26 May 2015
In May, the FCA published Decision Notices against three former senior managers of Keydata Investment Services. The Decision Notices set out the FCA's decision to:
- fine former CEO Stewart Ford £75 million;
- fine former sales director Mark Owen £4 million;
- fine former compliance officer Peter Johnson £200,000;
- impose prohibition orders on all three individuals against performing any role in regulated financial services, all three having been found to have breached Principle 1 (integrity).
The £75m fine for Mr Ford is the largest ever fine for an individual decided on by the FCA. All three men have referred the matter to the Upper Tribunal.
Keydata designed and sold structured investment products to retail investors via IFAs. Keydata used money invested in the products to invest in bonds issued by two special purpose vehicles in Luxembourg. The SPVs in turn invested in portfolios of life insurance policies. Prior to its administration, Keydata had £2.8 billion of its own and other institutions’ investment products under administration.
The FCA found that the three individuals had failed to exercise sufficient due diligence before selling the products, issued misleading brochures, falsely marketed the products as being eligible for ISA investment and had misled the FCA as to the financial state of the products. Most damningly, however, the FCA found that Mr Ford had used a complex web of off-shore trusts and companies to siphon off some £72.4 million in fees and commissions from the products, with the result that the products were much less likely to provide successful returns to consumers.
You can read the Decision Notices here: Ford, Owen, Johnson.
The fine imposed on Mr Ford was huge – some twenty times the previous record for an individual. The vast majority of the fine was related to the £72.4 million found to have been earned from the sale of the products by Mr Ford and his family.
In some respects, given the nature of the integrity findings made, the areas of interest in terms of enforcement are fairly limited. However, there are some areas thrown up by the cases that are worth mentioning:
- The cases are a useful illustration again about personal responsibility and accountability. For example:
- They serve to illustrate the FCA’s view that, whilst tasks can be delegated, that does not absolve the person who delegates from his responsibility for the performance of the delegated tasks, nor for the responsibility of the business. The FCA gave short shrift to such arguments;
- Mr Owen argued that the FCA had not had sufficient regard to the role of Keydata's Finance Director, who was more senior than Mr Owen, and who, along with Mr Ford, was the only person who at all times knew Keydata's financial position. The FCA decided that, given the small number of directors on the Keydata board, it was particularly important that Mr Owen provided effective challenge to Mr Ford's actions and effective supervision of Keydata.
- The Decision Notice against Mr Johnson provides a view from the FCA on how far an individual in his role could be expected to go in challenging others more senior than him. The FCA found as follows:
The steps that Mr Johnson could have taken to ensure that the Keydata board of directors committed Keydata to taking these actions include: (i) refusing to sign off the financial promotions for the Lifemark Products, and/or (ii) making it clear that, if the Keydata board of directors did not commit Keydata to taking these actions, he would have no alternative but to resign from his position and/or notify the Authority of the issues.”
- Firms should think carefully about their engagements with third party advisors. For example, in one area of the investigation (whether the products were eligible for ISA status), Keydata was criticised for having failed to take any steps to instruct external advisors to advise as to whether their purported understanding of the relevant legislation was in fact correct. Conversely, central to the FCA’s findings in respect of due diligence and financial promotions was the extent to which Keydata ignored advice given by external advisors as to the deficiencies in these areas.
- Prior to publication of the Decision Notices, the individuals applied to the Upper Tribunal to prevent the publication of the Notices. The application was rejected with the Tribunal finding that the individuals had failed to show that publishing the Decision Notices would cause any of them "irreparable reputational damage" or that there would be a "substantial likelihood of disproportionate damage" to them.
All three individuals have referred their cases to the Upper Tribunal. Additionally, it has been reported in the press that Mr Ford has threatened to bring civil proceedings against the FCA for misfeasance in public office in respect of the manner in which the FCA instigated its enforcement action and its role in the administration of the firm. This is clearly not the end of the Keydata saga.
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