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Financial services investigations and enforcement monthly round-up - May 2019

As the FCA continues to promote a fairer sector, a number of firms and individuals have come under scrutiny. Here we unravel the key facts of these developments:

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Lifetime bans jump up by 70%

FCA sets up anti-phoenixing taskforce

Directors fined over £76 million for pension transfer failings

How is the PRA amending its policy on settlement of enforcement action?

Unauthorised investment firm ordered to repay nearly £1 million to investors

Will the FCA have to compensate for inaccuracies on its Register?

Lifetime bans jump up by 70%

The FCA banned 70% more people from operating in the regulated industry last year than in the year before. That’s according to comments made by John Glen, Economic Secretary to the Treasury. He reported that the FCA had issued prohibition orders to 24 people in 2018, compared with just 14 in 2017.

However, the figures based on the financial year reveal that 20 lifetime bans were issued in 2018/19 and 19 were issued 2017/18 financial year.

In John Glen’s words, "regardless of which numbers are used, the point remains the same: the FCA has strong powers to tackle bad practice, and that the regulator utilises these powers to protect consumers".

It is important to note that the FCA is not simply punishing individuals but instead taking proactive action to prevent future harm.

FCA sets up anti-phoenixing taskforce

The FCA has launched a working group to tackle phoenixing in financial services.

Phoenixing is a widely used administration practice that enables company directors to escape personal liabilities to consumers. For example, company directors may close down a firm by resigning from senior positions only to re-emerge within another legal entity.

Although this tactic is not illegal, it is a major problem for advisers. When consumers raise complaints about collapsed companies, the liability is shouldered by the FSCS, which is funded by levies every advice firm pays.

Representatives from the FSCS, FOS, Insolvency Service and Scotland's Accountant in Bankruptcy will join forces with the FCA to prevent phoenixing. The group will share data on FSCS claims, complaints and director disqualifications to help the FCA identify suspect firms before they make an attempt to phoenix.

Directors fined over £76 million for pension transfer failings

On 9 May 2019, the FCA published Decision Notices against three firms (Financial Page Ltd, Henderson Carter Associates Limited and Bank House Investment Management Limited (BHIM)) and five individuals for their part in providing unsuitable pension advice. This led to £26 million in compensation paid out by the FSCS.

The FCA considered that the firms had little oversight and involvement in the pensions advice provided to customers. The firms had positioned themselves to customers as capable of providing bespoke independent investment advice based on a detailed and fair analysis of the whole market.

This was misleading. The reality of the service was recommended pension switches and transfers to high risk, illiquid assets. They had outsourced important functions of pension review and advice processes to unauthorised third parties.

In response, the FCA held that the individuals managing the advice firms should have known the products they were selling were likely to be unsuitable. The individuals have been fined by the regulator and issued with prohibitions.

All five individuals and BHIM have referred their Decision Notices to the Upper Tribunal. In these cases, the Upper Tribunal will determine the appropriate action the FCA should take.

The sanctions recommended by the FCA against the individuals and firms (ranging from public censure to financial penalties in the range of £400,000) will have no effect pending the determination of the case by the Upper Tribunal.

How is the PRA amending its policy on settlement of enforcement action?

The PRA published a consultation paper (CP) on 15 April 2019 setting out proposals to amend its policy on the settlement of enforcement action.

It identified benefits to having a discount scheme to encourage early settlement. In the CP, the PRA recommends keeping the 30% early settlement discount and removing both the 20% and 10% discounts available for settlement in later stages of enforcement action.

To make it clear that the discount will only apply at stage 1 of the investigations process, the PRA will refer to it as the "Discount Stage". This would enable the PRA to identify early in the process the cases most likely to be contested.

The CP also sets out a number of amendments to the existing policy to help clarify its settlement procedures. It has outlined a process to introduce periodic reviews of settled cases to assess the fairness and effectiveness of settlement procedures.

We will find out the decision on the proposals from 15 July 2019.

Unauthorised investment firm ordered to repay nearly £1 million to investors

The FCA declared that Xcore Capital Ltd (Xcore) and Jonathan Chitty had carried out an unauthorised investment scheme. On 14 May 2019, the High Court made an order, following the FCA application.

The investment scheme took nearly £1 million from investors, leading them to believe they would see a 6% return in money traded on foreign exchange and equity markets.

In reality, the money was used to fund an office in Mayfair, brokers' wages and Mr Chitty's personal spending. His personal spending included £102,000 on cryptocurrencies, £20,000 on his wedding, £24,000 on a Rolex watch and £58,000 on other luxury goods.

The court found that Xcore had been running a deposit taking scheme without the necessary FCA authorisation and that Mr Chitty had knowingly breached the law. The court order requires Xcore and Mr Chitty to repay the full value of the sums owed to the investors, adding up to £917,231. The FCA will distribute the funds owed to consumers.

Following the Court decision, the FCA has renewed its warning against online investment scams. It advised that "consumers should be especially wary when contacted out of the blue about an investment opportunity", stating that if the firm is not authorised then it is probably a scam.

The increase in demand for cryptocurrencies and the promise of high returns make it an easy market for scammers. The FCA and Action Fraud have teamed up to urge the public to be more aware of "bogus" online trading platforms, which are often promoted on social media sites.

They reported that the number of crypto asset and foreign exchange scam cases has more than tripled in 2018/2019 from 530 to 1,834. On average a victim will lose £14,600, with the overall total loss being £27,366,12.

The FCA is launching a series of adverts via its ScamSmart campaign, to encourage consumers to be more aware of trading scams that promise high returns.

Will the FCA have to compensate for inaccuracies on its Register?

The Financial Regulators Complaints Commissioner has recommended that the FCA compensate 50% of a consumer's investment losses after it found "seriously inaccurate" entries on the FCA register.

In May 2018, a consumer contacted the FCA to confirm if an Austrian company they wished to invest in was a regulated entity. The FCA call centre associate confirmed the firm was legitimate based on its registration number and because it was eligible to operate in the UK under EU passporting laws.

The consumer was advised to contact the Austrian regulator before investing. The consumer did so but did not await a response before investing £13,000 with the company, which turned out to be a clone.

The Complaints Commissioner found that the FCA associate was correct to recommend the consumer contact the Austrian regulator, but it found two "serious errors" made by the FCA's predecessor, the FSA. In 2005 the FSA registered the firm under the wrong name, and in 2006 failed to follow instructions to de-register the firm, meaning it was still showing as registered.

The Commissioner acknowledged that the FCA does not generally warrant the accuracy of the Register ­– "The FCA register entry for this firm was seriously inaccurate. If it had been deregistered in 2006, you might not have lost your investment in the way you did".

The FCA responded that it was unable to accept the Complaints Commissioner's recommendation because it has no obligation under statute of common law to pay compensation for errors in the Register. It has, however, pledged to review the accuracy of its data.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2019. Specific advice should be sought for specific cases. For more information see our terms & conditions.

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