The FCA has fined David Samuel Watters £75,000 and removed his CF10 controlled function.
Watters was the compliance officer (CF10) at the firm now called Lanyon Astor Buller (LAB). He was also the chairman and sole shareholder. LAB, which transferred out of a partnership called McClure Watters during the period covered by the Final Notice (1 February 2006 to 30 April 2009), provided advice to over 700 members of UK registered defined benefits schemes (DB Schemes) about the merits of transferring out of those schemes as part of an enhanced transfer value (ETV) exercise. The FCA's guidance (COBS 19.1.6G) is that such transfers by retail clients (which are transfers away from a guaranteed income for a premium) should be assumed to be unsuitable, unless the firm recommending can demonstrate with reference to contemporary evidence that the transfer is in the client's best interest. LAB advised on 11 ETV exercises, and around 500 members together transferred around £12.7m.
The FCA's Final Notice focussed on a sample of 17 files, all of which were found to contain serious breaches of COB and COBS rules. These included failures to gather adequate know-your-client information, to provide clear advice, to provide suitable advice and failures to properly document advice.
Watters' numerous failings as CF10 were concerned with a lack of engagement with both the particular risks generated by the ETV advice process at LAB and the need to provide pensions advice compliant with the rules. He was also found to lack relevant experience and qualifications to act as CF10 in respect of ETV advice, and he was criticised for not having obtained any relevant qualifications or attended any relevant training before or during his role as compliance officer.
Whilst he did not give ETV advice himself, the FCA found that Watters had failed to oversee the advice being given by the pension advisers. In the event, there were various breaches of COB/COBS by the advisors and Watters had failed to take reasonable steps to identify the way in which LAB's ETV advice fell below the requirements in the COB/COBS rules. He had left the design of the ETV advice process to the advisers themselves. The FCA determined that Watters should have properly reviewed the ETV advice process when he took on the CF10 role, or realised during his limited (and undocumented) file reviews that something was seriously amiss with the advisory process.
There were also specific risks generated by the circumstances of the firm that Watters failed to engage with or manage. LAB was paid a commission by the pension provider to whom customers transferred. The FCA could see no evidence that this conflict was disclosed or managed by Watters. Additionally, one of the two pensions advisers was paid with reference to LAB's income from the ETV process, and therefore also had a conflict of interest in relation to the advice that he gave. Again this conflict was not identified or managed by Watters.
Watters engaged the services of external compliance consultants on two occasions.
- The first occasion was in April 2006. Whilst not entirely clear to the FCA, it appears that the scope of this consultant's work was very narrowly defined. Whilst that consultant did provide some limited comment on the ETV process (including proposing changes to the suitability report), these recommendations were ignored. The FCA criticised Watters for taking no role in the appointment of the consultant and for not acting on its limited recommendations. Its work took three hours and it charged £90 in total. The FCA found that Watters also took no role in defining its scope of work to properly include a real review of the ETV advice process.
- A further compliance consultant was asked in 2007 to look at the ETV advice business. However, the FCA found that Watters was aware that this consultant was not qualified to conduct a review of the ETV business. In any event, the FCA could find no evidence that Watters had engaged with the findings of this consultant.
In this Final Notice, the FCA notes its strong focus on the pensions market. Indeed, Watters' failings came to the regulator's attention as a result of a thematic review in 2013/14. That review looked at 292 sample case files across different advisory firms giving ETV advice. The review found that, in 48% of cases, the advice was unclear or unsuitable. In 47% of those files, the communication between adviser and client was deemed inadequate. As such, whilst Watters' failure to engage with regulatory requirements may be extreme, it is plainly a problem shared more widely across the industry.
This case also contains valuable lessons for all those who are responsible for compliance. The FCA expects holders of the CF10 controlled function first to understand and then to meaningfully engage with the processes which they oversee. When it comes to third party compliance consultants, their instruction alone is not enough. The CF10 must engage with their qualifications, scope of instruction and crucially implement the advice that they provide.