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Enforcement Watch

The Upper Tribunal Fines and Imposes a SIF Ban on Charles Palmer
Enforcement Watch

Enforcement WatchIssue 23 | September 2017

Date
08 August 2017

The Upper Tribunal has upheld an RDC decision to fine Mr Palmer £86,961 and to prohibit him from holding any Significant Influence Function (SIF).


The Upper Tribunal fines and imposes a SIF ban on Charles Palmer

The Upper Tribunal has upheld an RDC decision to fine Mr Palmer £86,961 and to prohibit him from holding any Significant Influence Function (SIF).  The Final Notice was published on 19 September.

Mr Palmer was a director (CF1) of Financial Limited ("Financial") and Investments Limited ("Investments") (together "the Firms").  Financial and Investments were wholly owned by Standard Financial Group Limited (together the "Group"), a company that Mr Palmer was the majority shareholder of.  Financial and Investments together operated a large network of financial adviser firms, each of which was an appointed representative of either Financial or Investments ("the ARs").  

In separate cases, the RDC determined that both Financial and Investments failed to implement and maintain effective controls to ensure that the ARs met the requirements of the regulatory system.  The RDC also disciplined Stephen Bell, the Firms' compliance officer and Paivi Grigg the Firms' risk management director.  Neither the Firms nor Bell and Grigg referred their Final Notices to the Upper Tribunal.  It is also relevant to note that Palmer was subject to a Final Notice in February 2010 in relation to failures of the systems and controls at Financial.  In that Final Notice, he was fined £49,000 (reduced from £70,000 for early settlement).   The date of that Final Notice is the start of the Relevant Period for the subsequent action against him. 

In respect of Palmer, the RDC determined that during the period 24 February 2010 to 20 December 2012 (the "Relevant Period") he breached Statement of Principle 6 by failing to exercise due skill, care and diligence in managing the business of the Firms for which he was responsible as CF1.  In particular, the RDC determined that he failed to take adequate steps: (i) to ensure that the risks posed to customers of the ARs were being managed by the ARs; and (ii) to ensure that the Firms put in place an appropriate control and risk management framework to mitigate any risks to the customers of the ARs; and (iii) to ensure that he and the boards of the Firms received sufficient, relevant and reliable information and assurances that the framework was operating effectively. 

In his defence, Palmer pointed the finger at Bell and Grigg and said that these matters were their responsibility.  Additionally, he said that it was the responsibility of the Firms' boards to monitor Bell and Grigg.    

The Upper Tribunal found fault with the FCA's articulation of its case under Principle 6.  The FCA's case was that Palmer breached Principle 6 because he "..failed to take adequate steps..".  However, the Upper Tribunal found that this was an unhelpful formulation of what Principle 6 required.  It had sympathy with the argument advanced by Palmer's barrister that the FCA's formulation might result in a higher standard being imposed on Palmer than Principle 6 intended.  The Upper Tribunal said that Principle 6 is commonly understood as a straightforward requirement of reasonable care, taking into account the person's particular skills and experience.  This was the standard that it imposed on Palmer.   

Having articulated the appropriate test, the Upper Tribunal approached its decision by considering first whether Palmer had assumed a personal responsibility (explicitly or in practice) for performing the functions that formed the subject of the RDC's findings.  It then considered whether he had performed these functions with due skill, care and diligence.  The factual analysis undertaken by the Upper Tribunal was detailed and apparently thorough, and we do not here summarise all of the findings.  Instead, we point to the following findings of the Upper Tribunal that are of more general interest:

  • Palmer had devised the Firms' business model, which was in essence to exercise the least possible interference with the ARs businesses and the products they sold.  This made the Firms' network particularly attractive.  However, this model should also have caused the Firms to ensure that their systems and controls were adequate to meet the challenges created by the ARs having increased autonomy.  The Upper Tribunal found that Palmer was aware of this heightened risk (he has said as much to the RDC). 

     
  • Palmer was the de facto CEO of both Firms.  He did in fact belatedly apply for FCA approval as a CF3 (chief executive).  Palmer considered the Group to be his own and exercised influence and control in all aspects.  There was no effective challenge to his authority at board level, despite two board re-structures instigated by the FCA.

     
  • The FCA did not seek to criticise the business model itself, nor did it contend that Palmer was responsible for actually setting up the heightened systems and controls it required (this responsibility was held by Bell and Grigg).  Its case was instead that Palmer failed to respond with due skill and care to the risk, particularly acute in his business model (with its increased AR autonomy), that the Firms' systems and controls were inadequate to oversee the ARs.

     
  • Palmer had assumed a personal responsibility for proper functioning of these systems and controls in the particular context of the business model, over and above the overall responsibility that the Firms' boards had. In addition to assuming this responsibility, prior to the Relevant Period, the Board had assigned to Mr Palmer the responsibility of ensuring that systems and controls throughout the Group were effective (as distinct from actually setting them up). 

     
  • To give readers a flavour of the relevant facts, following an ARROW visit in 2012 the then FSA made serious criticism of the Firms and Palmer personally.  It found that the Firms' systems and controls were so deficient as to pose a high risk to the FSA's regulatory objectives.  Palmer (and others) were said to have inadequate knowledge of the risks caused to underlying customers. A subsequent skilled persons' report required by the FSA determined that the systems and controls were weak. 

     
  • The Upper Tribunal ultimately determined that Palmer never grasped the heightened standard that the business model (and the risks it generated) required of him in discharging his responsibilities.  His leadership of the network required a keen and close attention to the risks posed to the customers of the ARs.  He should have continually and proactively challenged Bell and Grigg as to the systems they had put in place.  However, the Upper Tribunal found that he only ever reacted to events.  This was because he did not have adequate knowledge of the risks created by the model.      

In relation to sanction, Palmer did not challenge the level of penalty (calculated in accordance with the 5-step process).  In relation to the SIF ban, the Upper Tribunal said that it would be irrational to impose a competence based prohibition, except where there was a risk to the public. In this case, the competence failures related to a long period and followed him being disciplined by the FSA. As such, it was clear to the Upper Tribunal that Palmer could not learn his lesson and he did pose such a risk to the public.  It therefore upheld the SIF ban.   

Comment

This was a factually heavy case for the Upper Tribunal. Ultimately, however, the FCA's case was a very narrow one, given that the individuals actually responsible for setting up the systems and controls and the Firms had already been disciplined. 

The use of the language of assumption of responsibility is interesting and is more redolent of common law tort cases, rather than disciplinary matters.  However, in this case it was plainly thought necessary in addition to the role overseeing the efficacy of systems and controls that Palmer had been given by the Boards, in order to ensure that Palmer (the controlling mind of the Firms) was properly held individually accountable.  

This case also represents another relatively rare example of a competence based prohibition – the Upper Tribunal's clarification of the need to show public risk is a useful indication in this regard.