FINAL NOTICE

Address:

24 Mount Pleasant Close


Hatfield
Herts
AL9 5BL

Individual Ref No:
RFR00007


TAKE NOTICE: The Financial Services Authority of 25 The North Colonnade, Canary
Wharf, London E14 5HS (“the FSA”) gives final notice that it has taken the following
action:

1.
THE ACTION

1.1
The FSA gave Mr Rhys a Decision Notice dated 20 January 2012 which notified him

that, having taken into account his oral and written representations, pursuant to

section 56 of the Financial Services and Markets Act 2000 ("the Act”), the FSA had

decided to impose an order prohibiting Mr Rhys from performing any function in

relation to any regulated activity carried on by any authorised person, exempt person,

or exempt professional firm.

1.2
Mr Rhys referred the matter to the Upper Tribunal (Tax and Chancery Chamber) (“the

Tribunal”) on 17 February 2012 but, following settlement discussions with the FSA,

notified the Tribunal of the withdrawal of the reference on 6 July 2012. The Tribunal

gave its consent to this withdrawal on 26 July 2012.

1.3
The FSA gave Mr Rhys a Further Decision Notice on 6 July 2012 which notified him

that, pursuant to section 56 of the Act, the FSA had decided to impose an order

prohibiting Mr Rhys from performing any function in relation to any regulated

activity carried on by any authorised person, exempt person, or exempt professional

firm on the grounds that he is not a fit and proper person in that he lacks competence

and capability.

1.4
Mr Rhys confirmed that he would not be referring the matter to the Tribunal and this

Final Notice is drafted in the same terms as the Further Decision Notice.

2.
SUMMARY REASONS FOR THE ACTION

2.1
Between September 2004 and May 2005, Mr Rhys was a director of MNFA Limited

(“MNFA” or “the firm”) and was mainly responsible for the investment and business

development side of the business. Mr Rhys was also the leading approved person in

the marketing and promotion of a scheme called the environmentally beneficial plant

scheme (the "EBP Scheme”) by MNFA. MNFA’s customers invested around £11.6

million in the EBP Scheme that it unlawfully promoted and the majority of investors

have subsequently sustained substantial losses.

2.2
On the basis of the facts and matters summarised below, and set out in more detail in

section 4 of this notice, the FSA has concluded that the EBP Scheme was promoted in

a way that risked it being mis-sold to the investors and Mr Rhys was directly

responsible for this. In particular, the FSA has concluded that Mr Rhys:

(1)
made statements in order to promote the EBP Scheme that obviously risked

misleading investors (and did in fact mislead them), without applying his mind

to that risk;

(2)
caused MNFA to promote the EBP Scheme without conducting proper due

diligence and without complying with the regulatory standards, including the

required statutory and regulatory promotional requirements for an unregulated

collective investment scheme;

(3)
failed to inform himself of and understand the relevant UCIS requirements;

and

(4)
failed to take any steps to ensure MNFA assessed the suitability of its advice

to customers.

3.
RELEVANT STATUTORY PROVISIONS, REGULATORY REQUIREMENTS
AND GUIDANCE

Unregulated collective investment schemes

3.1.
An unregulated collective investment scheme is defined in the Glossary to the FSA

Handbook of rules and guidance as “a collective investment scheme which is not a

regulated collective investment scheme” (“UCIS”).

3.2.
Unless a collective investment scheme (“CIS”) falls within the narrow Glossary

definition of a regulated CIS, it will be a UCIS. Whilst a UCIS does not carry the

same level of regulatory oversight as a regulated CIS, it is still subject to regulation,

notably around the extent to which it may be marketed and the persons to whom it

may be marketed.

3.3.
UCIS investments can be attractive as they typically aim to generate high returns and

they are not subject to the same restrictions as regulated CIS. For example, the latter

are restricted in the underlying assets that can be held and their ability to borrow funds

and are required to spread risk, whilst UCIS are not so restricted. The risks typically

associated with UCIS investments include many of those that exist with regulated

mainstream investments. However, there are a number of additional risks that are

often inherent in a UCIS which an adviser should consider when making a

recommendation.

3.4.
Furthermore, individuals who invest in UCIS have no recourse to the Financial

Ombudsman Service (“FOS”) or the Financial Services Compensation Scheme

(“FSCS”) in respect of the UCIS themselves or the providers of those schemes.

However, they may have recourse to the FOS or the FSCS in respect of personal

recommendations made by authorised firms to invest in UCIS.

3.5.
Section 238 of the Act (Restrictions on promotion) states that “An authorised person

must not communicate an invitation or inducement to participate in a [CIS]” although

there are exceptions including:

(1)
those exemptions set out in the Financial Services and Markets Act 2000

(Promotion of Collective Investment Schemes) (Exemptions) Order 2001 (“the

PCIS Order”). The PCIS Order provides for authorised firms to promote UCIS

to individuals if they fall within a particular category of exemption set out in the

order. The exemptions tend to be narrow in scope and subject to specific

requirements including reasonable checks, disclosure of appropriate warnings,

the structure of the underlying fund and the certification of the investor’s status.

These exemptions pertain to individuals classed as certified high net worth

individuals, certified sophisticated investors or self-certified sophisticated

investors; and

(2)
those exemptions set out in the FSA Handbook, namely COBS 4.12.1R(4)

(COB 3 Annex 5 prior to 1 November 2007). In order to be exempt under the

COBS rules, the inducement or invitation must be made only to recipients

whom the firm has taken reasonable steps to establish are persons in that

category or be directed at recipients in such a way as to reduce, as far as

possible, the risk of participation in the CIS by persons not in that category.

There is no provision for these steps to be taken retrospectively.

Further provisions

3.6.
Further detail and guidance in relation to the above is set out in the Annex to this

Notice, together with other relevant statutory and regulatory provisions.

4.
FACTS AND MATTERS RELIED ON

4.1
Mr Rhys was one of three directors at MNFA and held the significant influence

function of CF1 (director) at the firm. MNFA was incorporated as a company in

March 2001. Mr Rhys set up the company along with the two other directors. The

purpose behind the business of MNFA was initially to offer services involving

mortgages and mortgage brokering principally for individuals who were non-

domiciled. MNFA concentrated on sophisticated mortgage brokering, in particular,

concentrating on the tax efficient structuring of mortgages. In conjunction with this,

the firm also offered a general mortgage brokering business.

4.2
The other aspect of MNFA’s business was principally sheltering income from taxation

for wealthy individuals working in the City in a professional capacity, which involved

selling tax efficient investment schemes to these individuals. Mr Rhys was primarily

responsible for this part of MNFA’s business.

4.3
MNFA was initially an appointed representative and member of a network but

became authorised on its own account on 1 September 2004.

4.4
MNFA was part of a group of companies which were all placed in creditors’

voluntary liquidation on 26 January 2009. As a result, MNFA’s Part IV permission

was cancelled on 24 March 2009.


4.5
Prior to the EBP Scheme, MNFA had promoted a range of tax mitigation film finance

schemes developed by various companies connected with Scotts Atlantic EBP LLP

(“Scotts Atlantic”) and its Managing Director (“the Scotts’ Managing Director”).

4.6
Mr Rhys was aware of legal advice received by the Scotts’ Managing Director in

relation to previous tax mitigation schemes that the film finance schemes were UCISs.

MNFA sought advice on the promotion of these schemes from its then principal who

also confirmed that they were UCISs and advised MNFA that it was not authorised to

promote or advise on UCISs. MNFA’s principal therefore recommended that MNFA

sell the schemes on an execution only basis.

Scotts Private Client Services Limited fined by the FSA

4.7
On 9 June 2004, Scotts Private Client Services Limited (“Scotts Private Client”) was

fined by the FSA for its involvement in introducing investors to an unauthorised and

apparently unlawful CIS. Scotts Private Client and the Scotts’ Managing Director

were found to have carried out inadequate due diligence in relation to the regulatory

status of the CIS. Shortly thereafter, Scotts Private Client applied to cancel its

authorisation and the cancellation was effected on 10 October 2004.

4.8
Mr Rhys was aware of the FSA’s action against Scotts Private Client.

The EBP Scheme – an unregulated collective investment scheme

4.9
In late 2004, Mr Rhys discussed with the Scotts’ Managing Director the potential for

MNFA to be involved in the promotion of the EBP Scheme. The idea behind the EBP

Scheme was that Scotts Atlantic would set up three limited liability partnerships

(“LLPs”) on an identical basis via which investment would be made in

environmentally beneficial plant (specifically machinery used to process waste into

energy), with each investor becoming a member of an LLP.

4.10
The aim was that investment into these LLPs would provide investors with a secure

income whilst also benefiting from the 100% tax rebates that were allowed by new tax

legislation relating to environmentally beneficial plant and machinery. It was intended

that the majority of the investment would be returned by way of a tax rebate by

August 2005. In essence, it was a scheme which aimed to allow investors to obtain tax

relief on a given sum at the time of investment but which, over time, would pay tax on

future income.

4.11
Mr Rhys failed to consider or obtain advice as to whether the three EBP Scheme LLPs

were UCISs despite his awareness of the restrictions around promoting UCISs from

his involvement in the film finance schemes. Instead, Mr Rhys stated that he simply

relied on assurances given to him by the Scotts’ Managing Director that the LLPs in

the EBP Scheme were not UCISs, despite the fact that he knew that:

(1)
The Scotts’ Managing Director and Scotts Private Client had been recently

criticised by the FSA for failing to conduct due diligence into the regulatory

status of an investment scheme; and

(2)
Scotts Atlantic was not an FSA authorised entity (see guidance at Conduct of

Business Rules (“COB”) COB 2.3.5G which, at the relevant time, stated that a

firm might generally rely on any information provided in writing by an

unconnected authorised person).

4.12
In fact, each of the three LLPs in the EBP Scheme was a UCIS because each one:

(1)
fell within the definition of a collective investment scheme set out in section

235 of the Act (Collective investment schemes); and

(2)
was not a regulated collective investment scheme as defined by the FSA

Handbook.

4.13
Amongst other criteria under section 235 of the Act, an arrangement will not be a CIS

if participants in the arrangement have day-to-day control over the management of the

property. In determining that investors in the EBP Scheme did not have day-to-day

control over the management of the property, the FSA has taken into account,

amongst others, the following factors:

(1)
under the terms of the EBP Scheme documentation, whilst investors retained

the right to give directions they delegated management of inter alia the

operation and maintenance of the plant and procurement and recommendation

of contracts to specified named third parties at the time of investment and

execution of the scheme documentation, without any discussion or

consideration of other alternative service providers, i.e. they did not retain day-

to-day control over the management of the property; and

(2)
the majority of investors held full time jobs, had no experience in relation to

the business of processing waste into energy (the underlying business) and

were led, by MNFA’s promotion of the scheme, to understand that that they

would have no involvement in the day-to-day running of the EBP Scheme.

Breach of promotional restrictions under section 238

4.14
As the LLPs were UCISs, promotion of the EBP Scheme was restricted by section

238 of the Act. Mr Rhys was aware of this restriction, at least in part through

MNFA’s involvement in the film finance schemes.

4.15
Between January and May 2005, MNFA promoted the EBP Scheme in breach of

section 238 of the Act. Although Mr Rhys believed that the LLPs in the EBP Scheme

were not UCISs, MNFA promoted the EBP Scheme (in letters drafted by MNFA’s

compliance officer) to investors in terms that:

(1)
informed them that the LLP they were investing in was a UCIS;

(2)
asked investors to sign a document entitled a “Confirmation of High Net-

Worth” in an apparent attempt to take advantage of article 21 of the PCIS

Order (Certified high net worth individuals) which, in certain circumstances,

provides an exemption from the restriction on the promotion of UCIS in

section 238 of the Act (the “section 238 restriction”) for promotion to

“certified high net worth individuals”. However, the requirements of article 21

were not met because:

(a)
article 21 is only relevant to the promotion of a UCIS that invests

wholly or predominantly in the shares or debentures of an unlisted

company, which was not the case in relation to the EBP Scheme; and

(b)
MNFA failed to include a risk warning that promotion may expose the

individual to a significant risk of losing all of the property invested as

required under the relevant legislation.

4.16
Alternatively, MNFA could have sought to comply with COB to be able to promote

the scheme to the investors. There is no evidence however that they complied with

such requirements or even intended to do so.

4.17
As a result, in promoting the EBP Scheme, MNFA breached section 238 of the Act.

Advised or execution only?

4.18
There were two individuals at MNFA responsible for marketing the EBP Scheme to

potential investors, one of whom was Mr Rhys.

4.19
The documentation prepared by MNFA in relation to the EBP Scheme informed

investors that:

“this business is treated as ‘Execution Only’, which means that no advice has
been sought or given as to the suitability of either the product or the provider
and that as a ‘High Net-Worth Individual’ you accept full responsibility for
entering into this transaction” .

4.20
Scotts Atlantic produced documentation to explain the EBP Scheme to investors but

in most cases MNFA (whilst claiming it was acting on an execution only basis) failed

to pass this explanatory documentation to investors until after they had invested.

Investors therefore relied on what they were told about the EBP Scheme by Mr Rhys

and an employee of MNFA (“the Employee”) and in this respect it is notable that

MNFA charged each investor a fee for £1,500 for the transaction. MNFA also

received commission, totalling around £760,000 for these transactions. The fees and

commission charged by MNFA was a clear indication that the product was being sold

on an advised basis rather than on an execution only basis.

4.21
Therefore, notwithstanding the claim that MNFA was acting on an execution only

basis, Mr Rhys and the Employee did in fact provide advice.

Statements made in the course of providing advice

4.22
In two particular areas, Mr Rhys failed to act with due skill, care and diligence as to

the way in which he advised investors:

(1)
statements made to investors by Mr Rhys as to the apparent existence of

signed contracts for the EBP Scheme from various water companies and

another similar environmental beneficial plant being up and running (and

similar statements made by the Employee which Mr Rhys must have been

aware of) when in fact those contracts were not signed; and

(2)
statements made to investors by Mr Rhys as to the apparent guaranteed 100%

first year allowance from Her Majesty’s Revenue and Customs (“HMRC”)

when in fact it was not guaranteed (and similar statements made by the

Employee which Mr Rhys must have been aware of).

Statements as to the existence of signed contracts about the EBP Scheme and another

similar environmental beneficial plant being up and running

4.23
In order for the EBP Scheme to enable investors to reclaim tax for the financial year

2004/2005, evidence had to be provided to HMRC that trading had taken place before

the end of the tax year (i.e. before 5 April 2005). For the scheme to be trading,

contracts with water companies had to be in place under which the machinery would

be leased out to the water companies. One of the biggest risks for the EBP Scheme

was to ensure that these contracts were in place.

4.24
Numerous investors have stated that, when the EBP Scheme was being promoted to

them in February 2005, they were told by Mr Rhys and the Employee that these

contracts were already in place or were verbally in place and about to be signed. In

fact, no such contracts were in place or were about to be signed by any water

company. Mr Rhys had attended a meeting held between Scotts Atlantic and the

manufacturer of the machines in February 2005 at which it was clearly stated that

there was no guarantee that these contracts would be in place for the EBP Scheme.

4.25
At the time of promotion, numerous investors were also told by Mr Rhys that another

similar environmental beneficial plant was up and running. This implied that the plant

was already in use and running successfully. This was misleading as the similar plant

was not built and functioning at the time of execution of the EBP Scheme as it had

experienced several problems both in relation to the build and assembly of the actual

plant and the actual capital allowance relief. The plant was not even built (let alone

operating at full capacity) until September 2005.

4.26
Investors should not have been left with an understanding that the similar plant was

up and running at that time or with the impression that contracts for the EBP Scheme

were already in place (or both). These were important issues for the financial viability

of the EBP Scheme and Mr Rhys should have checked their accuracy before making

such statements on which investors would clearly rely.

4.27
It is not contended that these assertions were made by Mr Rhys deliberately to

investors to induce them to invest into the EBP Scheme, rather that they were made

without Mr Rhys applying his mind to the obvious risk that they may have misled

investors. This led directly to a risk of the EBP Scheme being mis-sold.

Statements as to the guaranteed full tax rebate from HMRC and the level of risk

4.28
The EBP Scheme was marketed on the basis that it would provide investors with a

secure income whilst also benefiting from 100% tax rebates. It was intended that the

majority of the investment would be returned by way of a tax rebate by August 2005.

4.29
However, there was a risk the 100% tax rebate was not guaranteed as it depended on

HMRC’s acceptance that the scheme satisfied certain criteria (including the LLPs

entering into contracts) which were not straightforward. In addition, Mr Rhys was

aware that tax avoidance and deferral schemes which used LLPs as their vehicle were

being subject to increased scrutiny by HMRC and anti-avoidance legislation.

4.30
Mr Rhys ignored the obvious risk that the tax rebate was not guaranteed and made

misleading statements to investors to the effect that it was guaranteed and that a full

rebate from HMRC would be granted. The FSA considers that Mr Rhys failed to

apply his mind to the obvious risk that the full rebate from the HMRC may not have

been granted. Making these statements directly led to a risk of the EBP Scheme being

mis-sold.

Responsibility for statements made to clients by the Employee

4.31
The Employee also made statements to investors as to the apparent existence of

signed contracts and the guaranteed nature of the tax rebate. Given the similarity of

assurances that Mr Rhys and the Employee were giving to investors, the FSA

considers that Mr Rhys must have been aware of what the Employee was telling

investors.

4.32
The Employee reported directly to Mr Rhys and was managed, monitored and

supervised by him. The Employee followed Mr Rhys’s instructions and reported back

to Mr Rhys on the sale of the scheme. Given Mr Rhys’s seniority in the business, and

his role as a CF1 director, Mr Rhys could have taken steps to prevent the Employee’s

misleading statements but he failed to do so (because he was making similar

statements himself).

Amount invested into the EBP Scheme

4.33
In total, 73 individuals invested in the EBP Scheme through MNFA. The investors

invested approximately £11.6 million in total of their own funds into the EBP Scheme

and they paid approximately £760,000 in fees and commission to MNFA.

4.34
However, due to concerns raised by HMRC later in 2005 the investors did not receive

a 100% tax rebate and received a rebate equivalent to approximately 25% of their

initial capital contribution. As a result, the majority of the investors have sustained

losses from their investment in the EBP Scheme.

4.35
The investors submitted complaints to MNFA claiming that the investment into the

EBP Scheme was unsuitable. MNFA rejected all the complaints claiming that the

investment was unregulated and was conducted on an “execution only” basis.

5.
REPRESENTATIONS

Key roles

5.1.
Mr Rhys said that the key roles were played by himself, the Scotts’ Managing

Director and the compliance officer of MNFA. Mr Rhys was a director of MNFA, his

particular role being that of business development. He gave no regulated advice and

at no time was any part of the compliance function delegated or assigned to him

although he did make a note of what someone approved to perform the investment

adviser for MNFA said to the investors.

5.2.
At the time when Mr Rhys claims to have relied on the Scotts’ Managing Director and

the authorised companies associated with him in relation to the EBP Scheme, the

Scotts’ Managing Director was an approved person. Scotts Atlantic was experienced

in these matters and had taken legal advice from both internal and external lawyers.

Mr Rhys stated that it was therefore reasonable to rely on their representations and in

doing so Mr Rhys was confident that he had discharged his regulatory responsibilities

correctly.

5.3.
Mr Rhys also relied on the FSA provisions COB 2.3.3R, COB 2.3.4E and 2.3.5G

relating to ‘Reliance on others’ (see the Annex paragraphs 2.12 to 2.14).

5.4.
The companies were appointed by the partners of the EBP Scheme to provide project

management services.

5.5.
The compliance officer of MNFA also performed the apportionment and oversight

function. At no time was any doubt cast on his capability.

The EBP Scheme

5.6.
Relying on the Scotts’ Managing Director and the scheme documentation, Mr Rhys

believed that the EBP Scheme was not a UCIS. The offering document to the scheme

indicated that the partners in the LLPs would have control over the affairs of the

LLPs. The Members’ Agreement provided that the partners would not be required to

become involved in operational matters. They could outsource many aspects of the

business but retain control by monitoring performance of them.

5.7.
There was no basis that the partners lacked time or experience in waste management

to fulfil their obligations. Neither was that assessment relevant to assessing day to

day control. As a matter of fact, partners were actively involved in the day to day

activities. Many of the investors were sophisticated and highly intelligent

professionals holding controlled functions in their firms.

5.8.
The FSA had ignored the scheme documentation and the activities of the partners.

Although some of the partners may not have been cognisant of the activities that were

going on, it was the function of the Member Consents to allow a limited number of

partners to conduct the business of the partnerships. The fact that other partners may

have had no interest in what was going on should not lead to the conclusion that the

partners were not exerting control on a day to day basis. The partners exerted control

over the business by managing the service providers.

5.9.
Mr Rhys said that he believed that the EBP Scheme did not turn into a UCIS in

practice because the participants did have day to day control. If it did turn into a

UCIS he should not be held accountable for that.

Statements made to investors

5.10. Mr Rhys said that he did not make statements to any investor as to the existence of

contracts where the information did not come directly from either the Scotts’

Managing Director or one other person. Mr Rhys said that he relied on a very bullish

comfort letter and other documents which have been lost due to difficulties with the

server. Whilst some of the statements may have been incorrect Mr Rhys did not

fabricate statements to lure investors into making investments.

5.11. Although the marketing material was clear on the expected tax relief, it came to light

later that the implementation of the EBP Scheme was not sufficient for the

partnerships to be considered trading. However, after some negotiation with HMRC

they agreed to give tax relief to the investors. Had the scheme been implemented

appropriately, and the valuation of the plant credible, HMRC could have been

satisfied and given tax relief of at least 50%. Given the tax relief agreed with HMRC

and the value of assets retained by the partnership, Mr Rhys did not believe that the

investors had suffered loss.

5.12. Although there was insufficient evidence to demonstrate that the investors had

received the scheme documentation, the investors themselves could not prove that

they did not receive the appropriate documentation. In particular, Mr Rhys said that it

was inconceivable that a group of over 70 sophisticated, highly intelligent

professionals would execute the documents without reviewing the documentation

including the Execution Only letter, which they also had to sign.

Competence and capability

5.13. Mr Rhys said that the question was ‘Who was responsible for compliance oversight?’

He was not responsible for compliance and that no part of it had been delegated to

him.

5.14. In any event, all the sales had been execution only.

5.15. If the allegations were found proved, prohibition would not be a proportionate

response having regard to the provisions in that part of the FSA Handbook known as

the Fit and Proper test for Approved Persons (known as ‘FIT).

6.
FINDINGS

Key roles

6.1.
Whilst Mr Rhys accepted his role of business development, he denied any

responsibility for anything else, notwithstanding his position as a director of MNFA.

As a director, his responsibilities would have included in particular being satisfied that

it was reasonable in all the circumstances to rely on the advice of others in relation to

the status of the EBP Scheme and in the effective discharge of the compliance

function.

6.2.
Mr Rhys himself made it clear that he understood that the question whether a scheme

was a UCIS was a difficult and complex one. However, he failed to provide sufficient

evidence to show that he did more than accept that the scheme was not a UCIS. He

relied on legal advice given to another party which he had not seen and there was no

evidence, for example, to show that he asked for that legal advice or the basis on

which the advice was given.

6.3.
It was also for Mr Rhys to satisfy himself that, even if the scheme documentation was

sufficient in its preparation to justify the position that the EBP Scheme was not a

UCIS, it depended on the operation of the scheme to ensure that it remained that way.

However, Mr Rhys sought to distance himself from accountability on the grounds that

he was not the compliance officer, despite the fact that the compliance officer was

accountable to him.

6.4.
Mr Rhys sought to rely on the provisions in COB relating to ‘Reliance on others’ (see

the Annex paragraphs 2.12 to 2.14). However, in doing so, Mr Rhys failed to give

sufficient evidence to demonstrate that it was reasonable in the circumstances to do

so. Also, having regard to COB 2.3.5G (“A firm may generally rely on any

information provided to the firm in writing by (1) an unconnected authorised person

…”), Mr Rhys failed to explain how the firms associated with the Scotts’ Managing

Director were unconnected to MNFA or that at the relevant time Scotts’ Managing

Director was no longer operating through an authorised firm.

The EBP Scheme

6.5.
The FSA accepts the representation that if the EBP Scheme was to avoid being a

UCIS, the participants had to have day to day control of the operation of the scheme.

Given that the scheme related to waste management, that the participants were

generally professional people of high net worth working in financial services, and that

there were in the region of 70 of them, the onus of demonstrating that they did have

day to day control was high. From the evidence before it, the FSA is satisfied that the

participants did not have day to day control.

6.6.
For example, one of the meetings relied upon to demonstrate day to day control,

through having oversight of the performance of the prime service provider, was an

informal meeting of the LLPs on 10 January 2007 chaired by four participants, with

the Scotts’ Managing Director, the LLP secretary and Mr Rhys in attendance.

However, the minutes themselves indicated that “… the meeting was informal and

therefore no major decisions could be made at this stage …”. The process for official

meetings were explained at the meeting and included 14 days notice; a right to attend

and to receive information relating to the meeting; a right to vote to by proxy; and a

right to not turn up or not respond at all. Any non-responses would follow the

decision of the Chairman.

6.7.
Based on the evidence before it, the FSA is satisfied that the EBP Scheme was a

UCIS.

Statements made to investors

6.8.
In the circumstances where a person has a responsibility not to promote unregulated

investments (except in limited circumstances), the person has a positive duty to satisfy

himself that he is compliant with the rules relating to financial promotion. Mr Rhys

failed to satisfy the FSA that he took sufficient steps to satisfy himself that his

statements in relation to the EBP Scheme were compliant with the rules relating to

financial promotion – which he maintains did not apply in the first place.

Competence and capability

6.9.
The question for the FSA was not whether Mr Rhys performed the compliance

function but whether he had responsibility, either alone or with others, for ensuring

that the statutory and regulatory requirements relating to collective investment

schemes were complied with. If he did, the next question was whether he discharged

that duty.

6.10. For the reasons given earlier, the FSA is satisfied that Mr Rhys, as a director of

MNFA, did have that responsibility and that he failed to discharge it. It is clear that

Mr Rhys was very alive to the risks he was taking, and permitting therefore MNFA to

take. Rather than rely on the advice given to Scotts Atlantic, Mr Rhys should have

taken reasonable steps himself, on behalf of MNFA, or ensured that such steps were

taken to satisfy himself and MNFA that the regulatory requirements were met. In the

absence of demonstrating that he had taken those steps, the clear inference to be

drawn is that Mr Rhys disregarded the duties placed upon him.

6.11. Mr Rhys also disregarded the risks attached to a failure to have regard to the

suitability provisions of the FSA Handbook. Given the complexity of the legal

position, it was not adequate to claim that the relationship with the investors was

execution only thereby avoiding the need to consider the suitability of advice.

6.12. The evidence relating to the documentation in the sales process is conflicting and on

balance the FSA accepts that some at least of the documentation was given to the

investors despite the claims by some that this was not so. It is unsatisfactory,

however, that the FSA is unable to be persuaded that the documentation provisions

were satisfied even allowing for evidential difficulties arising from the server. This is

particularly the case bearing in mind that Mr Rhys is saying that the basis of the

arrangement as evidenced by the documentation was ‘execution only’ and that this

was a key element in considering the relationship of MNFA to the investors.

6.13. Mr Rhys recognised the complexity of the financial products which were being

promoted. He was well aware of the significant sums of money being invested. He

knew of the risks of non-compliance both in the setting up of the EBP Scheme and in

the operation of it. He was aware that participants would be relying on what was

being said to them, whether by himself, others within MNFA or externally.

6.14. Taking all of these factors into account, the expectation would be that Mr Rhys should

take considerable care to ensure compliance with the statutory and regulatory

requirements and to be able to demonstrate that he had done so. In the absence of

compelling evidence that he had satisfied himself, and continued to satisfy himself, on

relevant matters, FSA finds that Mr Rhys failed to act competently. The relevant

matters included the status of the EBP Scheme and the failure to appreciate the

obvious risk of investors being misled in relation to statements made about signed

contracts, the operation of similar environmental beneficial plant and the status of the

tax rebate.

6.15. In considering his fitness and propriety, the FSA also takes into account the absence

of sufficient evidence of the steps taken by Mr Rhys to ensure that the statements

made by another individual within MNFA were not misleading. As a director, it was

not good enough to distance himself from the need to consider the interests of the

investors by claiming that he had no immediate or direct responsibility for what was

being said by others within MNFA to investors.

6.16. In the circumstances, the FSA is satisfied that Mr Rhys is not a fit and proper person

and that it is appropriate to impose an order on Mr Rhys in the terms set out earlier in

this notice.

7.
DECISION MAKER

7.1.
The decision that gave rise to the obligation to give this Final Notice was made on

behalf of the FSA by the Settlement Decision Makers.

8.
IMPORTANT

8.1.
This Final Notice is given to Mr Rhys under section 390 of the Act.

8.2.
Sections 391(4), 392(6) and 391(7) of the Act apply to the publication of information

about the matter to which this Final 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 Mr Rhys or prejudicial to

the interests of consumers.

8.3.
The FSA intends to publish such information about the matter to which this Final

Notice relates as it considers appropriate.

FSA contacts

8.4.
For more information concerning this matter generally Mr Rhys should contact Paul

Howick (direct line: 020 7066 7954 or by e-mail: paul.howick@fsa.gov.uk) of the

FSA’s Enforcement and Financial Crime Division.

Tom Spender

Head of Department
FSA Enforcement and Financial Crime Division

Annex (paragraph 3.6)

RELEVANT STATUTORY PROVISIONS, REGULATORY REQUIREMENTS AND FSA
GUIDANCE

1.
STATUTORY AND REGULATORY PROVISIONS AND POLICY TO IMPOSE A
PROHIBITION ORDER

1.1
The FSA’s statutory objectives are set out in section 2(2) of the Act. In relation to this case,
the most relevant statutory objectives are maintaining confidence in the financial system and
the protection of consumers.

1.2
The FSA has the power, pursuant to section 56 of the Act, to make an order prohibiting
individuals from performing a specified function, any function falling within a specified
description, or any function, if it appears to the FSA that he is not a fit and proper person to
perform functions in relation to a regulated activity carried on by an authorised person. Such
an order may relate to a specified regulated activity or any regulated activity falling within a
specified description or all regulated activities.

Fit and Proper Test for Approved Persons

1.3
The section of the FSA handbook entitled “FIT” sets out the Fit and Proper test for Approved
Persons. The purpose of FIT is to outline the main criteria for assessing the fitness and
propriety of a candidate for a controlled function and FIT is also relevant in assessing the
continuing fitness and propriety of an approved person.

1.4
FIT 1.3.1G provides that the FSA will have regard to a number of factors when assessing a
person’s fitness and propriety. Among the most important considerations will be the person’s
competence and capability.

1.5
The FSA’s approach to exercising its powers to make prohibition orders and withdraw
approvals is set out at Chapter 9 of the Enforcement Guide (“EG”).

1.6
EG 9.1 states that the FSA’s power to make prohibition orders under section 56 of the Act
helps it work towards achieving its regulatory objectives. The FSA may exercise this power
where it considers that, to achieve any of those objectives, it is appropriate either to prevent
an individual from performing any functions in relation to regulated activities or to restrict the
functions which he may perform.

1.7
EG 9.4 sets out the general scope of the FSA’s powers in this respect, which include the
power to make a range of prohibition orders depending on the circumstances of each case and
the range of regulated activities to which the individual’s lack of fitness and propriety is
relevant. EG 9.5 provides that the scope of a prohibition order will vary according to 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 posed by him to consumers or
the market generally.

1.8
In circumstances where the FSA has concerns about the fitness and propriety of an approved
person, EG 9.8 to 9.14 provides guidance. In particular, EG 9.8 states that the FSA may
consider whether it should prohibit that person from performing functions in relation to
regulated activities, withdraw that person’s approval or both. In deciding whether to withdraw
approval and/or make a prohibition order, the FSA will consider whether its regulatory
objectives can be achieved adequately by imposing disciplinary sanctions.

1.9
EG 9.9 states that the FSA will consider all the relevant circumstances when deciding whether
to make a prohibition order against an approved person and/or to withdraw that person’s
approval. Such circumstances may include, but are not limited to, the following factors:

(1)
whether the individual is fit and proper to perform functions in relation to regulated
activities, including in relation to the criteria for assessing the fitness and propriety
set out in FIT;

(2)
the relevance and materiality of any matters indicating unfitness;

(3)
the length of time since the occurrence of any matters indicating unfitness;

(4)
the particular controlled function the approved person is (or was) performing, the
nature and activities of the firm concerned and the markets in which he operates;

(5)
the severity of the risk which the individual poses to consumers and to confidence in
the financial system; and

(6)
the previous disciplinary record and general compliance history of the individual.

1.10
EG 9.12 provides a number of examples of types of behaviour which have previously resulted
in the FSA deciding to issue a prohibition order or withdraw the approval of an approved
person. The examples include serious lack of competence.

Conduct of Business Rules

1.11
Guidance on the Conduct of Business rules is set out in the Conduct of Business manuals of
the FSA Handbook.

1.12
At the relevant time, COB 5 set out rules relating to a firm’s obligation to ensure suitability of
advice.

2.
STATUTORY AND REGULATORY PROVISIONS REGARDING UCIS AND
SUITABILITY

Section 235 of the Act

2.1
Section 235 of the Act (Collective investment schemes) provides the definition of a collective
investment scheme as follows:

(1)
In this Part “collective investment scheme” means any arrangements with respect to
property of any description, including money, the purpose or effect of which is to
enable persons taking part in the arrangements (whether by becoming owners of the
property or any part of it or otherwise) to participate in or receive profits or income
arising from the acquisition, holding, management or disposal of the property or sums
paid out of such profits or income.

(2)
The arrangements must be such that the persons who are to participate
(“participants”) do not have day-to-day control over the management of the property,
whether or not they have the right to be consulted or to give directions (our
emphasis).

(3)
The arrangements must also have either or both of the following characteristics:

(a)
the contributions of the participants and the profits or income out of which
payments are to be made to them are pooled;

(b)
the property is managed as a whole by or on behalf of the operator of the
scheme.

(4)
If arrangements provide for such pooling as is mentioned in subsection (3)(a) in
relation to separate parts of the property, the arrangements are not to be regarded as
constituting a single collective investment scheme unless the participants are entitled
to exchange rights in one part for rights in another.

(5)
The Treasury may by order provide that arrangements do not amount to a collective
investment scheme—

(a)
in specified circumstances; or

(b)
if the arrangements fall within a specified category of arrangement.

Section 238 of the Act

2.2
Section 238 of the Act (Restrictions on promotion) provides restriction on promotion of
collective investment schemes.

(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) does not apply in relation to—

(a)
an authorised unit trust scheme;

(b)
a scheme constituted by an authorised open-ended investment company; or

(c)
a recognised scheme.

(4)
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.

(5)
The Treasury may by order specify circumstances in which subsection (1) does not
apply.

(6)
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.

(7)
“Communicate” includes causing a communication to be made.

(8)
“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.

(9)
“Participate”, in relation to a collective investment scheme, means become a
participant (within the meaning given by section 235(2)) in the scheme.

Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes)
(Exemptions) Order 2001

2.3
Article 21 of the Financial Services and Markets Act 2000 (Promotion of Collective
Investment Schemes) (Exemptions) Order 2001 provides for a specific exemption for
“certified high net worth individuals”. Article 21 of the PCIS Order which was in force from
September 2004 until 3 March 2005 provides as follows:

(1)
If the requirements of paragraphs (4) and (5) are met, the scheme promotion
restriction does not apply to any communication which—

(a)
is a non-real time communication or a solicited real time communication;

(b)
is made to a certified high net-worth individual;

(c)
relates only to units falling within paragraph (6);

(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 net-worth individual” means any individual—

(a)
who has a current certificate of high net worth; 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 am able to receive promotions of units in
unregulated collective investment schemes where such promotions are exempt
from the restriction in section 238 of the Financial Services and Markets Act
2000. The exemption relates to certified high net worth individuals 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”.

(3) For the purposes of paragraph (2)(a) a certificate of high net worth—

(a)
must be in writing or other legible form;

(b)
is current if it is signed and dated within the period of twelve months ending
with the day on which the communication is made;

(c)
must state that in the opinion of the person signing the certificate, the person to
whom the certificate relates either—

(i)
had, during the financial year immediately preceding the date on
which the certificate is signed, an annual income of not less than
£100,000; or

(ii)
held, throughout the financial year immediately preceding the date on
which the certificate is signed, net assets to the value of not less than
£250,000;

(d)
must be signed by the recipient’s accountant or by the recipient’s employer.

(4) 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 Financial Services and Markets Act 2000) on the grounds
that the communication is made to a certified high net worth individual;

(b)
of the requirements that must be met for a person to qualify as a certified high
net worth individual;

(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 person who is in any doubt about the units to which the
communication relates should consult an authorised person specialising in
advising on participation in unregulated schemes.

(5) In determining an individual’s “net assets”, no account is to be taken of—

(a)
the property which is his primary residence or of any loan secured on that

residence;

(b)
any rights of his under a qualifying contract of insurance; or

(c)
any benefits (in the form of pensions or otherwise) which are payable on the
termination of his service or on his death or retirement and to which he is (or
his dependents are), or may be, entitled.

(6) A unit falls within this paragraph if it is in an unregulated scheme—

(a)
which is not operated by the person who has signed the certificate of high net
worth referred to in paragraph (2)(a); and

(b)
which invests wholly or predominantly in the shares in or debentures of an
unlisted company.

(7) “Unlisted company” has the meaning given in the Financial Services and Markets Act
2000 (Financial Promotion) Order 2001(1).

2.4
The PCIS Order was amended on 3 March 2005. Article 21 of the amended PCIS Order in
force from 3 March 2005 until May 2005 provides as follows:

(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 non-real 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 net worth individual;

(c) relates only to units falling within paragraph (8); and

(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 net worth 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 Schedule1.

(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.”

Conduct of Business Rules – promotion of unregulated collective investment schemes

2.5
COB 3 set out rules and other provisions relating to financial promotion.

2.6
COB 3.11 sets out exemptions from the restriction on promoting unregulated collective
investment schemes under section 238 of the Act.

2.7
Under COB 3.11.2R a firm may communicate an invitation or inducement to participate in an
unregulated collective investment scheme if the communication falls within COB 3 Annex 5
R.

2.8
Under COB 3, Annex 5 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 is to a category of persons and promoted in a
particular way.

2.9
A Category 1 person is a person who is already a participant in a UCIS or a qualified
investment scheme; or a person who has been in the last 30 months a participant in an

unregulated collective investment scheme or a qualified investment scheme. Promotion of that
specified collective investment scheme is permissible.

2.10
A Category 2 person is a person for whom a firm is required to take reasonable steps to ensure
that their investment in that particular collective investment scheme was suitable and who is
an established or newly accepted customer of the firm or of a person in the same group as the
firm. Financial promotion of any such collective investment scheme is permissible.

Conduct of Business Rules – reliance on others

2.11
COB 3 set out rules and other provisions relating to the extent to which a firm could rely on
others.

2.12
COB 2.3.3R provided that a firm will be taken to be in compliance with any rule in COB that
requires a firm to obtain information to the extent that the firm can show that it was
reasonable for the firm to rely on information provided to it in writing by another person.

2.13
COB 2.3.4E provided that in relying on COB 2.3.3 R, a firm should take reasonable steps to
establish that the other person providing written information is (a) not connected with the
firm; and (b) competent to provide the information. Compliance with this tended to indicate
compliance with COB 2.3.3R; contravention indicated contravention with COB 2.3.3R.

2.14
COB 2.3.5G provided that a firm may generally rely on any information provided to the firm
in writing by (1) an unconnected authorised person or (2) a professional firm unless the firm
is aware, or ought reasonably to be aware, of any fact, or facts, that would give reasonable
grounds to question the accuracy of any such information.