to make these

payments would result in the policies lapsing and all capital value being

lost;

(2)
the Lifemark Portfolio was not in existence when the Lifemark Products

were launched and therefore it would take some time for the Lifemark

Portfolio to reach the required size where it would be self-funding (i.e.

policy maturities were able to fund the premium payments and obligations

under the Lifemark Bonds). This meant that Lifemark needed to have the

ability to continue to issue the Lifemark Bonds or raise funds by other

means, including borrowing, until such time as the Lifemark Portfolio

became self-funding; and

(3)
the performance of the Lifemark Portfolio (and therefore the returns to

investors) was dependent on the deaths of the individuals insured under

the US senior life settlement policies occurring broadly in line with the

forecast life expectancies.

4.17.
In addition to his beneficial ownership of Lifemark, Mr Ford personally and/or his

family, through trusts he set up on behalf of his family, were the beneficial

owner(s) of, or entitled to the full benefit from, the Lifemark Companies, which

comprised:

(1)
the Offshore Promoter, which was paid fees of £5,283,739 under its

agreement with Lifemark, which provided for it to “promote and distribute

the asset backed securitization bonds being issued from time to time by

Lifemark”;

(2)
the Offshore Consultancy, which was paid fees of £31,106,469 by US

brokers for introductory services in respect of the sale of US senior life

settlement policies to Lifemark; and

(3)
the Offshore Arranger to which Lifemark agreed to pay 10% of the funds

invested in the Lifemark Bonds pursuant to a Professional Services

Agreement dated 16 October 2006 in return for the provision of a number

of services including: the negotiation of contracts with “investment activity

parties” and “administration parties”; the provision of “introductions to

distribution opportunities” and advice on “distribution opportunities to allow

[Lifemark] access to key distribution opportunities”; and the provision of

support to Lifemark’s contract counterparties for operational matters.

Lifemark paid fees to the Offshore Arranger of £36,074,852.

4.18.
As set out above, the Lifemark Companies took over £72.4 million from the

Lifemark structure (a sum equivalent to 19.4% of all the investment funds

invested in the Lifemark Products). The Authority considers that the Lifemark

Companies performed no, or no meaningful, services in return for the sums

received by them in respect of their involvement in the Lifemark structure.

4.19.
The risk to investors in the Lifemark Products of not receiving the returns promised

was made considerably more likely by the very high level of fees paid to Keydata

and the Lifemark Companies (see paragraphs 4.15 and 4.17 above). The

Provisional Administrator of Lifemark stated in his report to the Luxembourg

Regulator that:

(1)
the level of fees payable under the Lifemark structure, a number of which

were undisclosed and paid to companies owned or controlled by Mr Ford,

was directly responsible for the failure of Lifemark: “the current model was

torpedoed by the high cost structure, which prevented Lifemark from

reaching the required level of assets in light of its debts”; and

(2) Lifemark had a liquidity problem:

“It could be thought that Lifemark issued bonds each time liquidity was

at risk. This situation was inevitable given the significant fees which had

been paid. …. If the fees had been less significant, then the available

funds would normally have been used to:

- retain a cash reserve, as provided for in the general

conditions

-
acquire
more
policies
(which
would
therefore potentially have

generated more mortalities and therefore more revenue)

In simple terms, the initiators probably pushed their luck a bit too much

and the survival link became considerably weaker”.

4.20.
The Lifemark Portfolio operated on the basis of a 2:1 RAC ratio (which is described

at paragraph 4.9 above in relation to the SLS Portfolio). The Luxembourg

Regulator closed Lifemark to new business in mid-2009 and Lifemark was

subsequently put into administration and, on 11 May 2012, liquidation.

Failure of the SLS Products to perform

4.21.
Mr Johnson was aware from 13 November 2006 that there were problems with the

performance of the SLS Portfolio, and accordingly that there could be problems

with the SLS Products.

4.22.
On 13 November 2006 Mr Ford attended a conference call with the Offshore

Partnership and the SLS Investment Manager. Mr Johnson received a copy of an

email dated 13 November 2006 from the Offshore Partnership reflecting the

content of that call, namely that the SLS Investment Manager advised that the

RAC ratio for the SLS Portfolio was (in breach of the terms and conditions of the

SLS Bonds) at 1.91:1 rather than the required 2:1 and that the SLS Bonds were

likely not worth par at that time (i.e. investors would receive less than £1 for each

£1 invested). The fact that the SLS Portfolio had breached the RAC ratio resulted

in the non-payment of income owing under the SLS Bonds. These income

payments were in turn used to fund the income payable under the SLS Products

and fees to Keydata and IFAs.

4.23.
On 6 January 2007 the Offshore Partnership informed Mr Ford that it had been told

of a rumour that “SLS will go into default in the next 20 days. This means that

income payments will stop and capital will be recovered on a partial basis”. Mr

Ford forwarded this email to Mr Johnson on 8 January 2007 and Mr Johnson

responded that “This e mail puts me in a difficult position as if it is fact I am duty

bound as Compliance Officer to report this to the [Authority], which would present

all kinds of potential problems. It also presents me with a serious conflict of

interest. I have asked [the Offshore Partnership] whether the e mail is fact or

rumour and [the Offshore Partnership] confirms that it is rumour at this stage,

which means that I do not have to report it”.

4.24.
On 12 February 2007 Mr Johnson wrote to Mr Ford: “I think we need to ensure

that we put steps in place to rectify the position with [SLS] asap. I have discussed

this with [the Offshore Partnership] and we think it would be best if Lifemark “took

over” [SLS]. If this is what is decided we need to instruct [the Offshore

Partnership] to proceed with matters”.

4.25.
On 16 April 2007 the Offshore Partnership attended a conference call with the SLS

Investment Manager to discuss, among other things, the failure of SLS to make an

income payment in respect of the SLS Bonds which underpinned the SIB 3. On 26

April 2007 Mr Johnson received an attendance note of the call in which it was

noted that the SLS Investment Manager had advised the Offshore Partnership that

this payment was missed due to the failure of the SLS Portfolio to meet the RAC

ratio.

4.26.
On 17 April 2007 Mr Johnson sent an email to the Offshore Partnership and Mr

Ford relating to the fact that an income payment for the SIB 3 had not been made

and Keydata was funding the payment: “Funding is coming from [the Keydata

Finance Director]. Definitely a worrying set of events, I am concerned it may be

something that is something we have to disclose to clients!”

4.27.
On 2 April 2008 Mr Johnson was made aware that Keydata was considering

funding the income payment for the SIB 1 that SLS had failed to pay. He referred

the matter to Mr Ford.

4.28.
On 30 July 2008 Mr Johnson received an email from the Offshore Partnership

confirming that the income due on 14 July 2008 for the SIB 3 was late and that

SLS did not have to pay until two months after the due date according to the

terms and conditions.

4.29.
On 1 August 2008 Mr Johnson sent an email to Mr Ford and the Keydata Sales

Director confirming that income on the SLS Bonds was not payable for 59 days

after it was due, suggesting that the July 2008 SIB 3 payment still had not been

paid.

4.30.
Mr Johnson was not aware of the detailed discussions which took place in 2007

and 2008 between Mr Ford, Mr Elias and the Offshore Partnership concerning the

deteriorating state of the SLS Portfolio. However, as set out above, Mr Johnson

was aware that the SLS Products were not performing and that there was a risk of

failure of the SLS Portfolio. In addition, he was aware that investors, IFAs and the

Authority were not aware of these matters, but failed to notify the Authority.

Financial promotions for the Products

4.31.
In late 2005 Keydata instructed its legal advisers to assess the brochures for the

SLS Products for the purposes of compliance with the Authority’s financial

promotion rules. Mr Johnson received the final written advice from Keydata’s legal

advisers on 5 December 2005 (the “Brochure Advice”).

4.32.
The Brochure Advice stated: “[a]s currently drafted we think the SIB brochures are

not sufficiently compliant with the [Authority’s] financial promotion rules and we

think the brochure should not be used until certain amendments have been made”.

4.33.
In particular the Brochure Advice stated that the comparison between the SIB and

other income products (for example a bank account) lacked sufficient clarity and

had the effect of suggesting that the risk of the SIB was “low per se, which is not

strictly accurate”. The Brochure Advice also pointed out that the brochures for the

SLS Products did not adequately set out the risks of the investment, as the section

entitled “Is there any risk?” was not comprehensive and later in the Key Features

documents other risks were mentioned.

4.34.
From 19 December 2005 Keydata issued financial promotions for the Lifemark

Products which were materially similar in content to those for the SLS Products,

despite the Brochure Advice, and were unclear, incorrect and misleading in a

number of areas:

(1)
the brochures for the Lifemark Products did not adequately explain the risks

associated with the operation of the products. For example: that the

Lifemark Products were inherently high risk, contrary to the brochures

which stated that they were “lower risk” in comparison to other types of

investments such as equities; that both income and capital were at risk;

that the date of maturity of the policies in the Lifemark Portfolio was

entirely uncertain; that the information about the projected future

performance of the products was not based on reasonable assumptions

supported by objective data, nor was it made clear that a forecast is not a

reliable indicator of future performance; and that the risk warnings that

were given were misleading and were often undermined by positive

language or by their positioning;

(2)
a number of the brochures for the Lifemark Products failed to disclose the

currency risk as one of the risks of the Product. The lack of a currency

hedge would affect the valuation of the Lifemark Products upon redemption

or maturity and the currency risk was an unknown quantity. However, the

contractual arrangements to secure a currency hedge were not in place

(from the launch of the Lifemark Products and the issue of the brochures)

to mitigate the foreign exchange risk inherent in the Lifemark Products.

Hedging arrangements using a US dollar to pound sterling currency swap

were later put in place, between late 2007 and early 2008;

(3)
the brochures for the SIB 4 contained references to the existence of a credit

facility to provide the Lifemark Portfolio with liquidity funding to enable it to

continue to pay the premiums due on the senior life settlement policies

comprising the Lifemark Portfolio in the event that they did not generate a

sufficient return to fund these expenses. No such credit facility was in

place; and

(4)
the brochures for each of the SIB 4, SIP 1 to 4 and the DIP 1 to 8 stated that

the investment was into a bond listed on the Luxembourg Stock Exchange

and that this would make the Product eligible for ISA status. The SIB 4 and

the SIP 1 to 4 (which were issued between 19 December 2005 and 31 July

2006) were not listed on the Luxembourg Stock Exchange until 6 June 2007

and the DIP 1 to 8 (which were issued between 5 March 2008 and 12

January 2009) were not so listed until 24 June 2009.

4.35.
As Keydata’s Compliance Officer, Mr Johnson was responsible for signing off the

financial promotions issued by Keydata for the Lifemark Products and was

ultimately responsible for ensuring that they were clear, fair and not misleading.

Mr Johnson was responsible for ensuring that every statement in Keydata’s

financial promotions for the Lifemark Products that purported to be a statement of

fact was accurate and that Keydata could demonstrate why it believed the factual

statement was accurate.

4.36.
Mr Johnson approved brochures for the Lifemark Products that he should have

known were misleading because they were materially similar in content to those

for the SLS Products and therefore were non-compliant for the reasons stated in

the Brochure Advice.

4.37.
On 7 February 2008 Mr Johnson received a review of the contents of the brochure

for the SIP 14 from one of Keydata’s professional advisers (the “February 2008

Brochure Report”). This advised: “[w]e believe that the way this information is

presented is not clear or fair enough and that it does not meet the standards

applied by the [Authority] or the industry generally.… A number of the individual

points we have raised may not seem that significant in isolation. Taken together,

though, the effect is sufficiently serious that you should consider suspending sales

on the basis of this material”.

4.38.
Following receipt of the February 2008 Brochure Report, on 19 February 2008 Mr

Johnson informed Mr Ford and Keydata’s Sales Director that Keydata’s professional

advisers had advised Keydata to “not issue SIP 15 until we receive the extra due

diligence”. Keydata did not issue any further issues of the SIP. Instead, it

renamed the product through which it offered investments in Lifemark as the DIP.

The DIP was in all material respects an identical product to the SIB 4 and the SIP.

In an email to IFAs Keydata described it as a “replacement product” for the SIP,

which “has been set up in exactly the same way and utilises the same robust

investment process and criteria as the SIP”.

4.39.
Keydata developed and packaged the Lifemark Products, produced promotional

material and selected the IFAs who were to market them, and therefore had

responsibility for (among other things): having systems and controls to manage

adequately the risks imposed by the product design; and, when providing

information to distributors, ensuring the information was sufficient, appropriate

and comprehensible in substance and form, including considering whether it would

enable distributors to understand it enough to give suitable advice (where advice

was given) and to extract any relevant information and communicate it to the end

customer.

4.40.
The Authority considers that Keydata’s due diligence into the Lifemark Products

was limited and was not completed prior to the launch of the Lifemark Products.

On 3 March 2008 Mr Johnson received a copy of advice from one of Keydata’s

professional advisers (the “March 2008 Due Diligence Report”) which concluded

that Keydata’s due diligence in relation to the SIP was inadequate and incomplete.

The March 2008 Due Diligence Report concluded that Keydata’s due diligence did

not evidence:

(1)
the roles of, or contractual arrangements with, various counterparties

within the Lifemark structure;

(2)
the terms, including the impact and cost, of any currency hedge;

(3)
whether Keydata had tested whether the rates of return on the Lifemark

Products were achievable or the risk parameters within which they were

achievable and the costs which were payable under the Lifemark structure;

(4)
whether Keydata had considered all the risks to the return of investor

capital; and

(5)
what protections existed within the Lifemark Portfolio to deal with a cross-

subsidy risk: “In the event that losses are suffered, it is not clear from the

papers whether any procedures exist to ensure that investors in earlier

issues would not receive returns at the expense of investors in later issues”.

4.41.
Further, the March 2008 Due Diligence Report advised Keydata that while it was

not possible to be definitive about the quantity or nature of the due diligence

required, “as a high level indicator”, as Keydata was “marketing and distributing

this complex offshore product to UK investors who are generally unable to

penetrate the product's structures”, its due diligence should have been sufficient

(1)
“be assured that the product will, in the normal course of events and

within reasonable parameters, perform as intended”;

(2)
“be able to describe those characteristics and risks to potential investors

in terms that are clear, fair, not misleading and are likely to be understood

by potential investors”; and

(3)
“enable the directors to explain the characteristics and risks and to

describe and evidence the processes that have been put in place to manage

those risks”.

4.42.
The March 2008 Due Diligence Report concluded that a number of Keydata’s

failings in respect of its due diligence were connected to potentially misleading

statements in its financial promotions. For example:

(1)
in order to ensure that the principal risks to the Lifemark Products were

adequately explained in the brochures Keydata should undertake (or

commission a third party to undertake) some additional work to:

(a)
model the Lifemark Products – to show the expected returns

“allowing for all charges deducted by the various parties at each

stage”;

(b)
run a number of test scenarios to assess the probability of investor

capital being returned in full: “Keydata then needs to demonstrate

that the probability of investor expectations not being met is

acceptably low and is presented appropriately in promotions”;

(c)
obtain quarterly valuations of the Lifemark Portfolio on a market

value basis;

(d)
regularly review the actuarial model “especially before embarking on

a series of purchases or sales” from the Lifemark Portfolio;

(e)
review the currency hedging arrangements: “check that these are

appropriate to the underlying risks and that the underwriting

organisation has the financial strength to honour its obligations. If

the whole currency risk is not hedged, assess the probability of

exchange impairment and whether this is acceptable”; and

(f)
address a concern about cross-subsidy between investors: “as all

assets are held in one fund and the demarcation of assets between

tranches of business is opaque, Keydata should consider how the

demarcation operates and how it can ensure and demonstrate that

final payouts to investors are a true reflection of the assets held on

their behalf”;

(2)
references in the brochures were unsubstantiated: “We note also that

Keydata’s marketing material [in fact, only the brochure for the SIB 4]

referred to a bank overdraft facility. We have not seen any papers relating

to the overdraft facility and so we recommend that any such arrangements

should be properly documented, as it has been alleged that this facility is

available to provide liquidity in adverse trading conditions”.

4.43.
Following the March 2008 Due Diligence Report Keydata obtained a series of

reports by the Lifemark Investment Manager, including a summary report dated

31 March 2008 (the “Summary Report”). The Summary Report was provided by

Keydata to its professional advisers to address the matters raised in the March

2008 Due Diligence Report. On 16 April 2008 Mr Johnson was provided with a

copy of Keydata’s professional advisers’ review of the Summary Report. Keydata’s

professional advisers concluded that the Summary Report did not provide enough

information to deal with their concerns raised in the March 2008 Due Diligence

Report, stating “In our view, none of the recommendations in our report have been

addressed adequately in this document.” The professional advisers recommended

that Keydata address each of the outstanding matters, but Keydata did not do so.

4.44.
Keydata’s professional advisers issued a further report to Keydata on 18 June 2008

(the “June 2008 Extract Review”) which considered a report Keydata had obtained

on the Lifemark Portfolio. Mr Johnson saw a copy of this report on 19 June 2008.

In the June 2008 Extract Review the professional advisers advised Keydata that

they agreed with the professional firm that had written the report on the Lifemark

Portfolio that the number of senior life settlement policies within the Lifemark

Portfolio (229 lives) was small, and commented that this “directly contradicts

assertions made by Keydata in its financial promotions for the SIP that the

portfolio contains a large pool of lives and is therefore less exposed to the random

fluctuations associated with small pools of lives”.

4.45.
As Keydata’s Compliance Officer, Mr Johnson should have made it clear to the

Keydata board of directors that, in order to comply with its regulatory duties,

Keydata should take the steps recommended by its professional advisers to

address the deficiencies identified in the February 2008 Brochure Report, the

March 2008 Due Diligence Report and the June 2008 Extract Review, including

amending its financial promotions, and stop selling or marketing the Lifemark

Products until those steps had been taken.

4.46.
However, Mr Johnson failed to take adequate steps to ensure that the Keydata

board of directors committed Keydata to taking these steps. Keydata continued

to market the SIP 14 on the basis of the unamended brochure which was the

subject of the February 2008 Brochure Report and allowed investors who had

already agreed to invest in the SIP 14 to be placed into it until it closed to

investment on 22 February 2008. Keydata then marketed the Income Plan 12 and

14 and the DIP 1 to 9 after 3 March 2008 by issuing financial promotions which

were materially similar in content to those for the earlier Lifemark Products. The

DIP 1 and Income Plan 12 were launched on 5 and 7 March 2008 respectively. Mr

Johnson was aware that the Keydata board of directors had not committed

Keydata to taking the steps recommended by its professional advisers and he

failed to take adequate steps to stop Keydata from continuing to market and sell

the Lifemark Products until it had made the necessary amendments to its financial

promotions.

The risk of failure of the Lifemark Products

4.47.
On 23 May 2007 Mr Johnson received from the Lifemark Investment Manager a

Lifemark Portfolio forecast which predicted that if only 30% of investors in the

Lifemark Products rolled over their investments at the end of the term into new

investments in Lifemark Products, the Lifemark Portfolio would face a deficit of

US$35 million in 2011, which was the time the Lifemark Products would start to

mature.

4.48.
In light of this information, Mr Johnson would have been aware of the significance

of the rollover rate and the need for Keydata to take steps to manage the risk that

the proportion of investors rolling over their investments would be insufficient to

avoid the Lifemark Portfolio facing a deficit, but he took no steps to ensure that

Keydata managed this risk.

4.49.
On 12 March 2008 Keydata was provided with the first of the Lifemark Investment

Manager’s reports mentioned in paragraph 4.43. This report was based on a 0%

rollover assumption. It indicated that the Lifemark Portfolio could not return

investors’ capital in full unless a number of steps were taken, including ensuring

that a low interest credit facility was put in place, and that there were cross-

subsidy concerns about investors buying different Lifemark Products at different

times. The Lifemark Investment Manager concluded that “If the portfolio is

maintained using a buy and hold strategy, we expect that the [Lifemark]

[P]ortfolio will experience a negative cumulative cash flow at year end 2009 of

($6,567,351) and will continue to be impacted negatively at an increasing rate

until year 2014”. Mr Johnson commented that: “In conclusion, the report does not

give me any comfort that the [Lifemark] Investment Manager is in control of the

Investment Management process!”

4.50.
As mentioned in paragraph 4.43, Keydata sought its professional advisers’ views

on the Summary Report. Keydata’s professional advisers raised a number of

queries (through Mr Ford) with the Lifemark Investment Manager. These queries

focused on the performance of the Lifemark Portfolio, currency risk and cross-

subsidy concerns. In their review of the Summary Report, a copy of which was

received by Mr Johnson on 16 April 2008, the professional advisers concluded that

the report “suggests that the portfolio will experience negative cashflow but no

arrangements are currently in place to address this”. Mr Johnson was therefore

aware that the Lifemark Investment Manager had predicted that the Lifemark

Portfolio faced a liquidity problem and that no credit facility was in place to deal

with this.

4.51.
On or around 30 May 2008 Mr Johnson was aware of the existence and contents

of a draft valuation of the Lifemark Portfolio (the “Draft Lifemark Valuation

Report”) provided to Keydata by the Lifemark Actuary. The Draft Lifemark

Valuation Report projected that the Lifemark Portfolio would face a deficit of

approximately US$172 million to US$84 million between 2011 and 2013 and

stated that the number of lives in the Lifemark Portfolio was small. It confirmed

that any deviations from its assumptions in respect of currency rates, interest

rates or life expectancies could have a significant impact on the overall

profitability of the Lifemark Portfolio.

4.52.
On 19 June 2008 Mr Johnson received Keydata’s professional advisers’ review of

the information regarding the SIB and SIP provided to the Authority by Keydata

on 21 May 2008 in response to statutory information requirements. Keydata’s

professional advisers advised Keydata that the RAC ratio was a “red herring”,

and that a more useful indicator of value would be the market value of the policies

within the portfolio versus the obligations owed under the relevant bonds.

Keydata’s professional advisers also commented that the SLS Portfolio was very

small in size and that “luck will play a key role unless Lifemark/Keydata insures

against light mortality”.

4.53.
The June 2008 Extract Review, also received by Mr Johnson on 19 June 2008,

concluded that:

(1)
the extract would “lead an informed reader to conclude that the probability

of Keydata meeting investors’ expectations is not better than 50:50, and

potentially a lot less”;

(2)
the number of senior life settlement policies within the Lifemark Portfolio

(229 lives) was small; and

(3)
“Lifemark will have to sell a significant proportion of the policies to

meet redemption payments, and it is therefore materially exposed to

market conditions at that time, costs of disposal and changes to mortality

assumptions”.

4.54.
During July 2008 Mr Johnson was aware that Keydata had amended and approved

the Lifemark Investment Manager’s update on the Lifemark Portfolio (which was

produced every six months) which stated that the Lifemark Portfolio was

“expected to provide a steady stream of returns covering the bond coupon

payments as well as the return of principal and capital to bond investors in a

timely manner”. Mr Johnson had good reason to doubt that the Lifemark

Investment Manager’s update gave an accurate impression of the risks to the

performance of the Lifemark Portfolio in light of the various reports produced by

the Lifemark Investment Manager, the Draft Lifemark Valuation Report and the

June 2008 Extract Review. Mr Johnson was aware that Keydata circulated the

Lifemark Investment Manager’s update to IFAs on or around 25 July 2008. Mr

Johnson failed to take adequate steps to ensure that this update gave an

accurate impression of the risks to the performance of the Lifemark Portfolio.

4.55.
On 3 November 2008 Keydata, by an email copied to Mr Johnson, provided its

professional advisers with a further report by the Lifemark Investment Manager

dated 30 October 2008 (the “October 2008 Lifemark Report”), which considered a

draft of an actuarial review conducted by the Lifemark Actuary dated 12 October

2008. This report concluded that the Lifemark Portfolio would face a very

significant negative cash balance between 2009 and 2014 (during which time the

majority of the Lifemark Products would be due to mature) that would peak at

minus $196 million, and that thereafter the cumulative cashflow of Lifemark would

be negative until 2023 but the Lifemark Portfolio would hold a positive cash

balance at 2027. The Lifemark Investment Manager expressed the view that the

Lifemark Portfolio could meet all of its obligations and that the risk to bondholders’

capital was minimal.

4.56.
On 4 December 2008 Mr Johnson received a report from Keydata’s professional

advisers which concluded that the October 2008 Lifemark Report raised concerns

that the Lifemark Investment Manager did not understand the Lifemark Products

and contained “[a] lot of negatives; lack of understanding, holes in logic and

warning signs”. Keydata’s professional advisers concluded that the October 2008

Lifemark Report “could (or should) lead a reader to question the viability of the

product”.

4.57.
At no time during the Relevant Period did Mr Johnson:

(1)
take adequate steps to ensure the Keydata board of directors committed

Keydata to taking effective action to manage the risks that had been clearly

identified by Keydata’s advisers (including those arising out of its

inadequate due diligence for the Lifemark Products) and which threatened

the ability of the Lifemark Products to deliver the investment returns that

had been promised and permit a return of capital, or consider or address

the need to ensure that the Authority, investors and IFAs were notified of

these risks;

(2)
take adequate steps to ensure the Keydata board of directors suspended or

ceased the promotion or sales of the Lifemark Products until Keydata’s

financial promotions were clear, fair and not misleading in all respects; or

(3)
take adequate steps to ensure the Keydata board of directors considered or

addressed the actions that Keydata could or should take to mitigate the

potential loss to investors who had invested in the Lifemark Products.

4.58.
The steps that Mr Johnson could have taken to ensure that the Keydata board of

directors committed Keydata to taking these actions include: (i) refusing to sign off

the financial promotions for the Lifemark Products, and/or (ii) making it clear that,

if the Keydata board of directors did not commit Keydata to taking these actions,

he would have no alternative but to resign from his position and/or notify the

Authority of the issues.

4.59.
The Authority concludes that Mr Johnson failed to take adequate steps to prevent

Keydata from proceeding with the promotion and sale of the Lifemark Products to

investors with a reckless disregard to the risks that they posed to such investors

and the risks that had been identified by Keydata’s professional advisers, and

despite being aware that IFAs and investors were unaware of such risks. As a

result of the professional advice and other information that he received or was

otherwise aware of, Mr Johnson could not have been in any doubt that material

risks to the performance of the Lifemark Portfolio existed and needed to be

addressed as a matter of urgency and that Keydata’s promotional material was

inadequate and incomplete. Despite this knowledge, Mr Johnson failed to take

adequate steps to ensure the Keydata board of directors committed Keydata to

managing such risks or ceasing to promote Lifemark Products, or that others,

including the Authority, IFAs and investors, were alerted to the existence of such

risks. He thereby recklessly exposed investors in the Lifemark Products to very

significant risks.

Failure of the Products to comply with the ISA Regulations

4.60.
Keydata offered the Products for investment with the benefit of a tax-

efficient ISA wrapper. In order to be eligible for ISA status the Products had to

comply at all times with the ISA Regulations. The ISA Regulations provided that

in order to be a qualifying investment for a stocks and shares ISA the securities in

question must have at least a five year investment term and must be listed on the

official list of a recognised stock exchange. For the purposes of the ISA

Regulations the main market of the Luxembourg Stock Exchange was a recognised

stock exchange.

4.61.
The brochures for the Products stated either that the relevant bonds were listed on

the Luxembourg Stock Exchange or that they would be so listed and (in many

cases) stated that they were therefore eligible for ISA status. However at the time

the Products were sold the counterparties had not listed the relevant bonds.

4.62.
Mr Johnson was aware at the time of the launch of the Products that listing was

necessary to ensure that the investments were eligible for investment with an ISA

wrapper. However he wrongly understood that if the relevant bonds were listed at

some stage within the five year investment term of the Products, the ISA

requirements would be met. Mr Johnson did not seek professional advice on this

point prior to the launch of the Products.

4.63.
Keydata also failed to ensure that each individual issue of the Products would

comply with the requirement under the ISA Regulations that the investment had at

least a five year term. In respect of one tranche of the SIB 2 the relevant SLS

Bond was issued five days later than Keydata had expected, and hence had a

maturity date falling less than five years after its inclusion in the relevant ISA.

Keydata did not notice this mistake at the time, and it was only discovered in June

2008.

4.64.
Mr Johnson was aware at the time of the launch of the SIB 1 on 26 July 2005 that

the SLS Bonds were not listed on the Luxembourg Stock Exchange. He was also

aware at the time of the launch of the SIB 4 on 19 December 2005 that the

Lifemark Bonds were not listed on the Luxembourg Stock Exchange.

4.65.
Mr Johnson was aware (even on his incorrect understanding of the ISA

Regulations) that there was a risk to the ISA status of the SLS Products and the

consequences of the listing not being in place. For example, on 14 November

2006 the Offshore Partnership confirmed to Mr Ford that Mr Johnson was under

pressure from the Authority and that Keydata needed to obtain a prospectus for

the SLS Bonds to “protect the status of the investors for PEP & ISA investment

structures” and to “evidence to the [Authority] that the bonds issued to Keydata

for its SIB 1, 2 & 3 investors will be listed on the Lux SE”.

4.66.
Mr Johnson was aware by 23 December 2008 (when he received a copy of a letter

from the Authority to Mr Ford) that the Authority was extremely concerned by the

risk of the SLS Products not fulfilling the conditions of the ISA Regulations

(following Mr Johnson’s confirmation during a compelled interview on 18 November

2008 that the SLS Bonds remained unlisted and that a listing was necessary to

secure ISA status) and was insisting that Keydata urgently refer the matter to

HMRC as the proper agency to determine the tax status of the Products. When the

Authority followed this up in January 2009, however, Mr Johnson advised the

Authority that Keydata would only take the matter up with HMRC once the SLS

Bonds were in fact listed. The Authority advised Keydata that the delay in dealing

with this matter was an unacceptable risk to retail investors and asked that

Keydata consent to the Authority referring the matter to HMRC. Despite Keydata’s

representations to the Authority that the matter had been reported to HMRC,

Keydata did not make the formal notification to HMRC until 4 March 2009.

Keydata’s letter of notification to HMRC acknowledged that if the relevant bonds

were not listed then this would amount to a breach of the ISA Regulations.

4.67.
On 22 May 2009 HMRC wrote to Keydata confirming that the SLS Bonds were not

qualifying investments for an ISA and that there had therefore been a breach of

the ISA Regulations. In addition, HMRC stated that the SIB 2 also breached the

ISA Regulations as the SLS Bonds would mature within 5 years of the date on

which they were first held in the SIB. The letter stated that as these investments

were not qualifying ISA investments, any return on them was not exempt from tax

and consequently HMRC would be seeking to recover the tax.

4.68.
Despite being aware by 23 December 2008 that the Lifemark Products had either

not been listed or had not been listed for the full five year investment term, and so

it was highly likely that they failed to comply with the ISA Regulations, Mr Johnson

recklessly failed to take adequate steps to ensure the Keydata board of directors

committed Keydata to cease selling the Lifemark Products to investors with an ISA

wrapper. On and after 23 December 2008 Keydata sold DIP 7, DIP 8 and DIP 9 to

2,213 investors, amounting to a further £18 million in ISA investment.

Misleading the Authority

4.69.
Mr Johnson misled the Authority about the performance of the Products. Mr

Johnson deliberately provided misleading answers in two compelled interviews and

withheld information in a meeting. As Keydata’s Compliance Officer until 1

December 2008, and as the person responsible for Keydata’s dealings with the

Authority in relation to the Products thereafter, it was incumbent on Mr Johnson to

ensure that he provided the Authority with full and accurate information regarding

the Products and their performance.

4.70.
On 11 June 2008 Mr Johnson attended a compelled interview with the Authority.

The Authority asked Mr Johnson if the investors in the SLS Products had been

receiving interest payable to date. Mr Johnson replied “they’ve had all their

interest to date” and added “there’s never been a problem with the income

payments. They haven’t been stopped or whatever”. Whilst it was true that

investors had received all their income payments to date, it was not true that

there had never been a problem with them and, as is clear from paragraphs 4.25

and 4.26, Mr Johnson was aware of this and his response was deliberately

misleading.

4.71.
On 18 November 2008 Mr Johnson attended a further compelled interview with the

Authority. The Authority asked Mr Johnson whether the Products were performing

as expected and Mr Johnson responded “I’m told by the directors [Mr Ford and

Keydata’s Sales Director] that they are”. Mr Johnson was aware that there was

considerable doubt about whether SLS would make income payments and that SLS

was facing liquidity problems, and that the Lifemark Portfolio faced very significant

and unresolved risks to achieving the performance that investors had been led to

expect. In responding as he did, he deliberately misled the Authority.

4.72.
On 18 January 2009 Mr Johnson informed Mr Ford and Keydata’s Sales Director

by email that at an upcoming meeting with the Authority to establish the current

performance of the Products he intended to confirm that the “[c]urrent financial

position of Lifemark is good” and the “[c]urrent financial position of the bonds is

good – all income paid and up to date”, and added “I do not propose talking

about the [2008 Actuarial Review] at this stage”. At the meeting, which took

place on 23 January 2009, Mr Johnson did not inform the Authority of the

problems with the Products of which he was aware. Mr Johnson was therefore

aware that the Authority continued to be concerned about the performance of the

Products and misled the Authority in this regard by withholding relevant

information.

4.73.
On 5 June 2009, by an email from Keydata’s solicitors (which was copied to Mr

Johnson), in response to a direct question from the Authority as to when Keydata

would receive the next income payments for the SLS Bonds which underpinned the

SLS Products, Keydata sent the Authority a spreadsheet setting out forthcoming

payments dates in 2009 and 2010 on which Keydata “will receive income for

distribution” from SLS. The spreadsheet clearly represented that future income

was expected from SLS. At the time this spreadsheet was sent, however, Mr

Johnson knew that SLS had failed to pay income when it became due in 2007 and

2008 and that there was considerable doubt about whether such payments would

be made in future. Therefore, Mr Johnson would have known that the information

provided to the Authority was likely to mislead the Authority but failed to correct

that information.

5.
FAILINGS

5.1.
The statutory and regulatory provisions relevant to this notice are referred to in

5.2.
The Authority considers that Mr Johnson failed to act with integrity in carrying

out his controlled functions at Keydata in breach of Statement of Principle 1.

5.3.
Mr Johnson received professional advice on 5 December 2005 (in relation to the SLS

Products) and on 7 February 2008 and 19 June 2008 (in relation to the Lifemark

Products) that Keydata’s financial promotions contained unclear, incorrect and

misleading statements (and as such were not clear, fair and not misleading). He

received professional advice on 3 March 2008 that Keydata’s due diligence in

relation to the Lifemark Products was inadequate. He received professional advice

or other information on 23 May 2007, 12 March 2008, 16 April 2008, 19 June 2008

and 3 November 2008 that identified risks to the ability of the Lifemark Products to

perform in the manner that investors had been led to expect by Keydata’s financial

promotions.

5.4.
Mr Johnson was aware that the issues with the financial promotions and due

diligence set out in paragraph 5.3 had not been addressed, and that the risks set

out in that paragraph of the Lifemark Portfolio not performing were not being

effectively managed and that investors and IFAs were not aware of these risks. Mr

Johnson’s awareness of the significance of these issues increased from the launch of

the Lifemark Products on 19 December 2005 onwards, during which time he also

became increasingly aware that the SLS Products were not performing and that

there was a risk that they might fail. Despite this increasing awareness, he

recklessly failed either to take adequate steps to ensure that Keydata addressed the

issues and risks that had been identified in relation to the Lifemark Products or to

take adequate steps to stop Keydata from marketing and selling the Lifemark

Products until effective remedial steps were taken.

5.5.
Despite becoming increasingly aware of the severe risks affecting the Lifemark

Portfolio, Mr Johnson recklessly failed to take adequate steps to ensure that Keydata

took steps to explain or mitigate the risk to existing and potential investors in the

Lifemark Products, and that material circulated to such investors gave an accurate

impression of the risks to the performance of the Lifemark Portfolio. For example,

he failed to ensure that the Lifemark Investment Manager’s update on the Lifemark

Portfolio, which was approved by Keydata and circulated to IFAs on or around 25

July 2008, gave an accurate impression of the risks to the performance of the

5.6.
Mr Johnson deliberately misled the Authority by representing to it in a compelled

interview on 11 June 2008 that there had never been a problem with the income

payments on the SLS Products, and in a compelled interview on 18 November 2008

that the Products (SLS and Lifemark) were on target to meet their obligations,

despite being aware that there had previously been problems with the income

30

payments on the SLS Products, that there was considerable doubt about whether

SLS would make income payments and of the serious liquidity and other risks with

the Lifemark Portfolio.

5.7.
The Authority considers that Mr Johnson failed to deal with the Authority in an open

and cooperative way and failed to disclose appropriately information of which the

Authority would reasonably expect notice in breach of Statement of Principle 4.

5.8.
The Authority has reached this conclusion having regard to the matter set out at

paragraph 5.6 above, and to the following matters.

5.9.
On 23 January 2009, at a meeting with the Authority, Mr Johnson withheld from the

Authority the problems with the performance of the Products of which he was aware.

5.10.
On 5 June 2009 Keydata (through an email from its solicitors which was copied to

Mr Johnson) provided the Authority with a detailed spreadsheet which represented

that Keydata was anticipating receipt of payments throughout 2009 and 2010 from

SLS (income under the SLS Bonds) which would fund income payments for the SLS

Products. The spreadsheet clearly represented that future income was expected

from SLS. However at this time Mr Johnson was aware that SLS had not paid

income in 2007 and 2008 and that there was considerable doubt about whether SLS

would do so in future. Therefore, Mr Johnson would have known that the

information provided to the Authority was likely to mislead the Authority, but failed

to correct that information.

5.11.
Mr Johnson failed to notify the Authority at any stage: that the SLS Products were

not performing and that there was a risk of failure of the SLS Portfolio; of the failure

of Keydata to address its professional advisers’ concerns over the due diligence for

the Lifemark Products and the financial promotions for the Products; or of the risk

that the Lifemark Portfolio might not perform as investors expected.

Fit and Proper

5.12.
By reason of the facts and matters set out above, the Authority considers that Mr

Johnson is not fit and proper, because he lacks integrity and has failed to

demonstrate a readiness and willingness to comply with the requirements and

standards of the regulatory system.

5.13.
Mr Johnson’s behaviour in many instances was reckless and in one case was

deliberate, and his actions were material and as such contributed to the extensive

consumer detriment which has arisen from the sale of the Products.

5.14.
Mr Johnson’s lack of integrity is further demonstrated by his reckless failure to take

adequate steps to prevent Keydata from continuing to market and sell the Lifemark

Products as fulfilling the conditions set out in the ISA Regulations after becoming

aware by 23 December 2008 that it was highly likely that they did not do so.

6.
SANCTION

Financial penalty

6.1.
The Authority has decided to impose a financial penalty on Mr Johnson for his

breaches of Statements of Principle 1 and 4.

6.2.
The Authority’s policy on the imposition of financial penalties is set out in Chapter 6

of DEPP, which came into force on 28 August 2007.

6.3.
In determining whether a financial penalty is appropriate, and the appropriate

level of any financial penalty, the Authority is required to consider all the relevant

circumstances of a case. Applying the criteria set out in DEPP 6.2, the Authority

considers that a financial penalty is an appropriate sanction in this case, in

particular given the serious nature of Mr Johnson’s breaches, the risk of loss to

which UK consumers were exposed as a result of his breaches and the actual loss

which they have suffered.

6.4.
DEPP 6.5 sets out a non-exhaustive list of factors that may be of relevance in

determining the appropriate level of financial penalty to be imposed on a person

under the Act. The Authority considers that the following factors are particularly

relevant in this case.

6.5.
The Authority has had regard to the need to promote high standards of regulatory

conduct by deterring those who have committed breaches from committing further

breaches and by helping to deter others from committing similar breaches.

If the person has made a profit or avoided a loss as a result of the breach

6.6.
The Authority has had regard to Mr Johnson’s earnings from Keydata over the

Relevant Period, which amounted to over £673,000.

The nature, seriousness and impact of the breach

6.7.
The Authority has had regard to the seriousness of Mr Johnson’s breaches, including

the nature and number of the breaches, the number of investors who were exposed

to risk of loss as a result of the breaches, and the significant amount of investor loss

actually caused. The Authority has also had regard to the fact that Mr Johnson was

not a director of Keydata and in general could not control its actions or failures to

act, he was deliberately not informed by the directors of Keydata of some relevant

matters concerning the performance of the Products and he was carrying out other

significant compliance functions not concerning the Products in respect of which the

Authority has not identified any concerns. Taking all these matters into account the

Authority considers that Mr Johnson’s breaches are of a serious nature.

The extent to which the breach was deliberate or reckless

6.8.
In many of the instances set out above Mr Johnson recklessly contravened

regulatory requirements or failed to take adequate steps to prevent Keydata from

doing so, and he deliberately misled the Authority in respect of the performance of

the Products on two occasions.

Difficulty of detecting the breach

6.9.
The Authority may impose a higher penalty where it considers that a person

committed a breach in such a way as to avoid or reduce the risk that the breach

would be discovered. Mr Johnson’s deliberate misleading of the Authority meant

that his (and Keydata’s) breaches were harder to detect.

Conduct following the breach

6.10.
The Authority has taken into account the fact that Mr Johnson failed to make the

Authority aware of his (and Keydata’s) breaches.

Disciplinary record and compliance history

6.11.
Mr Johnson has not previously been the subject of disciplinary action by the

Authority.

Other action taken by the Authority

6.12.
The Authority has taken into account action taken by the Authority in respect of

other approved or authorised persons for similar behaviour.

6.13.
In light of these factors, but especially the seriousness of the misconduct, the risk of

loss to which UK consumers were exposed and the actual loss which they have

suffered, the Authority has decided to impose a penalty of £200,000 on Mr Johnson.

6.14.
Mr Johnson’s misconduct demonstrates that he is not fit and proper. As a result the

Authority, having regard to its statutory objectives, including protecting and

enhancing the integrity of the UK financial system, and securing an appropriate

degree of protection for consumers, has decided to prohibit him from performing

any function in relation to any regulated activity carried on by an authorised person,

exempt person or exempt professional firm.

7.
REPRESENTATIONS

7.1.
Annex B contains a brief summary of the key representations made by Mr Johnson

and how they have been dealt with. In making the decision which gave rise to the

obligation to give this Notice, the Authority has taken into account all of the

representations made by Mr Johnson, whether or not set out in Annex B.

8.
PROCEDURAL MATTERS

Decision Maker

8.1.
The decision which gave rise to the obligation to give this Notice was made by the

Regulatory Decisions Committee.

8.2.
This Decision Notice is given to Mr Johnson under sections 57 and 67 and in

accordance with section 388 of the Act. The following statutory rights are important.

The Tribunal

8.3.
Mr Johnson 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 Johnson 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 Decision Notice. The Tribunal’s current contact details are: The Upper

Tribunal, Tax and Chancery Chamber, 45 Bedford Square, London WC1B 3DN (tel:

020 7612 9730; email fs@hmcts.gsi.gov.uk), but from 17 November 2014 the

Tribunal’s address will be: Fifth Floor, Rolls Building, Fetter Lane, London EC4A 1NL.

Further information on the Tribunal, including guidance and the relevant forms to

complete, can be found on the HM Courts and Tribunal Service website:

8.4.
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 Alexandra Stableforth at the Financial Conduct Authority, 25 The

North Colonnade, Canary Wharf, London E14 5HS.


Access to evidence

8.5.
Section 394 of the Act applies to this Decision Notice. In accordance with section

394, Mr Johnson has the right to access:

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

Notice; and

(2)
the secondary material which, in the opinion of the Authority, might

undermine that decision.

8.6.
A copy of this Notice is being given to SLS and Lifemark as third parties identified in

the reasons above and to whom in the opinion of the Authority the matter is

prejudicial. Those parties have similar rights of representation and access to

material in relation to the matters which identify them.

Confidentiality and publicity

8.7.
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 of the Act provides that a person to whom this Notice is

given or copied may not publish the Notice or any details concerning it unless the

Authority has published the Notice or those details.

8.8.
However, the Authority must publish such information about the matter to which a

decision notice or final notice relates as it considers appropriate. Mr Johnson, SLS

and Lifemark should be aware, therefore, that the facts and matters contained in

this Notice may be made public.

Contacts

8.9.
For more information concerning this matter generally, contact Alexandra

Stableforth at the Authority (direct line: 020 7066 5866).

Acting Chairman, Regulatory Decisions Committee

36

ANNEX A

RELEVANT STATUTORY AND REGULATORY PROVISIONS

1.
RELEVANT STATUTORY PROVISIONS

1.1.
The Authority’s statutory objectives, set out in section 1B(3) of the Act, include

protecting and enhancing the integrity of the UK financial system, and securing an

appropriate degree of protection for consumers.

1.2.
The Authority has the power pursuant to section 56 of the Act to make an order

prohibiting an individual from performing a specified function, any function falling

within a specified description, or any function, if it appears to the Authority that

that individual is not a fit and proper person to perform functions in relation to a

regulated activity carried on by an authorised person, exempt person or exempt

professional firm. Such an order may relate to a specified regulated activity, any

regulated activity falling within a specified description, or all regulated activities.

1.3.
Section 66 of the Act provides:

“(1) [The Authority] may take action against a person under this section if –

(a)
it appears to the [Authority] that he is guilty of misconduct; and

(b)
the [Authority] is satisfied that it is appropriate in all the

circumstances to take action against him.

(2) …a person is guilty of misconduct if, while an approved person –

(a)
the person has failed to comply with a statement of principle

issued by the [Authority] under section 64…

(3)
If the [Authority] is entitled to take action under this section against a

person, it may…

(a)
impose a penalty on him of such amount as it considers appropriate.

(4)
[The Authority] may not take action under this section after the end of the

period of three years beginning with the first day on which the [Authority]

knew of the misconduct, unless proceedings in respect of it against the

person concerned were begun before the end of that period.


(5)
For the purposes of subsection (4) –

(a)
[the Authority] is to be treated as knowing of misconduct if it has

information from which the misconduct can reasonably be inferred;

and

(b)
proceedings against a person in respect of misconduct are to be

treated as begun when a warning notice is given to him under section

67(1).”

1.4.
The three-year period in section 66(4) took effect from 8 June 2010, following an

amendment made to that section by section 12(1) of the Financial Services Act

2010. Prior to that amendment, the period provided for in section 66(4) was two

years.

1.5.
Throughout the Relevant Period, the ISA Regulations provided as follows:

“7.— Qualifying investments for a stocks and shares component

(1) This regulation specifies the kind of investments (“qualifying investments for a

stocks and shares component”) which may be purchased, made or held under a

stocks and shares component…

(2) Qualifying investments for a stocks and shares component to which paragraph

(1) refers are–

(b) securities (“qualifying securities”) –

(i) issued by the company wherever incorporated…

(ii) which satisfy at least one of the conditions specified in paragraph (5) and

the condition specified in paragraph (6)…

(5) The conditions specified in this paragraph are–

(a) that the shares in the company issuing the securities are listed on the official

list of a recognised stock exchange;

38

(b) that the securities are so listed;

(c) that the company issuing the securities is a 75 per cent. subsidiary of a

company whose shares are so listed.

(6) The condition specified in this paragraph is that, judged at the date when each

of the securities is first held under the account, the terms on which it was issued do

not –

(a) require the loan to be repaid or the security to be re-purchased or

redeemed, or

(b) allow the holder to require the loan to be repaid or the security to be

repurchased or redeemed except in circumstances which are neither certain

nor likely to occur,

within the period of five years from that date.”

2.
RELEVANT REGULATORY PROVISIONS

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

2.2.
During the Relevant Period, Statement of Principle 1 stated:

“An approved person must act with integrity in carrying out his controlled

function.”

2.3.
During the Relevant Period, Statement of Principle 4 stated:

“An approved person must deal with the [Authority]… and other regulators in

an open and cooperative way and must disclose appropriately any information

of which the [Authority] would reasonably expect notice.”

2.4.
One of the purposes of FIT is to set out and describe the criteria that are relevant in

assessing the continuing fitness and propriety of approved persons.

2.5.
FIT 1.1.1G provides that it applies to an approved person.

2.6.
FIT 1.3.1G sets out that the Authority will have regard to a number of factors when

assessing the fitness and propriety of a person to perform a particular controlled

function. One of the most important considerations will be the person’s honesty,

integrity and reputation.

2.7.
FIT 2.1.1G sets out 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. FIT 2.1.3G(13) includes, as one of the relevant

matters the Authority will consider, 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.

2.8.
The Authority’s general approach to determining whether to impose a financial

penalty and the appropriate level of any such penalty is set out in DEPP. The

principal purpose of imposing a financial penalty is to promote high standards of

regulatory
conduct by deterring persons who have breached regulatory

requirements from committing further contraventions, helping to deter others from

committing similar breaches and demonstrating generally the benefits of compliant

behaviour (DEPP 6.1.2G). DEPP 6.2 sets out a non-exhaustive list of factors that

may be relevant to determining whether to impose a financial penalty. DEPP

6.5.2G sets out a non-exhaustive list of factors that may be relevant to determining

the appropriate level of financial penalty.

2.9.
In considering whether to impose a financial penalty and the amount of the penalty

to impose, the Authority has also had regard to the provisions of ENF which were in

force during the Relevant Period.

2.10. Guidance relating to prohibition orders is contained in EG at EG 9. This states that

the Authority may exercise its power to prohibit individuals where it considers that,

to achieve any of its statutory objectives, it is appropriate to prevent an individual

from performing any function in relation to regulated activities (EG 9.1).

2.11. EG 9.8 provides:

“When the [Authority] has concerns about the fitness and propriety of an

approved person, it may consider whether it should prohibit that 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 [Authority] will consider in each case whether its statutory objectives can be

achieved adequately by imposing disciplinary sanctions, for example, public censures or

financial penalties, or by issuing a private warning”.

2.12. EG 9.3 provides:

“In deciding whether to make a prohibition order… the [Authority] will

consider all the relevant circumstances including whether other enforcement

action should be taken”.

2.13. When deciding whether to make a prohibition order, the Authority will consider all

relevant circumstances of the case which may include but are not limited to the

following criteria set out in EG 9.9:

“(2) Whether the individual is fit and proper to perform functions in relation to

regulated activities. [The criteria for assessing this are set out in FIT.]

(3) Whether and to what extent the approved person has:

(a)
failed to comply with the Statements of Principle issued by the

[Authority] with respect to the conduct of approved persons;

(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 functions 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.”

2.14. EG 9.5 provides:

“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 risk which he poses to

consumers of the market generally.”

2.15. EG 9.10 provides:

“The [Authority] 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.”

2.16. EG 9.12 provides a non-exhaustive list of examples of behaviours which have

previously resulted in a prohibition order:

“(1) Providing false or misleading information to the [Authority]; including

information relating to identity, ability to work in the United Kingdom, and

business arrangements;

(3)
Severe acts of dishonesty, e.g. which may have resulted in financial crime;

(4)
Serious lack of competence; and

(5) Serious breaches of the Statements of Principle for approved persons, such

as failing to make terms of business regarding fees clear or actively

misleading clients about fees; acting without regard to instructions;

providing misleading information to clients, consumers or third parties;

giving clients poor or inaccurate advice; using intimidating or threatening

behaviour towards clients and former clients; failing to remedy breaches of

the general prohibition or to ensure that a firm acted within the scope of its

permissions.”

ANNEX B

REPRESENTATIONS

1.
Mr Johnson made the following representations:

Time bar

1.1.
Section 66(4) of the Act required the Authority to issue a warning notice against an

individual proposing action under section 66 no more than two years after it

became aware of facts suggesting he was guilty of misconduct. The Warning

Notice in these proceedings was not issued until 26 October 2010, well after the

Authority became aware of the relevant facts, which was evident from the fact that

they were investigating. Specifically, Mr Johnson informed the Authority at an

interview in May 2008 that the SLS Bonds had not been listed.

1.2.
With effect from 8 June 2010, the two year time limit in section 66(4) was extended

to three years. Mr Johnson queried the Authority’s interpretation of that amended

provision as entitling it to take action three years after acquiring the relevant

knowledge in this case, where the investigation had begun before the change in

the applicable period.

1.3.
Further, section 69(8) of the Act required the Authority to have regard to any

statements of policy published by it and in force at the time the misconduct in

question occurred, in deciding whether to exercise its powers under section 66; the

Authority was considering issues about due diligence and financial promotions in

2006, well outside the two year time limit.

1.4.
The Products were not of a type considered high risk at the time they were

launched. Furthermore, the Authority had only stated since the end of the

Relevant Period that it considered life settlement backed products to be high risk.

Mr Johnson’s role within Keydata

1.5.
He was not generally taken into the confidence of the directors and his knowledge

of the affairs of Keydata was limited accordingly.

1.6.
The Authority had failed to give due credit to the fact that Keydata employed the

services of a range of reputable professional firms including compliance

consultants, whose advice he relied on.

1.7.
He was employed by Keydata’s administrator after the Relevant Period, receiving

the gratitude of the administrator and no criticism of his work, demonstrating that

the administrator regarded him as an honest and reliable individual. He had also

fulfilled other compliance responsibilities not concerning the Products to the

satisfaction of commercial clients who were subject to financial regulation.

Failure of the SLS Products to perform

1.8.
He had believed during the Relevant Period that the SLS Portfolio was performing

well. Its default was due to the replacement of its assets with a guarantee, of

which he had been unaware. He had no reason to believe the SLS Portfolio was

not performing well, because the issue with the RAC ratio dropping below its

required level was (or appeared to have been) rectified, as were the early failures

to make income payments on time (which were due only to initial issues relating to

the setting up of payments); these matters were not indicators of non-

performance. The information he received from the SLS Investment Manager

suggested the SLS Portfolio was performing well. He believed the rumour about

possible default had been invented by an individual for personal advantage.

Financial promotions for the Products

1.9.
Keydata followed the recommendations of the Brochure Advice, both for existing

Products and those issued subsequently. However, the conclusion of the Brochure

Advice that the brochures presented Keydata as considering the Products to be

low-risk was wrong.

1.10. He disputed the Authority’s conclusions as to the respects in which it considered the

brochures to be misleading. The brochures were compliant with the rules in force

at the time. Compliance consultants retained by Keydata had reviewed the

brochures and not raised any issues.

1.11. Keydata discussed the February 2008 Brochure Report with its authors, together

with Keydata’s compliance consultants, and the matters raised in it on which the

Authority relied were resolved in those discussions.

1.12. He also disputed the conclusion in the June 2008 Extract Review that the number of

lives in the Lifemark Portfolio was small. He had thought at the relevant time that

the DIP would be a separate portfolio but this decision was reversed by Mr Ford on

the basis that a larger portfolio was preferable.

1.13. Keydata was a distributor, not a product provider, and its due diligence

responsibilities were limited accordingly. That Keydata was a distributor was

demonstrated by the fact that it signed distribution agreements with both SLS and

Lifemark.

1.14. This view of Keydata’s role was also supported by the finding of the Court in its

judgment in respect of the application for judicial review of the FSCS’s treatment of

Keydata losses, where it had allocated the losses to the “investment

intermediaries” levy class.

1.15. Keydata’s due diligence was extensive and adequate, and the Authority’s criticisms

of it were unjustified. He disputed the conclusions of the March 2008 Due

Diligence Report which were relied upon by the Authority. The work stated by the

report as necessary to verify statements in the financial promotions was either

unnecessary, or the responsibility of parties other than Keydata.

1.16. It was the decision of others at Keydata to continue to market the Lifemark

Products in light of the March 2008 Due Diligence Report, and it was not within his

power to prevent this decision.

The risk of failure of the Lifemark Products

1.17. The various reports by the Lifemark Investment Manager and others, relied on by

the Authority, set out stress-testing scenarios, not forecasts of what was expected

to happen. The projections based on particular rollover percentages were “what if”

scenarios, not predictions that those percentages would occur. They did not take

into account key controls such as the RAC ratio. Keydata had assessed its target

market and had evidence that rollover rates for previous income products were at

least 30%. He denied receiving the Draft Lifemark Valuation Report.

1.18. He disputed the conclusion of Keydata’s professional advisers that the RAC was a

“red herring”, and their conclusions in the June 2008 Extract Review. During the

Relevant Period, he believed the Lifemark Portfolio to be performing well. He

reasonably based this view on information received from the Lifemark Investment

Manager, which was a reputable firm, and which he had no reason to doubt.

1.19. It was reasonable for him to rely on, among other things, the information in the

July 2008 Investment Manager’s Report to investors as being correct. He

considered the cash flow issue identified in the October 2008 Lifemark Report as

being remediable (for example, by a credit facility which would have been readily

available) and regarded the 95% probability of a positive outcome for the Lifemark

Portfolio, which was mentioned in that report (and orally to him also by Mr Ford

and others), as being positive.

Failure of the Products to comply with the ISA Regulations

1.20. Keydata had been working with its lawyers to address the failure to comply with the

ISA Regulations in respect of the Products, with a view to repairing the breaches

using “simplified voiding”. It had powerful arguments in this regard, and could

have been expected to succeed, but was undermined by the Authority intervening

with HMRC.

1.21. He disputed HMRC’s interpretation of the ISA Regulations as requiring continuous

listing. Further, HMRC’s published guidance was not clear on this point.

1.22. Notwithstanding that formal notification by Keydata with regard to the issues was

not made until 4 March 2009, the Authority had been kept fully informed of the

discussions with HMRC.

Misleading the Authority

1.23. He did not seek to mislead the Authority in interview about the performance of the

SLS Bonds and the Lifemark Bonds as he honestly believed they were performing

well.

1.24. His email dated 18 January 2009 setting out what he intended to say to the

Authority was in order to check with Mr Ford and Keydata’s Sales Director whether

they had any information which would make what he intended to say inaccurate.

1.25. In a number of instances his and/or Keydata’s alleged failure to provide the

Authority with documentation they ought to have provided (or details of the

conclusions contained in those documents) was due to the fact the documents

were (or were at the time advised by Keydata’s lawyers to be) subject to legal

professional privilege which Keydata had been advised by its lawyers not to waive.

He had understood that advice as meaning it was not possible to provide any

information arising from that advice.

The Authority’s conduct

1.26. The Authority acted improperly in the following respects.

(1) It
acted
aggressively
and
unfairly,
including
by
bringing
about
the

administration of Keydata by an unfair process. It involved the administrator in

the drafting of the Warning Notice despite a conflict of interest on the part of

the administrator.

(2) It intervened with HMRC to prevent the repair of the ISA status of the Products.

(3) It conducted an unfair investigation which assumed his guilt and repeatedly

failed to give him or Keydata an adequate opportunity to respond. The

allegations in the Warning Notice went beyond the scope of the Authority’s

investigation as notified to him in its Memorandum of Appointment of

Investigators.

(4) It repeatedly failed to provide him with complete documentation, or provided it

late or only on his request; this hampered the preparation of his defence to

these proceedings.

Financial penalty

1.27. A substantial penalty was not appropriate in respect of the alleged misconduct,

taking into account penalties previously imposed by the Authority on other

individuals in comparable cases.

2.
The Authority has reached the following conclusions:

Time Bar

2.1.
As noted by Mr Johnson in his representations, with effect from 8 June 2010, the

two-year period in section 66(4) of the Act was replaced by a period of three years.

The Authority’s position is that if the case against the individual was already time-

barred under section 66(4) by that date, the two-year period still applies, but if not,

then the three-year period applies. The Authority had not, by 8 June 2008,

acquired information from which the misconduct set out in this Notice could

reasonably be inferred. The mention by Mr Johnson at an interview in May 2008

that the SLS Bonds had not been listed occurred prior to his misconduct in relation

to Keydata’s non-compliance with the ISA Regulations, and it is not relevant to any

other issues in this matter.

2.2.
Even if (contrary to the Authority’s position) the correct approach were to apply a

strict two-year period in cases where the investigation had begun prior to the

change to section 66(4), the defence that the case was time-barred would not apply

in this case. On that approach, the Authority would be precluded from taking action

in respect of misconduct if it knew of the misconduct (i.e. it had information from

which the misconduct could reasonably be inferred) two years before the issue of

the Warning Notice (that is, by 26 October 2008). However, the fact that the

Authority commenced an investigation in August 2008 into whether Mr Johnson had

committed misconduct does not mean that it knew at that time that he had

committed the misconduct set out in this Notice and, as a matter of fact, it did not

know.

2.3.
The Authority is not precluded from taking action in respect of particular instances

of misconduct at any time by the fact it has previously expressed concern about the

type of matter to which the misconduct relates. It is a misreading of section 69(8)

of the Act to suggest that it precludes the Authority from taking action against Mr

Johnson in respect of misconduct relating to due diligence and financial promotions

because it had considered issues in those areas before the start of the limitation

period in this case.

Nature of the Products

2.4.
The Authority is satisfied that the Products were of a type generally considered high

risk when they were launched. As set out in this Notice, during the Relevant Period

Mr Johnson was aware of numerous pieces of advice from Keydata’s own

professional advisers which mentioned the risks of the Products.

Mr Johnson’s role within Keydata

2.5.
The Authority accepts that Mr Johnson’s knowledge of Keydata’s affairs was limited

to the extent that he was not taken into the confidence of members of the Keydata

board of directors. The Authority has found that some information that was

relevant to his compliance role was deliberately kept from him. The Authority has

taken account of this in reaching its conclusions as to the knowledge he had of

relevant matters and the extent of his involvement in regulatory breaches by

Keydata.

2.6.
The Authority has also taken into account the fact that Keydata sought and received

advice from professional advisers, and has taken account of the advice received to

the extent relevant and insofar as this has been made available to it. However, as

well as seeking and receiving advice, Keydata should have taken appropriate steps

in response to the advice. The Authority considers that Mr Johnson acted recklessly

in failing to take adequate steps to ensure that Keydata addressed the issues

identified by its professional advisers.

2.7.
The Authority makes no criticism in this Notice of work performed by Mr Johnson for

the administrator of Keydata after the Relevant Period, and has taken into account

the fact that he carried out other significant compliance functions not concerning

the Products in respect of which the Authority has not identified any concerns.

Failure of the SLS Products to perform

2.8.
While it accepts that Mr Johnson was not aware of the fact that the assets of the

SLS Portfolio had been replaced by a guarantee, the Authority is satisfied that Mr

Johnson was increasingly aware that the SLS Products were not performing, by

reason of the matters set out in paragraphs 4.21 to 4.29 of this Notice. The

cumulative evidence of which he was aware was such that there was no reasonable

basis for him to think that the SLS Products were performing well. Had he taken

appropriate steps to ascertain whether the SLS Products were performing he would

have found out that Keydata was unable to meet its obligations and that, to varying

extents, the directors of Keydata were aware of this. Further, the terms and

conditions of the SLS Bonds required the RAC ratio to be met at all times, albeit

there was a procedure for remedying a failure to issue an RAC certificate. The

failure to meet the RAC ratio was remedied but, as a result of the failure, Mr

Johnson was alerted to problems with the ability of SLS to pay interest when it fell

due.

Financial promotions for the Products

2.9.
The Authority is satisfied that the Brochure Advice was correct in identifying that

Keydata did not adequately describe the risks of the SLS Products. The Brochure

Advice should have been taken into account and acted upon when the financial

promotions for the Lifemark Products were produced. Instead, these were

materially similar in content to those for the SLS Products.

2.10. The Authority is satisfied that the financial promotions for the Lifemark Products

were unclear, incorrect and misleading in the ways set out in paragraph 4.34 of this

Notice. Mr Johnson was entitled to take account of advice provided by compliance

consultants, but he had an obligation to evaluate any conflicting opinions amongst

advisers and take any necessary steps to ensure that concerns raised by any of

them were resolved.

2.11. Mr Johnson produced evidence of discussions with the authors of the February 2008

Due Diligence Report about their conclusions but this did not provide evidence that

the issues raised by the report were “resolved”.

2.12. The Authority does not accept Mr Johnson’s argument that 229 senior life

settlements was not a small portfolio (albeit if the DIP had been a separate portfolio

it would have been even smaller) and it should have been significant to him on

reading the June 2008 Extract Review that its authors took a different view.

2.13. Even if it might properly be regarded for some purposes as a “distributor”,

Keydata’s role in relation to the Products was to design, launch and distribute via

IFAs (rather than, in general, direct to investors) the Products. As such, it was a

“provider” within the meaning of the Authority’s July 2007 Policy Statement

(PS07/11) on “Responsibilities of providers and distributors for the fair treatment of

customers”. The responsibilities of providers (set out in that publication) on which

the Authority relies are as described in paragraph 4.39 of this Notice, and Mr

Johnson should have been aware of these during the Relevant Period. (While

PS07/11, and its preceding Discussion Paper (DP06/4), was published during the

Relevant Period, it was summarising the existing position rather than introducing

new requirements.) Further, there is contemporaneous evidence from Keydata’s

records that both advisers to the firm and Mr Johnson himself considered it to have

those responsibilities during the Relevant Period. For example: the March 2008 Due

Diligence Report regarded it as Keydata’s responsibility to consider all the risks to

the return of investor capital; and Mr Johnson sent an email to Mr Ford on 30 March

2007 commenting on Keydata’s responsibilities as outlined in PS07/11 from the

perspective of its being a provider. In practice, Keydata did package the Lifemark

Products, select the IFAs who were to sell the Lifemark Products and provide them

with promotional material in respect of the Lifemark Products.

2.14. The judgment referred to by Mr Johnson (R (on the application of ABS Financial

Planning Ltd and others) v FSCS and FSA) relates only to the treatment by the

FSCS of particular claims against Keydata, and is not conclusive for all purposes;

the “investment intermediaries” levy class does not map across to the concept of

“distributor” in PS07/11. Nor is the fact of the distribution agreements which

Keydata entered into with SLS and Lifemark conclusive: they merely demonstrate

that Keydata had a place in the distribution chain for the Products. The Authority is

satisfied that the Products were Keydata’s own products. For example, they had

different features to the underlying SLS/Lifemark Bonds, including different rates of

income and a commitment to eligibility for an ISA.

2.15. The Authority does not dispute that some due diligence was carried out by Keydata

in relation to the launch of the Lifemark Products; however, it was inadequate in the

respects set out in this Notice; in particular, in paragraphs 4.40 to 4.42. Mr

Johnson’s reasons for disputing the conclusions of the March 2008 Due Diligence

Report as to the work required, and for disputing that it was the responsibility of

Keydata, were largely based on his limited view (which the Authority does not

accept) of Keydata’s due diligence responsibilities.

2.16. The Authority accepts that Mr Johnson did not have the absolute decision-making

power within Keydata to prevent the further sale and marketing of the Lifemark

Products in light of the March 2008 Due Diligence Report, but as Compliance Officer

he should have made it clear to the Keydata board of directors that it should stop

selling and marketing the Lifemark Products pending the taking of steps

recommended by the report; as Compliance Officer his views would (or should)

have carried weight with the Keydata board of directors.

The risk of failure of the Lifemark Products

2.17. The Authority agrees that mention of particular rollover rates in the various reports

produced in relation to the Lifemark Portfolio did not equate to a forecast that any

of those rates would actually occur; nevertheless, a number of the rollover

projections indicated potentially serious consequences if they did occur. The

Authority does not accept that it is correct to say that, if previous income products

had experienced a rollover rate of at least 30% (as to which the Authority has not

made any finding), this was the rollover rate which could be expected for the

Lifemark Products. Accordingly, Mr Johnson was not in a position to assess the

likelihood of this happening, and so should have regarded the projections as

significant. The Authority considers that Mr Johnson was aware of the contents of

the Draft Lifemark Valuation Report.

2.18. The Authority does not agree that either Keydata’s professional advisers’ view that

the RAC ratio was a “red herring”, or the conclusions of the June 2008 Extract

Review, were wrong; the fact that these views had been expressed formed part of

the cumulative evidence which, in the Authority’s view, meant Mr Johnson was

increasingly aware of the serious risk of a liquidity issue with the Lifemark Portfolio.

Accordingly, the Authority does not accept that Mr Johnson believed the Lifemark

Portfolio was performing well notwithstanding any positive assurances he may have

received.

2.19. The Authority considers that Mr Johnson had good reason to doubt that the

Lifemark Investment Manager’s July 2008 update to investors gave an accurate

impression of the risks to the performance of the Lifemark Portfolio in light of the

various reports produced by the Lifemark Investment Manager, the Draft Lifemark

Valuation Report and the June 2008 Extract Review. The Authority considers that

the issues identified in the October 2008 Lifemark Report provide further evidence

that Mr Johnson was aware of the problems with the performance of the Lifemark

Portfolio.

Failure of the Products to comply with the ISA Regulations

2.20. While HMRC does have a “simplified voiding” process by which it is sometimes

possible to resolve issues over compliance with the ISA Regulations, it is not

applicable in all cases. It was HMRC’s decision whether to apply that process to the

Products. It was not guaranteed that HMRC would agree to allow the non-

compliance to be remedied, and the Authority considers that Mr Johnson acted

recklessly in not taking steps to cease or suspend sales of the Lifemark Products or

otherwise act to protect the position of investors in the face of this substantial risk.

2.21. The Authority is satisfied that HMRC’s interpretation of the ISA Regulations as

requiring continuous listing is correct and in any event the view of HMRC on tax

matters should have been regarded by Mr Johnson as so serious that it was reckless

to proceed with the marketing and sales of the Lifemark Products.

2.22. The Authority accepts that Keydata was in contact with HMRC prior to its formal

notification of its failure to comply with the ISA Regulations, but the delay by

Keydata in making the formal notification, while continuing to promote the Lifemark

Products as being eligible for an ISA, is evidence of a reckless disregard for the risk

to new investors.

Misleading the Authority

2.23. While it accepts that Mr Johnson was not aware of the fact that the assets of the

SLS Portfolio had been replaced by a guarantee, the Authority is satisfied that at the

time of his interviews Mr Johnson was aware that there were issues with the

performance of the SLS Portfolio and in particular that income payments on the SLS

Bonds had been missed. There was therefore no basis on which he could say that

there had never been a problem with the income payments on the SLS Products or

that the SLS Products were performing well. He was also well aware of the liquidity

issues with the Lifemark Bonds (as set out at paragraphs 4.49 to 4.56 of this

Notice).

2.24. The Authority does not accept that Mr Johnson sent the email of 18 January 2009 to

Mr Ford and Keydata’s Sales Director so that they could check whether they had

any information which would make what he intended to say inaccurate. The

Authority is satisfied he knew the statements included in the email to be inaccurate

and the Authority believes, rather, that Mr Johnson sent the email to obtain

sanction from the Keydata board of directors for his intention to withhold material

information from the Authority.

2.25. The fact that Keydata took legal advice (or other professional advice which it

mistakenly believed at the time to be subject to legal professional privilege) did not

excuse it, or Mr Johnson as Keydata’s Compliance Officer, from the responsibility to

make appropriate disclosure to the Authority of issues (that gave rise to the need to

take advice) which the Authority would expect to be told about (as distinct from the

advice itself), and Mr Johnson should have been aware of that.

The Authority’s conduct

2.26. The Authority does not consider that any of Mr Johnson’s complaints against the

Authority undermine the evidence relied upon by it in reaching its decision (which

has been made by the Regulatory Decisions Committee, a committee of the

Authority which is independent from the Authority’s Enforcement and Financial

Crime Division). Mr Johnson’s complaints about the conduct of the Authority may

be pursued by him using the Complaints Scheme established under the Financial

Services Act 2012, and the Authority does not address their substance in this

Notice.

Financial penalty

2.27. The Authority has considered Mr Johnson’s representations and considers the level

of the penalty set out in this Notice is appropriate in respect of Mr Johnson’s

misconduct. The Authority has taken into account all relevant circumstances,

including the level of penalty imposed in comparable cases, in reaching this

conclusion.