The Upper Tribunal has upheld a ban and fine against Darren Antony Reynolds, a former pensions adviser, for what the FCA described as the "worst misconduct" out of all the British Steel Pension Scheme (BSPS) cases.
Background and admitted misconduct
Mr Reynolds was an authorised person at Active Wealth (UK) Limited, a financial advice firm. The misconduct occurred between 12 March 2015 and 5 February 2018. The FCA's allegations, which Mr Reynolds admitted, were as follows:
- Between March 2015 and September 2016, Mr Reynolds dishonestly advised Active Wealth's retail customers to invest in Portfolio Six (P6), a portfolio of high risk, illiquid investments managed by Greyfriars Asset Management LLP, "knowing that it was not suitable for them".
- Between December 2016 and November 2017, Active Wealth advised around 400 customers to switch or transfer their pensions to SIPPs and invest in portfolios consisting of UCITS sub-funds, which imposed exit fees of up to 5%. Mr Reynolds dishonestly failed to disclose the exit fees adequately or at all to customers, even when customers specifically raised the issue of exit fees. In some instances, he advised customers that no exit fees would apply if they remained with Active Wealth.
- Mr Reynolds dishonestly advised and persuaded around 140 customers to transfer their BSPS pensions to alternative pension arrangements, often SIPPs, when he knew it was not likely to be in their best interests.
- The suitability reports prepared by Active Wealth did not reflect Mr Reynolds' oral advice and were deliberately drafted to give the false impression that customers had been advised to remain in the BSPS, and, in most cases, the reports were provided only after the funds had been transferred.
- Mr Reynolds also dishonestly created, maintained and concealed a significant conflict of interest so that he and other financial advisers at Active Wealth could receive prohibited commission payments, arranging for commission to be paid to him and other employees via two separate companies to disguise the prohibited commission payments and conceal the true nature of the payments.
- Through the commission payments, Mr Reynolds' direct financial benefit amounted to £1,014,976.
The investigation and proceedings
The FCA's Decision Notice dated 2 May 2023 (the Decision) concluded that Mr Reynolds lacked honesty and integrity and was therefore not a fit and proper person to perform functions in relation to any regulated activity.
Accordingly, the FCA issued a Prohibition Notice (the Prohibition) preventing Mr Reynolds from performing any function in relation to regulated activities and a financial penalty of £2,212,316 (the Penalty).
Mr Reynolds made a reference to the Upper Tribunal on a number of grounds. However, he subsequently withdrew his challenge to the scope of the Prohibition but objected to aspects of the decision on two grounds:
- The Limitation Ground – that no penalty ought to have been imposed in respect of conduct which could have been reasonably inferred from information available to the FCA prior to 10 August 2016, because the Warning Notice issued on 10 August 2022 was more than six years after that date; and
- The Disgorgement Ground – that certain prohibited commission payments should be excluded from the disgorgement calculation because they are subject to claims by a liquidator and/or HMRC tax discussions.
The Tribunal's decision
In respect of The Limitation Ground, Section 66(4) of The Financial Services and Markets Act 2000 (FSMA) provides that the FCA (or PRA) may not take action against a person (meaning issuing a decision notice) after the end of six years from when the regulator knew of the misconduct. The regulator is to be treated as knowing of misconduct if it has information from which the misconduct can be reasonably inferred.
The Tribunal in this case concluded that the Authority did not have any information from which Mr Reynolds' dishonest misconduct could reasonably be inferred before 17 August 2017 (at the earliest).
The Tribunal reasoned that while the FCA could have inferred that Mr Reynolds was giving bad advice to retail customers in relation to P6 by the end of May 2016, it could not infer dishonesty without knowing more about his state of mind.
The Tribunal found that the FCA did not have material from which it could infer that prohibited commissions were being paid to independent financial advisers (IFAs) in relation to P6. Even if it could have made such an inference, there was insufficient information to infer that Mr Reynolds specifically was receiving such commissions, particularly given the sophisticated manner in which he concealed these payments through various companies.
The Tribunal partially accepted the disgorgement argument, allowing for potential future adjustment of the penalty if Mr Reynolds pays competing claims from HMRC or the Official Receiver relating to the same funds.
Penalty
The Tribunal upheld the financial penalty of £2,212,316, with only minor modifications to the calculation methodology.
The High Court disqualified Mr Reynolds in 2021 from being a company director for 13 years following an investigation by the Insolvency Service which concluded he had failed to act in the best interests of Active Wealth's customers.
Customer redress
By 5 August 2022, the Financial Services Compensation Scheme had paid compensation of over £17.6 million to over 470 of Active Wealth's customers, at least 231 of whom suffered losses that exceeded the FSCS compensation cap of £50,000.
Comment
An assessment of whether the FCA is time-barred requires consideration of what information the FCA possessed (in any department or "inbox") and whether from that information the wrongdoing could reasonably be inferred. In a number of previous cases the FCA has been forced to drop parts of its case against individuals because it was deemed to be outside the limitation period. In some cases, the FCA has faced criticism from the Upper Tribunal for being out of time. In this case, it was accepted that the FCA was in possession of some information relevant to wrongdoing, and accordingly, Mr Reynolds was perhaps justified in seeking to test whether the FCA was out of time. Ultimately, the Tribunal determined that the full extent of Mr Reynolds' wrongdoing could not be determined from the material in the FCA's possession.
Therese Chambers, joint executive director of enforcement and market oversight at the FCA has publicly stated that the FCA is speeding up investigations and "doing fewer investigations faster". One of the benefits of this approach is reducing the number of occasions the FCA falls foul of the six-year rule.
This case is possibly the last in a long series, and certainly represents the most egregious conduct by an adviser. The FCA has faced parliamentary criticism for being "consistently behind the curve" in relation to BSPS and that in 2017 the FCA "did not know what was happening in the DB pension transfer market or the BSPS case". None of this is the fault of the Enforcement Division which has taken decisive action against many financial advisers. Going forward, perhaps the FCA's focus on more intensive supervision will prevent similar advice scandals.