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First Jointly Contested Enforcement Case Before the FCA and PRA Decision Making Committees

Posted on 18 November 2019

The PRA and the FCA have decided to ban and fine Stuart Malcolm Forsyth, the former CEO of a small insurer, £76,180 and £78,318 respectively.  The PRA's Enforcement Decision Making Committee (EDMC) and the FCA's Regulatory Decisions Committee (RDC) found, following a joint investigation, that between February 2010 and July 2016 Mr Forsyth transferred excessive amounts of his own remuneration to his wife to reduce his own tax liability and took steps to conceal that arrangement.  The decisions are subject to appeal to the Upper Tribunal.

As CEO of Scottish Boatowners Mutual Insurance Association, Mr Forsyth paid his wife a proportion of his own salary in compensation for providing some out of hours administrative support and occasional hospitality at home. Initially Mrs Forsyth was paid between £5,000 and £10,000 per annum, which the PRA and FCA agreed was not unreasonable for the work she was undertaking.  

However, from 2010, Mr Forsyth transferred increasing amounts of his salary, and in most years all or part of his own bonus, to Mrs Forsyth in order to reduce his tax liability. Between 2010 and 2016, Mr Forsyth transferred just over £200,000 of his pay to Mrs Forsyth, and by the 2015/16 tax year, Mrs Forsyth’s remuneration was just over £52,000, more than any other SBMIA employee save Mr Forsyth. As a result of these arrangements, Mr Forsyth paid approximately £18,000 less in income tax than he should have done.

The Insurer's Board and Remuneration Committee were aware that Mr Forsyth paid a proportion of his salary to Mrs Forsyth but were not aware how much. The Regulators also found that Mr Forsyth created false minutes to give the misleading impression that the firm's Remuneration Committee had agreed the salaries of both Mr and Mrs Forsyth in 2013, 2014 and 2015. In fact, it had only agreed Mr Forsyth’s salary.

Comment

Previously, there have been a handful of joint PRA and FCA cases that have led to sanctions by the PRA and FCA on the same or overlapping facts.  However, this is the first case which has not settled and instead was considered by the respective decision making committees of the FCA and PRA.

Happily for the FCA and PRA, the EDMC and RDC came to similar conclusions after hearing the evidence and their published outcomes are consistent.  Comparison of the two Decision Notices shows a high degree of similarity in the text - perhaps reflecting the fact that a single FCA and PRA investigation team is responsible for producing the draft Warning Notices (which are the starting point for each Decision Notice).  The same team will also be responsible for responding to representations made by the subject of the investigation.  There are some differences in the outcomes where the RDC and EDMC have imposed their own style of drafting or sought to emphasise particular points.

Where the Notices do differ is in determination of penalty.  Although the sums imposed by way of fine are similar, the reasoning differs. 

The starting point for any penalty is disgorgement of any benefit of the wrongdoing by the subject.  The regulators determined that in the case of Mr Forsyth, this was £18,034, being the income tax saved. Each regulator has fined Mr Forsyth 50% of that figure, taking into account that the remaining half forms part of the penalty of the other regulator.  This does demonstrate a degree of collaboration between the EDMC and the RDC in determining penalty - before coming to a final decision.

As to the punitive element of penalty, the PRA applied its usual formula of basing penalty on a proportion of an individual's annual income – in this case 30% of £218,876 (£65,662).  The penalty was not adjusted for mitigating and aggravating factors or deterrence. 

In contrast, the FCA based its penalty on income during the relevant period of breach (£905,102) and took 30% of that figure representing a level 4 (out of 5) level of seriousness (£135,765).  However, the FCA then applied a 50% reduction so the penalty is proportionate to the breach and then a further 50% reduction to take into account the fact that the PRA decided to impose its financial penalty in relation to the same misconduct.  This resulted in a final figure of £67,800.

As set out above, Mr Forsyth has indicated that he intends to appeal the FCA and PRA decisions to the Upper Tribunal.  This will involve a single hearing to determine appeals against both the PRA and FCA decisions and is likely to provide useful guidance on how the regulators should deal with joint investigations.  The PRA's Decision Notice discloses that Mr Forsyth argued that it is not necessary for the PRA to take its own duplicative action in every case where a lack of integrity is alleged by the FCA and, in this case, the PRA's action is disproportionate and oppressive, achieving no useful purpose.  It will be interesting to see whether the Upper Tribunal agrees.

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