FINAL NOTICE

To:
Specialist Solutions Public Limited Company (“Specialist Solutions” /
“the Firm”)

TAKE NOTICE: The Financial Services Authority of 25 The North Colonnade, Canary
Wharf, London E14 5HS (the “FSA”) gives you final notice about a requirement to pay
a financial penalty:

1.
THE PENALTY

1.1.
The FSA gave you a Decision Notice on 28 March 2011 which notified you that,
pursuant to section 206 of the Financial Services and Markets Act 2000 (the “Act”),
the FSA had decided to impose on you a financial penalty of £35,000 for breaches of
Principles 3 and 9 of the FSA’s Principles for Businesses (the “Principles”) arising
from the promotion of unregulated collective investment schemes (“UCIS”) between
1 January 2008 and 31 December 2009 (the “relevant period”).

1.2.
You confirmed on 23 March 2011 that you will not be referring the matter to the
Upper Tribunal (Tax and Chancery Chamber).

1.3.
Accordingly, for the reasons set out below, the FSA imposes a financial penalty on
you in the amount of £35,000.

1.4.
You agreed to settle at an early stage of the FSA’s investigation and therefore
qualified for a 30% (stage 1) discount under the FSA’s executive settlement
procedures. The FSA would have otherwise imposed a financial penalty of £50,000.

2.
REASONS FOR THE PROPOSED ACTION

Introduction

2.1.
On the basis of the facts and matters described below, the FSA proposes to impose a
financial penalty on Specialist Solutions for breaches of the Principles within the
relevant period. In summary, the FSA has concluded that Specialist Solutions failed
to:

(1)
consider and correctly apply the relevant legislative and regulatory provisions
governing the promotion of UCIS to retail customers;

(2)
implement adequate systems and controls and training and competence
procedures to ensure that UCIS were not promoted to customers in breach of
the regulations governing their promotion;

(3)
undertake adequate due diligence into UCIS prior to recommending to
customers that they invest in those funds; and

(4)
ensure that customers were given suitable advice to invest in UCIS.

2.2.
Consequently, Specialist Solutions promoted UCIS to 101 retail customers in breach
of the restrictions on promotion pursuant to section 238 of the Act during the relevant
period and exposed those customers to the risk of receiving unsuitable advice.

2.3.
The FSA regards these failings as particularly serious because:

(1)
the number of retail customers affected and the amount of money invested by
certain customers in UCIS is significant; and

(2)
the skilled person has to date reviewed 20 customer files for suitability. In
nearly 50% of the customer files reviewed, the advice given by Specialist
Solutions to customers to invest in UCIS was found to be unsuitable.

2.4.
The FSA considers that the failings identified have been mitigated to a considerable
extent by the significant changes Specialist Solutions has implemented to its sales
processes and compliance arrangements since the failings were identified, including
the replacement of the independent external compliance consultant referred to below.
Specialist Solutions has also undertaken a past business review and has agreed, in
principle, to contact customers who may have been unsuitable to invest in UCIS with
a view to providing redress to those customers, if any, who have suffered detriment.
The FSA has also taken into account the fact that the two individuals responsible for
the large majority of the UCIS sales/promotions are no longer at the Firm.

2.5.
In addition, Specialist Solutions voluntarily applied to the FSA for an immediate
change to its permissions. As a result, the Firm has not promoted or given any advice
on UCIS since June 2010.

3.
RELEVANT STATUTORY PROVISIONS, REGULATORY REQUIREMENTS
AND FSA GUIDANCE

3.1.
The relevant statutory provisions, regulatory requirements and FSA guidance are set
out at Annex A to this notice.

4.
FACTS AND MATTERS RELIED ON

4.1.
Specialist Solutions is a firm of independent financial advisors based in Cheltenham
and Exeter currently retaining the services of eight self-employed customer advisers
approved to carry out controlled function CF30 (customer function).

4.2.
The firm has been authorised by the FSA since 21 December 2004 to undertake the
following regulated activities: advising on Pension Transfers and Pension Opt Outs;
advising on investments (except on Pension Transfers and Pension Opt Outs);
advising on regulated mortgage contracts; agreeing to carry on a regulated activity;
arranging (bringing about) deals in investments; arranging (bringing about) regulated
mortgage contracts; making arrangements with a view to regulated mortgage
contracts; and, making arrangements with a view to transactions in investments.

4.3.
Potential issues regarding Specialist Solutions’ recommendations to invest in UCIS
came to the FSA’s attention following a visit by the FSA to the Firm on 25 February
2010. The visit was undertaken as part of the FSA’s thematic review into the
promotion of UCIS.

4.4.
Specialist Solutions started promoting and advising on investments into UCIS in
2007. During the relevant period, Specialist Solutions advised approximately 3,000
customers. Of those customers, Specialist Solutions recommended UCIS to 101
customers who invested a total of £11,244,923 in one or more of three UCIS funds
and generated gross commission for the firm of £321,827 by these investments.
Approximately 98% of the firm’s UCIS business was invested through a product
wrapper (e.g. SIPP or bond).

4.5.
The FSA’s visit to Specialist Solutions in February 2010, and its review of nine
customer files in which UCIS were recommended, highlighted a number of causes for
concern regarding the Firm’s failure to comply with the promotional restrictions
pursuant to section 238 of the Act, the suitability of advice given to customers by the
firm in relation to UCIS, the Firm’s monitoring and compliance functions and the
Firm’s training and competence procedures. These concerns were explained to
Specialist Solutions in a post visit letter from the FSA dated 9 June 2010, by which
time Specialist Solutions had already reviewed and amended its internal procedures
regarding UCIS, as communicated to the FSA at the end of April 2010.

4.6.
On 28 October 2010, the FSA required Specialist Solutions to appoint a skilled person
pursuant to section 166 of the Act to review the Firm’s promotion of UCIS and advice
given to customers about UCIS. The skilled person reviewed all files for customers
who were recommended UCIS by Specialist Solutions during the relevant period.
The findings of the skilled person are referred to below.

Conduct in issue

4.7.
Specialist Solutions has breached Principle 3 in that it did not take reasonable care to
organise and control its affairs responsibly and effectively, with adequate risk
management systems. Specifically, during the relevant period Specialist Solutions
breached Principle 3 in the following ways:

4.8.
Failure to comply with the promotional restrictions for UCIS:

(1)
Section 238(1) of the Act generally prohibits the promotion of UCIS by
authorised firms. However, an authorised firm may promote UCIS to
customers in certain circumstances where there is an exemption to section
238(1) provided in the Promotion of Collective Investment Schemes
(Exemptions) Order 2001 (“the PCIS Order”) and/or the Conduct of Business
Sourcebook (“COBS”) 4.12.

(2)
The skilled person reviewed all 101 customer files in which UCIS were
promoted by Specialist Solutions to customers during the relevant period to
determine whether the promotions complied with the relevant legislation and
regulations. The skilled person found that Specialist Solutions promoted UCIS
to all 101 customers without first adequately assessing whether the customer
was eligible to receive such promotions pursuant to an exemption contained in
the PCIS Order and/or COBS 4.12. The skilled person found that, for 55 of
those 101 customers, a relevant exemption to section 238 of the Act could
have potentially applied (for example, because a customer was a high net
worth individual) but for 46 customers out of 101, there was no applicable
exemption. The Firm failed to demonstrate that the exemptions were
applicable to the respective customers.

4.9.
Failure to implement and maintain adequate compliance procedures

(1)
Specialist Solutions’ internal compliance procedures did not refer specifically
to UCIS or contain any guidance or procedure specific to the promotion of
UCIS. The Firm’s Compliance Plan for the relevant period was high level and
did not detail any procedures for the promotion of UCIS.

(2)
During the relevant period, all suitability reports were checked by Specialist
Solutions’ internal compliance function. In addition, from June 2009
(following discussions with the FSA), Specialist Solutions sent 10% of its
customer files to the compliance consultant for review. Despite this, the
individual advisers’ failure to assess whether UCIS could be promoted to
customers pursuant to the relevant legislation was not identified.

4.10. Failure to implement and maintain an adequate training and competence programme

(1)
During the relevant period, Specialist Solutions’ training and competence
scheme did not include any specific training tailored to UCIS business. The
firm’s advisers attended some presentations from UCIS fund managers, but

advisers were not tested to assess their understanding of the funds’ nature,
structure or risk profile prior to promoting UCIS.

(2)
During the UCIS Project visit, the FSA interviewed a customer adviser who
had sold UCIS to customers since 2008 and found that he was not familiar
with the regulations governing or the risks associated with UCIS. This was
indicative of the Firm’s failure to provide adequate training for advisers in
relation to the promotion of UCIS.

4.11. Failure to undertake adequate due diligence

(1)
Specialist Solutions’ due diligence on the three UCIS funds it promoted
included receiving presentations from those funds and reviewing the product
literature produced by the funds. The due diligence was inadequate in that the
promotional literature provided by each of the UCIS promoted by Specialist
Solutions specifically referred to the funds being UCIS and to there being
provisions in the Act which restricted the promotion of UCIS to certain
categories of investors. Specialist Solutions did not appreciate that, as UCIS,
the funds were subject to a particular regulatory regime.

4.12. Specialist Solutions has accepted in correspondence with the FSA that “many of [our]
systems and controls were somewhat inadequate in relation to the advice and
promotion of Unregulated Collective Investment Schemes” and that “[we] didn’t have
a clear understanding of the financial promotion of UCIS”.

4.13. Specialist Solutions breached Principle 9 in that it did not take reasonable care to
ensure the suitability of its advice to customers.

4.14. The skilled person conducted a detailed review of 20 customer files in which
Specialist Solutions had recommended to its customers that they invest in UCIS. Of
these 20 customer files, exemptions to the section 238 restriction could have been
applied to 13 customers. The skilled person found that, of the 20 files, only three files
demonstrated suitable advice, nine files demonstrated unsuitable advice and in the
remaining eight files it could not be determined whether the advice was suitable (i.e.
because the documentation on the files was not sufficient).

4.15. The basis for determining the advice to be unsuitable in most cases was the
inconsistency between the customer’s stated attitude to risk, where this was recorded
as being low/medium, and the risk profile of the UCIS investment, coupled with the
fact that in some cases a significant proportion of the customer’s investment portfolio
was transferred to a UCIS. For example, Specialist Solutions advised a customer
aged 60 to invest 35% of his portfolio in a UCIS by transferring funds from his
existing pension plan incurring a 4% penalty charge, despite his attitude to risk being
recorded as low/medium.

5.
ANALYSIS OF BREACHES

5.1.
As a result of the facts and matters set out in paragraphs 4.7 to 4.15 above, the FSA
considers that Specialist Solutions did not take reasonable care to organise and control

its affairs responsibly and effectively, with adequate risk management systems, in
breach of Principle 3, and did not take reasonable care to ensure the suitability of its
advice to customers to invest in UCIS, in breach of Principle 9.

6.
ANALYSIS OF PROPOSED SANCTION

6.1.
The FSA’s policy on imposing a financial penalty is set out in Chapter 6 of the
Decision Procedures and Penalties Manual (“DEPP”), which is part of the FSA
Handbook. In addition, the FSA has had regard to Chapter 7 of the Enforcement
Guide (“EG”).

6.2.
The principal purpose of imposing a financial penalty is to promote high standards of
conduct by deterring persons who have committed regulatory breaches from
committing further breaches, helping to deter others from committing similar
breaches and demonstrating generally the benefits of compliant behaviour.

Financial penalty

6.3.
In determining whether a financial penalty, or a public censure, is appropriate, the
FSA is required to consider all the relevant circumstances of the case. Applying the
criteria set out in DEPP 6.2.1 and 6.4.2, the FSA considers that a financial penalty
would be an appropriate sanction in this case, given the serious nature of the breaches,
the risks created for customers of Specialist Solutions and the need to send out a
strong message of deterrence to others.

6.4.
DEPP 6.5.2G sets out a non-exhaustive list of factors which may be relevant to
determining the appropriate level of financial penalty. The FSA considers that the
following factors are particularly relevant in this case.

Deterrence (DEPP 6.5.2(1))

6.5.
Imposing a financial penalty will deter firms which have committed breaches from
committing further breaches and deter others from committing similar breaches, as
well as demonstrating generally the benefits of compliant behaviour.

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, the duration and frequency of the breaches, and whether the breaches
revealed serious failings in Specialist Solutions’ systems and controls. The FSA
considers the breaches are serious as they:

(1)
affected a significant number of retail customers who invested significant
sums in UCIS; and

(2)
arise from a fundamental lack of awareness of the regulatory regime governing
the promotion of UCIS.

6.7.
In determining the appropriate sanction, the FSA has had regard to the following
mitigating factors:

7


(1)
UCIS were promoted to a small proportion (approximately 3%) of the Firm’s
customers.

(2)
Approximately 94% of the turnover derived from the promotion of UCIS was
produced by two individuals who are no longer at the Firm (having left in May
and November 2010).

(3)
The FSA acknowledges that Specialist Solutions did carry out some
investigations into the assets underlying the UCIS funds into which it advised
customers to invest and the skilled person found that the UCIS chosen by
Specialist Solutions were relatively “mainstream” rather than “exotic” in terms
of the underlying investment(s).

(4)
The Firm retained an independent compliance consultant to conduct quarterly
client file reviews. From June 2009, Specialist Solutions sent 10% of its
customer files to the compliance consultant for review. These included three
UCIS files. On reviewing these files, the compliance consultant did not
identify that UCIS had been promoted to retail customers without
consideration of the relevant regulations. (However, the fact that the
consultant failed to identify that UCIS potentially had been incorrectly
recommended does not absolve Specialist Solutions from failing to make itself
aware of and ensure compliance with the relevant regulation.)

The extent to which the breach was deliberate or reckless (DEPP 6.5.2(3))

6.8.
The FSA has found no evidence that the breaches were deliberate or reckless.

Conduct following the breach (DEPP 6.5.2(8))

6.9.
The FSA has taken into account that Specialist Solutions has cooperated fully with the
FSA’s investigations and has implemented, and continues to implement, changes to
its procedures to ensure that similar issues do not arise in the future. It has conducted
a past business review and has agreed, in principle, to undertake a customer contact
exercise in relation to those customers who were sold UCIS in breach of the relevant
regulations. The FSA also notes that the Firm has replaced the independent
compliance consultant referred to above.

6.10. Specialist Solutions voluntarily applied to the FSA for an immediate change to its
permissions. As a result, the Firm has not promoted or given any advice on UCIS
since June 2010.

Disciplinary record and compliance history (DEPP 6.5.2(9))

6.11. Specialist Solutions has not been the subject of any previous FSA investigations.

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 on other authorised firms for similar behaviour.

6.13. Having regard to all the circumstances, the FSA considers the appropriate level of
financial penalty is £50,000 before discount for early settlement.

7.
DECISION MAKER

7.1.
The decision which gave rise to the obligation to give this notice was made on behalf
of the FSA by the Settlement Decision Makers.

8.
IMPORTANT

8.1.
This Final Notice is given to you in accordance with section 390 of the Act.

Manner of and time for payment

8.2.
The financial penalty must be paid in accordance with the terms agreed in the
settlement agreement.

If the financial penalty is not paid

8.3.
If all or any of the financial penalty is not paid in accordance with the terms of the
settlement agreement, the FSA may recover the outstanding amount as a debt owed by
you to the FSA.

8.4.
Sections 391(4), 391(6) and 391(7) apply to the publication of information about the
matter to which this notice relates. Under those provisions, the FSA must publish such
information about the matter to which this notice relates as the FSA considers
appropriate. The information may be published in such manner as the FSA considers
appropriate. However, the FSA may not publish information if such publication
would, in the opinion of the FSA, be unfair to you or prejudicial to the interests of
consumers.

FSA contacts

8.5.
For more information about this matter, you should contact Anna Hynes at the FSA
(direct line: 020 7066 9464 /fax: 020 7066 9465).

Tom Spender
FSA Enforcement and Financial Crime Division

ANNEX A

RELEVANT STATUTORY PROVISIONS, REGULATORY REQUIREMENTS AND
FSA GUIDANCE

1.
Statutory provisions

1.1.
The FSA’s statutory objectives are set out in section 2(2) of the Act. In this case, the
most relevant statutory objective is the protection of consumers.

1.2.
Section 138 of the Act provides that the FSA may make such rules applying to
authorised persons as appear to it to be necessary or expedient for the purpose of
protecting consumers.

1.3.
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 imposed on him by or under the Act.

1.4.
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. Section
238(4) provides that certain authorised schemes are exempted from this prohibition.

1.5.
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 collective investment scheme (“CIS”) falls within the narrow definition of a
regulated CIS1 , it will be a UCIS.

1.6.
The PCIS Order and COBS 4.12 provide for circumstances when UCIS may be
promoted to customers without the promoter falling foul of section 238 of the Act.
There are a number of exemptions that may be applied to the section 238 restriction.
For example, under the PCIS Order, UCIS may be promoted to persons defined as
‘certified high net worth investors’ and ‘sophisticated investors’.

1.7.
Section 4.12 of COBS defines eight categories of persons to whom an authorised
person may promote UCIS. These include:

(1)
Category 2: a person for whom a firm has taken reasonable steps to ensure that
investment in a collective investment scheme is suitable and who is an
“established” or “newly accepted” client of the firm; and

(2)
Category 8: a person to whom the firm has undertaken an adequate assessment
of expertise, experience and knowledge and to whom the firm has provided
certain written warnings.

1 A CIS is defined in the Handbook Glossary as follows: (a) an investment company with variable capital; or (b)
an authorised unit trust scheme: or (c) a recognised scheme, (ie a CIS constituted overseas and formally
recognised under sections 264, 270 or 272 of the Financial Services and Markets Act 2000); whether or not the
units are held within an ISA or personal pension scheme.

1.8.
An authorised firm must take reasonable steps to ensure that its personal
recommendations to customers are suitable in compliance with the rules in Chapter 9
of COBS and Principle 9.

2.
Handbook provisions

2.1.
In exercising its power to impose a financial penalty, the FSA must have regard to
relevant provisions in the FSA Handbook of rules and guidance (“the FSA
Handbook”). The main provisions relevant to the action specified above are set out
below.

Principles for Businesses

2.2.
Under the FSA’s rule-making powers as referred to above, the FSA has published in
the FSA Handbook the Principles for Business (“Principles”) which apply either in
whole, or in part, to all authorised persons.

2.3.
The Principles are a general statement of the fundamental obligations of firms under
the regulatory system and reflect the FSA’s regulatory objectives. A firm may be
liable to a disciplinary sanction where it is in breach of the Principles.

2.4.
The Principles relevant to this matter are:

(1)
Principle 3 (management and control) which states that “a firm must take
reasonable care to organise and control its affairs responsibly and effectively,
with adequate risk management systems.”

(2)
Principle 9 (customers: relationships of trust) which 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.”

3.
Other relevant regulatory provisions

Enforcement Guide (“EG”)

3.1.
The FSA’s policy on exercising its enforcement power is set out in the EG, which
came into effect on 28 August 2007.

Decision Procedure and Penalties Manual (“DEPP”)

3.2.
Guidance on the imposition and amount of penalties is set out in Chapter 6 of DEPP.

3.3.
DEPP 6.1.2G provides that the principal purpose of imposing a financial penalty is to
promote high standards of regulatory and/or market 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. Financial penalties are tools that the FSA may employ to
help it to achieve its regulatory objectives.

3.4.
DEPP 6.4.1G provides that the FSA will consider all the relevant circumstances of the
case when deciding whether to impose a penalty or issue a public censure.

3.5.
DEPP 6.5.1G(1) provides that the FSA will consider all the relevant circumstances of
a case when it determines the level of financial penalty (if any) that is appropriate and
in proportion to the breach concerned.

3.6.
DEPP 6.5.2 sets out a non-exhaustive list of factors that may be relevant to
determining the appropriate level of financial penalty to be imposed on a person under
the Act. The following factors are relevant to this case:

Deterrence: DEPP 6.5.2G(1)

3.7.
When determining the appropriate level of financial penalty, the FSA will have regard
to the principal purpose for which it imposes sanctions, namely to promote high
standards of regulatory and/or market conduct by deterring persons who have
committed breaches from committing further breaches and helping to deter other
persons from committing similar breaches, as well as demonstrating generally the
benefits of compliant business.

The nature, seriousness and impact of the breach in question: DEPP 6.5.2G(2)

3.8.
The FSA will consider the seriousness of the breach in relation to the nature of the
rule, requirement or provision breached, which can include considerations such as the
duration and frequency of the breach, whether the breach revealed serious or systemic
weaknesses in the person’s procedures or of the management systems or internal
controls relating to all or part of a person’s business, the nature and extent of any
financial crime facilitated, occasioned or otherwise attributable to the breach and the
loss or risk of loss caused to consumers, investors or other market users.

The extent to which the breach was deliberate or reckless: DEPP 6.5.2G(3)

3.9.
The FSA will regard as more serious a breach which is deliberately or recklessly
committed, giving consideration to factors such as whether the person has given no
apparent consideration to the consequences of the behaviour that constitutes the
breach. If the FSA decides that the breach was deliberate or reckless, it is more likely
to impose a higher penalty on a person than would otherwise be the case.

Whether the person on whom the penalty is to be imposed is an individual: DEPP
6.5.2G(4)

3.10. When determining the amount of penalty to be imposed on an individual, the FSA
will take into account that individuals will not always have the resources of a body
corporate, that enforcement action may have a greater impact on an individual, and

further, that it may be possible to achieve effective deterrence by imposing a smaller
penalty on an individual than on a body corporate. The FSA will also consider
whether the status, position and/or responsibilities of the individual are such as to
make a breach committed by the individual more serious and whether the penalty
should therefore be set at a higher level.

The size, financial resources and other circumstances of the person on whom the
penalty is to be imposed: DEPP 6.5.2G(5)

3.11. The FSA may take into account whether there is verifiable evidence of serious
financial hardship or financial difficulties if the person were to pay the level of
penalty appropriate for the particular breach.

Conduct following the breach: DEPP 6.5.2G(8)

3.12. The FSA may take into account the degree of co-operation the person showed during
the investigation of the breach by the FSA.

Other action taken by the FSA (or a previous regulator): DEPP 6.5.2G(10)

3.13. The FSA seeks to apply a consistent approach to determining the appropriate level of
penalty. The FSA may take into account previous decisions made in relation to
similar misconduct.

FSA guidance and other published materials: DEPP 6.5.2G(12)

3.14. The FSA will consider the nature and accessibility of the guidance or other published
materials when deciding whether they are relevant to the level of penalty and, if they
are, what weight to give them in relation to other relevant factors.