Final Notice
FINAL NOTICE
Date
18 September 2012
1.
ACTION
1.1.
For the reasons given in this notice, the FSA hereby imposes on Pi Financial Limited
(“Pi”) a financial penalty of £58,300 in respect of breaches of Principle 3
(Management and Control) and Principle 9 (Customers: Relationships of Trust) of the
FSA’s Principles for Businesses (the “Principles”).
1.2.
Pi agreed to settle at an early stage of the FSA’s investigation and therefore qualified
for a 30% (stage 1) discount under the FSA’s executive settlement procedures. Were it
not for this discount, the FSA would have imposed a financial penalty of £83,363 on
Pi.
2.
SUMMARY OF REASONS
2.1.
On the basis of the facts and matters described below, the FSA considers that between
1 January 2009 and 3 February 2012 (the “Relevant Period”) Pi failed to comply with
Principles 3 and 9.
2.2.
The FSA found that Pi failed to take reasonable care to organise and control its affairs
responsibly and effectively, with adequate risk management systems, in breach of
Principle 3. In particular, Pi failed to:
(1)
implement adequate internal sales monitoring procedures across the Firm that
ensured that advice was given in accordance with regulatory requirements;
(2)
provide adequate training and supervision to its advisers; and
(3)
establish and maintain adequate compliance and file checking arrangements,
appropriate to the size and types of business conducted by Pi, particularly
given the high risk products that Pi sold.
2.3.
Further, the FSA found that Pi failed to take reasonable care to ensure the suitability
of its advice to clients, in breach of Principle 9. The FSA has reviewed a sample of 28
files transacted during the Relevant Period involving high risk products and found that
14 of the files were unsuitable. In particular, the FSA found that:
(1)
none of the files involving recommendations to invest in UCIS was suitable in
light of the clients’ attitude to risk (“ATR”) and Pi failed to demonstrate that
the clients in question fell within the relevant category of COBS 4.12;
(2)
none of the files involving recommendations to invest in structured products
was suitable, due to a mismatch between the product and the clients’ ATR; and
(3)
of the files involving recommendations to clients to switch their pensions, 24%
were found to be unsuitable, due to the underlying investments being too high
risk. There was no evidence on file to demonstrate that two of these unsuitable
files were checked by a Pension Transfer Specialist as required in COBS
19.1.1R.
2.4.
The FSA regards these failings as serious. During the Relevant Period, Pi promoted
UCIS to 168 clients, who invested over £6 million, and promoted structured products
to 362 clients, who invested nearly £20 million, either directly or indirectly through
SIPPs. UCIS and structured products are high risk products, and customers investing
in these products were at significant risk of losing some or all of their money.
2.5.
In addition, whilst the focus of the FSA’s investigation into the suitability of sales was
on high risk products, the systems and compliance failings identified revealed
systemic weaknesses across the Firm’s systems and controls.
2.6.
Pi’s failings are aggravated by the fact that they occurred despite concerns being
raised by the FSA during the Relevant Period in relation to the Firm’s systems and
controls and compliance and the engagement of a skilled person. Additionally, Pi’s
failings are further aggravated by the fact that extensive guidance was issued by the
FSA during and prior to the Relevant Period, which set out the importance of ensuring
product suitability in relation to UCIS, structured products and Pension Transfers and
which called for network firms (of which Pi is one) to ensure that they had sufficient
control over their Appointed Representatives (“AR”s).
2.7.
However, Pi’s failings are mitigated by the fact that it has taken a number of steps in
response to the FSA’s concerns during the Relevant Period, including various steps
recommended by a skilled person. Whilst these steps did not resolve Pi’s failings, the
FSA recognises that Pi attempted to address its concerns. Further, since being
referred to Enforcement, the Firm has voluntarily varied its Part IV Permission so that
it is no longer authorised to arrange and promote UCIS. It has also undertaken to
make improvements to training, establish 100% file checking for its high risk
products and initiate a client contact exercise in relation to the past sales of high risk
products.
2.8.
This action supports the FSA’s regulatory objectives of maintaining market
confidence and the protection of consumers.
3.
DEFINITIONS
3.1.
The definitions below are used in this Final Notice:
“the Act” means the Financial Services and Markets Act 2000
“AR” means Appointed Representative
“ATR” means attitude to risk
“COBS” means the Conduct of Business Sourcebook within the FSA Handbook
“Compliance manual” means the inhouse compliance manual used by Pi’s sales and
compliance staff during the Relevant Period
“the FSA” means the Financial Services Authority
“FSA Handbook” means the FSA Handbook of Rules and Guidance
“IFA” means Independent Financial Adviser
“KPI” means Key Performance Indicator
“MI” means Management Information
“PCIS Order” means the Promotion of Collective Investment Schemes (Exemptions)
Order 2001
“pension switch” means a transfer from one pension fund to another. A Pension
Transfer is a specific type of transfer (defined below)
“Pension Transfer” means a transaction resulting from the decision of a retail client
who is an individual, to transfer deferred benefits from:
(a) an occupational pension scheme;
(b) an individual pension contract providing fixed or guaranteed benefits that
replaced similar benefits under a defined benefits pension scheme; or
(c) in the cancellation rules (COBS 15) a stakeholder pension scheme or
personal pension scheme,
(d) a stakeholder pension scheme;
(e) a personal pension scheme; or
(f) a deferred annuity policy, where the eventual benefits depend on
investment performance in the period up to the date when those benefits will
come into payment
“Pension Transfer Specialist” means an individual appointed by a firm to check the
suitability of a Pension Transfer or pension optout who has passed the required
examinations as specified in the FSA’s Training and Competence part of its
Handbook
“Pi”/ “the Firm” means Pi Financial Limited
“Relevant Period” means 1 January 2009 to 3 February 2012
“SIPP” means self invested personal pension
“the Tribunal” means the Upper Tribunal (Tax and Chancery Chamber)
“UCIS” means unauthorised collective investment scheme (as defined in Part XVII,
Chapter 1 and II of the Act)
“VVOP” means voluntary variation of a Part IV Permission
4.
FACTS AND MATTERS
4.1.
Pi is an IFA network firm based in Shrewsbury, with approximately 72 investment
advisers and 16 ARs.
4.2.
During the Relevant Period, Pi was the subject of two visits from FSA Supervision in
August 2009 and April 2010. Both of these visits identified systems and control and
compliance weaknesses. As a result of these weaknesses, a skilled person was
appointed in July 2010 pursuant to section 166 of the Act to report on the quality of
advice provided by Pi and the compliance monitoring framework in place.
4.3.
Following the findings of two reports from the skilled person over two years, the FSA
remained concerned about the suitability of the advice provided by Pi and the
adequacy of its compliance function.
4.4.
As part of its investigation, the FSA undertook a further review of Pi’s systems and
controls, along with a review of a sample of files involving recommendations of
UCIS, structured products, and pension switch (including Pension Transfer) advice.
Systems and controls and compliance
Internal sales monitoring procedures
Product approval
4.5.
Pi had a system in place under which those products categorised by Pi as higher risk,
such as UCIS and structured products, had to be approved by the Firm before advisers
could recommend them. Advisers referred products that they were interested in selling
to a particular employee at Pi who was responsible for reviewing and researching the
referred product and deciding whether to approve it. This process, introduced in 2009
in response to the growth of alternative investments, was designed to ensure that
products were properly researched and understood, and that advisers did not sell
products which the Firm considered to be too risky.
4.6.
The product approval process involved the relevant Pi employee preparing a factsheet
summarising the product, highlighting the risks and assigning a risk rating. Initially,
the factsheets were provided for adviser use only. Advisers would then have to sit an
examination demonstrating that they had a good understanding of the product. From
March 2011 advisers began providing copies of relevant factsheets to clients who
were required to sign them.
4.7.
The FSA found that Adviser A submitted a large volume of products for approval
(106 over an 18 month period). The employee responsible for product approval
reported to the Firm that he felt highly pressured by Adviser A because of the number
of requests made under strict time constraints.
4.8.
Similarly, the FSA found that the factsheet system used by the Firm did not operate
effectively in practice. For each of the structured product or UCIS files reviewed by
the FSA, for which there was a factsheet on the file, the product was categorised as
high risk. However, at least two of Pi’s advisers, referred to as Advisers A and B,
recommended these products to clients with no more than a medium ATR, without
clearly indicating that the product was high risk. Factsheets were not included in every
file, and of those that were in the files, the majority reviewed by the FSA had not been
signed. Accordingly, it was not clear whether the factsheet had been provided to the
client. However, it is noted that the requirement for clients to be provided with a copy
of the factsheet and to sign the same was not introduced until March 2011.
Sales monitoring
4.9.
Pi collated KPIs for advisers within its network every three months. The KPIs were
compiled using data from the new business register and from compliance file checks,
and were designed to capture information across various business areas. The KPIs
provide information as to the type of products sold and the providers used. The KPI
reports also summarised each adviser’s file checking results, including the number of
documentation problems, “overall failures” (classified by Pi as multiple or serious
documentation failures) and “unsuitable sales”.
4.10. The FSA found that, in many cases, the KPIs produced during the Relevant Period
were inaccurate. In 12 files, UCIS sales were categorised as ISAs or OEICs when they
were in fact contained within the same. Further, 61 UCIS sales referred to in the New
Business Register for Adviser B did not appear on his KPIs as they were referred to
by their “wrapper”. In this way, it was possible for advisers to provide incomplete
product information on the form they submitted to the Firm, and it did not appear that
there were systems or controls in place at the Firm to prevent this or to identify when
it had happened. The identification of the “wrapper” rather than the underlying
product meant that Pi did not have an immediate full and accurate picture of the
volume of sales of high risk products conducted by Pi’s advisers within its KPIs.
Training and supervision of advisers and staff
4.11. Pi circulated technical and compliance bulletins to advisers on a regular basis. The
compliance bulletins provided updates on FSA guidance and enforcement actions in
relation to a range of products and business areas (including high risk products).
4.12. Pi also maintained a Compliance manual for use by advisers. This provided high level
information on fact finding, suitability and product disclosure, as well as templates for
use by advisers, such as suitability letter templates. The Compliance manual had a
chapter dealing with “specialist and/or high risk areas”, which stated that advisers
selling these kinds of products needed to take particular care to ensure that they could
demonstrate suitability for clients, “as these areas are subject to increased regulatory
scrutiny”.
4.13. However, whilst this chapter of the Compliance manual provided some guidance in
respect of structured products, it made no reference to UCIS. This was despite the fact
that Pi categorised UCIS as “highly speculative”, fitting within its riskiest category of
products, and through its compliance bulletins demonstrated awareness of FSA
guidance on UCIS advice and of enforcement action against firms in respect of UCIS
sales.
4.14. Pi’s factsheets for structured products indicated that it regarded these as high risk. Pi
was aware of the FSA’s guidance (from October 2009) that careful consideration
should be given to investing more than 25% of a client’s assets into structured
products, and placing more than 10% of a client’s assets into a single structured
product.
4.15. Further, Pi considered Pension Transfers and pension switches into SIPPs to be high
risk areas of its business. During the Relevant Period, Pi’s compliance bulletins made
frequent reference to the FSA’s announcements and action in relation to both pension
switches, as a whole, and Pension Transfers.
Supervision of advisers
4.16. During the Relevant Period, one to one meetings between advisers and senior
managers of the Firm took place between two to four times per year. These meetings
were used to review the advisers’ KPI data and file checking record.
4.17. Two advisers at Pi, Advisers A and B, processed comparatively high sales volumes
(close to three times as high as other advisers in the network) of structured products
and UCIS. The Firm was aware of this.
4.18. Adviser A, who sold a large volume of structured products throughout the Relevant
Period, did not consider some of the structured products that he recommended were
high risk investments. Adviser B, who sold a large volume of UCIS throughout the
Relevant Period, did not agree with the Firm’s categorisation of all UCIS as high risk
products.
4.19. Further, although Pi was aware of documentation failings on the part of Advisers A
and B, such as missing information on the file and poorly drafted suitability letters, it
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did not take sufficient steps to resolve these issues. Both Advisers A and B relied on
their administrative staff to draft suitability reports, and Adviser A admitted during
interview that he did not read through or check all sections of his suitability reports
before they were sent out to clients.
4.20. Advisers A and B had regular one to one meetings during the Relevant Period
although their meetings were poorly documented.
Compliance and file checking
4.21. During the Relevant Period, Pi’s compliance function initially included two file
checkers. From 2011 this was increased to three. Pi largely conducted postsale file
checks across all areas of the Firm’s business. Members of the compliance function
used checklists, aide memoires and FSA templates to record their file review findings.
4.22. On joining Pi, file checkers went through an initial period in which a senior member
of the compliance function would monitor their file checking closely. After this
period, that senior member checked one file per month from each of the checkers,
which was referred to as the “checking the checkers” system.
4.23. The FSA found that Pi’s compliance function lacked sufficient compliance experience
and was not closely supervised or monitored once initial training was complete. The
number of file checkers within the compliance function (at most four) relative to the
number of advisers (approximately 72) was low, particularly given that one file
checker worked exclusively for Adviser A. The FSA also considers that this file
checker may not have been sufficiently independent of Adviser A to perform his role
properly, given that he was a former client of Adviser A and that Adviser A was
involved in his recruitment.
4.24. The Firm’s checking the checkers system involved a senior member of staff double
checking one file reviewed by each checker per month, but this system was weak.
4.25. Of the unsuitable sales identified by the FSA, half had been reviewed by Pi’s
compliance function who had concluded that all but one file was suitable, and one file
was unclear. The FSA found that all of the compliance review documents it
considered (with the possible exception of the file that was judged ‘unclear’)
demonstrated minimal evidence of analysis or consideration on the part of the file
checker, and in some files, had not been completed accurately.
4.26. Although Pi assessed some files to be initially unclear (usually due to missing
documentation on the file), once sufficient documents were produced, it would
normally regrade these as suitable. When interviewed by the FSA, one of its
members could only recall having reviewed two unsuitable files, with the others
recalling none. The KPIs for Adviser A and B showed that neither had any unsuitable
sales in the two year period from 1 January 2010 to 31 December 2011, and only one
(for Adviser A) and two (for Adviser B) “overall failures” (failures relating to
documentation problems). The KPIs for four other advisers reviewed by the FSA also
showed no unsuitable sales and no more than one overall failure over this same two
year period. Members of the compliance function were also unclear on the process
that would apply if they were to find advice to be unsuitable.
4.27. Although Pi intended file checking to be undertaken shortly after advice was given,
there was a serious backlog in file checking in 2010 and 2011. In April 2011, the
backlog of files to check stood at 215, and included files dating from as far back as
January 2010. Some of the backlog related to files of Adviser A. This delay made it
difficult for Pi to resolve any issues that had arisen with the files.
Sales of high risk products
4.28. During 2008, advisers in the Pi network began to recommend different types of
products to their clients, in search of better rates of return following the market
downturn. In particular, Advisers A and B began to recommend increased numbers of
structured products and UCIS to their clients. This advice usually entailed advising
the client to move their existing pension funds into a SIPP.
4.29. The FSA reviewed 28 files involving UCIS, structured products and pension switch
advice. It found that half of those sales were unsuitable. The FSA found the following
common problems across many of the unsuitable sales:
(1)
although Pi categorised structured products and UCIS as high risk products,
advisers recommended these products to clients with a moderate ATR. For
example, Client A who was described as being prepared to take a moderate
level of risk, was advised to move all of his pension funds (other than those
held in a final salary scheme) amounting to £88,000 into a SIPP, and place
£51,000 of this into a UCIS and £34,000 into a structured product;
(2)
the recommendations often meant that clients had a significant level of
exposure to high risk products in their investment portfolio and in particular in
their SIPP portfolio. For example, Client B was advised to invest 93% of his
SIPP funds into structured products, with the effect that 54% of his total
investment portfolio was invested into structured products; and
(3)
several of the clients appeared to have low incomes, limited assets and limited
capacity for loss. For example, Client C, who had an annual income of
£18,500 and two dependant children, and no significant assets other than his
home, was advised to transfer his entire pension fund of £78,000 into one
UCIS.
4.30. As discussed above, the FSA’s file review found that Pi’s compliance function failed
to identify the unsuitable files.
UCIS sales
4.31. Seven of the files reviewed by the FSA involved the recommendation of a UCIS
product. Adviser B was the adviser in relation to four of these recommendations.
4.32. Section 238(1) of the Act prohibits the promotion of UCIS by authorised firms, other
than in circumstances where there is an exemption to section 238(1) provided in the
PCIS Order or COBS 4.12, for example by ensuring the client is certified as a
sophisticated investor or high net worth individual. The FSA found that Pi had not
demonstrated a valid UCIS exemption in any of the UCIS files reviewed. In three of
the UCIS files, there was no evidence at all that an exemption had been considered;
while there were certificates on the file for the remaining four UCIS files, these did
not meet the requirements under the PCIS Order or COBS 4.12.
4.33. Even taking aside the exemption point, the UCIS recommendations reviewed were not
suitable for the clients. Although Pi regarded UCIS generally as high risk products,
none of the clients concerned had a high ATR; their ATRs ranged from cautious to
moderately
speculative.
In
addition,
three
of the
clients
had
received
recommendations to invest a substantial part of their SIPP into a single UCIS, thereby
exposing their pension funds to a significant risk of loss.
Structured products
4.34. Five of the files reviewed by the FSA involved the sale of structured products. In each
case, the recommendations made were unsuitable. The key concern was that the
client’s ATR (ranging from ‘medium’ to ‘moderately adventurous’) did not match the
risk profile of the products (which had been assessed by Pi to be high risk).
4.35. This was exacerbated by the fact that three of these clients also had a high level of
exposure to structured products as part of their investment portfolio – ranging from
32% to 54%. In each of the structured product files, the structured products were held
within a SIPP. Three clients were advised to invest over 90% of their SIPP funds into
structured products.
Pension advice
4.36. Although the Firm was aware that the FSA requires that Pension Transfers must be
approved by a qualified Pension Transfer Specialist, in two of the Pension Transfers
conducted during the Relevant Period, the FSA found that there was no evidence on
file that they had been checked by a Pension Transfer Specialist as required by COBS
19.1.1R.
4.37. The FSA reviewed 17 files involving pension switch advice (two of which were also
reviewed for the UCIS recommendation made at the same time). Four of these files
were found to be unsuitable: two files were Pension Transfers, and two files involved
pension switches into SIPPs. Issues identified in relation to the unsuitable files include
the following:
(1)
two clients were advised to move out of pension schemes providing
guaranteed benefits into SIPP schemes, without being warned of the
disadvantages of this course, and the difficulty of matching the guaranteed rate
without taking substantial investment risks. Client A (a pension switch into a
SIPP) had to incur a substantial transfer penalty as a result of the transfer
advised by Pi, and the justification provided for this by the adviser was
inadequate. Client C, a Pension Transfer case, was advised to move his funds
out of a defined benefit scheme in circumstances where the new scheme would
need to generate growth of 8% per annum to match the benefits of the defined
benefit scheme; and
(2)
a further two clients (one a Pension Transfer, and one a pension switch into a
SIPP) were advised to move their pension funds into a SIPP and then to invest
these funds into investments that were too high risk in light of their recorded
ATR.
Documentation failings
4.38. Ten of the files reviewed had poor documentation, which would make it difficult for
Pi to establish that they were suitable. In particular, the FSA found that:
(1)
fact find documents were confusing: they were often updated with undated
handwritten amendments, so it was not clear what the client’s position was at
the time of the advice and they contained insufficient detail about the client’s
financial position;
(2)
suitability letters contained largely generic product information and little
analysis of why the product was suitable for the client; they did not always
make clear the risks involved in investing in the product or that the product
was regarded by Pi as high risk; and did not set out the level of commission
payable to Pi in all cases, so it is not clear that clients were aware of this; and
(3)
key aspects of the advice were in file notes (some undated) rather than in the
suitability letter; it is not clear whether these file notes were made
contemporaneously and whether or not they were provided to the client.
5.
FAILINGS
5.1.
The regulatory provisions relevant to this Final Notice are referred to in Annex 1.
Breach of Principle 3
5.2.
On the basis of the facts and matters above, the FSA considers that Pi failed to:
(1)
Implement adequate internal sales monitoring procedures across the Firm that
ensured that advice was given in accordance with regulatory requirements: Pi’s
product approval process was inadequate, as the employee responsible for
approving products felt under timepressure from advisers to approve
products. The factsheet system used by the Firm did not work effectively in
practice, as, contrary to the guidance provided in the factsheets, Advisers A
and B recommended products to clients which exceeded their ATR. Further,
the sales monitoring information generated by Pi, in the form of KPIs, was
often inadequate and did not evidence the volumes of high risk sales being
conducted by its advisers or that it was able to deal appropriately with the risks
associated with high risk products. The result of these failings was that Pi’s
product sales were not being monitored effectively, which was a systemic
problem at Pi;
(2)
provide adequate training and supervision to its advisers: Guidance provided
by Pi, in relation to UCIS was inadequate. Even where Pi’s guidance was
adequate (parts of the Compliance manual, and compliance bulletins) the FSA
considers that Pi did not take reasonable care to ensure that its advisers
followed its guidance, especially in relation to higher risk products. Moreover,
despite being aware that Advisers A and B conducted a high volume of sales
of high risk products, did not agree with Pi’s guidance on UCIS and structured
products and were prone to documentation failings, Pi failed to take sufficient
steps to monitor and supervise their activity; and
(3)
establish and maintain adequate compliance and file checking arrangements
across all areas of its business, appropriate to the size of Pi and the high risk
products that it sold: members of Pi’s compliance function lacked experience
and were not supervised adequately. The reviews conducted by members of
Pi’s compliance function demonstrated minimal analysis and failed to assess
the suitability of the advice provided. The filechecking process at Pi was
unclear and resulted in failures to identify unsuitable advice which is
demonstrated by the fact that Pi regarded most of the files identified by the
FSA as unsuitable, to be suitable. The result was that Pi’s compliance function
failed to detect and take appropriate action in relation to unsuitable advice.
5.3.
The FSA considers that Pi’s systems and controls were inadequate for a firm of its
size and taking into account the high risk products that it sold. Further, Pi’s
compliance function failed to detect and take appropriate action on unsuitable advice
and was inadequate to meet the needs of the business. The FSA considers that these
failings were systemic.
5.4.
As a result of these failings, the FSA considers that Pi has failed to take reasonable
care to organise and control its affairs responsibly and effectively, with adequate risk
management systems, in breach of Principle 3.
Breach of Principle 9
5.5.
14 of the 28 files reviewed by the FSA in relation to high risk products were found to
be unsuitable. In particular:
(1)
seven files involving recommendations to invest in UCIS were all found to be
unsuitable. The FSA found that in these files, Pi had failed to provide
documents demonstrating that valid exemptions applied. Pi had also failed to
ensure that the advice was suitable in light of each client’s ATR;
(2)
five files involving recommendations to invest in structured products were all
found to be unsuitable, due to a mismatch between the product and each
client’s ATR; and
(3)
four pension switch files (two involving a pension switch into a SIPP, and two
Pension Transfers) were found to be unsuitable, and there was no evidence on
file that the two Pension Transfers had been checked by a Pension Transfer
Specialist as required by COBS 19.1.1R.
5.6.
The high number of unsuitable files identified by the FSA demonstrates that Pi failed
to take reasonable care to ensure the suitability of its advice and discretionary
decisions for clients who were entitled to rely upon its judgment, in breach of
Principle 9.
6.
SANCTION
Financial penalty
6.1.
The FSA’s policy for imposing a financial penalty is set out in Chapter 6 of DEPP. In
respect of conduct occurring on or after 6 March 2010, the FSA applies a fivestep
framework to determine the appropriate level of financial penalty. DEPP 6.5A sets
out the details of the fivestep framework that applies in respect of financial penalties
imposed on firms.
6.2.
Although Pi’s misconduct straddles both the penalty regime prior to 6 March 2010
and the new penalty framework in place after 6 March 2010, the FSA considers that
the gravamen of Pi’s misconduct falls within the period following 6 March 2010. This
is because the majority of the misconduct fell during this period of time and, further,
the FSA considers Pi’s misconduct to be more serious following 6 March 2010, as it
was during this period that Pi’s unsuitable advice in relation to higher risk products
specifically came to light.
Step 1: disgorgement
6.3.
Pursuant to DEPP 6.5A.1G, at Step 1 the FSA seeks to deprive a firm of the financial
benefit derived directly from the breach where it is practicable to quantify this.
6.4.
The FSA has not identified any financial benefit that Pi derived directly from its
breach. Step 1 is therefore £0.
Step 2: the seriousness of the breach
6.5.
Pursuant to DEPP 6.5A.2G, at Step 2 the FSA determines a figure that reflects the
seriousness of the breach. Where the amount of revenue generated by a firm from a
particular product line or business area is indicative of the harm or potential harm that
its breach may cause, that figure will be based on a percentage of the firm’s revenue
from the relevant products or business area.
6.6.
The FSA considers that the total revenue generated by Pi during the period of the
breaches is indicative of the potential harm caused by its breaches. The FSA has
therefore determined a figure based on a percentage of Pi’s relevant revenue. The
period of Pi’s breaches was from 1 January 2009 to 3 February 2012. The FSA
considers Pi’s relevant revenue for this period to be £833,626.
6.7.
In deciding on the percentage of the relevant revenue that forms the basis of the step 2
figure, the FSA considers the seriousness of the breach and chooses a percentage
between 0% and 20%. This range is divided into five fixed levels which represent, on
a sliding scale, the seriousness of the breach; the more serious the breach, the higher
the level. For penalties imposed on firms there are the following five levels:
Level 1 – 0%
Level 2 – 5%
Level 3 – 10%
Level 4 – 15%
Level 5 – 20%.
6.8.
In assessing the seriousness level, the FSA takes into account various factors which
reflect the impact and nature of the breach, and whether it was committed deliberately
or recklessly. DEPP 6.5A.2G (11) lists factors likely to be considered ‘level 4 or 5
factors’. Of these, the FSA considers the following factors to be relevant:
(1)
there is a significant risk of consumer detriment due to the high risk nature of
the products that Pi sold; and
(2)
the breaches revealed systemic weakness in the Firm’s systems and controls.
6.9.
DEPP 6.5A.2 (12) lists factors likely to be considered ‘level 1, 2 or 3 factors’. Of
these, the FSA considers the following factors to be relevant:
(1)
there is no evidence that Pi’s misconduct was deliberate – the breaches appear
to have been committed negligently or inadvertently; and
(2)
no crystallised client detriment has yet been identified that follows from the
unsuitable advice.
6.10. The FSA also considers that whilst there is a risk of client detriment in all areas of the
Firm’s business, due to the systemic weaknesses identified in its systems and controls
and compliance, it acknowledges that it has only obtained evidence of unsuitable
advice given in relation to high risk products, as this was the focus of its investigation,
and this constitutes a relatively small part of the Firm’s overall business.
6.11. Taking all of these factors into account, the FSA considers the seriousness of the
breach to be level 3 and so the Step 2 figure is 10% of £833,626.
6.12. Step 2 is therefore £83,363.
Step 3: mitigating and aggravating factors
6.13. Pursuant to DEPP 6.5A.3G, at Step 3 the FSA may increase or decrease the amount of
the financial penalty arrived at after Step 2, but not including any amount to be
disgorged as set out in Step 1, to take into account factors which aggravate or mitigate
the breach.
6.14. The FSA considers that the following factors aggravate the breach:
(1)
the failings occurred despite the concerns raised by the FSA during the
Relevant Period in relation to the Firm’s systems and controls and compliance,
and despite the engagement of a skilled person; and
(2)
the FSA issued extensive guidance during and prior to the Relevant Period,
which set out the importance of ensuring product suitability in relation to
UCIS, structured products and pension switches and which called for network
firms, like Pi, to ensure that they had sufficient control over their ARs.
6.15. The FSA considers that the following factors mitigate the breach:
(1)
the Firm took certain steps in response to the FSA’s concerns during the
Relevant Period, such as engaging a skilled person to produce two reports,
altering the management structure at Pi by employing further personnel to
perform controlled functions, employing further file checkers and holding
more meetings of senior management than previously. Whilst the FSA’s view
is that these steps were not adequate to resolve Pi’s failings, it considers that
these steps to improve the systems and controls and compliance function at Pi
should be credited; and
(2)
since being referred to Enforcement, the Firm has voluntarily varied its Part IV
Permission so that it is no longer authorised to arrange and promote UCIS. It
has also undertaken to make improvements to training, establish 100% file
checking for its high risk products and initiate a client contact exercise in
relation to the past sales of high risk products.
6.16. Having taken these aggravating and mitigating factors into account, the FSA considers
that the aggravating and mitigating factors balance each other out and no reduction or
increase should be made for mitigation or aggravation respectively. The Step 2 figure
should remain therefore at £83,363.
6.17. Step 3 is therefore £83,363.
Step 4: adjustment for deterrence
6.18. Pursuant to DEPP 6.5A.4G, if the FSA considers the figure arrived at after Step 3 is
insufficient to deter the firm who committed the breach, or others, from committing
further or similar breaches, then the FSA may increase the penalty.
6.19. The FSA considers that the Step 3 figure of £83,363 represents a sufficient deterrent
to Pi and others, and so has not increased the penalty at Step 4.
6.20. The figure at Step 4 remains £83,363.
Step 5: settlement discount
6.21. Pursuant to DEPP 6.5A.5G, if the FSA and the firm on whom a penalty is to be
imposed agree the amount of the financial penalty and other terms, DEPP 6.7 provides
that the amount of the financial penalty which might otherwise have been payable will
be reduced to reflect the stage at which the FSA and the firm reached agreement. The
settlement discount does not apply to the disgorgement of any benefit calculated at
Step 1.
6.22. The FSA and Pi reached agreement at Stage 1 and so a 30% discount applies to the
Step 4 figure.
6.23. The figure at Step 5 is therefore £58,354. After being rounded to the lowest hundred,
this figure is £58,300.
6.24. The FSA therefore has decided to impose a total financial penalty of £58,300 on Pi for
breaching Principles 3 and 9.
7.
PROCEDURAL MATTERS
Decision maker
7.1.
The decision which gave rise to the obligation to give this Notice was made by the
Settlement Decision Makers.
7.2.
This Final Notice is given under and in accordance with section 390 of the Act.
Manner of and time for payment
7.3.
The financial penalty must be paid in full by Pi to the FSA no later than 2 October
2012, 14 days from the date of the Final Notice.
If the financial penalty is not paid
7.4.
If all or any of the financial penalty is outstanding on 3 October 2012, the FSA may
recover the outstanding amount as a debt owed by Pi and due to the FSA.
7.5.
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of information
about the matter to which this notice relates. Under those provisions, the FSA must
publish such information about the matter to which this notice relates as the FSA
considers appropriate. The information may be published in such manner as the FSA
considers appropriate. However, the FSA may not publish information if such
publication would, in the opinion of the FSA, be unfair to you or prejudicial to the
interests of consumers.
FSA contacts
7.6.
For more information concerning this matter generally, contact Anthony Monaghan at
the FSA (direct line: 020 7066 6772 /fax: 020 7066 6773).
Georgina Philippou
Head of Department
FSA Enforcement and Financial Crime Division
Annex 1
RELEVANT STATUTORY PROVISIONS, REGULATORY REQUIREMENTS AND
FSA GUIDANCE
1.
Statutory Provisions
1.1.
The FSA’s statutory objectives, set out in section 2(2) of the Act, are market
confidence, financial stability, consumer protection and the reduction of financial
crime.
1.2.
Section 206 of the Act provides:
“If the Authority considers that an authorised person has contravened a requirement
imposed on him by or under this Act,… it may impose on him a penalty, in respect of
the contravention, of such amount as it considers appropriate”.
1.3.
Pi is an authorised person for the purposes of section 206 of the Act. The
requirements imposed on authorised persons include those set out in the FSA’s rules
and made under section 138 of the Act.
1.4.
Section 238 of the Act sets out the restrictions in place in relation to the promotion of
collective investment schemes. This section provides:
(1) An authorised person must not communicate an invitation or inducement to
participate in a collective investment scheme.
(2) But that is subject to the following provisions of this section and to section 239.
(3) Subsection (1) applies in the case of a communication originating outside the
United Kingdom only if the communication is capable of having an effect in the
United Kingdom.
(4) Subsection (1) does not apply in relation to—
(a) an authorised unit trust scheme;
(b) a scheme constituted by an authorised openended investment company; or
(c) a recognised scheme.
(5) Subsection (1) does not apply to anything done in accordance with rules made by
the Authority for the purpose of exempting from that subsection the promotion
otherwise than to the general public of schemes of specified descriptions.
(6) The Treasury may by order specify circumstances in which subsection (1) does not
apply.
(7) An order under subsection (6) may, in particular, provide that subsection (1) does
not apply in relation to communications—
(a) of a specified description;
(b) originating in a specified country or territory outside the United Kingdom;
(c) originating in a country or territory which falls within a specified
description of country or territory outside the United Kingdom; or
(d) originating outside the United Kingdom.
(8) The Treasury may by order repeal subsection (3).
(9) “Communicate” includes causing a communication to be made.
(10) “Promotion otherwise than to the general public” includes promotion in a way
designed to reduce, so far as possible, the risk of participation by persons for
whom participation would be unsuitable.
(11) “Participate”, in relation to a collective investment scheme, means become a
participant (within the meaning given by section 235(2)) in the scheme.
2.
Regulatory Provisions
2.1.
In exercising its power to issue a financial penalty, the FSA must have regard to the
relevant provisions in the FSA Handbook.
2.2.
In deciding on the action, the FSA has also had regard to guidance set out the in the
Regulatory Guides, in particular the Decision Procedure and Penalties Manual
(DEPP).
2.3.
The Principles are a general statement of the fundamental obligations of firms under
the regulatory system and are set out in the FSA Handbook. They derive their
authority from the FSA’s rulemaking powers as set out the Act and reflect the FSA’s
regulatory objectives. The relevant Principles are as follows:
Principle 3 provides:
“A firm must take reasonable care to organise and control its affairs
responsibly and effectively, with adequate risk management systems.”
Principle 9 provides:
“A firm must take reasonable care to ensure the suitability of its advice and
discretionary decisions for any customer who is entitled to rely upon its
judgment.”
2.4.
The FSA’s Conduct of Business Sourcebook (COBS) applied to authorised firms with
effect from 1 November 2007.
2.5.
Chapter 4 of COBS sets out the FSA’s rules governing communicating with clients
including those relating to financial promotions.
2.6.
COBS 4.12.1R provides:
(1) A firm may communicate an invitation or inducement to participate in an
unregulated collective investment scheme without breaching the restriction on
promotion in section 238 of the Act if the promotion falls within an exemption
in the table in (4), as explained further in the Notes.
(2) Where the lefthand column in the table in (4) refers to promotion to a
category of person, this means that the invitation or inducement:
(a) is made only to recipients who the firm has taken reasonable steps to
establish are persons in that category; or
(b) is directed at recipients in a way that may reasonably be regarded as
designed to reduce, so far as possible, the risk of participation in the
collective investment scheme by persons who are not in that category.
(3) A firm may rely on more than one exemption in relation to the same
invitation or inducement.
(4)
Promotion to:
Promotion of an unregulated collective investment
scheme which is:
Category 1 person
(1) a person who is already a participant in an
unregulated collective investment scheme; or
(2) A person who has been, in the last 30
months, a participant in an unregulated
collective investment scheme.
A. that collective investment scheme; or
B. any other collective investment scheme whose
underlying property and risk profile are both
'substantially similar' (see Note 1) to those of that
collective investment scheme; or
C. a collective investment scheme which is
intended to absorb or take over the assets of that
collective investment scheme; or
D. a collective investment scheme, units in which
are being offered by its operator as an alternative
to cash on the liquidation of that collective
investment scheme.
Category 2 person
(1) A person:
(a) for whom the firm has taken reasonable
steps to ensure that investment in the collective
investment scheme is suitable; and
(b) who is an 'established' or 'newly accepted'
client of the firm or of a person in the same
group as the firm (see Notes 2 & 3).
That collective investment scheme
Category 3 person
A person who is eligible to participate in a
scheme constituted under:
(1) the Church Funds Investment Measure
1958;
(2) section 24 of the Charities Act 1993;; or
(3) section 25 of the Charities Act (Northern
Ireland) 1964.
Any such collective investment scheme
Category 4 person
An eligible employee, that is, a person who is:
(1) an officer;
1. A collective investment scheme the instrument
constituting which:
A. restricts the property of the scheme, apart
Promotion to:
Promotion of an unregulated collective investment
scheme which is:
(2) an employee;
(3) a former officer or employee; or
(4) a member of the immediate family of any of
(1) (3),
of an employer which is (or is in the same
group as) the firm, or which has accepted
responsibility for the activities of the firm in
carrying out the designated investment
business in question.
from cash and near cash, to:
(1) (where the employer is a company) shares in
and debentures of company or any other
connected company (see Note 4);
(2) (in any case), any property, provided that the
scheme takes the form of:
(i) a limited partnership, under the terms of
which the employer (or connected company) will
be the unlimited partner and the eligible
employees will be some or all of the limited
partners; or
(ii) a trust which the firm reasonably believes not
to contain any risk that any eligible employee
may be liable to make any further payments
(other than charges) for investment transactions
earlier entered into, which the eligible employee
was not aware of at the time he entered into
them; and
B. (in a case falling within A(1) above) restricts
participation in the scheme to eligible employees,
the employer and any connected company.
2. Any collective investment scheme provided that
the participation of eligible employees is to
facilitate their coinvestment:
(i) with one or more companies in the same group
as their employer (which may include the
employer); or
(ii) with one or more clients of such a company.
Category 5 person
A person admitted to membership of the
Society of Lloyd's or any person by law
entitled or bound to administer his affairs.
A scheme in the form of a limited partnership
which is established for the sole purpose of
underwriting insurance business at Lloyd's.
Category 6 person
An exempt person (other than a person
exempted only by section 39 of the Act
(Exemption of appointed representatives)) if
the financial promotion relates to a regulated
activity in respect of which the person is
exempt from the general prohibition.
Any collective investment scheme.
Category 7 person
Any collective investment scheme in relation to
Promotion to:
Promotion of an unregulated collective investment
scheme which is:
An eligible counterparty or a professional
client.
which the client is categorised as a professional
client or eligible counterparty (see Note 5).
Category 8 person
A person:
(1) in relation to whom the firm has
undertaken an adequate assessment of his
expertise, experience and knowledge and that
assessment gives reasonable assurance, in
light of the nature of the transactions or
services envisaged, that the person is capable
of making his own investment decisions and
understanding the risks involved;
(2) to whom the firm has given a clear written
warning that this will enable the firm to
promote unregulated collective investment
schemes to the client; and
(3) who has stated in writing, in a document
separate from the contract, that he is aware of
the fact the firm can promote certain
unregulated collective investment schemes to
him.
Any collective investment scheme covered by the
assessment.
The following Notes explain certain words and phrases used in the table above.
Note 1
The property of a collective investment scheme is 'substantially similar' to that of
another collective investment scheme if in both cases the objective is to invest in
the same one of the following sectors:
(a) onexchange derivatives or warrants;
(b) onexchange (or quoted) securities;
(c) the property market (whether in security of property companies or in
property itself);
(d) collectable items of a particular description (such as works of art, antique
vehicles, etc);
(e) artistic productions (such as films, television, opera, theatre or music);
(f) unlisted investments (including unlisted debt securities).
The risk profile of a scheme will be substantially similar to that of another scheme only if there is
such similarity in relation to both liquidity and volatility.
Note 2
A person is an 'established client' of another person if he has been and remains
an actual client of that person in relation to designated investment business done
with or through that other person.
Note 3
A person is a 'newly accepted' client of a firm if:
(a) a written agreement relating to designated investment business exists
between the client and the firm (or, if the client is normally resident outside
the United Kingdom, an oral or written agreement); and
(b) that agreement has been obtained without any contravention of section 238
or 240 of the Act, or of any rule in COBS applying to the firm or (as far as
the firm is reasonably aware) any other authorised person.
Note 4
A company is 'connected' with another company if:
(a) they are in the same group; or
(b) one company is entitled either alone or with another company in the same
group, to exercise or control the exercise of a majority of the voting rights
attributable to the share capital, which are exercisable in all circumstances
at any general meeting of the other company or of its holding company.
Note 5
Firms may use the client categorisation regime that applies to business other
than MiFID or equivalent third country business. [This is the case even if the
firm will be within the scope of MiFID when it makes the promotion.]
2.7.
Chapter 9 of COBS sets out the FSA’s rules governing suitability (including basic
advice).
2.8.
COBS 9.2.1R provides:
(1) A firm must take reasonable steps to ensure that a personal
recommendation, or a decision to trade, is suitable for its client.
(2) When making the personal recommendation or managing his investments,
the firm must obtain the necessary information regarding the client's:
(a) knowledge and experience in the investment field relevant to the
specific type of designated investment or service;
(b) financial situation; and
(c) investment objectives;
so as to enable the firm to make the recommendation, or take the decision,
which is suitable for him.
2.9.
COBS 9.2.2R provides:
(1) A firm must obtain from the client such information as is necessary for the
firm to understand the essential facts about him and have a reasonable basis
for believing, giving due consideration to the nature and extent of the service
provided, that the specific transaction to be recommended, or entered into in
the course of managing:
(a) meets his investment objectives;
(b) is such that he is able financially to bear any related investment risks
consistent with his investment objectives; and
(c) is such that he has the necessary experience and knowledge in order
to understand the risks involved in the transaction or in the management
of his portfolio.
(2) The information regarding the investment objectives of a client must
include, where relevant, information on the length of time for which he wishes
to hold the investment, his preferences regarding risk taking, his risk profile,
and the purposes of the investment.
(3) The information regarding the financial situation of a client must include,
where relevant, information on the source and extent of his regular income,
his assets, including liquid assets, investments and real property, and his
regular financial commitments.
2.10. COBS 9.2.3R provides:
The information regarding a client's knowledge and experience in the investment field
includes, to the extent appropriate to the nature of the client, the nature and extent of
the service to be provided and the type of product or transaction envisaged, including
their complexity and the risks involved, information on:
(1) the types of service, transaction and designated investment with which the
client is familiar;
(2) the nature, volume, frequency of the client's transactions in designated
investments and the period over which they have been carried out;
(3) the level of education, profession or relevant former profession of the
client.
2.11. COBS 19.1.1R provides: “If an individual who is not a pension transfer specialist
gives a personal recommendation about a pension transfer or pension optout on a
firm's behalf, the firm must ensure that the recommendation is checked by a pension
transfer specialist.”
2.12. COBS19.1.2R provides that
“A firm must:
(1) compare the benefits likely (on reasonable assumptions) to be paid under a
defined benefits pension scheme with the benefits afforded by a personal pension
scheme or stakeholder pension scheme, before it advises a retail client to transfer
out of a defined benefits pension scheme;
(2) ensure that that comparison includes enough information for the client to be
able to make an informed decision;
(3) give the client a copy of the comparison, drawing the client's attention to the
factors that do and do not support the firm's advice, no later than when the key
features document is provided; and
(4) take reasonable steps to ensure that the client understands the firm's
comparison and its advice.
2.13. The Financial Services and Markets Act 2000 (Promotion of Collective Investment
Schemes) (Exemptions) Order 2001 (the PCIS Order) outlines the exemptions that
apply to the promotion of Unregulated Collective Investment Schemes.
2.14. Article 21 of the PCIS Order provides:
21 Certified high net worth individuals
(1) If the requirements of paragraphs (4) and (7) are met, the scheme promotion
restriction does not apply to any communication which—
(a) is a nonreal time communication or a solicited real time communication;
(b) is made to an individual whom the person making the communication
believes on reasonable grounds to be a certified high networth individual;
(c) relates only to units falling within paragraph (8);
(d) does not invite or induce the recipient to enter into an agreement under the
terms of which he can incur a liability or obligation to pay or contribute more
than he commits by way of investment.
(2) “Certified high networth individual” means an individual who has signed, within
the period of twelve months ending with the day on which the communication is made,
a statement complying with Part I of the Schedule.
(3) The validity of a statement signed for the purposes of paragraph (2) is not affected
by a defect in the form or wording of the statement, provided that the defect does not
alter the statement’s meaning and that the words shown in bold type in Part I of the
Schedule are so shown in the statement.
(4) The requirements of this paragraph are that either the communication is
accompanied by the giving of a warning in accordance with paragraphs (5) and (6)
or, where because of the nature of the communication this is not reasonably
practicable,—
(a) a warning in accordance with paragraph (5) is given to the recipient orally
at the beginning of the communication together with an indication that he will
receive the warning in legible form and that, before receipt of that warning, he
should consider carefully any decision to participate in a collective investment
scheme to which the communication relates; and
(b) a warning in accordance with paragraphs (5) and (6) (d) to (h) is sent to the
recipient of the communication within two business days of the day on which the
communication is made.
(5) The warning must be in the following terms—
“Reliance on this promotion for the purpose of buying the units to which the
promotion relates may expose an individual to a significant risk of losing all of the
property or other assets invested”.
But, where a warning is sent pursuant to paragraph (4)(b), for the words “this
promotion” in both places where they occur there must be substituted wording which
clearly identifies the promotion which is the subject of the warning.
(6) The warning must—
(a) be given at the beginning of the communication;
(b )precede any other written or pictorial matter;
(c) be in a font size consistent with the text forming the remainder of the
communication;
(d) be indelible;
(e) be legible;
(f) be printed in black, bold type;
(g) be surrounded by a black border which does not interfere with the text of the
warning; and
(h) not be hidden, obscured or interrupted by any other written or pictorial
matter.
(7) The requirements of this paragraph are that the communication is accompanied
by an indication—
(a) that it is exempt from the restriction on the promotion of unregulated
schemes (in section 238 of the Act) on the grounds that the communication is
made to a certified high net worth individual;
(b) of the requirements that must be met for an individual to qualify as a
certified high net worth individual;
(c) that any individual who is in any doubt about the units to which the
communication relates should consult an authorised person specialising in
advising in participation in unregulated schemes.
(8) A unit falls within this paragraph if it is in an unregulated scheme which invests
wholly or predominantly in the shares in or debentures of one or more unlisted
companies.
(9) “Business day” means any day except a Saturday, a Sunday, Christmas Day,
Good Friday or a day which is a bank holiday under the Banking and Financial
Dealings Act 1971 in any part of the United Kingdom.
(10) “Unlisted company” has the meaning given in the Financial Services and
Markets Act 2000 (Financial Promotion) Order 2001.
2.15. Article 23 of the PCIS Order provides:
23 Sophisticated investors
(1) “Certified sophisticated investor” means a person—
(a) who has a current certificate in writing or other legible form signed by an
authorised person to the effect that he is sufficiently knowledgeable to understand
the risks associated with participating in unregulated schemes; and
(b) who has signed, within the period of twelve months ending with the day on
which the communication is made, a statement in the following terms:
“I make this statement so that I can receive promotions which are exempt from the
restriction on promotion of unregulated schemes in the Financial Services and
Markets Act 2000. The exemption relates to certified sophisticated investors and I
declare that I qualify as such. I accept that the schemes to which the promotions
will relate are not authorised or recognised for the purposes of that Act. I am
aware that it is open to me to seek advice from an authorised person who
specialises in advising on this kind of investment”.
(1A) The validity of a statement signed in accordance with paragraph (1)(b) is not
affected by a defect in the wording of the statement, provided that the defect does
not alter the statement’s meaning.
(2) If the requirements of paragraph (3) are met, the scheme promotion restriction
does not apply to any communication which—
(a) is made to a certified sophisticated investor; and
(b) does not invite or induce the recipient to participate in an unregulated scheme
operated by the person who has signed the certificate referred to in paragraph
(1)(a) or to acquire units from that person.
(3) The requirements of this paragraph are that the communication is accompanied
by an indication—
(a) that it is exempt from the scheme promotion restriction (in section 238 of the
Financial Services and Markets Act 2000) on the communication of invitations or
inducements to participate in unregulated schemes on the ground that it is made
to a certified sophisticated investor;
(b) of the requirements that must be met for a person to qualify as a certified
sophisticated investor;
(c) that buying the units to which the communication relates may expose the
individual to a significant risk of losing all of the property invested;
(d) that any individual who is in any doubt about the investment to which the
invitation or inducement relates should consult an authorised person specialising
in advising on investments of the kind in question.
(4) For the purposes of paragraph (1)(a), a certificate is current if it is signed
and dated not more than three years before the date on which the communication
is made.
2.16. Article 23A of the PCIS Order provides:
23A Selfcertified sophisticated investors
(1) “Selfcertified sophisticated investor” means an individual who has signed,
within the period of twelve months ending with the day on which the communication is
made, a statement complying with Part II of the Schedule.
(2) The validity of a statement signed for the purposes of paragraph (1) is not affected
by a defect in the form or wording of the statement, provided that the defect does not
alter the statement’s meaning and that the words shown in bold type in Part II of the
Schedule are so shown in the statement.
(3) If the requirements of paragraphs (4) and (7) are met, the scheme promotion
restriction does not apply to any communication which—
(a) is made to an individual whom the person making the communication
believes on reasonable grounds to be a selfcertified sophisticated investor;
(b) relates only to units falling within paragraph (8); and
(c) does not invite or induce the recipient to enter into an agreement under the
terms of which he can incur a liability or obligation to pay or contribute more
than he commits by way of investment.
(4) The requirements of this paragraph are—
(a) …
(b) … that either the communication is accompanied by the giving of a warning
in accordance with paragraphs (5) and (6) or, where because of the nature of
the communication this is not reasonably practicable,—
(i) a warning in accordance with paragraph (5) is given to the recipient
orally at the beginning of the communication together with an indication
that he will receive the warning in legible form and that, before receipt
of that warning, he should consider carefully any decision to participate
in a collective investment scheme to which the communication relates;
and
(ii) a warning in accordance with paragraphs (5) and (6) (d) to (h) is
sent to the recipient of the communication within two business days of
the day on which the communication is made.
(5) The warning must be in the following terms—
“Reliance on this promotion for the purpose of buying the units to which the
promotion relates may expose an individual to a significant risk of losing all
of the property or other assets invested.”
But, where a warning is sent pursuant to paragraph (4)(b), for the words “this
promotion” in both places where they occur there must be substituted wording which
clearly identifies the promotion which is the subject of the warning.
(6) The warning must—
(a) be given at the beginning of the communication;
(b) precede any other written or pictorial matter;
(c) be in a font size consistent with the text forming the remainder of the
communication;
(d) be indelible;
(e) be legible;
(f) be printed in black, bold type;
(g) be surrounded by a black border which does not interfere with the text of the
warning; and
(h) not be hidden, obscured or interrupted by any other written or pictorial
matter.
(7) The requirements of this paragraph are that the communication is accompanied
by an indication—
(a) that it is exempt from the scheme promotion restriction (in section 238 of the
Act) on the communication of invitations or inducements to participate in
unregulated schemes on the ground that it is made to a selfcertified
sophisticated investor;
(b) of the requirements that must be met for an individual to qualify as a self
certified sophisticated investor;
(c) that any individual who is in any doubt about the investment to which the
invitation or inducement relates should consult an authorised person
specialising in advising on investments of the kind in question.
(8) A unit falls within this paragraph if it is in an unregulated scheme which invests
wholly or predominantly in the shares in or debentures of one or more an unlisted
companies.
(9) “Business day” means any day except a Saturday, a Sunday, Christmas Day,
Good Friday or a day which is a bank holiday under the Banking and Financial
Dealings Act 1971 in any part of the United Kingdom.
(10) “Unlisted company” has the meaning given in the Financial Services and
Markets Act 2000 (Financial Promotion) Order 2001.
Decision Procedure and Penalties Manual (DEPP)
2.17. Guidance on the imposition and amount of penalties is set out in Chapter 6 of DEPP.
Changes to DEPP were introduced on 6 March 2010. Given that most of the
misconduct occurred after that date, the FSA has had regard to the provisions of
DEPP in force after that date.
Enforcement Guide (EG)
2.18. The FSA’s approach to taking disciplinary action is set out in Chapter 2 of EG. The
FSA’s approach to financial penalties and public censures is set out in Chapter 7 of
EG.
2.19. EG 7.1 states that the effective and proportionate use of the FSA’s powers to enforce
the requirements of the Act, the rules and the Statements of Principles for Approved
Persons will play an important role in the FSA’s pursuit of its regulatory objectives.
Imposing financial penalties and public censures shows that the FSA is upholding
regulatory standards and helps to maintain market confidence and deter financial
crime. An increased public awareness of regulatory standards also contributes to the
protection of consumers.