FINAL NOTICE

1
ACTION

1.1
For the reasons given in this notice, the Authority hereby:

(1)
publishes a statement of Mr Hughes’ misconduct for failing to comply with

Statement of Principle 7;

(2)
withdraws the approvals granted to Mr Hughes to perform the CF4 (Partner),

CF10 (Compliance oversight) and CF11 (Money Laundering Reporting)

controlled functions at 1 Stop; and

(3)
makes an order prohibiting Mr Hughes from performing any significant

influence function in relation to any regulated activity carried on by any

2

authorised person, exempt person or exempt professional firm. This order

takes effect from 17 April 2014.

1.2
The Authority would have imposed a financial penalty of £393,079 on Mr Hughes

(reduced to £275,100 as Mr Hughes agreed to settle at an early stage of the

Authority’s investigation and therefore qualified for a 30% (stage 1) discount under

the Authority’s executive settlement procedures). However, the Authority

recognises that there may be significant liability for redress for 1 Stop’s customers

which will fall to the FSCS. The amount of any such liability is currently unknown

but is being investigated by the FSCS. In these circumstances, the Authority has

not imposed this financial penalty after agreement from Mr Hughes that these

assets are instead transferred to the FSCS to contribute towards any redress that

may become due to 1 Stop’s customers. In light of the above, and taking into

account all the circumstances, the Authority publishes a statement of Mr Hughes’

misconduct.

1.3
This statement of misconduct will be issued on 17 April 2014 and will take the form

of this Final Notice, which will be published on the Authority’s website.

2
SUMMARY OF REASONS

2.1
Mr Hughes was one of two partners at 1 Stop, a firm that provided advice to

customers seeking to transfer their pension to unregulated investments such as

diamonds and overseas property via SIPPs.

2.2
During the period 1 October 2010 to 10 November 2012 inclusive, Mr Hughes failed

to take reasonable steps to ensure that the business of 1 Stop for which he was

responsible in his controlled function complied with the relevant requirements and

standards of the regulatory system. Specifically, Mr Hughes failed to take

reasonable steps to ensure that 1 Stop assessed the suitability of the underlying

investment for the customer. Instead, 1 Stop’s business model focussed solely on

providing advice on the most suitable SIPP wrapper for the underlying investment.

2.3
Further, Mr Hughes failed to take reasonable steps to ensure that 1 Stop gathered

sufficient information to be able to assess the suitability of the underlying

investment for its customers. In particular, Mr Hughes failed adequately to take

reasonable steps to ensure that 1 Stop:

(1)
established customers’ investment aims and objectives;

(2)
assessed customers’ attitude to risk; and

3

(3)
ascertained customers’ knowledge and experience in relation to financial

products.

2.4
Mr Hughes also failed to take reasonable steps to ensure that 1 Stop’s customers

understood fully the information provided to them, and therefore understood fully

the key features of their investment, including both the operation of the SIPP that

they were investing in (and the risks associated with that SIPP) and the underlying

investment.

2.5
As a result of Mr Hughes’ actions, 1,959 of 1 Stop’s customers during the Relevant

Period were at risk of having invested a total of £112,331,229, mostly from

pension funds including some final salary schemes, into SIPPs which may not have

been suitable for them. 49% of those customers invested in overseas property

developments operated by Harlequin.

2.6
EGI was a separate, unregulated company that introduced customers to 1 Stop.

Mr Hughes was also a director and shareholder of EGI and benefitted financially

from both the fees paid by customers for the advice given by 1 Stop and also from

the commission received by EGI from the underlying product provider for EGI’s

part in the facilitation of the sale of the product to the customer. This created a

conflict of interest, in that Mr Hughes was advising customers to transfer their

pensions into a SIPP in order to purchase an underlying investment (through 1

Stop) when he had also a financial interest in facilitating the sale of that

investment to the customer (through EGI). However, Mr Hughes failed to disclose,

manage and mitigate adequately this conflict of interest.

2.7
Mr Hughes was also responsible for ensuring compliance with the Authority’s rules

at 1 Stop. However, Mr Hughes delegated all of his compliance oversight

responsibilities to an external compliance consultant, without adequate oversight of

that consultant. Mr Hughes therefore failed to take reasonable steps to discharge

adequately his CF10 (Compliance oversight) responsibilities.

2.8
Mr Hughes therefore breached Statement of Principle 7 by failing to:

(1)
take reasonable steps to ensure that 1 Stop assessed the suitability of the

underlying investment within the SIPP for the customer;

(2)
take reasonable steps to ensure that 1 Stop established adequately

customers’ investment objectives, assessed adequately customers’ ATR and

ascertained adequately customers’ knowledge and experience in relation to

financial products;

(3)
take reasonable steps to ensure that 1 Stop’s customers understood fully the

information provided to them in relation to their SIPP;

(4)
disclose, manage and mitigate adequately the conflict of interest that existed

as a result of Mr Hughes’ ownership of and roles at both 1 Stop and EGI; and

(5)
take reasonable steps to ensure sufficient oversight of the compliance

function within 1 Stop in order to discharge adequately his CF10 (Compliance

oversight) responsibilities.

2.9
As a consequence of his actions, Mr Hughes failed to meet minimum regulatory

standards in terms of performing significant influence controlled functions. He is

therefore not fit and proper to perform significant influence controlled functions at

any authorised person, exempt person or exempt professional firm.

2.10 The Authority hereby withdraws the approvals given to Mr Hughes to perform the

CF4, CF10 and CF11 controlled functions at 1 Stop and makes an order prohibiting

Mr Hughes from performing significant influence controlled functions at any

authorised person, exempt person or exempt professional firm.

2.11 The Authority would have imposed a financial penalty on Mr Hughes of £275,100.

However, the Authority recognises that there may be significant liability for redress

for 1 Stop’s customers which will fall to the FSCS. The amount of any such liability

is currently unknown but is being investigated by the FSCS. In these

circumstances, the Authority has not sought to impose this financial penalty after

agreement from Mr Hughes that these assets are instead transferred to the FSCS

to contribute towards any redress that may become due to 1 Stop’s customers.

The Authority therefore has not imposed any financial penalty on Mr Hughes as a

result of this action but publishes a statement of Mr Hughes’ misconduct for failing

to comply with Statement of Principle 7.

2.12 The FSCS is currently investigating such claims for redress at present and will be in

communication with 1 Stop’s customers in due course. However, in the interim,

and at the Authority’s request, Mr Hughes has agreed to contact all of 1 Stop’s

SIPP customers to inform them of the Authority’s action (as detailed in this Final

Notice) and to notify them of the FSCS’ investigation.

3
DEFINITIONS

3.1
The definitions below are used in this Final Notice.

5

“1 Stop” or the “Firm” means 1 Stop Financial Services, a partnership authorised

and regulated by the Authority;

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

“ATR” means attitude to risk;

the “Authority” means the body corporate previously known as the Financial

Services Authority and renamed on 1 April 2013 as the Financial Conduct

Authority;

the “Authority’s Handbook” means the Authority’s Handbook of rules and guidance;

“COBS” means the Authority’s Conduct of Business Sourcebook;

“DEPP” means the Authority’s Decision Procedure and Penalties Manual;

“EG” means the Authority’s Enforcement Guide;

“EGI” means Exclusive Global Investments Limited;

“FSCS” means the Financial Services Compensation Scheme;

“Harlequin” means the Harlequin group of companies including, but not limited to,

Harlequin Management Services (South East) Limited, an unregulated, limited

company (in administration with effect from 3 May 2013);

“IFA” means independent financial adviser;

“Introducer” means an entity/individual that referred new SIPP business to 1 Stop;

“Mr Hughes” means Timothy Adrian Hughes;

the “Principles” means the Authority’s Principles for Businesses;

the “Relevant Period” means 1 October 2010 to 10 November 2012 inclusive;

“SIPP” means self-invested personal pension;

“SIPP Operator” means the legal entity responsible for operating and administering

the SIPP scheme;

“Statements of Principle” means the Authority’s Statements of Principle and Code

of Practice for Approved Persons;

6

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

“TVAS” means a transfer value analysis system.

4
FACTS AND MATTERS

The Firm

4.1
1 Stop is a partnership, set up and operated by Mr Hughes and another partner. 1

Stop has been authorised and regulated by the Authority since 11 November 2004.

4.2
Throughout the Relevant Period, 1 Stop had permission to carry on the following

regulated activities:

(1)
agreeing to carry on a regulated activity;

(2)
advising on investments (except Pension Transfers and Pension Opt Outs)

and advising on regulated mortgage contracts;

(3)
arranging (bringing about) deals in investments and arranging (bringing

about) regulated mortgage contracts; and

(4)
making arrangements with a view to transactions in investments and making

arrangements with a view to transactions in regulated mortgage contracts.

4.3
At the request of the Authority, 1 Stop voluntarily varied its permissions, such that

with effect from 5pm on 10 November 2012, 1 Stop was no longer permitted to

carry on any regulated activities. On 14 March 2013, 1 Stop voluntarily applied to

cancel its permissions.

4.4
Mr Hughes has been approved to hold the controlled functions CF4 (Partner), CF10

(Compliance oversight) and CF11 (Money laundering reporting) at 1 Stop since 11

November 2004. He has also been approved to hold the CF30 (Customer)

controlled function since 1 November 2007. Mr Hughes continued to hold all of

these controlled functions throughout the Relevant Period. Mr Hughes is one of 1

Stop’s financial advisers (only some of whom, including Mr Hughes, advised on

SIPPs) and advised customers on SIPP products throughout the Relevant Period.

7

4.5
Alongside his fellow partner, during the Relevant Period Mr Hughes had active

management and day to day responsibility for the business of 1 Stop. He was also

jointly responsible for establishing and implementing the business model of 1 Stop.

As the CF10 (Compliance oversight) controlled function holder, Mr Hughes had sole

responsibility for compliance at 1 Stop.

Non-regulated Introducer company

4.6
For all but one month of the Relevant Period, Mr Hughes was also a shareholder

and director of EGI, an unregulated company that facilitated the sale of investment

products to customers. These investment products were often unregulated

products and included overseas property investments such as those operated by,

amongst others, Harlequin. EGI also acted as an Introducer to 1 Stop throughout

the Relevant Period; EGI regularly introduced customers to 1 Stop in order that the

customer could receive regulated advice on the most suitable SIPP wrapper for the

unregulated investment product promoted by EGI.

4.7
During the Relevant Period, EGI introduced 480 customers to 1 Stop. This

amounted to 24.5% of 1 Stop’s total SIPP customers during the Relevant Period.

4.8
EGI was dissolved with effect from 20 August 2013.

4.9
Prior to and during the Relevant Period, 1 Stop shifted the focus of its business

from advising on a mix of mortgage, insurance and standard retail investment

products to providing advice in relation to SIPPs. In April 2010, mortgage and

insurance advice accounted for 52% of the revenue earned by 1 Stop. By October

2012 however, 97% of 1 Stop’s revenue was derived from its SIPP business.

4.10 A SIPP is a trust-based wrapper for an individual’s pension investment. It gives

tax relief on an individual’s contributions and tax-free growth and offers a wider

range of investments and options for extracting benefits than are ordinarily

available in a life policy type investment. In addition, a SIPP offers a greater

degree of control over where and when funds are invested or moved than is

permitted by traditional pension arrangements run by life assurance companies.

4.11 For 1 Stop’s customers, a SIPP was a way of investing their pension into

unregulated investments such as diamonds and overseas property which were

typically not permitted by their existing pension schemes. These investments

often provided the potential for higher returns than customers’ existing pension

schemes, but often carried a higher risk.

4.12 The typical investments purchased by the SIPPs taken out by 1 Stop’s customers

also held additional risks for those customers because:

(1)
they were more likely to be deemed liable to tax by HM Revenue & Customs

and thereby incur significant additional tax charges; and

(2)
they may have been an inappropriate investment for the customer to hold in

their SIPPs on the basis that they were not readily realisable in the event of

the customer’s death, or if the customer required that they be sold at short

notice.

4.13 In total, 1 Stop advised 1,959 customers to invest in or via a SIPP. Those

customers transferred £112,331,229 in total into SIPPs. The vast majority of this

money came from the customers’ existing pensions. The fees earned from its SIPP

business by 1 Stop during the Relevant Period were £4,307,901. Mr Hughes’ total

income received during the Relevant Period was £1,511,846.

4.14 As a result of the risks posed by the non-standard investments within the SIPPs, it

was especially important that 1 Stop ensured – and Mr Hughes took reasonable

steps to ensure – that when making investment decisions, customers understood

fully how their SIPPs operated and also understood fully the potential increased

risks associated with the underlying investments within them.

4.15 It was also essential that 1 Stop assessed both the suitability of the SIPP wrapper

and the proposed underlying investment for the customer, to ensure that

customers only invested in investments which were suitable for them.

4.16 The Authority has reviewed the investments made by some of 1 Stop’s customers

who received advice on SIPPs. This review included, but was not limited to, a

review of the documentation recorded on 15 of 1 Stop’s customer files.

1 Stop’s SIPP advisory process

4.17 A 1 Stop customer seeking advice on moving their pension would typically be one

looking to invest their pension into an unregulated product such as an overseas

property investment. Such customers would typically have been introduced to the

investment product by an unregulated Introducer (for example, perhaps by EGI),

who would, on behalf of the underlying investment company, present marketing

materials and/or provide presentations to the customer on which the customer

based their decision to invest. The customer would then be introduced by the

Introducer to 1 Stop in order to obtain advice on using their pension to facilitate

the investment via a SIPP. During the Relevant Period, every customer was

referred to 1 Stop by an Introducer.

4.18 Upon referral to 1 Stop, the customer would:

(1)
complete a brief ‘fact find’ or ‘pension profiler questionnaire’ document that

included very high level questions regarding their investment aims and

objectives, ATR and knowledge and experience of financial products. In some

cases, the fact find would be completed by the Introducer for the customer,

with no input from 1 Stop;

(2)
receive 1 Stop’s complimentary ‘pension review report’, setting out details of

their existing pension(s) and projected yield. If the customer had a final

salary pension, a specialist company would be instructed by 1 Stop to

produce a report on that final salary pension which would be provided to the

customer;

(3)
at the same time as the pension review report or shortly thereafter, receive 1

Stop’s ‘suitability report’, which contained 1 Stop’s recommendation for the

most suitable SIPP wrapper for the proposed investment. Typically, when

selecting the most suitable SIPP for the customer, 1 Stop assessed, amongst

other things, the set up and ongoing fees of the SIPP provider, the standard

of administrative assistance and whether the SIPP was able to invest into the

underlying investment product; and

(4)
receive a SIPP application pack that would enable the customer to purchase a

SIPP from the SIPP Operator recommended by 1 Stop. This application pack

would be submitted to the SIPP Operator, processed and then the customer’s

pension funds would be transferred. Those funds would then be used to

purchase the underlying investment.

4.19 For the services provided by 1 Stop, a customer would typically pay a fee of

between £75 and £3,995 – but most commonly of £2,995 - which was usually

taken out of the funds being transferred into the SIPP, typically from existing

pension schemes.

4.20 The vast majority of correspondence between 1 Stop and the customer was

conducted via email, post or via the Introducer. Typically, 1 Stop would send the

documents outlined above to the customer without providing any further

explanation and/or clarification. 1 Stop instead relied on the customer to

proactively contact it if the customer required further clarification.

Conduct in Issue

Advising on the underlying investment

4.21 If an IFA is advising on an investment wrapper product, such as a SIPP, that IFA

will generally have to consider the suitability of the overall proposition i.e. the

suitability of both the SIPP wrapper and the underlying investment, in order to be

able to provide suitable advice to the customer. In circumstances where the

customer is selling existing investments (including transferring their existing

pension) in order to invest in another investment via a SIPP, the IFA must assess

the suitability of that underlying investment for the customer prior to

recommending a SIPP. The regulatory provisions relevant to these requirements

are referred to in Annex A.

4.22 The advisory model established at 1 Stop by Mr Hughes and his partner however

did not take into account any consideration of the suitability for the customer of

the underlying investment within the SIPP. In fact, 1 Stop’s customer

documentation contained numerous disclaimers that as a business, 1 Stop did not

advise on, or have any involvement in considering, the underlying investment.

4.23 None of the 15 customer files reviewed by the Authority contained any evidence

that 1 Stop took any steps to consider the suitability of the underlying investment

for the customer as part of its suitability assessment of the SIPP.

4.24 As a result of this deficient business model, all 1,959 of 1 Stop’s SIPP customers

were at risk of investing a total of £112,331,229 into an investment which may not

have been suitable for them.

4.25 Some of 1 Stop’s customers may have chosen to proceed with the investment

regardless of the advice they received from 1 Stop. However, in those

circumstances 1 Stop remained under the obligation to provide advice to the

customer on both the SIPP wrapper and the underlying investment product; it

would then be up to the customer whether they accepted that advice or not.

4.26 In January 2013, after 1 Stop had voluntarily ceased to conduct SIPP business, the

Authority published an alert affirming its expectations of IFAs advising on overseas

property investments, including those sold by Harlequin, through a SIPP. The

Authority’s alert noted that IFAs have to ensure that they give careful

consideration to the particular features of the investment in question and that, if

recommending a SIPP knowing that the customer will sell current investments to

invest in an overseas property, the suitability of the overseas property investment

must form part of the advice to the customer.

4.27 Of the 1,959 SIPP customers advised by 1 Stop during the Relevant Period, 958

invested into overseas property investments operated by Harlequin (one of the

overseas property investment operators that 1 Stop’s customers invested in). This

represented 49% of all investments made by 1 Stop’s SIPP customers. None of

those customers received any advice from 1 Stop on the suitability of that overseas

property investment when 1 Stop advised on and recommended their SIPP.

4.28 In addition to the above, as part of the process for determining whether or not an

investment is suitable for their customer, an IFA must obtain the necessary

information regarding, amongst other things, the customer’s investment aims and

objectives, ATR and knowledge and experience of relevant financial products. Mr

Hughes failed to take reasonable steps to ensure that 1 Stop assessed adequately

these key aspects of its customers’ investment profiles in order to establish if the

SIPP was suitable for them. Each of these suitability aspects are considered in

more detail below.

Establishing customers’ investment aims and objectives

4.29 1 Stop sought to establish the customer’s investment aims and objectives by

requiring the customer to answer some questions in a fact find document or a

pension profiler questionnaire.

4.30 The fact find document contained a basic table to cover different aims and

objectives which could be categorised on a scale from ‘1 – Essential’ to ‘5 – Not

Disclosed’.

4.31 On ten of the 15 files reviewed by the Authority the aims and objectives of the

customer were noted as ‘Planning a secure retirement: 1 – Essential’. A further

two files had the aim and objective noted as ‘Pensions – Maintaining your standard

of living in retirement’.

4.32 ‘Planning a secure retirement’ and ‘Maintaining your standard of living in

retirement’ are not compatible with the potentially high risk nature of many of the

investments made by 1 Stop’s customers. Such investments could result in

customers losing some or all of the pension funds that they had used to purchase

them.

4.33 The Authority therefore considers that the fact find had the potential to mislead

customers into believing that they may be receiving advice on a product that would

allow them to fulfil their aim and objective of ‘Planning a secure retirement’ or

‘Maintaining [their] standard of living in retirement’.

4.34 As a result of this, it was particularly important that Mr Hughes took reasonable

steps to ensure that 1 Stop clarified this potential inconsistency in their customers’

aims and objectives to ensure that the underlying investment which they had

selected was compatible with them.

4.35 In the files reviewed by the Authority however, where customers had indicated that

they wanted to plan a secure retirement or maintain their standard of living in

retirement, 1 Stop failed to clarify adequately the customer’s aims and objectives

in eight (67%) of the 12 cases.

4.36 For example, 1 Stop advised customer A, a 51 year old publican earning

approximately £20,000 per year, to invest in a SIPP through which the customer

purchased an overseas property. Customer A used in excess of £64,000, funded

by a transfer of funds from their existing pension schemes, as a down payment on

the overseas property. Although customer A had selected ‘Planning a secure

retirement’ as their objective on their fact find document, 1 Stop took no further

steps to clarify the customer’s aims and objectives to ensure that they advised the

customer to invest in a suitable SIPP.

4.37 In establishing and implementing a business model that failed to establish

adequately the customer’s investment aims and objectives, Mr Hughes therefore

failed to take reasonable steps to ensure that 1 Stop had a sufficient understanding

of their customers’ aims and objectives to be able to advise them effectively on a

suitable SIPP product.

Establishing customers’ ATR

4.38 A customer’s ATR was typically recorded on the fact find document. Where

customers completed a pension profiler questionnaire instead of a fact find

however, that document did not record or refer to a customer’s ATR.

4.39 The fact find contained a basic table to cover the customer’s ATR on a scale of ‘Low

Risk’, (“You will not accept any risk to capital and require fixed/guaranteed returns

typically available from deposits”) through to ‘High Risk’, (“You accept a very high

level of risk to capital to achieve maximum growth potential”). A slightly different

risk rating system was also used by 1 Stop at points during the Relevant Period

whereby ATR was measured on a scale of ‘Conservative’, (“You prefer not to invest

in the stock market and are prepared to accept potentially lower returns from

investments where your capital is not at risk”) through to ‘Speculative’, (“You are

happy to invest in individual equities, with the aim of potentially higher returns,

accepting the increased risk of loss on your capital”).

4.40 On all 12 files reviewed by the Authority where there was a fact find document, the

customer’s ATR was recorded as being ‘High’ or ‘Speculative’, (i.e. the highest risk

rating on the respective fact find document). The three remaining files of the 15

reviewed by the Authority contained a pension profiler questionnaire, which did not

address the customer’s ATR at all.

4.41 The customer’s ATR was typically also stated as ‘High’ risk in the suitability report

produced by 1 Stop. All 15 customer files reviewed by the Authority contained a

suitability report which stated that the customer’s ATR was ‘High’.

4.42 Mr Hughes confirmed that 1 Stop’s customers were stated as having a ‘High’ ATR

because of the types of underlying investment that the customers were investing

into through their SIPPs. A customer’s ATR was therefore inferred from his

proposed underlying investment, as opposed to 1 Stop taking steps to confirm that

the customer was indeed willing to accept a high level of risk in his investment,

and therefore confirm whether that investment was suitable for the customer.

4.43 Mr Hughes’ failure to take reasonable steps to ensure that 1 Stop adequately

assessed and confirmed the customer’s ATR would have presented a particular risk

to customers who were at or near retirement age, and were therefore unlikely to

have capacity to replenish their pension funds in the event that they lost some or

all of their money as a result of investing in these investments. Customer B was

58 years old at the time they used a SIPP recommended by 1 Stop to invest in an

overseas property development, using approximately £60,000 of funds from their

existing pension funds. Despite this, 1 Stop took no steps to confirm the level of

risk that the customer was willing to accept from their investment.

4.44 Further, in cases where the customer was moving funds from a final salary pension

scheme into the SIPP, 1 Stop would request that an independent company produce

a TVAS report, which was provided to the customer, with a copy also provided to 1

Stop. The TVAS report would typically contain an assessment of the customer’s

ATR. However, there were sometimes inconsistencies between the stated ATR of

the customer as disclosed on the TVAS report documentation compared to the ATR

of the customer as recorded on 1 Stop’s documentation. In those instances, Mr

Hughes did not take any steps to ensure that 1 Stop investigated and reconciled

the conflicting ATRs of the customer.

4.45 As a result, for all 15 (100%) customers whose files and investments were

reviewed by the Authority, 1 Stop failed to establish adequately the ATR of that

customer. Mr Hughes did not therefore take reasonable steps to ensure that 1

Stop understood fully the level of risk that its customers were willing and able to

take to enable 1 Stop to advise on a suitable SIPP.

Assessing customers’ knowledge and experience in relation to financial

products

4.46 The customer’s knowledge and experience of financial products was set out in the

1 Stop suitability report. All 15 (100%) of the customer files reviewed by the

Authority noted that the customer had a “high level of understanding” of financial

services products.

4.47 Mr Hughes confirmed that the statements in the suitability report regarding the

customer’s “high level of understanding” of financial services products related

solely to the customer’s understanding of the underlying investment – for example,

the overseas property investment – as opposed to the customer’s understanding of

the SIPP. Mr Hughes confirmed that the customer’s understanding of that

underlying investment product would be what he perceived to be as ‘high’, based

on the customer having received promotional material from the Introducer.

However, the business model established by Mr Hughes required no further steps

to be taken to confirm the customer’s knowledge and experience of financial

products, including taking no further steps to confirm whether the customer

actually understood the promotional material they had been provided with.

4.48 The customers whom 1 Stop advised included, amongst others, a builder, a joiner,

a window cleaner and a publican. None of those individuals provided any

information to 1 Stop to confirm that they knew anything about SIPPs or other

financial services products. Nevertheless, all of these customers were recorded in

1 Stop’s suitability report as having a “high level of understanding” of financial

services products, and invested subsequently in potentially high risk investments

through their SIPPs.

4.49 Mr Hughes failed to take reasonable steps to ensure that 1 Stop adequately

assessed its customers’ knowledge and experience in relation to financial products.

None of the 15 files reviewed by the Authority demonstrated that 1 Stop had taken

sufficient steps to assess its customers’ knowledge and experience in relation to

financial products. This information was required in order for 1 Stop to be able to

understand sufficiently whether or not the SIPP product (including both the SIPP

wrapper and the underlying investment product) would be suitable for the

customer.

Customer understanding of advice received

4.50 Given that the vast majority of 1 Stop’s customers were retail investors with

limited knowledge and experience of financial services products (and in particular

often potentially high risk, unregulated investments facilitated through a SIPP), it

was essential for those customers to be provided with information about their

investment that was clear and comprehensible to them to assist in the process of

deciding whether to invest. 1 Stop’s documentation did not always meet this

standard.

4.51 The suitability report produced by 1 Stop was the key document on which a typical

customer would be expected to base their decision to enter into a SIPP. The

suitability report should have clarified the customer’s aims and objectives, and

explained why 1 Stop had concluded that the SIPP product (including the

underlying investment) was suitable for the customer. It should also have

explained, in greater detail, any possible disadvantages of the investment to the

customer.

4.52 Mr Hughes considered that the customer would have a sufficient understanding of

the advice given by 1 Stop just based on the customer reading the contents of the

suitability report issued by 1 Stop.

4.53 However, the suitability report was a lengthy document, typically between 26 and

37 pages long. It contained relatively complex information, for example on the

general structure of a SIPP, and its advantages and disadvantages. It also

contained technical information, for example regarding contribution allowances and

the treatment of SIPPS for taxation purposes, which would not be readily

understandable to inexperienced investors.

4.54 Throughout the course of their relationship, 1 Stop also requested that its

customers sign a number of disclaimers. These disclaimers covered a wide variety

of issues, including but not limited to declarations on the customer’s proposed

retirement age, the fees to be charged by 1 Stop and a declaration self-certifying

the customer as a sophisticated investor. Across the 15 files reviewed by the

Authority, 1 Stop’s customers signed at least 82 disclaimers. Again, some of these

disclaimers contained important yet complex information, which a customer with

limited knowledge and experience of financial services products may not have

understood fully.

4.55 For example, one declaration signed by all 15 customers whose files were

examined stated that the unregulated investments to be entered into by the

customer were not covered by the FSCS. However, the customer may not have

fully appreciated the consequences of this i.e. that the customer may not have

recourse to the FSCS’ statutory compensation scheme in the event that the

company providing the underlying investment opportunity went into liquidation.

4.56 In circumstances in which the documentation provided to customers (including but

not limited to suitability reports and disclaimers) was not clear and easily

understood, Mr Hughes should have taken reasonable steps to ensure that 1 Stop

could satisfy itself that the customer understood the information provided to them.

However, 1 Stop merely provided large quantities of documentation to the

customer, typically without further explanation or clarification and relied on the

customer to proactively contact 1 Stop if the customer required further

clarification.

4.57 As a result, the information provided to 1 Stop’s customers, and in particular the

suitability report, could not necessarily be understood fully by inexperienced

investors without further explanation and/or clarification. Mr Hughes therefore

failed to take reasonable steps to ensure that all of 1 Stop’s customers understood

fully the information provided to them, and therefore understood fully the key

features of their investment, including the operation of the SIPP they were

investing in, and the risks associated with that product.

Conflict of interest

4.58 As noted at paragraph 4.6 above, throughout the vast majority of the Relevant

Period, Mr Hughes was a shareholder and director of EGI. EGI acted as an

Introducer to 1 Stop and introduced 24.5% of 1 Stop’s total SIPP customers during

the Relevant Period. As a result, EGI was the most prolific Introducer to 1 Stop

during the Relevant Period.

4.59 Mr Hughes benefitted financially from both the fees paid by customers for the

advice given by 1 Stop on the SIPP transfer and also from the commission received

by EGI from the underlying product provider for EGI’s part in the facilitation of the

sale of that product to the customer. This receipt of financial benefit created a

conflict of interest, in that Mr Hughes was advising customers to transfer their

pensions into a SIPP in order to purchase an underlying investment (through 1

Stop) when he also had a financial interest in facilitating the sale of that

investment to the customer (through EGI). This conflict of interest should have

been disclosed in full to customers prior to the customer obtaining advice on the

SIPP product from 1 Stop.

4.60 1 Stop’s client agreement notified customers explicitly that occasions could arise

where 1 Stop could have an interest in business that 1 Stop was transacting for the

customer. That document noted that if this did happen, 1 Stop would inform the

customer and obtain the customer’s consent before carrying out the customer’s

instructions. However, despite the wording of the client agreement, Mr Hughes’

involvement with both EGI as the Introducer and 1 Stop as the adviser was not

disclosed to any customers prior to 18 January 2012 at the earliest.

4.61 On 18 January 2012, a declaration document was put in place by 1 Stop to be used

where the customer had been introduced to 1 Stop by EGI. The declaration noted

that 1 Stop and EGI were related entities. The declaration did not however explain

that Mr Hughes was involved with both entities, or that he would benefit financially

from his roles at both 1 Stop and EGI as a result of the customer’s investment.

This declaration document did not therefore disclose adequately Mr Hughes’ conflict

of interest.

4.62 The Authority therefore considers that throughout the Relevant Period, Mr Hughes

failed to disclose, manage and mitigate adequately the conflict of interest.

4.63 Throughout the Relevant Period, Mr Hughes was approved as the CF10

(Compliance oversight) controlled function holder at 1 Stop.

4.64 1 Stop employed the services of an external compliance consultant throughout the

Relevant Period. The external compliance consultant was contracted to perform all

SIPP-related compliance tasks at 1 Stop throughout the Relevant Period.

4.65 The responsibility for ensuring that 1 Stop complied with regulatory requirements,

including but not limited to those identified above in relation to suitability of SIPP

advice given, rested with Mr Hughes (both in his role as a compliance officer and

partner of 1 Stop). However, Mr Hughes delegated all of his responsibilities as

compliance officer to an external compliance consultant, without sufficient

oversight of that consultant’s activities. For example, throughout the Relevant

Period, Mr Hughes conducted no assessment of the conduct of the compliance

consultant to ensure that 1 Stop was complying with the Authority’s regulatory

requirements, and that he was discharging adequately his responsibilities as a

CF10 (Compliance oversight) controlled function holder.

4.66 Mr Hughes failed to take reasonable steps to ensure sufficient oversight of the

compliance function within 1 Stop. Mr Hughes confirmed that he “…put too much

trust in [the compliance consultant’s] competency to deliver what was expected

from regulators. …he [the compliance consultant] went along with everything and

we deemed to see it as correct…”.

5
FAILINGS

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

5.2
Throughout the Relevant Period, Statement of Principle 7 stated that:

An approved person performing a significant influence function must take

reasonable steps to ensure that the business of the firm for which he is responsible

in his controlled function complies with the relevant requirements and standards of

the regulatory system.

5.3
By reason of the facts and matters referred to above, during the Relevant Period

Mr Hughes breached Statement of Principle 7 by failing to:

(1)
take reasonable steps to ensure that 1 Stop assessed the suitability of the

underlying investment within the SIPP for the customer;

(2)
take reasonable steps to ensure that 1 Stop established adequately

customers’ investment objectives, assessed adequately customers’ ATR and

ascertained adequately customers’ knowledge and experience in relation to

financial products;

(3)
take reasonable steps to ensure that 1 Stop’s customers understood fully the

information provided to them in relation to their SIPP;

(4)
disclose, manage and mitigate adequately the conflict of interest that existed

as a result of Mr Hughes’ ownership of and roles at both 1 Stop and EGI; and

(5)
take reasonable steps to ensure sufficient oversight of the compliance

function within 1 Stop in order to discharge adequately his CF10 (Compliance

oversight) responsibilities.

5.4
As a consequence of his actions, Mr Hughes failed to meet minimum regulatory

standards in terms of performing significant influence controlled functions. He is

therefore not fit and proper to perform significant influence controlled functions at

any authorised person, exempt person or exempt professional firm.

6
SANCTION

Financial penalty

6.1
The Authority’s policy for imposing a financial penalty is set out in Chapter 6 of

DEPP. In respect of conduct occurring on or after 6 March 2010, the Authority

applies a five-step framework to determine the appropriate level of financial

penalty. As Mr Hughes’ misconduct occurred after that date, the Authority has

assessed the financial penalty wholly under the regime in force after 6 March 2010.

DEPP 6.5B sets out the details of the five-step framework that applies in respect of

financial penalties imposed on individuals in non-market abuse cases.

Step 1: disgorgement

6.2
Pursuant to DEPP 6.5B.1G, at Step 1 the Authority seeks to deprive an individual of

the financial benefit derived directly from the breach where it is practicable to

quantify this.

6.3
The Authority has not identified any financial benefit that Mr Hughes derived

directly from the breach.

6.4
Step 1 is therefore £0.

Step 2: the seriousness of the breach

6.5
Pursuant to DEPP 6.5B.2G, at Step 2 the Authority determines a figure that reflects

the seriousness of the breach. That figure is based on a percentage of the

individual’s relevant income. The individual’s relevant income is the gross amount

of all benefits received by the individual from the employment in connection with

which the breach occurred, and for the period of the breach.

6.6
The period of Mr Hughes’ breach was from October 2010 to November 2012. The

Authority considers Mr Hughes’ relevant income for this period to be £1,511,846.

6.7
In deciding on the percentage of the relevant income that forms the basis of the

step 2 figure, the Authority considers the seriousness of the breach and chooses a

percentage between 0% and 40%. This range is divided into five fixed levels

which represent, on a sliding scale, the seriousness of the breach; the more

serious the breach, the higher the level. For penalties imposed on individuals in

non-market abuse cases there are the following five levels:

Level 1 – 0%

Level 2 – 10%

Level 3 – 20%

Level 4 – 30%

Level 5 – 40%

6.8
In assessing the seriousness level, the Authority takes into account various factors

which reflect the impact and nature of the breach, and whether it was committed

deliberately or recklessly. The Authority considers the following factors to be

relevant.

Impact of the breach

6.9
Mr Hughes’ failings meant that all of 1 Stop’s customers investing in a SIPP were at

risk of having invested a total of £112,331,229 into SIPPs which were not suitable

for them. The obligation of 1 Stop to assess the suitability of the underlying

investment product applied notwithstanding the fact that some customers may

have proceeded with the investment regardless of 1 Stop’s advice. The majority of

1 Stop’s customers invested into potentially high risk investments that were

unregulated and not necessarily covered by the FSCS. Customers investing in

unregulated investments are therefore at risk of potentially losing all of their

investments. There is therefore significant risk of loss associated with Mr Hughes’

failings.

6.10 Mr Hughes’ failings did not have an adverse effect on markets.

Nature of the breach

6.11 Mr Hughes’ failings occurred throughout the Relevant Period, during which 1 Stop

advised 1,959 customers to invest via a SIPP.

6.12 Mr Hughes did not fail to act with integrity or abuse a position of trust.

6.13 Mr Hughes was jointly responsible with his partner for the business model put in

place by 1 Stop which led to the breaches occurring.

Whether the breaches were deliberate and/or reckless

6.14 The Authority has not found that the breaches by Mr Hughes were deliberate or

reckless.

6.15 Mr Hughes relied on the advice of an external compliance consultant regarding the

business model put in place at 1 Stop, as well as for compliance support (although

he failed to oversee adequately the work of that compliance consultant).

6.16 The breaches were negligent rather than intentional and there was no attempt by

Mr Hughes to conceal the breaches.

6.17 Taking all of these factors into account, the Authority considers the seriousness of

the breach to be level 3 and so the Step 2 figure is 20% of £1,511,846.

6.18 Step 2 is therefore £302,369.

Step 3: mitigating and aggravating factors

6.19 Pursuant to DEPP 6.5B.3G, at Step 3 the Authority may increase or decrease the

amount of the financial penalty arrived at after Step 2, but not including any

amount to be disgorged as set out in Step 1, to take into account factors which

aggravate or mitigate the breach.

6.20 The Authority does not consider there to be any factors that aggravate or mitigate

the breach.

6.21 As a result, the Authority considers that the Step 2 figure should remain.

6.22 Step 3 is therefore £302,369.

Step 4: adjustment for deterrence

6.23 Pursuant to DEPP 6.5B.4G, if the Authority considers the figure arrived at after

Step 3 is insufficient to deter the individual who committed the breach, or others,

from committing further or similar breaches, then the Authority may increase the

penalty.

6.24 The Authority considers that the Step 3 figure of £302,369 does not represent a

sufficient deterrent to Mr Hughes and others, and so has increased the penalty at

Step 4. This is on the basis that the figure reached after Step 3 is insufficient to

deter Mr Hughes, or others, from committing further or similar breaches, in light of

the further monies received by Mr Hughes from the activities carried on by EGI

(including the introduction of customers to 1 Stop) in addition to his relevant

income from 1 Stop. The Authority therefore has increased the Step 3 figure by

30%.

6.25 Step 4 is therefore £393,079.

Step 5: settlement discount

6.26 Pursuant to DEPP 6.5B.5G, if the Authority and the individual on whom a penalty is

to be imposed agree the amount of the financial penalty and other terms, DEPP 6.7

provides that the amount of the financial penalty which might otherwise have been

payable will be reduced to reflect the stage at which the Authority and the

individual reached agreement. The settlement discount does not apply to the

disgorgement of any benefit calculated at Step 1.

6.27 The Authority and Mr Hughes reached agreement at Stage 1 and so a 30%

discount applies to the Step 4 figure.

6.28 Step 5 is therefore £275,155 (rounded down to £275,100).

6.29 The Authority therefore proposes to impose a total financial penalty of £275,100 on

Mr Hughes for breaching Statement of Principle 7.

Conclusion as to financial penalty

6.30 Having applied the five-step framework set out in DEPP, the appropriate level of

financial penalty to be imposed on Mr Hughes is £275,100.

6.31 The Authority would have imposed a financial penalty on Mr Hughes of £275,100.

However, the Authority recognises that there may be significant liability for redress

for 1 Stop’s customers which will fall to the FSCS. The amount of any such liability

is currently unknown but is being investigated by the FSCS. In these

circumstances, the Authority has not imposed this financial penalty after

agreement from Mr Hughes that these assets are instead transferred to the FSCS

to contribute towards any redress that may become due to 1 Stop’s customers.

6.32 The Authority’s policy in relation to the imposition of a public censure is set out in

Chapter 6 of DEPP. DEPP sets out non exhaustive factors that may be of particular

relevance in determining whether it is appropriate to issue a public censure rather

than impose a financial penalty. DEPP 6.4.2G (5) includes that it may be a factor

(depending on the nature and seriousness of the breach) in favour of a public

censure rather than a financial penalty including but not limited to where a person

has taken steps to ensure that those who have suffered loss due to the breach are

fully compensated for those losses. Whilst the full amount of any losses due to Mr

Hughes’ breaches are not yet quantified, they may be significant. In light of this,

and the ongoing FSCS investigation of liability, the Authority has agreed that the

sums otherwise due as a financial penalty should be transferred to the FSCS.

6.33 The Authority has had regard to the fact that Mr Hughes has agreed to transfer to

the FSCS assets that would otherwise be used to satisfy any financial penalty

imposed by the Authority to be used towards any redress that may become due to

1 Stop’s customers. On that basis, the Authority has not imposed a financial

penalty on Mr Hughes but instead issues a statement of Mr Hughes’ misconduct

under section 66 of the Act.

Withdrawal of approvals and Prohibition

6.34 The Authority has had regard to the guidance in Chapter 9 of EG and considers

that it is appropriate and proportionate in all the circumstances to withdraw Mr

Hughes’ CF4 (Partner), CF10 (Compliance oversight) and CF11 (Money Laundering

Reporting) controlled functions at 1 Stop and to prohibit Mr Hughes from

performing any significant influence function in relation to any regulated activity

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

because he is not a fit and proper person in terms of competence and capability.

7
PROCEDURAL MATTERS

Decision maker

7.1
The decision which gave rise to the obligation to give this Final 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 Authority must publish such information about the matter to which this notice

relates as the Authority considers appropriate. The information may be published

in such manner as the Authority considers appropriate. However, the Authority

may not publish information if such publication would, in the opinion of the

Authority, be unfair to you or prejudicial to the interests of consumers or

detrimental to the stability of the UK financial system.

7.4
The Authority intends to publish such information about the matter to which this

Final Notice relates as it considers appropriate.

Authority contacts

7.5
For more information concerning this matter generally, contact Kate Tuckley at the

Authority (direct line: 020 7066 7086 / fax: 020 7066 7087).

Financial Conduct Authority, Enforcement and Financial Crime Division

ANNEX A

RELEVANT STATUTORY AND REGULATORY PROVISIONS

1.1
The Authority’s operational objectives, set out in section 1B(3) of the Act, include

the consumer protection objective.

1.2
Section 63 of the Act provides that the Authority may withdraw an approval issued

under section 59 of the Act in relation to the performance by a person of a function

if the Authority considers that the person is not a fit and proper person to perform

the function. If the Authority proposes to withdraw an approval, it must give each

of the interested parties a Notice. Each interested party may refer the matter to

the Tribunal.

1.3
Section 66 of the Act provides that the Authority may take action against a person

if it appears to the Authority that he is guilty of misconduct and the Authority is

satisfied that it is appropriate in all the circumstances to take action against him.

A person is guilty of misconduct if, while an approved person, he has failed to

comply with a statement of principle issued under section 64 of the Act, or has

been knowingly concerned in a contravention by a relevant authorised person of a

relevant requirement imposed on that authorised person.

1.4
Section 56 of the Act provides that the Authority may make an order prohibiting an

individual from performing a specified function, any function falling within a

specified description or any function, if it appears to the Authority that that

individual is not a fit and proper person to perform functions in relation to a

regulated activity carried on by an authorised person, exempt person or exempt

professional person. Such an order may relate to a specified regulated activity,

any regulated activity falling within a specified description, or all regulated

activities.

2
Relevant Regulatory provisions

Statements of Principle and Code of Practice for Approved Persons

2.1
The Authority’s Statements of Principle have been issued under section 64 of the

Act.

2.2
Statement of Principle 7 states:

“An approved person performing a significant influence function must take

reasonable steps to ensure that the business of the firm for which he is responsible

in his controlled function complies with the relevant requirements and standards of

the regulatory system.”

The Fit and Proper Test for Approved Persons

2.3
The part of the Authority’s Handbook entitled “The Fit and Proper Test for

Approved Persons” (“FIT”) sets out the criteria that the Authority will consider

when 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.

2.4
FIT 1.3.1G states that the Authority will have regard to a number of factors when

assessing the fitness and propriety of a person. The most important considerations

will be the person’s honesty, integrity and reputation, competence and capability

and financial soundness.

The Authority’s policy for exercising its power to make a prohibition order

2.5
The Authority’s policy in relation to prohibition orders is set out in Chapter 9 of EG.

2.6
EG 9.1 states that the Authority may exercise this power where it considers that,

to achieve any of its regulatory 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.

The Authority’s policy for imposing financial penalties

2.7
Chapter 6 of DEPP sets out the Authority’s statement of policy with respect to the

imposition and amount of financial penalties under the Act.

The following provisions are also relevant with regard to the conduct explored in this

Principles for Businesses

2.8
The Principles are a general statement of the fundamental obligations of firms

under the regulatory system and are set out in the Authority’s Handbook. They

derive their authority from the Authority’s rule making powers set out in the Act.

“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.”

Conduct of Business

2.10 The following rules in COBS are relevant regarding suitability of advice given to

customers:

COBS 2.1.1R

(1) A firm must act honestly, fairly and professionally in accordance with the best

interests of its client (the client's best interests rule).

COBS 9.2.1R

(1) A
firm
must
take
reasonable
steps
to
ensure
that
a
personal

recommendation, or a decision to trade, is suitable for its client.

(2) When making the personal recommendation or managing his investments,

the firm must obtain the necessary information regarding the client's:

(a) knowledge and experience in the investment field relevant to the

specific type of designated investment or service;

(b) financial situation; and

(c) investment objectives;

so as to enable the firm to make the recommendation, or take the decision, which

is suitable for him.

COBS 9.2.2R

(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.

COBS 9.2.3R

The information regarding a client's knowledge and experience in the investment

field includes, to the extent appropriate to the nature of the client, the nature and

extent of the service to be provided and the type of product or transaction

envisaged, including their complexity and the risks involved, information on:

(1) the types of service, transaction and designated investment with which the

client is familiar;

(2) the nature, volume, frequency of the client's transactions in designated

investments and the period over which they have been carried out;

(3) the level of education, profession or relevant former profession of the client.