This half-year update provides an overview of recent enforcement activity by the Financial Conduct Authority (“FCA”) in the period from January to June 2022.
It has been a fairly busy first half of the year, with enforcement outcomes reached in a number of high-profile and important cases across the spectrum of FCA enforcement activity. Those include further use of the FCA’s criminal powers in cases against individuals; a rare account forfeiture order; a continued aggressive and risk averse approach taken in relation to crypto business; and significant fines imposed for failings in relation to managing conflicts of interest, financial crime and anti-money laundering controls, and treating customers fairly.
As we move into the second half of the year, we expect those trends to continue, together with a more frequent use of the FCA’s statutory intervention powers and the exercise of robust supervision and scrutiny in relation to consumer credit activity and Appointed Representatives in particular.
January 2022
Directors of Collateral (UK) Ltd charged with fraud and money laundering
In early January 2022, the FCA announced that it had charged two former directors of Collateral (UK) Ltd (“Collateral”) with fraud by false representation, fraud by abuse of position and converting criminal property. The FCA allege that the defendants dishonestly represented to investors that Collateral was authorised and regulated by the FCA to operate as a peer-to-peer lender knowing this was untrue. It is also alleged that shortly after Collateral was asked by the FCA to cease conduct of all regulated activities and shortly before Collateral ceased trading, the defendants dishonestly transferred funds to a separate company and, in addition, transferred further sums that they knew or suspected were the proceeds of crime into personal bank accounts.
See FCA press release here.
February 2022
FCA discontinues prosecution of an individual charged with failing to provide passwords to his devices.
In December 2021, the FCA had announced that it had charged an individual with failing to provide passwords for various laptops and phones, which had been seized from him by a warrant issued under section 176 of the Financial Services & Markets Act 2000. The individual had then been served with a notice under section 49 of the Regulation of Investigatory Powers Act 2000, requiring him to disclose his passwords to those devices.
In February 2022, the FCA discontinued the prosecution after receiving information from the defendant’s previous solicitors relating to the fact that his solicitors had not contacted the defendant about the statutory notice when it had been issued. That meant that there was no longer a realistic prospect of conviction.
This case is another recent example of investigating authorities taking a firm approach to suspected non-compliance with statutory notices and steps taken to frustrate investigatory powers to gather evidence. The case follows the acquittal of Konstantin Vishnyak in 2020, who was charged by the FCA with destroying WhatsApp conversations after being required to provide his mobile phone to the FCA, knowing or suspecting that the deleted data would be relevant to an FCA investigation into suspected insider dealing offences. It also follows similar proactive approach being taken by the SFO, which charged Anna Machkevitch with failing to provide documents in compliance with a section 2(3) notice, during its ongoing investigation into Eurasian Natural Resources Company.
See FCA press-release here.
Barclays Bank Plc fined £783,800 for oversight failings relating to payment firm Premier FX
In February 2021, the FCA issued a public censure to Premier FX Limited (“Premier FX”). Premier FX was authorised by the FCA under the Payments Services Regulations to perform the regulated payment service of money remittance. The FCA found that Premier FX had seriously misled its customers by misrepresenting that it was able to hold their funds indefinitely, that their funds would be held in secure, segregated client accounts and that their funds would be protected by the Financial Services Compensation Scheme.
Barclays Bank Plc (“Barclays”) was Premier FX’s sole banker in the UK. The FCA found that Barclays breached Principle 2 of the FCA’s Principles for Business by not acting with due skill, care and diligence in carrying out its ongoing monitoring of Premier FX. The failure included delays in finalising its AML/EDD reviews of Premier FX; simply copy and pasting information when preparing those reports, including errors which were not identified or rectified; not adequately challenging information provided by Premier FX’s sole director and shareholder; and failing to make enquiries about the purpose of certain accounts opened by Premier FX. In light of those failings, Barclays was fined £783,800 by the FCA, having also agreed to make an ex gratia payment of £10,076,943.75 to be distributed amongst Premier FX’s customers.
See FCA press release here.
Upper Tribunal Rejects application by cryptoassets exchange to suspend effect of fca decision notice
On 15 November 2021, the FCA issued a Decision Notice to a crypto ATM provider, Gidiplus Limited (“Gidiplus”) refusing its application to be registered as a cryptoasset exchange provider pursuant to Regulation 57 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“the MLRs”). As a consequence, the temporary registration held by Gidiplus to carry on cryptoassets activity ceased to have effect. Gidiplus referred that decision to the Upper Tribunal and also applied for a direction that the effect of the Decision Notice be suspended pending determination of the reference.
It was common ground that granting suspension is a matter of discretion for the Tribunal and that the conditions to be met are those set out in Sussex Independent Financial Advisers Limited v FCA [2019] UKUT 228 (TCC) at [14] and [15], namely that (a) the Tribunal must be satisfied that there is a case to answer on the reference; (b) the sole question is whether in all the circumstances the proposed suspension would not prejudice the interests of persons intended to be protected by the notice; (c) detriment to the applicant is not relevant to that test; (d) the burden is on the applicant to satisfy the Tribunal that the interests of consumers would not be prejudiced; and (e) as regards risk to consumers, the Tribunal is concerned with significant risk beyond the normal risk of a firm that is doing business in a broadly compliant manner.
Applying those conditions, the Tribunal dismissed Gidiplus’ suspension application. The Tribunal found that given the serious concerns identified in the Decision Notice and the lack of evidence as to how Gidiplus would undertake its business in a broadly compliant fashion pending determination of the substantive Tribunal reference, the Tribunal could not be satisfied that allowing Gidiplus to continue to carry on its activities would not prejudice those who are intended to be protected by the FCA’s decision to refuse Gidiplus’ application for registration. This case demonstrates the value that specialist legal / compliance resource can bring to crypto firms in a contested process to assist in addressing any perceived risk areas and evidencing compliance with the MLRs.
See Upper Tribunal judgment here.
former redcentric Plc senoir staff convicted of offences relating to misstated accounts
In February 2022, the FCA announced the convictions of the former Chief Financial Officer and Finance Director of Redcentric Plc (“Redcentric”). Redcentric is an AIM-listed IT service provider which was publicly censured by the FCA in 2020 for committing market abuse by issuing unaudited interim results and audited final year results which materially overstated its cash position and, consequently, misstated its net debt position.
The CFO of Redcentric was found guilty of 2 counts of making a false or misleading statement, contrary to section 89(1) of the Financial Services Act 2012, and 3 counts of false accounting, contrary to section 17(1)(a) of the Theft Act 1968. He was sentenced to five and a half years’ imprisonment and disqualified from being a director for ten years. The Finance Director earlier pleaded guilty to 2 counts of making a false or misleading statement, 4 counts of false accounting, and 7 counts of making a false or misleading statement to an auditor contrary to section 501 of the Companies Act 2006. She was sentenced to three years’ imprisonment.
See FCA press-release here and here.
March 2022
Asset management firm and an Investment Director fined for failings relating to management of conflicts of interests
On 30 March 2022, the FCA announced that it had fined the asset management firm, GAM International Management Limited (“GAM”), and a former Investment Director and Business Unit Head, £9,103,523 and £230,037, in respect of failings relating to managing conflicts of interests.
The FCA found that GAM failed to manage conflicts of interest arising from three transactions in respect of which potential incentives were offered which would have provided benefits to GIML or its parent company. Although these were not taken up, they were not dealt with properly by GIML. Conflict of interest policies were not followed and as a result any potential conflicts were not considered by those who should have been responsible for doing so. Furthermore, the Investment Director and Business Unit Head received gifts and entertainment, including travelling on a private aircraft, but failed to record them in a timely manner with GIML. Although the FCA did not find evidence that the individual made investment decisions because of these gifts and entertainment, it found that the fact that conflicts were not properly managed heightened the risk that he may have been incentivised to invest for personal interest.
See FCA press-release here.
April 2022
FCA secures £2million account forfeiture order against fintech start-up
On 21 April 2022, the FCA announced that it had secured an account forfeiture order in the amount of £2 million against a fintech start-up. Powers to apply to freeze and forfeit money held in bank accounts were granted to the FCA through amendments to the Proceeds of Crime Act 2002 made by the Criminal Finances Act 2017.
In this case, the money was initially frozen in urgent proceedings brought by the FCA in October and December 2020, in which the FCA claimed that the money was the proceeds of illegal activity connected to criminal proceedings in the USA concerning an alleged conspiracy to commit wire fraud against banks, credit card companies and other financial services providers. While the FCA did not allege that the fintech start-up was involved in the alleged conspiracy, the FCA observed that the company had received the money from a third-party company, allegedly as an investment, and had then moved the money repeatedly to different bank accounts in several countries which none of those transactions appearing to be related to legitimate business. A forfeiture order was made by consent at Westminster Magistrates’ Court.
See FCA press-release here.
May 2022
FCA issues warning to businesses about misleading credit adverts
In May 2022, the FCA warned lenders and brokers that they could face regulatory action if they do not stop using misleading terms when advertising. 28,000 consumer credit firms were written to by the FCA warning them not to use terms such as “no credit check loans”, “loan guaranteed”, “pre-approved” or “no credit checks” when marketing loans. With an increase in people seeking loans due to the cost of living crisis, the FCA made clear that adverts should not give the impression that a person will receive a loan automatically when applying, or that they can get a loan without the lender checking they can afford it. The FCA made clear that it will continue to monitor online credit advertising to check that firms are complying with the requirements. If firms do not comply, then the FCA is likely to take action, which could include banning adverts or requiring firms to change or withdraw them. In more serious cases, the FCA could seek to remove a firm’s permissions to engage in regulated credit activity.
See FCA press-release here.
Five directors banned and fined over £1million for causing losses by giving unsuitable pensions advice
On 9 May 2022, the FCA fined and issued prohibition orders to five directors of financial advice firms following their role in causing losses to pension customers. This followed a lengthy judgment by the Upper Tribunal which found that the directors had failed to act with integrity, having either acted dishonestly or recklessly, and provided unsuitable advice to over 2,000 customers causing them to place their pensions in high-risk financial products in self-invested personal pensions. The Tribunal found that all the five individuals allowed their “instincts and values to be overridden” and their judgement to be compromised for personal financial gain. They had also failed to scrutinise where their customers’ pension funds were being invested, causing significant losses of over £50 million. The FCA has recently been criticised by the Commons Public Accounts Select Committee for failing to do enough to protect members of the British Steel Pension Scheme from financial advisers providing unsuitable advice to transfer out of the scheme to their financial detriment.
See FCA press-release here and Committee of Public Accounts report here.
FCA refuses authorisation to regulatory consultancy firm
On 13 May 2022, the FCA published a final notice refusing Alexander Jon Compliance Consulting Ltd’s (“AJCC”) application for authorisation to provide regulatory hosting services. AJCC had applied for various regulatory permissions in October 2020, including arranging deals in investments and advising on investments. Its proposed business model was to operate as a regulatory host, whereby it would carry on regulated activities through a number of Appointed Representatives (“ARs”), who would deal directly with retail consumers, and for whom it would be ultimately responsible.
In scrutinising AJCC’s application, the FCA was not satisfied that it would be able to satisfy the minimum requirements for authorised firms (its Threshold Conditions). In particular, the FCA found that the applicant failed to show the necessary non-financial resources to be able to oversee its ARs effectively, including lacking staff with sufficient skill, experience and understanding of the business, and could not demonstrate how its ARs would ensure that products being offered to retail consumers were appropriate for them. The FCA also found that the firm’s proposed business model was not suitable or viable in the long term.
There can be little doubt that the FCA will continue to mitigate harm assertively in this area. The FCA has long standing concerns about the AR model, and considers regulatory hosting to be of particularly high risk, with Principal host firms frequently lacking the resources and expertise to oversee their ARs effectively. We are, therefore, increasingly seeing firms wishing to enter the perimeter as Principals being subject to high levels of scrutiny, whilst the FCA’s supervision of those already operating in this sector is becoming more intrusive and interventionist than ever before.
See FCA press-release here.
Jury discharged in insider dealing trial without a verdict
On 25 May 2022, the jury was discharged having been unable to reach a verdict in an insider dealing case, following an eight-week trial at Southwark Crown Court. The two defendants faced charges of insider dealing, with one defendant also charged with improperly disclosing inside information, or encouraging another, whilst being an insider, to engage in dealing. The alleged offending took place between 2 May 2016 and 10 June 2016 and involved trading in shares in British Polythene Industries plc (“BPI”), ahead of an announcement that RPC Group plc was to acquire BPI. One of the defendants worked for RPC Group plc during that period.
On 22 June 2022, the FCA announced that it will pursue a re-trial of both defendants.
See FCA press-release here.
June 2022
FCA fines consumer credit firm £811,900 in relation to deficient affordability checks
TFS Loans Ltd (in administration) (“TFS”) offered guarantor loans to customers with poor credit histories who typically struggled to obtain other forms of credit. The loans required the customer to nominate a third party, often a family member or friend, to provide a guarantee of their loan repayments. If the borrower did not make the requirement payments on the loan, then the guarantor was legally obligated to pay the loan on the borrower’s behalf.
The FCA’s rules under the Consumer Credit sourcebook (“CONC”), within the FCA’s Handbook, require guarantor lenders to undertake creditworthiness assessments to determine whether a potential guarantor’s commitments in respect of the loan could adversely impact the guarantor’s financial situation. For such an assessment to be effective, lenders must collect and analyse adequate information regarding a potential guarantor’s actual income and expenses.
The FCA found that TFS failed to undertake adequate affordability checks on the guarantors who were liable when borrowers were unable to pay their debts. That failure meant that some guarantors were unable to afford the guarantees they entered into, risking significant personal financial repercussions and distress, if those guarantees were called upon. This happened in some cases. TFS also placed an additional financial burden on customers who were already in arrears by charging excessive late payment management fees, in violation of its own policies. As a result, the FCA found that TFS failed to treat customers fairly or to take reasonable care to organise and control its affairs responsibly and effectively. In doing so, the FCA found that TFS breached Principles 3 and 6 of the FCA’s Principles for Businesses and certain provisions of CONC.
The FCA imposed on TFS a fine of £811,900 and a requirement to provide redress to guarantors who have suffered loss as a result of its failings. Notably, the FCA acknowledged clearly in its Final Notice the high level of cooperation demonstrated by TFS, which resulted in a discount to the fine imposed by the FCA. TFS’ cooperation included all members of its management agreeing to attend a voluntary roundtable interview with the FCA at a very early stage, at which they participated in an open and candid manner. TFS also waived its right to claim legal professional privilege and unreservedly shared all information requested by the FCA throughout the investigation, including sensitive material and material which would otherwise have been protected by privilege.
See press-release here.
FCA fines insurance broker £7.8million for financial crime control failings
On 22 June 2022, the FCA fined an insurance broker, JLT Speciality Limited, £7.8million for breaching Principle 3 of the FCA’s Principles for Businesses in relation to failures to take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems to counter the risk that it might be used to further financial crime.
Those failings included (a) not considering whether additional safeguards or approvals should be incorporated into the broker’s processes with respect to overseas introducers engaged by another group entity; (b) not ensuring that information, including potential red flags, was brought to the attention of the firm’s Financial Crime Team for review, consideration and action as necessary; (c) not considering whether additional monitoring and oversight of oversight introducers was appropriate; and (d) the firm’s Financial Crime Team not following its own due diligence processes.
See FCA press-release here.
Ghana International Bank Plc fined £5.8million for failings in its anti-money laundering controls
On 23 June 2022, the FCA announced that it had fined Ghana International Bank Plc (“GIB”) £5,829,900 for breaching Regulations 14(1), 14(3) and 20(1) of the Money Laundering Regulations in respect of its correspondent banking activities, by failing to (a) establish and maintain appropriate and risk-sensitive policies and procedures; (b) conduct adequate enhanced due diligence when establishing new business relationships and (c) conduct adequate enhanced ongoing monitoring.
GIB provided correspondent banking services to overseas banks. This allowed those banks to provide products and services they would not otherwise be able to, including making payments in different currencies and across borders. The FCA requires banks to carry out extra checks on their correspondent banking customers to reduce the higher risk of money laundering and terrorist financing associated with the service. However, it found that between 1 January 2012 and 31 December 2016, GIB did not adequately perform the additional checks required when it established relationships with overseas banks and failed to demonstrate it had assessed those banks’ anti-money laundering controls. It further found that GIB had failed to undertake annual reviews of the information it held on the banks it had a relationship with, failed to give staff adequate training on how to scrutinise transactions properly and did not establish appropriate policies and procedures for staff. While no actual money laundering was identified at GIB, the risk of money laundering was significant due to the deficient systems in place. GIB agreed to settle at the earliest opportunity, affording it a 30% discount on the total fine imposed.
See FCA press-release here.
Further Information
For further information on the issues raised in this blog post, please contact a member of our criminal litigation team.
ABOUT THE AUTHORS
Philip Salvesen is a Senior Associate in the criminal litigation team. Phil specialises in contentious FCA regulatory work and has been named by Legal 500 as a key lawyer in this area who “completely masters the detail of complex cases”. He has advised clients in some of the most high profile FCA investigations of recent years, such as various investigations arising out of the failure of London Capital & Finance Plc (LCF). His experience covers FCA investigations from their early stages through to contested cases before the FCA’s Regulatory Decisions Committee (RDC) and the Upper Tribunal. Phil also advises firms and individuals on contested FCA approval applications and other FCA regulatory matters, including disciplinary investigations with FCA regulatory aspects, Conduct Rule breaches, reporting obligations, regulatory references and other issues arising under the Senior Managers and Certification Regime (SMCR).
Emma McGrath is a Paralegal in the criminal litigation team. She assists with a broad range of cases including general crime, white collar crime and financial services investigations. Her current caseload includes assisting in relation to a complex FCA investigation into suspected non-financial misconduct by a senior executive. Emma has been at Kingsley Napley for 11 years and is an Advanced Paralegal CILEX member.