FINAL NOTICE

To:
Terence John Harrop
To: Principal Mortgage Services Limited


IRN:
TJH01104
FRN: 303168




1.
ACTION

1.1.
For the reasons given in this notice, the FSA hereby makes an order:

(1)
withdrawing Mr Harrop’s approval to perform controlled functions at PMSL
pursuant to section 63 of the Act; and

(2)
prohibiting Mr Harrop from performing any function in relation to any
regulated activity carried out by an authorised person, exempt person or
exempt professional firm pursuant to section 56 of the Act because he is not
currently a fit and proper person in terms of his competence and capability.

1.2.
The order takes effect from the date of this Final Notice.

2.
SUMMARY OF REASONS

2.1.
Mr Harrop was the chief executive and majority shareholder of PMSL during the
relevant period. Prior to its liquidation, PMSL was a small mortgage intermediary
based in the West Midlands. During the relevant period, it advised approximately 738
customers to take out interest only mortgages together with an unregulated mortgage

accelerator plan it had developed called the Flexible Repayment Plan (FRP). The FRP
was operated by PMSL’s sister company, FRL. PMSL charged customers an up front
fee of £995 for the FRP, in addition to a broking fee of around 1% of the mortgage,
and FRL charged an ongoing annual administration fee of £60.

2.2.
The FRP operated as a means by which customers could make capital repayments on
their interest only mortgages. Customers would pay the monthly interest on the
mortgage directly to the lender, and pay an additional amount into their FRP. These
additional monthly payments would be collected and held in an account operated by
FRL, and would be transferred to the customer’s lender at annual intervals.

2.3.
Although the FRP was an unregulated product, the advice PMSL gave customers to
take out an interest only mortgage with the FRP was a regulated activity, because the
advice given about the FRP was inextricably linked to advice to take out regulated
interest only mortgages. The FSA considers that the FRP was the main reason PMSL
recommended customers to take interest only mortgages.

2.4.
PMSL provided marketing material to customers purporting to demonstrate the
benefits of taking an interest only mortgage with the FRP, and individual personalised
illustrations purporting to show the savings the customer would make by taking out an
interest only mortgage with FRP, as compared to their current mortgage arrangement,
or a repayment mortgage.

Mr Harrop’s lack of fitness and propriety

2.5.
In summary, Mr Harrop has demonstrated that he is not fit and proper, in terms of his
competence and capability, to perform any function, in the following key ways:

(1)
he failed to ensure that PMSL paid due regard to customers’ interests in
recommending interest only mortgages with the FRP to customers, regardless
of whether that arrangement was the most appropriate or cost effective for the
customer;

(2)
he failed to ensure that presentations and illustrations purporting to compare
the recommended package with repayment mortgages were clear, fair and not
misleading;

(3)
he failed to comply with his regulatory responsibilities, by failing to cooperate
fully with the FSA and by failing, to date, to repay his director’s loan to PMSL
ultimately to the detriment of consumers; and

(4)
he failed to ensure customers’ monies were adequately identified and
protected, in his capacity as director of FRL.

2.6.
Mr Harrop was the majority shareholder and chief executive (controlled function 3) of
PMSL during the relevant period. In practice, Mr Harrop was heavily involved in the
day to day business of PMSL. He was aware of the nature of the FRP illustrations
sent to customers and that PMSL recommended interest only mortgages with the FRP
to the majority of its customers.

2.7.
The FSA considers that customers are likely to have suffered loss as a result of taking
out interest only mortgages with the FRP, instead of repayment mortgages or interest
only mortgages without the FRP. As Mr Harrop failed to ensure that PMSL conducted
the review of PMSL’s past sales, having agreed to do so in 2010, and as PMSL has
since gone into liquidation, there are no figures available as to the extent of the
customer detriment caused by PMSL’s advice.

2.8.
Mr Harrop’s conduct demonstrates his lack of fitness and propriety in terms of his
competence and capability. Through his conduct, Mr Harrop has demonstrated an
incapability to perform controlled functions adequately at PMSL.

2.9.
The FSA has concluded that the nature and seriousness of Mr Harrop’s misconduct
warrant the withdrawal of Mr Harrop’s controlled functions CF3 (Chief executive),
CF28 (Systems and Controls) and insurance mediation, and his prohibition from
performing any function in relation to any regulated activity on the grounds of his
lack of competence and capability and because of the risk he poses.

2.10. This action supports the FSA’s statutory objective of securing the appropriate degree
of protection for consumers.

3.
DEFINITIONS

3.1.
The definitions below are used in this Final Notice.

the “Act” means the Financial Services and Markets Act 2000

“APER” means the Statements of Principle and the Code of Practice for Approved
Persons as contained in the FSA Handbook

“CeMAP” means Certificate of Mortgage Advice and Practice

“DEPP” means the FSA’s Decision Procedures and Penalties manual

“EG” means the FSA’s Enforcement Guide

“ENF” means the FSA’s Enforcement Manual

“FRL” means Flexible Repayment Limited

the “FRP” means the Flexible Repayment Plan

the “FSA” means the Financial Services Authority

“PMSL” means Principal Mortgage Services Limited

the “relevant period” means 31 October 2004 to 19 November 2010

“Statement of Principle” means one of the FSA’s Statements of Principle for
Approved Persons as set out in APER

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

4.
FACTS AND MATTERS

PMSL’s business and sales process

4.1.
PMSL was a mortgage intermediary which operated from offices in Worcester
between the date of its FSA authorisation on 31 October 2004 and the date it went
into liquidation on 19 November 2010.

4.2.
During the relevant period, PMSL recommended a mortgage accelerator plan (the
FRP) to its customers. The FRP was marketed as a means by which customers could
repay the principal amount of their interest only mortgages. The FRP was
administered by an unauthorised firm (FRL), which was also controlled by Mr Harrop
and which shared offices with PMSL.

4.3.
PMSL advised customers to take out an interest only mortgage and the FRP. The FRP
involved customers making interest payments directly to their mortgagee and paying
an additional monthly amount to FRL. FRL would accumulate the customers’
payments in a low interest current account, then transfer the accumulated funds to the
customers’ mortgagees at selected intervals to reduce the capital balance.

4.4.
PMSL charged customers an initial fee of £995 (regardless of the amount of the
mortgage) in addition to the broking fee of around 1% of the mortgage. Customers
also paid an ongoing annual fee of £60 to FRL to administer the FRP.

4.5.
PMSL sourced customers through a network of appointed representatives, who were
not authorised to give advice to customers. The appointed representatives met with
customers and undertook fact finds. The fact finds were passed to office staff
employed by PMSL, one of whom at any relevant time during the relevant period was
CeMAP qualified. The office staff generated a recommended regulated mortgage and
an illustration purporting to show the benefits of an interest only mortgage with the
FRP. The recommendation was then made to the customer by the appointed
representative.

4.6.
PMSL provided a brochure for its appointed representatives to distribute to and
discuss with customers at their first meeting, called “Don’t know which way to go for
a better mortgage deal?” The brochure lists the purported benefits of the FRP as
follows:

“Your mortgage will be repaid faster than with any other product
we are aware of.

A threefold savings benefit:

Reduction in monthly outlay.

Reduction in mortgage term.

Interest savings over the mortgage term.”

4.7.
The brochure suggests that, if customers take out the FRP, they will benefit from each
of the “threefold savings” listed. In fact, of 29 customer files reviewed by the FSA
where the customer agreed to take out the FRP, only one personalised illustration
demonstrated all three savings being achieved by the customer taking out an interest
only mortgage with the FRP for the full term of the plan. Only six personalised
illustrations demonstrated all three savings being achieved by the customer in year
one of the FRP. In addition, the brochure fails to highlight clearly that the stated
reduced monthly outlay was for the first year only and that indexation meant the
repayments would increase significantly over the term of the mortgage.

4.8.
The appointed representatives also presented a brochure entitled “Working together to
save you money” at their first meeting with customers. The brochure sets out an
illustration entitled “How it works”. The illustration shows the customer paying an
amount of interest per month to the mortgagee, which decreases year on year, and an
amount of capital repayment per month, which increases to the same extent the
interest amount has decreased, maintaining the same net monthly payment throughout
the term of the mortgage. The illustration suggests that, as more capital is paid off,
the interest amount on the remaining capital decreases, and the repayment element
can increase to compensate for that.

4.9.
In practice, however, the FRP did not work like this. In all of the customer files
reviewed by the FSA, the amount by which the interest reduced each year was far
outweighed by the increase to the capital repayment element needed in order to pay
off the mortgage within the term. This resulted in the overall monthly outlay for
customers increasing significantly over the term of the mortgage, such that in 20 of 29
customer files reviewed where the customer took the FRP, the monthly outlay more
than doubled over the term of the mortgage.

4.10. Following the appointed representatives’ first meeting with the customer, PMSL
would generate a personalised illustration for the customer purporting to show the
benefits of taking an interest only mortgage with the FRP, as compared to the
customer’s current situation or, where the customer was not remortgaging, a standard
repayment mortgage. The illustrations contained in the 29 FRP files reviewed by the
FSA gave a misleading impression of the benefits of taking out an interest only
mortgage with the FRP.

4.11. The illustrations were misleading as they did not compare like with like. They did not
compare the best available repayment mortgage with the best available interest only
mortgage plus FRP. The interest rate on the repayment mortgage used as a
comparator was generally higher than for the interest only mortgage, accounting for
much of the interest saving. Additional savings were also often achieved by
consolidating an expensive unsecured loan with the proposed new mortgage. The
illustrations stated the purported interest savings generated by the interest only
mortgage with FRP in bold, for example: “INTEREST SAVINGS £X”. This
suggested that the savings were due to the mortgage arrangement recommended by
PMSL but, in fact, the savings were due to other factors and could have been achieved
without incurring the cost of the FRP.

4.12. The illustrations also stated in bold the monthly savings the customer would make by
taking an interest only mortgage with the FRP, for example: “MONTHLY OUTLAY
REDUCED BY £X”. PMSL did not clearly highlight that the reduction was only for
the first year of the mortgage term and that, over the course of the term, the monthly
outlay must increase significantly year on year in order for the mortgage to be paid off
in full, meaning that, in fact, the monthly outlay was only reduced for the initial part
of the term. The illustrations stated that the monthly repayments were subject to 3.5%
indexation, and the increases were shown in a repayment schedule on the second page
of the illustration. However, the evidence from customers the FSA spoke to suggests
that the impact of this was not clearly explained to customers, many of whom did not
appreciate that the reduction presented was only for the first year of the term.

4.13. PMSL failed to disclose clearly and fairly the fees being charged to customers for the
FRP. There were two costs associated with the FRP: the £995 set up fee and the £60
per annum management fee. These fees were disclosed to customers across a series
of separate documents, some of which mentioned one or the other of these fees, and
some of which mentioned neither. For example, customers might have expected all
the costs associated with the mortgage to be listed in the Key Facts Illustration.
Whilst this document listed PMSL’s broking fee, the mortgagee’s fee, the solicitor’s
and valuer’s fees, it did not mention the £995 FRP fee or the £60 annual management
fee.

4.14. PMSL did not disclose to customers before the point of sale that their monies would
be collected and held by a firm which was not FSA authorised. PMSL’s initial
disclosure document stated that PMSL was FSA authorised, implying rights of
recourse to the FOS and the FSCS. The documentation did not clearly state such
rights did not apply in respect of services carried out by FRL.

4.15. In addition, evidence gathered by the FSA suggests that PMSL told its appointed
representatives that the customer monies held at FRL would be ring fenced, and
therefore protected, and that appointed representatives passed this information on to
customers. However, the customer funds held at FRL were not adequately ring
fenced and customers were treated as unsecured creditors on FRL’s liquidation in
November 2010. FRL could not repay customers their monies in full on its
liquidation as the funds had not been adequately ring fenced: they had been placed
into a single client call account. Some customers’ FRP balances were negative, as
they had not kept up payments into the FRP but had been charged the £60 annual
management fee, and some customers’ balances were in credit. Those customers who
had a positive balance on their FRP account effectively made up the shortfall caused
by the customers with negative balances on liquidation. In addition, on liquidation
PMSL owed approximately £30,000 to FRL, indicating that PMSL’s and FRL’s funds
had been mixed during the course of business. FRL should not have mixed
customers’ monies held in its account with PMSL’s business funds.

Mr Harrop’s role

4.16. During the relevant period, Mr Harrop was the majority shareholder and controlling
mind of PMSL. He held the significant influence function CF3 (chief executive)
throughout the relevant period of the investigation into PMSL. He also held
controlled functions CF8 (apportionment and oversight), CF28 (systems and controls)

7


and responsibility for insurance mediation for all or most of the relevant period. He
was therefore required at all times to take reasonable steps to ensure that PMSL
complied with regulatory requirements and standards.

4.17. In practice, Mr Harrop was heavily involved in the day to day business of PMSL.
Specifically, Mr Harrop knew which mortgage products were being recommended to
customers and had a detailed knowledge of all aspects of the business. He was
familiar with the brochures and illustrations produced by PMSL to promote the FRP.

4.18. The FSA considers that Mr Harrop is responsible for the advice PMSL advisers gave
to customers, as a significant influence controlled function holder and someone who
had a detailed knowledge of all aspects of the business. Mr Harrop knew how the
FRP was presented to customers and knew that PMSL recommended interest only
mortgages with the FRP to the majority of its customers.

5.
FAILINGS

5.1.
The regulatory provisions relevant to this Final Notice are referred to in the Annex.

Mr Harrop’s fitness and propriety

Mr Harrop’s competence and capability as chief executive of PMSL

5.2.
Through his conduct, Mr Harrop has demonstrated a serious incapability to perform
significant influence functions adequately at PMSL. Mr Harrop ought to have made
sure PMSL had due regard to customers’ interests, treated customers fairly and
provided information to customers in a way that was clear, fair and not misleading,
but he failed to do so.

5.3.
Mr Harrop has also demonstrated that he lacks competence and capability to perform
the customer function or to act as a mortgage broker, as his failings relate to mis-
selling mortgages to customers.

5.4.
Mr Harrop failed to ensure that PMSL had due regard to customers’ interests or
treated customers fairly, in that PMSL:

(1)
promoted the FRP to customers at the first meeting with them, before
assessing whether taking out an interest only mortgage with the FRP was
suitable for their particular circumstances;

(2)
recommended interest only mortgages with the FRP to customers who could
have achieved the benefits purportedly associated with the FRP directly from
their lender. Most customers could have made capital repayments directly to
the mortgagee without incurring any fees or charges, thus saving the £995
initial fee and £60 annual administration charge for the FRP. There is no
evidence that lenders required customers to have the FRP, or a similar
repayment scheme, in place as a condition of the mortgage. PMSL did not
explain to customers that they could overpay their mortgages directly to the
lender, without incurring the costs of the FRP; and

(3)
he failed to ensure customers’ monies were adequately identified and
protected, in his capacity as director of FRL.

5.5.
The evidence suggests that PMSL’s business model was to sell the FRP regardless of
whether the customer would genuinely benefit from taking an interest only mortgage
with the FRP. As chief executive of PMSL, Mr Harrop failed to have due regard to
the interests of its customers and treat them fairly. Mr Harrop, as a director of FRL,
also failed to identify risks to customers’ money held by FRL, namely that the funds
of customers who had a positive balance on their FRP made up the shortfall for those
with negative balances on the liquidation of FRL.

5.6.
In addition, Mr Harrop failed to ensure that the information and recommendations
PMSL gave to customers were clear, fair and not misleading. Specifically:

(1)
The illustrations provided to customers purporting to compare the cost of the
customer’s current mortgage with PMSL’s recommended interest only
mortgage and FRP showed the customer would benefit from a reduced
monthly payment, overall savings on the interest paid on the loan and/or a
reduction to the mortgage term, if they took out the interest only mortgage
with FRP. However, the illustrations did not compare like with like. The
interest savings were, in fact, due to the lower interest rate on the new
mortgage compared to the customer’s current mortgage and/or consolidating a
high interest loan with the new mortgage. The FRP in itself could not generate
any real savings for the customer, but this was not apparent in the illustrations
provided to PMSL’s customers.

(2)
The FRP was presented to customers verbally by PMSL as the “best way to
repay” a mortgage. PMSL told customers the FRP was “cheaper than a
standard repayment mortgage” and would repay their mortgage more quickly.
These statements were unfounded.

(3)
PMSL did not adequately explain to customers why taking an interest only
mortgage with the FRP was purportedly more beneficial than a repayment
mortgage or an interest only mortgage without the FRP. PMSL could not
demonstrate from its records that customers were told that (a) they could
overpay their mortgage directly to the mortgagee without the FRP (which
would have been an acceptable method of repayment as far as lenders were
concerned), or (b) overpaying an interest only mortgage directly to the lender,
or taking out a repayment mortgage, may offer better value for money as
customers would not have to pay the FRP fee and annual administration
charge.

(4)
The illustrations purported to show reduced monthly repayments for the
customer, but did not highlight clearly that the stated reduction was for the
first year only and that indexation meant the repayments would need to
increase significantly over the term of the mortgage in order to repay the
mortgage within the term.

(5)
The fees charged to customers for the FRP were not clearly disclosed, in that
they were disclosed in some documents but not in others, and/or there were
inconsistencies in the fees and charges quoted to customers.

(6)
The documents provided to customers stated that PMSL was an FSA
authorised firm, implying the attendant rights of recourse to the FOS and
FSCS, but did not highlight to customers that an unauthorised firm (FRL)
would be holding their monies. The documentation did not clearly state such
rights did not apply in respect of services carried out by FRL.

(7)
PMSL misrepresented to customers that their funds would be ring fenced, but
failed to make sure this was the case. As a result, customers lost 45% of their
funds held in the FRP when PMSL and FRL went into liquidation in
November 2010.

5.7.
Mr Harrop was the majority shareholder and chief executive of PMSL. He had a
hands-on role in the mortgage advice process and had knowledge of PMSL’s
mortgage recommendations and the nature of the FRP illustrations. As such, Mr
Harrop is responsible for the failings at PMSL identified above. Specifically, he
failed to ensure that PMSL paid due regard to customers’ interests in recommending
interest only mortgages with the FRP to all customers. He failed to ensure that
presentations and illustrations purporting to compare the recommended package with
repayment mortgages were clear, fair and not misleading.

5.8.
Mr Harrop ought to have known that advising customers to take out an interest only
mortgage with the FRP was regulated advice. Accordingly, he ought to have ensured
that PMSL complied with the relevant rules and, specifically, paid due regard to
customers’ interests and that advice given to customers was appropriate and presented
in a clear, fair and not misleading way. He failed to do so.

5.9.
Mr Harrop did not exercise reasonable care assessing the risks of PMSL’s sales
process, which was to promote interest only mortgages with the FRP to all customers
at the first meeting and to restrict product research to interest only mortgages. He did
not take reasonable steps to ensure the mortgage illustrations provided by PMSL to
customers were clear, fair and not misleading. As such, his conduct was below that
which would be reasonable in all the circumstances.

Pressure selling

5.10. In June 2010, the FSA received a complaint from a customer stating that PMSL had
told him that lenders would not look kindly on his mortgage application unless the
FRP was in place. When the customer subsequently sought to cancel the FRP
application, PMSL, through its appointed representative, told the customer that the
lender had confirmed that the mortgage offer would be withdrawn if the FRP was
cancelled. This was not true.

5.11. On being given this information by PMSL’s appointed representative, the customer
asked to speak with Mr Harrop. The customer stated in his complaint that Mr Harrop
subsequently telephoned and told him that, if the FRP were to be cancelled, Mr
Harrop would have to tell the lender’s underwriters and there was a “distinct

possibility” that they would cancel the customer’s mortgage. The customer had
contacted the lender directly and found this not to be the case.

5.12. The FSA has found no evidence to suggest that such pressure selling was widespread
at PMSL during the relevant period. It appears Mr Harrop believed, albeit wrongly,
that lenders required a repayment vehicle such as the FRP to be in place before they
would agree to provide interest only mortgages to customers.

Mr Harrop’s outstanding director’s loan

5.13. A further concern is that Mr Harrop has failed to repay an outstanding director’s loan
to PMSL. He has thus deprived PMSL’s creditors of funds which should rightfully
form part of the liquidation. One of PMSL’s creditors is FRL, whose creditors, in
turn, are customers of PMSL who deposited funds with FRL as part of the FRP. Mr
Harrop’s failure to repay his director’s loan has, therefore, caused detriment to
customers.

Past business review

5.14. Mr Harrop agreed to PMSL conducting a past business review following the FSA’s
supervisory visit on 24 August 2010. During the period in which the review of past
business should have been undertaken, it appears that PMSL began experiencing
financial difficulties, which led to its liquidation on 19 November 2010. Mr Harrop
then terminated all contact with FSA Supervision and did not review PMSL’s past
business to identify customers who may have suffered loss.

Interaction with the FSA

5.15. Mr Harrop’s interaction with the FSA has, at times, demonstrated a failure to comply
with his regulatory responsibilities. Specifically:

(1)
The FSA would have reasonably expected notice of PMSL’s financial
difficulties and subsequent liquidation in November 2010 as it is a matter
having serious regulatory impact, in accordance with SUP 15.3.1R. However,
Mr Harrop failed to notify the FSA of these circumstances. Mr Harrop states
that he had received advice that he should have no further involvement with
PMSL, which he took to include any contact with the FSA about PMSL’s
affairs.

(2)
Mr Harrop has, at times, failed to cooperate fully with the FSA enforcement
investigation. He failed to comply with requirements to provide certain
information within his knowledge and to attend a compelled interview. Mr
Harrop has suffered from ill health, but the FSA does not believe this should
have prevented him from providing some of the information required, for
example, his current address.

Conclusion about Mr Harrop’s fitness and propriety

5.16. Mr Harrop has demonstrated by his conduct that he is not fit and proper, in terms of
his competence and capability, to carry out any functions in relation to any regulated

activity. He failed, as an approved person at PMSL, to ensure that PMSL complied
with relevant regulatory standards and treated its customers fairly.

6.
SANCTION

Withdrawal of approval and prohibition

6.1.
The FSA considers it appropriate and proportionate in all the circumstances to
withdraw the approval given to Mr Harrop to perform the controlled functions CF3,
CF28 and insurance mediation at PMSL because he is not competent or capable of
performing these functions. The FSA also considers Mr Harrop should be prohibited
from performing any function in relation to any regulated activity carried out by an
authorised person, exempt person or exempt professional firm because he is not a fit
and proper person in terms of competence and capability.

6.2.
The FSA has had regard to the guidance in Chapter 9 of EG in proposing that Mr
Harrop’s approval be withdrawn and that he be prohibited from performing any
function in relation to any regulated activity. The relevant provisions of EG are set
out in the Annex of this Notice.

6.3.
Given the nature and seriousness of the failures outlined above, the FSA has
concluded that Mr Harrop’s conduct demonstrated a lack of competence and
capability such that he is not fit and proper to perform any function in relation to
regulated activities carried on at any authorised person, exempt person or exempt
professional firm. In particular, Mr Harrop demonstrated a lack of regard for the
standards and requirements of the regulatory system. In the interests of consumer
protection, the FSA deems it appropriate and proportionate in all the circumstances to
withdraw Mr Harrop’s approval and to impose a prohibition order on Mr Harrop in
the terms set out above.

7.
PROCEDURAL MATTERS

Decision maker

7.1.
The decision which gave rise to the obligation to give this Notice was made by the
Settlement Decision Makers.

7.2.
This Final Notice is given under, and in accordance with, section 390 of the Act.

7.3.
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 Mr Harrop or prejudicial to
the interests of consumers.

FSA contacts

7.4.
For more information concerning this matter generally, contact Rachel West at the
FSA (direct line: 020 7066 0142 /fax: 020 7066 0143).

Tom Spender
Project Sponsor
FSA Enforcement and Financial Crime Division

Relevant regulatory provisions

1.
The Act

1.1.
The FSA’s regulatory objectives are set out in section 2(2) of the Act and include 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.
Section 56 of the Act provides that the FSA may make a Prohibition Order if it
appears to the FSA that an individual 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 specific regulated activity, an activity falling within a
specified description or all regulated activities.

1.4.
Section 63 of the Act provides that the FSA may withdraw its approval to carry out a
controlled function if it considers that the person in respect of whom it was given is
not a fit and proper person to perform the function to which the approval relates.

2.
FIT

2.1.
The part 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. FIT is also relevant in
assessing the continuing fitness and propriety of an approved person.

2.2.
FIT 1.3.1G provides that the FSA will have regard to a number of factors when
assessing a person’s fitness and propriety. One of the considerations will be the
person’s competence and capability.

2.3.
As set out in FIT 2.2, in determining a person’s competence and capability, the FSA
will have regard to matters including but not limited to:

(1)
whether the person satisfies the relevant FSA training and competence
requirements in relation to the controlled function the person performs or is
intended to perform; and

(2)
whether the person has demonstrated by experience and training that the
person is able, or will be able if approved, to perform the controlled function.

3.
SUP

3.1.
SUP 15.3.1R provides that a firm must notify the FSA immediately it becomes aware,
or has information which reasonably suggests, that any of the following has occurred,
may have occurred or may occur in the foreseeable future:

(1)
the firm failing to satisfy one or more of the threshold conditions; or

(2)
any matter which could have a significant adverse impact on the firm’s
reputation; or

(3)
any matter which could affect the firm’s ability to continue to provide
adequate services to its customers and which could result in serious detriment
to a customer of the firm; or

(4)
any matter in respect of the firm which could result in serous financial
consequences to the UK financial system or to other firms.

4.
Enforcement Guide

4.1.
The FSA’s policy on exercising its enforcement power is set out in EG, which came
into effect on 28 August 2007. Although the references in the Final Notice are to the
EG, the FSA has also had regard to the appropriate provisions in ENF, which
preceded the EG and applied during part of the relevant period.

4.2.
The FSA’s approach to exercising its powers to make prohibition orders and withdraw
approvals is set out at Chapter 9 of EG.

4.3.
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.

4.4.
EG 9.2 states that the FSA’s effective use of the power under section 63 of the Act to
withdraw approval from an approved person will also help to ensure high standards of
regulatory conduct by preventing an approved person from continuing to perform the
controlled function to which the approval relates if he is not a fit and proper person to
perform that function. Where it considers this is appropriate, the FSA may prohibit
an approved person, in addition to withdrawing their approval.

4.5.
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.

4.6.
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.

4.7.
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 of an approved person in terms of competence and capability as
set out in FIT 2.2;

(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.

4.8.
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.

4.9.
EG 9.23 provides that in appropriate cases the FSA may take other action against an
individual in addition to making a prohibition order and/or withdrawing its approval,
including the use of its power to impose a financial penalty.