Final Notice
FINAL NOTICE
1.
ACTION
1.1.
For the reasons given below, and pursuant to section 206 of the Financial Services
and Markets Act 2000 (“the Act”), the FSA hereby imposes on Rockingham
Independent Limited (“Rockingham”) a financial penalty of £35,000. This penalty is
in respect of contraventions of section 59 of the Act and Principle 3 (Management and
control), Principle 7 (Communications with clients) and Principle 9 (Customers:
relationships of trust) of the FSA’s Principles for Businesses (“the Principles”).
1.2.
Rockingham agreed to settle at an early stage of the proceedings and therefore
qualified for a 30% reduction in penalty pursuant to the FSA’s executive settlement
procedures. But for this reduction, the FSA would have imposed a financial penalty
of £50,000.
2.
SUMMARY OF REASONS
2.1.
During the period from January 2008 to 29 September 2010 (“the relevant period”),
Rockingham’s failures exposed 426 customers to the risk of receiving unsuitable
advice, 39 of whom were advised to invest in unregulated collective investment
schemes (“UCIS”). To put those figures in context, Rockingham’s direct offer
business dealt with 14,000 customers in total.
2.2.
Rockingham failed :
(1)
to take reasonable care to organise and control its affairs responsibly and
effectively, with adequate risk management systems, in contravention of
section 59 of the Act and Principle 3 in that it failed:
(a)
to take reasonable care to ensure that Gary Forster did not perform the
controlled function of CF3 (Chief Executive) without the prior
approval of the FSA;
(b)
to take sufficient steps to ensure that, as the advisory business
expanded, it had in place sufficiently robust compliance monitoring
and client file monitoring arrangements; and
(c)
despite undertaking a significant amount of due diligence on the
investments it promoted, to establish that an appropriate exemption
from the statutory restriction on the promotion of collective investment
schemes (“CIS”) to retail customers in section 238 of the Act (the
“section 238 restriction”) was applicable before promoting and
recommending unregulated collective investment schemes (“UCIS”);
(2)
to pay due regard to the information needs of its clients, and communicate
information to clients in a way which was clear, fair and not misleading, in
contravention of Principle 7 in respect of:
(a)
the misleading description on its website of its pension draw down
offering called the Retirement Income Tri-investment Account
(“RITA”) as relatively low risk;
(b)
the misleading description in its suitability reports of the UCIS it
recommended as low risk;
(c)
the unbalanced presentation in its suitability reports of the features and
risks of the investments that its advisers recommended;
(d)
the failure to communicate reasons for its recommendations to
customers (and therefore to take any potential customer responses into
consideration) before instructions to divest were sent to the ceding
schemes; and
(e)
describing itself as independent and offering a “whole of market”
service when in practice it tended to recommend the RITA packaged
product in the majority of cases;
(3)
to take reasonable care to ensure the suitability of its advice, in contravention
of Principle 9 (and Conduct of Business (“COBS”) rule 9.2.1R) in respect of
the failure to:
(a)
explain the disadvantages of the draw-down option so that customers
could make fully informed decisions about whether to proceed
(regardless of whether, in principle, Rockingham considered that the
customer had already decided not to purchase a conventional annuity);
(b)
adequately monitor and manage the crystallised risk of its advisers
recommending a high concentration of investment in one fund/scheme;
(c)
identify and act upon the inconsistent interpretation by advisers of
attitude to risk scores and consequently potentially unsuitable
investment strategies for customers;
(d)
consider whether any exemptions to the section 238 restriction applied
to customers before promoting and recommending UCIS to them; and
(e)
record sufficient personal and financial information about its customers
to determine their eligibility to receive UCIS promotions and to assess
the suitability of UCIS recommendations to customers.
2.3.
In determining the appropriate level of financial penalty, the FSA has had regard to
the following mitigating factors.
(1)
Rockingham’s external compliance consultant failed to identify that
some of the investments recommended to customers were UCIS and
therefore that Rockingham was breaching section 238 of the Act.
(2)
Following the FSA’s intervention, Rockingham appointed a new
external compliance consultant and also agreed to the appointment of
a skilled person to conduct a past business review to determine
whether any customer redress is required.
(3)
Rockingham fully co-operated with the FSA’s investigation and
voluntarily varied its Part IV permission to cease giving investment
advice pending the outcome of the FSA’s investigation.
(4)
The FSA acknowledged Rockingham’s credible representations that
its decision to introduce its draw down offering was made in response
to the changing market conditions as regards annuities and that, in so
doing, in their own minds the senior management were seeking to act
in the best interest of customers. Nor did they seek deliberately to
underestimate the investment risks associated with RITA and the
underlying investments.
3.
RELEVANT STATUTORY AND REGULATORY PROVISIONS
3.1.
The relevant statutory provisions and regulatory requirements are set out at Annex A.
4.
FACTS AND MATTERS RELIED UPON
Background to Rockingham
4.1.
Rockingham is based in Peterborough, Cambridgeshire. It was established by Mr
Stephen Hunt (“Mr Hunt”) as “Pensions4.com Limited” and traded as Annuity-
advisor.co.uk. It became directly authorised by the FSA on 17 May 2005 to perform
personal investment-related regulated activities (i.e. advising excluding pension
transfers/opt outs).
4.2.
Rockingham was authorised by the FSA to carry on the following regulated activities
in relation to regulated investment advice:
(1)
advising on investments (except on pension transfers and pension opt
outs);
(2)
agreeing to carry on a regulated activity;
(3)
arranging deals in investments;
(4)
arranging (bringing about) deals in investments; and
(5)
making arrangements with a view to transactions in investments.
4.3.
From 8 May 2009 it was authorised to carry out additional regulated activities in
respect of designated investment business:
(1)
advising on pension transfers and pension opt outs;
(2)
dealing in investments as principal; and
(3)
establishing/operating/winding up personal pensions.
4.4.
The following individuals have performed the controlled function of CF1 (Director) at
(1)
Mr Hunt (continuously from 17 May 2005) and
(2)
Mr Jonathan Edwards (“Mr Edwards”) (from 17 May 2005 to 16
August 2010).
4.5.
Another individual, Gary Forster, (“Mr Forster”) joined as an adviser when the firm
became directly authorised. Mr Forster was described as CEO on Rockingham’s web
site and he presented himself as CEO on his business cards, but without Rockingham
having first applied for approval for him to perform the controlled function of CF3
(Chief Executive). After the omission was pointed out to Rockingham by the FSA it
submitted an individual approval application for Mr Forster.
4.6.
Mr Edwards also performed the controlled function of CF10 (Compliance oversight)
from 17 May 2005 to 16 August 2010.
4.7.
Two years ago Rockingham expanded by also offering alternative investment and
pension solutions on an advised basis which, by 2010, represented approximately
20% of its business. Rockingham has employed a total of 13 approved
investment/trainee advisers (including Mr Hunt and Mr Edwards). In July 2010, it
agreed on a voluntary basis to cease making advised sales pending the outcome of the
FSA’s enquiries. The advisory side of the business focussed mainly on its income
draw down offering.
RITA
4.8.
Rockingham described itself as independent, offering “whole of market” services.
However in practice Rockingham tended to advise its customers to make use of
RITA, a ten year annuity product wrapped within a Self Invested Pension Plan
(“SIPP”). RITA was marketed to customers as an alternative to the purchase of a
conventional annuity. In Rockingham’s view, RITA was a low risk cost-effective
product which provided customers with the flexibility of a drawdown product and
matched the security of an annuity product. In 2010 sales of RITA represented 20 per
cent of Rockingham’s business
4.9.
RITA offered customers a choice of three underlying investments: Prudential With-
(“GIB”) and the ARM Bond. The investment in Met Life GIB was placed in the
Defensive Index Portfolio whereas the TIP would invest in wide range of assets
including equities, property, shares, fixed interest and other investments.
4.10. Customers were required to make a minimum investment of £3,500 and it was
available to customers who were aged 55 or over. The ARM Bond was intended to
return capital in full at the end of the 10 year period, although it offered no capital
guarantee.
4.11. Rockingham marketed RITA as a low risk investment with a risk rating of 3 out of 10.
The same risk score of 3 out of 10 was given to the ARM Bond which was a 10 year
structured capital at risk product investing in senior settlement policies which did not
provide capital guarantee. Rockingham has accepted that the RITA risk rating was set
too low and in February 2010 Rockingham increased the risk level of RITA to 5 out
4.12. Rockingham recommended the ARM Bond to cautious to moderately cautious
customers. Rockingham did not have restrictions on the amount placed in each
underlying investment held within RITA. The FSA found instances where all the
customers’ investment monies were invested in ARM Bond. Rockingham accepts
with the benefit of hindsight that it did not identify or manage the concentration risk.
Restriction on the promotion of UCIS
4.13. UCIS 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.”
Unless a CIS falls within the narrow definition of a recognised CIS, an authorised unit
trust or a scheme constituted by an open ended investment company, it will be a
UCIS. A UCIS does not carry the same level of regulatory oversight as a CIS but is
still subject to regulation, notably around the extent to which it may be marketed and
the persons to whom it may be marketed.
7
4.14. The section 238 restriction prohibits an authorised person from communicating an
invitation or inducement to participate in a collective investment scheme. There are a
number of exemptions to the section 238 restriction which an authorised firm could
rely on to promote UCIS to its customers. These exemptions are contained in the
Financial Services and Markets Act 2000 (Promotion of Collective Investment
Schemes (Exemptions) Order 2001 (the “PCIS Order”) and listed in the tables at COB
3 Annex 5 (for the period up to 31 October 2007) and COBS 4.12.1R(4) (for the
period from 1 November 2007). Relevant provisions relating to the promotion of
UCIS are summarised in the Annex to this Notice.
4.15. UCIS are often characterised by high levels of volatility and illiquidity which can in
turn entail a higher degree of risk for consumers. Further, as UCIS fall outside the
regulatory regime, consumers who invest in UCIS may have limited recourse to the
Financial Ombudsman Service (the “FOS”) and the Financial Services Compensation
Scheme (the “FSCS”). For these reasons, there is a restriction on the categories of
investor to whom UCIS can be promoted.
4.16. Rockingham’s advisers advised customers to make investments in “life settlements”
UCIS such as the EEA Life Settlement Fund (“EEA Life”). Their rationale for
choosing EEA Life was that they considered it prudent to choose a lower risk fund for
customers showing an interest in life settlements. The risks typically associated with
UCIS investments include many of those that exist with regulated mainstream
investments. However, there are number of additional risks that are often inherent in a
UCIS, for example, in respect of liquidity, currency, gearing, credit risk and
geopolitical risk. In Rockingham’s opinion, while EEA Life did not offer guarantees,
it was performing well and was liquid, and they considered that the risk was spread
because of the way the fund invested in many individual insured/impaired lives
(mitigating the risk of any individual insurance policy failing to deliver a return on the
death of the insured).
4.17. When Rockingham decided to recommend UCIS to its customers it delegated the
responsibility of carrying out due diligence to a third party. The senior management
provided the FSA with extensive material which Rockingham had collated on the
UCIS to demonstrate that it had conducted extensive due diligence on the products in
question. However, Rockingham failed to understand the section 238 restriction or
take into account the numerous references to the section 238 restriction in the
documents obtained in the course of undertaking due diligence on the proposed
investments.
4.18. Consequently, Rockingham promoted, and subsequently advised 39 customers to
invest pension funds in UCIS without ensuring that those customers fell within the
relevant exemptions to the section 238 restriction, exposing these customers to the
risk of being recommended investments that may not have been suitable for their
needs. Specifically, Rockingham failed to:
(1)
take into account the customers’ needs and circumstances when
making recommendations; and
(2)
obtain, record and retain sufficient information about its customers’
needs and circumstances to support its assessment of suitability.
4.19. One of the consequences of this lack of due diligence was that Rockingham did not
make any explicit reference in communications with customers to the fact that these
underlying investments included UCIS and that for example the schemes were not in
themselves covered by the FOS and the FSCS.
Sales of annuities process
4.20. In practice, 99 per cent of the enquiries received by Rockingham via its website were
for quotations on annuities. Rockingham would then contact the customer and gather
some initial personal and financial information. The customer would receive a quote
containing details of the best (i) guaranteed lifetime annuity, (ii) guaranteed fixed
term annuity, (iii) with-profits lifetime annuity, and (iv) details of Rockingham’s
drawdown offering (RITA). Suitability letters were usually drafted by paraplanners
and reviewed by the advisers. Rockingham failed to assess the customer’s attitude to
risk before product information was sent out to the customer.
Suitability of advice
4.21. Rockingham’s senior management said that annuity customers who expressed an
interest in its advisory pension and investment service would have already made the
decision to divest from their pension fund. Even if that is the case, Rockingham was
obliged under COBS 9.4.7 R to explain why it had concluded that the
recommendation was suitable and explain any possible disadvantages of transferring.
Rockingham was obliged to establish the customers’ investment knowledge and
experience, financial situation and investment objectives and to establish how its
recommended investments matched the customers’ preferences regarding risk taking
as well as whether the clients could bear any related investment risk consistent with
their investment objectives in accordance with COBS 9.2.2 R(2).
4.22. The FSA reviewed 10 client files which included recommendations to invest in
structured capital at risk products and UCIS and found the following matters of
concern.
(1)
There was no consistent application of customers’ preferences
regarding risk taking to the investments recommended, in breach of
COBS 9.2.2R (2). For example, four customers assessed as
Moderately Cautious, one customer assessed as Balanced and one
customer assessed as Moderately Adventurous were all advised to
invest all of their money in the same product ARM Bond where their
capital was at risk. Also two customers assessed respectively as
Moderately Cautious and Balanced were recommended to split their
investments equally between two products.
(2)
There was no evidence in the suitability reports (or elsewhere on the
client files) that consideration had been given to diversification of
investments or concentration risk when recommending particular
investments, in breach of the requirement in COBS 9.2.2 R (1) (a) and
(b), to ensure the recommended products meet the clients’ objectives
and that the client can bear the risks. Customers were routinely
advised to invest most or all of their funds in one underlying RITA
investment (the ARM Bond).
(3)
It was not apparent how the advisers had identified, recorded and
explained any possible disadvantages of the recommended draw
down transaction for the client.
(4)
There was no evidence in any file where UCIS were recommended
that an assessment was made as to whether exemptions to the section
238 restriction applied and there was insufficient financial and
personal information about its customers to determine their eligibility
for UCIS promotions or to assess the suitability of its
recommendations to customers to invest in UCIS.
(5)
Suitability reports lacked balance because they highlighted the
benefits of the recommended investments but directed the customers
to product literature for them to read the associated risks. Also, the
underlying investments were incorrectly and misleadingly described
as relatively low risk when they were in fact high risk did not have
FSCS protection, were concentrated, volatile and illiquid.
(6)
Rockingham assessed its customers’ attitude to risk using a risk
profiler questionnaire which contained six questions. The six
questions were not sufficiently detailed and the results of these risk
assessments were not applied consistently. For example customers
who were assessed as moderately cautious, balanced and moderately
adventurous were all advised to make highly concentrated
investments in the ARM Bond where return of capital was not
guaranteed.
Communications with clients
4.23. The file reviews highlighted that Rockingham failed to communicate its
recommendations to customers in a way which was clear, fair and not misleading. The
suitability reports did not adequately explain the reasons for the recommendations as
they were template driven and generic in nature and were not tailored specifically to
each customer.
4.24. In its suitability reports Rockingham failed to:
(1)
provide a balanced view of the products recommended: for example,
it was common practice for the advisers to highlight the benefit of the
recommended product and then refer the customer to the product
literature for information relating to risk;
(2)
state explicitly that some of the funds were UCIS and highlight
adequately the risks associated with such investments;
(3)
state explicitly why a structured capital at risk product was
recommended or explain adequately the risks associated with such
investments.
4.25. These reports did not meet the “clear, fair and not misleading” requirement and
customers could not therefore rely on them to make informed decisions.
4.26. In 2005 Rockingham’s board consisted of Mr Hunt acting as the managing director
and Mr Edwards acting as the compliance director. This remained the structure of the
board until August 2010, after the FSA visited.
4.27. During the relevant period Mr Edwards performed the significant influence functions
of CF1 (Director), CF10 (Compliance Oversight) and CF11 (Money Laundering
Reporting). Mr Edwards also performed the role of CF30 at Rockingham. Mr
Edwards reported directly to Mr Hunt.
4.28. As the director of Rockingham with responsibility for compliance oversight, Mr
Edwards was responsible for ensuring that Rockingham complied with the
requirements and standard of the regulatory system. He was also responsible for
putting in place robust compliance monitoring arrangements to mitigate against the
risk of Rockingham giving potentially unsuitable advice.
4.29. However, in practice Mr Edwards failed to fulfil his responsibility as compliance
officer. Mr Edwards devoted only 25 per cent of his time to dealing with compliance
issues. He was not able to cope with the growing complexity and scale of compliance
demands as Rockingham expanded rapidly and developed its business model.
4.30. Rockingham sought to provide Mr Edwards with support and to recruit a full time
compliance officer but as the business grew and recommended alternative investments
it did not put in place correspondingly robust compliance arrangements. The level of
compliance support remained broadly the same between 2005 and 2010 and did not
therefore increase in line with the expansion of the business, as shown in the table
below.
Year
Snr management
Sales advisors
Compliance
sales director
7
2
sales director
0
1
4.31. The FSA found no evidence of any systematic reviews of Rockingham’s advisers’
recommendations or risk-based analysis of trends in the investment advice (e.g. 100%
investment exposure in the ARM Bond) and follow up action. These failures exposed
Rockingham’s customers to the risk of receiving unsuitable pension and investment
advice.
4.32. In March 2009, Mr Edwards put Rockingham’s board of directors including Mr Hunt
on notice that he was not able to discharge the responsibilities of a compliance officer.
Rockingham was aware of this issue, but continued to place reliance on him to
perform this function.
4.33. In mitigation, Rockingham was able to demonstrate that it attempted to recruit a full
time compliance officer in 2007, 2008 and 2009. One successful candidate took an
opportunity elsewhere. Another individual was to be engaged on a consultancy basis
in July 2010. In July 2010 Rockingham ceased to conduct investment-related
regulated activities on a voluntary basis pending the outcome of the FSA’s
investigation. Rockingham also distributed some compliance tasks to other members
of staff and external compliance consultants from time to time to reduce the burden on
4.34. Mr Hunt was not only the Director (CF1) but also the majority shareholder of
Rockingham during the relevant period. He was the controlling mind of Rockingham
and as such exercised significant influence over the business. Mr Hunt had the power
to veto any decision he did not agree with.
4.35. Rockingham experienced rapid expansion between 2005 and 2010. Rockingham
employed two advisers in 2005 and by 2009 Rockingham employed seven advisers.
Throughout this time the level of compliance support remained the same. Mr Hunt
failed to increase the number of compliance support staff commensurate with the
increase in the number of advisers, scale and complexity of its advisory business.
4.36. The senior management informed the FSA that Rockingham’s Training and
Competency officer was also responsible for conducting periodic internal file review
checks. However, in practice internal file review checks were not objective. They
were undertaken on an ad hoc and informal basis. Senior management only became
aware of this after the FSA’s visit.
4.37. Mr Hunt allowed Mr Edwards perform the compliance director’s role at Rockingham
and continued to place reliance on someone who was not suitable and competent to
undertake the role.
Permitting an employee to perform a controlled function without approval
4.38. Mr Forster was not a director of Rockingham but he was involved in its formation. He
was also a 50 per cent shareholder of Rockingham during the relevant period. Despite
not being formally appointed as a director, in practice Mr Forster held himself out to
be the “CEO” of Rockingham. Since the authorisation of Rockingham, Mr Forster
exercised significant influence over the affairs of Rockingham and was involved in
making key decisions. In particular:
(1)
Mr Forster was invited to, and attended, nearly all board meetings
since Rockingham’s authorisation and had significant involvement in
the strategic planning at Rockingham;
(2)
Mr Forster was on numerous occasions held out to be the CEO of
Rockingham in correspondence from Rockingham to third parties;
and
(3)
Mr Forster was held out as CEO to the employees of Rockingham.
5.
ANALYSIS OF BREACHES
5.1.
Rockingham contravened section 59 of the Act in the relevant period by failing to
take reasonable care to ensure that no person performed a controlled function unless
the FSA had approved the person to perform a controlled function. For the following
reasons, Rockingham also failed to take reasonable care to organise and control its
affairs responsibly and effectively, with adequate risk management systems, in
contravention of Principle 3 (Management and control) of the FSA’s Principles for
(1)
the failure to take reasonable care to ensure that Mr Forster did not
perform the controlled function of CF3 (Chief Executive) without the
prior approval of the FSA;
(2)
the failure to ensure that, as the advisory business expanded, it had in
place sufficiently robust compliance monitoring and client file
monitoring arrangements; and
(3)
the failure, despite undertaking due diligence, to identify and have
regard to the section 238 restriction, or identify and apply any
relevant exemptions before promoting and recommending UCIS (and
the contravention of section 238 of the Act).
5.2.
For the following reasons, Rockingham failed to pay due regard to the information
needs of its clients, and communicate information to them in a way which is clear, fair
and not misleading, in contravention of Principle 7 (Communications with clients):
(1)
the misleading description on its web site of RITA as relatively low
risk;
(2)
the misleading description of UCIS in the suitability report as low
risk;
(3)
the unbalanced presentation in its suitability reports of the features
and risks of the investments its advisers recommended; and
(4)
describing itself as independent and offering a “whole of market”
service when in practice it mainly offered access to its RITA product
and a narrow range of investments.
5.3.
For the following reasons, Rockingham failed to take reasonable care to ensure the
suitability of its advice in contravention of Principle 9 (Customers: relationships of
trust) and COBS 9.2.1 R:
(1)
the failure to record and explain the possible disadvantages of draw
down so that customers could make fully informed decisions about
their options regardless of whether in principle Rockingham
considered that the customer had already decided not to purchase an
annuity. Even if they had, Rockingham was obliged under COBS
9.4.7 R to explain why it had concluded that the recommendation was
suitable and explain any possible disadvantages of transferring.
(2)
the failure to adequately monitor and manage the crystallised risk of
its advisers recommending a high concentration of investment in one
fund/scheme, and in particular investment into the ARM Bond;
(3)
the failure to identify and act upon the inconsistent interpretation by
advisers of appropriate investment strategies in relation to attitude to
risk scores;
(4)
the failure to consider whether any exemptions to the section 238
restriction applied to customers before promoting UCIS and
recommending that they invest in UCIS and the failure to record
sufficient financial and personal information about its customers to
determine their eligibility for UCIS promotions or to assess the
suitability of its recommendations to customers to invest in UCIS;
(5)
the failure to ensure that its suitability reports were balanced by
highlighting the benefits of the recommended investments but
directing the customers to product literature for them to read the
associated risks.
6.
ANALYSIS OF SANCTION
6.1.
The FSA's policy on the imposition of financial penalties relevant to the misconduct
as detailed in this Notice is set out in Chapter 6 of the version of the Decision
Procedure and Penalties Manual (“DEPP”) in force prior to 6 March 2010, which
formed part of the FSA Handbook. All references to DEPP in this section are
references to that version of DEPP. Rockingham’s advisory service began in 2008
but ceased in July 2010 when Rockingham voluntarily ceased to make advised sales.
In the circumstances, the pre-March 2010 version of DEPP applied for most of the
period in question and the penalty is therefore calculated according to the pre 6 March
2010 guidance. In addition the FSA has had regard to the guidance published in the
Enforcement Guide (“EG”).
6.2.
The principal purpose of imposing a financial penalty is to promote high standards of
regulatory conduct by deterring firms who have committed breaches from committing
further breaches, helping to deter other persons from committing similar breaches and
demonstrating generally the benefits of compliant behaviour (DEPP 6.1.2G).
6.3.
In determining whether a financial penalty is appropriate the FSA is required to
consider all relevant circumstances of a case. Applying the criteria set out in DEPP
6.2.1G (regarding whether or not to take action for a financial penalty or public
censure) and 6.4.2G (regarding whether to issue a public censure rather than impose a
financial penalty), the FSA considers that a financial penalty is an appropriate
sanction, given the nature of the breaches and the fact that there were inherent
compliance failures which exposed a large number of customers to a risk of financial
loss. The penalty will also serve to deter others in the industry from similar
misconduct.
6.4.
DEPP 6.5.2G sets out a non-exhaustive list of factors that may be of relevance in
determining the level of a financial penalty. The FSA considers that the following
factors are particularly relevant in this case.
Deterrence (DEPP 6.5.2(1))
6.5.
In determining the appropriate level of penalty the FSA has had regard to the principal
purpose for which it imposes sanctions, that is to promote high standards of regulatory
conduct. The FSA considers the financial penalty it proposes will deter both
Rockingham and others from committing similar breaches.
The nature, seriousness and impact of the breach in question (DEPP 6.5.2(2))
6.6.
In determining the appropriate sanction, the FSA has had regard to the seriousness of
the breaches, including the nature of the requirements breached, the duration and
frequency of the breaches, whether the breaches revealed serious failings in
Rockingham’s systems and controls and the number of customers who were affected
and/or placed at risk of loss.
6.7.
The FSA considers Rockingham’s failings to be serious as they included
contraventions of statutory as well as regulatory provisions, and may have led
customers to make ill-informed pension and investment decisions. Between June 2008
and June 2010, 436 customers were exposed to the risk of loss arising from unsuitable
advice.
6.8.
In determining the appropriate level of financial penalty, the FSA has had regard to
the following mitigating factors:
(1)
Rockingham’s agreement to voluntarily vary its permission at the
request of the FSA;
(2)
Rockingham’s agreement to the appointment of the skilled person
under section 166 of the Act to conduct a past business review with a
view to determining what redress may be required;
(3)
the failure by Rockingham’s external compliance consultant to
identify that some of the investments recommended by Rockingham
were UCIS;
(4)
Rockingham appointed a new external compliance consultant in 2010
after the FSA visit and took immediate steps to implement
recommendations, having accepted that there were shortcomings
during the relevant period; and
(5)
Rockingham was open and cooperative throughout the FSA’s
investigation and it accepted that with the benefit of hindsight that it
made incorrect assessments in respect of the investment risk it
attributed to RITA and underlying investments and in not identifying
the risk of recommending concentrated investments in one particular
scheme or fund.
The extent to which the breach was deliberate or reckless (DEPP 6.5.2(3))
6.9.
The FSA has found no evidence to show that Rockingham’s misconduct was
deliberate but it acted recklessly, notwithstanding the steps it took to enhance its
compliance support, by allowing Mr Edwards to continue to perform nominally the
compliance oversight function when it was aware that the role was not being
performed adequately by him.
The size, financial resources and other circumstances of Rockingham (DEPP
6.5.2(5))
6.10. The FSA has no evidence to suggest that Rockingham will be unable to pay this
penalty.
Disciplinary record and compliance history (DEPP 6.5.2(9))
6.11. Rockingham has not previously been the subject of disciplinary action.
Other action taken by the FSA (DEPP 6.5.2(10))
6.12. In determining the level of financial penalty, the FSA has taken into account penalties
imposed by the FSA on other authorised persons for similar behaviour.
6.13. Having considered all the circumstances set out above, the FSA has determined that
£50,000 (before any discount for early settlement) is the appropriate financial penalty
to impose on Rockingham.
7.
DECISION MAKER
7.1.
The decision which 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 Rockingham in accordance with section 390 of the Act.
The following statutory rights are important.
8.2.
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.
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, contact Chris Walmsley
(direct line: 020 7066 5894) of the Enforcement and Financial Crime Division of the
FSA.
Tom Spender
Head of Department
FSA Enforcement and Financial Crime Division
ANNEX A
1.
RELEVANT STATUORY PROVISIONS, REGULATORY REQUIREMENTS
AND GUIDANCE
Statutory provisions
1.1.
The FSA’s statutory objectives, set out in Section 2(2) of the Act, include the
reduction of financial crime, maintaining confidence in the financial system and the
protection of consumers.
1.2.
The FSA has the power, pursuant to section 206 of the Act, to impose a financial
penalty of such amount as it considers appropriate where the FSA considers an
authorised person has contravened a requirement by or under the Act.
1.3.
Section 59(1) of the Act requires firms to ensure that controlled functions are not
performed by persons without approval. Under section 59 (3) and 59 (4) a controlled
function means a function of a kind specified in rules (the relevant rules being SUP
10.4.5 R and the table), including functions likely to enable the person responsible for
them to exercise a significant influence on the conduct of the firm’s affairs (section 59
Principles for Businesses
1.4.
The Principles are a general statement of the fundamental obligations of firms under
the regulatory system. They derive their authority from the FSA’s rule-making
powers as set out in the Act and reflect the FSA’s regulatory objectives. The relevant
Principles breached are as follows:
(1)
Principle 3 (Management and control): A firm must take reasonable
care to organise and control its affairs responsibly and effectively,
with adequate risk management systems;
(2)
Principle 7 (Communications with clients): A firm must pay due
regard to the information needs of its clients, and communicate
information to them in a way which is clear, fair and not misleading;
and
(3)
Principle 9 (Customers: Relationships of trust): A 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.
UCIS Financial Promotions
1.5.
Section 238(1) of the Act provides that an authorised person must not communicate
an invitation or inducement to participate in a collective investment scheme (“CIS”),
and therefore also an UCIS. Section 21 of the Act imposes an equivalent restriction
in relation to unauthorised persons.
1.6.
Section 238 goes on expressly to carve out circumstances where this prohibition will
not apply. These include:
(1)
Where the CIS in question is an authorised unit trust/open ended investment
company.
(2)
The circumstances set out in the Financial Services and Markets Act 2000
(Promotion of collective investment schemes)(Exemptions) Order 2001 (“the
PCIS Order”).
(3)
The exemptions listed in table 4.12.1R(4) of the Conduct of Business
Sourcebook (COBS).
1.7.
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.
1.8.
These exemptions pertain to certain categories of individuals, for example, those
classed as certified high net worth individuals, certified sophisticated investors or
self-certified sophisticated investors (articles 21, 23 and 23A of the PCIS Order).
2.
The PCIS Order exemptions - Certified high net worth individuals
2.1.
Article 21(2) defines a certified high net worth individual as being an individual who
has signed a statement complying with Part I of the Schedule to the PCIS Order in
the past 12 months. Essentially this requires that at least one of the following sets of
circumstances apply:
(1)
The person had, during the previous financial year, an annual income of
£100,000 or more; and/or
(2)
The person held, throughout the previous financial year, assets to the value of
£250,000 or more, not including that person’s primary residence/mortgage,
life insurance or death in service benefits.
2.2.
The statement also requires that the person signs a statement to indicate he accepts
that he can lose his property and other assets from making investment decisions
based on financial promotions and is aware it is open to him to seek specialist
advice.
2.3.
If the person making the communication believes on reasonable grounds that he is
making it to a certified high net worth individual, then the section 238 restriction
will not apply as long as the communication:
(1)
is a non-real time communication or a solicited real time communication;
(2)
relates only to units in a UCIS which invests wholly or predominantly in the
shares in or debentures of one or more unlisted companies;
(3)
does not invite or induce the recipient to enter into an agreement under the
terms of which he can incur a liability or obligation to pay or contribute more
than he commits by way of investment;
(4)
a specified warning in the following terms is given both orally (in respect of
a real-time communication) and in writing in the manner prescribed in
“Reliance on this promotion for the purpose of buying the units to which the
promotion relates may expose an individual to a significant risk of losing all
of the property or other assets invested.”; and
(5)
is accompanied by an indication that the promotion is exempt from section
238 on the grounds that it is communicated to a certified high net worth
individual, together with details of the requirements for certified high net
worth investors and a reminder that the individual should consult a specialist
if in any doubt about participating in a UCIS.
2.4.
There are similar provisions for high net worth companies and associations at
Article 22.
3.
The PCIS Order exemptions - Sophisticated investors
3.1.
There are two sorts of sophisticated investors referred to in the PCIS Order –
certified and self-certified.
Certified sophisticated investors
3.2.
A certified sophisticated investor is defined in Article 23(1) as someone:
(1)
Who has a current certificate (signed and dated in the past three years) 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 a UCIS; and
(2)
Who has signed, within the previous 12 months, a statement in the following
terms:
“I make this statement so 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.”
3.3.
The communication must be accompanied by an indication that section 238 does not
apply, of the requirements to be a certified sophisticated investor, a prescribed risk
warning and a reminder to seek independent advice.
3.4.
Provided all this is met, and the communication is not to participate in a UCIS
carried on by the person who certified the investor as sophisticated, then the section
238 restriction will not apply.
Self-certified sophisticated investors
3.5.
Article 23A defines a self-certified sophisticated investor as an individual who has
signed a statement complying with Part II of the Schedule to the PCIS Order in the
past 12 months. Essentially this requires that at least one of the following sets of
circumstances applies to the investor:
(1)
he is a member of a network or syndicate of “business angels” and has been
so for at least the last six months;
(2)
he has made more than one investment in an unlisted company in the past
two years;
(3)
he is working, or has worked in the past two years, in a professional capacity
in the private equity sector, or in the provision of finance for small and
medium enterprises;
(4)
he is currently, or has been in the two years before signing the statement, a
director of a company with an annual turnover of at least £1 million.
3.6.
As with high net worth individuals, the statement also requires the investor to sign a
statement that he accepts he can lose his property and assets from making
investment decisions based on financial promotions and that he is aware that it is
open to him to seek specialist advice.
3.7.
If the person making the communication believes on reasonable grounds that he is
making it to a self-certified sophisticated investor, then the section 238 restriction
will not apply as long as the communication:
(1)
relates only to units in a UCIS which invests wholly or predominantly in the
shares in or debentures of one or more unlisted companies;
(2)
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;
(3)
a specified warning in the following terms is given both orally (in respect of real
time communications) and in writing in the manner prescribed in Article 23A:
“Reliance on this promotion for the purpose of buying the units to which the
promotion relates may expose an individual to a significant risk of losing all of
the property or other assets invested.”; and
(4)
is accompanied by an indication that the promotion is exempt from section 238
on the ground that it is made to a self-certified sophisticated investor, together
with details of the requirements for self-certified sophisticated investors and a
reminder that the individual should consult a specialist if in any doubt about
participating in a UCIS.
4.
The COBS exemptions
4.1.
A firm may communicate an invitation or inducement to participate in a UCIS
without breaching the section 238 restriction if the promotion falls within an
exemption listed in the tables at:
(1) COB 3 Annex 5 of COB 3.11 for the period up to 31 October 2007; and
(2) COBS 4.12.1R(4) of COBS 4.12 for the period from 1 November 2007.
4.2.
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.
4.3.
Category 1 covers people who are already participants in a UCIS or have been so in
the last 30 months. An authorised person can promote to these persons the UCIS in
which they are already participants (and any successor scheme) or one whose
underlying property and risk profile are both “substantially similar” to those of the
UCIS in which they participate.
4.4. Category 2 deals with those persons for whom the firm has taken reasonable steps to
ensure that investment in the UCIS is suitable and who is a client of the firm or a
company in its group.
4.5.
Category 7 provides that if a client is categorised as a professional client or eligible
counterparty then an authorised person can promote to that client any UCIS in
relation to which the client is so categorised.
4.6.
Category 8 allows financial promotion of UCIS to 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 UCIS 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 UCIS to him.
5.
Ensuring suitability of advice
5.1.
The fact that a customer is eligible to receive a communication promoting a UCIS
under one or more exemption does not mean that UCIS will be automatically suitable
to that customer.
5.2.
Principle 9 (Customers: relationships of trust) of the FSA’s Principles for Businesses
states that 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.
5.3.
Before making a personal recommendation, a firm is required to obtain and document
information about a specific customer to assess the suitability of an investment for
that customer. The relevant provisions that applied during the relevant period were set
out at:
(1) COB 5.2 up to 31 October 2007; and
(2) COBS 9.2 from 1 November 2007.
5.4.
COBS 9.2.1R(2) provides that when making the personal recommendation or
managing his investments, the firm must obtain the necessary information regarding
the customer’s:
(1) knowledge and experience in the investment field relevant to the specific type of
designated investment or service;
(2) financial situation; and
(3) investment objectives
so as to enable the firm to make the recommendation, or take the decision, which is
suitable for him.
5.5.
In addition, COBS 2.2.1R (1) provides that a firm must provide appropriate
information to a client about the firm and its services and also about costs and
associated charges, so that the client is reasonably able to understand the nature and
risks offered so that the client is able to take investment decisions on an informed
basis.
5.6.
COBS 9.2.2 R requires that:
(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.
5.7.
COBS 9.2.3R clarifies that the information regarding a customer’s knowledge and
experience in the investment field includes the nature and extent of the service to be
provided and the type of product or transaction envisaged, including its complexity
and the risks involved. In addition consideration needs to be given to the:
(1)
types of service, transaction and investments with which the customer
is familiar;
(2)
nature, volume and frequency of the customer’s transactions in
investments and the period over which they have been carried out;
and
(3)
level of education, profession or relevant former profession of the
customer.
5.8.
There is no direct equivalent COB rule to COBS 9.2.1R(2), COBS 9.2.2R(1) and
COBS 9.2.3R but COB 5.2.11G(1)(a) provides that information collected from a
customer should at a minimum provide an analysis of a customer’s personal and
financial circumstances leading to a clear identification of his needs and priorities so
that, combined with attitude to risk, a suitable investment can be recommended.
5.9.
COBS 9.2.6R provides that if a firm does not obtain the necessary information to
assess suitability, it must not make a personal recommendation to the customer or take
a decision to trade for him. There is no direct equivalent COB rule but COB 5.2.7G
provides that where a customer declines to provide sufficient information a firm
should not proceed to make a personal recommendation without promptly advising
the customer that the lack of such information may adversely affect the quality of the
services which it can provide.
5.10. COBS 9.4.7 requires that suitability reports must, at least, specify the client’s needs
and demands, and explain why the firm has concluded that the recommended
transaction is suitable for the client having regard to the information provided by the
client. It must also explain any possible disadvantages of the transaction for the client.
5.11. The FSA approach to taking disciplinary action is set out in Chapter 2 of EG.
Imposing financial penalties and public censures shows that the FSA is upholding
regulatory standards and helps to maintain market confidence, promote public
awareness of regulatory standards and deter financial crime. An increased public
awareness of regulatory standards also contributes to the protection of consumers.
5.12. The FSA’s policy on the imposition of financial penalties is set out in chapter 6 of
DEPP which is a module of the FSA's Handbook of rules and guidance. The principal
purpose of imposing a financial penalty is to promote high standards of regulatory
conduct by deterring persons who have committed breaches from committing further
breaches, helping to deter other persons from committing similar breaches and
demonstrating generally the benefits of compliant behaviour (DEPP 6.1.2G).
5.13. FSA will consider the full circumstances of each case when determining whether or
not to take action for a financial penalty. DEPP 6.2.1G sets out guidance on a non-
exhaustive list of factors that may be of relevance in determining whether to take
action for a financial penalty, which include the following:
(a)
DEPP 6.2.1G (1): The nature, seriousness and impact of the
suspected breach;
(b)
DEPP 6.2.1G (2): The conduct of the person after the breach;
(c)
DEPP 6.2.1G (3): The previous disciplinary record and
compliance history of the person;
(d)
DEPP 6.2.1G (4): FSA guidance and other published materials;
and
(e)
DEPP 6.2.1G (5): Action taken by the FSA in previous similar
cases.
5.14. The FSA will consider all the relevant circumstances of a case when it determines the
level of financial penalty. DEPP 6.5.2G sets out guidance on a non-exhaustive list of
factors that may be of relevance when determining the amount of a financial penalty,
which include:
(a)
DEPP 6.5.2G (1): Deterrence;
(b)
DEPP 6.5.2G (2): The nature, seriousness and impact of the
breach in question;
(c)
The extent to which the breach was deliberate or reckless: DEPP
(d)
DEPP 6.5.2G (4): Whether the person on whom the penalty is to
be imposed is an individual;
(e)
DEPP 6.5.2G (5): The size, financial resources and other
circumstances of the person on whom the penalty is to be
imposed;
(f)
DEPP 6.5.2G (6): The amount of benefit gained or loss avoided;
(g)
DEPP 6.5.2G (8): Conduct following the breach;
(h)
DEPP 6.5.2G (9): Disciplinary record and compliance history;
(i)
DEPP 6.5.2.G (10): Other action taken by the FSA;
(j)
DEPP 6.5.2G (12): FSA guidance and other published materials;
and
(k)
DEPP 6.5.2G (13): The timing of any agreement as to the amount
of the penalty.