The UK's regulatory Upper Tribunal has upheld the Financial Conduct Authority’s decision to ban Charles Palmer, the former CEO of Financial Ltd and Investments Ltd, from performing 'significant influence' functions and to fine him £86,691.

Palmer was the majority (90%) shareholder and CEO of Standard Financial Group (of which both firms are subsidiaries) and a director and de facto CEO of the 'advisor network' which consisted of the two firms. The network operated nationally and, at its peak, in March 2011, consisted of 397 appointed representatives (“ARs”) and 516 registered individuals (“RIs”). Between 24 February 2010 and 20 December 2012, the Firms’ ARs and RIs collectively provided advice to approximately 40,000 customers.

Justice delayed

The FCA published its decision notice, which Palmer contested unsuccessfully, in September 2015 - a proof of how slowly the wheels of British justice turn. Between February 2010 and December 2012 Palmer performed the CF1 (director) function at each of the firms. The group of which they are part is not an 'authorised person' and does not trade actively. Together, the firms form an 'advisor network' on which Palmer exerted the primary controlling influence. Under him, ARs and RIs were given a wide measure of latitude in the way they operated.

Palmer, the FCA and Upper Tribunal concluded, ought to have known that the firms' business model was exposing customers to risks (including the risks inherent in receiving bad advice) because of a final notice that the old Financial Services Authority sent the firms in 2010. This stated that he had gone against APER (approved person) statements of principle 5 and 7 in performing his CF1 (Director) and CF8 (Apportionment and Oversight) controlled functions at Financial.

Statement of Principle 5 says that an approved person performing an accountable higher management function must take reasonable steps to ensure that the business of the firm for which he is responsible in his accountable function is organised so that it can be controlled effectively. Statement of Principle 7 says that an approved person performing an accountable higher management function must take reasonable steps to ensure that the business of the firm for which he is responsible in his accountable function complies with the relevant requirements and standards of the regulatory system.

A litany of errors

There were other previous reviews involving the firms. In August 2008, the FSA visisted them as part of the its thematic review of pension-switching advice. It uncovered "a significant risk of consumer detriment as a result of weaknesses in systems and controls" and a skilled person had to be called in to write a 'section 166' report, which came out in 2013 and found "potential customer detriment" in 10 cases out of 34, which led to redress for those customers from the firm.

In April 2012, as a follow-up to the visit of 2008, the FCA reviewed a random sample of the firms’ pension-switching recommendations and uncovered "a risk of providing unsuitable advice to retail customers." It also had deep reservations about the way in which the firms' assessed customer’s risk appetites. It therefore required Financial Ltd to undertake a review that was still going on in 2015. The omens at the time were not propitious.

In June 2012 the FSA visited the firms again, this time in connection with its thematic review of firms’ practices in respect of the promotion and sale of unregulated collective investment schemes or UCIS, uncovering weak systems and controls and plenty of unsuitable advice. Even in late 2015, Financial was still at the tail-end of a 'voluntary' review (under the watchful eye of the FCA’s supervisory division) of the firms’ past sales and promotions of UCIS funds (invloving 346 transactions and 274 customers). It had found that a staggering 94% of UCIS fund transactions it had assessed were "potentially unsuitable."

Fine words butter no parsnips

The group's business plan for 2012/13 contained many fine phrases about “looking at the outcomes for customers more than the output of advisers” and "moving the business model towards customers and advice.” Palmer's presentation to the board, however, seemed to betray his true aim: "in terms of the main business model, there are no major changes to the services offered." The FCA found this rather damning.

Even more damning was the aforementioned 'skilled person's report' of September 2013 that the FSA demanded by invoking section 166 Financial Services and Markets Act 2000. It found fault with both the design of the firms’ systems and controls (particularly in relation to oversight of ARs and RIs) and the application of appropriate standards. It also said that the firms' risk management practices were not helping its senior management to identify and manage risk proactively.

The report attributed these failings to the wide latitude that Palmer's management team afforded to the firms' ARs and RIs and to the firms' "cultural focus," which was Palmer's main responsibility. It thought that the firms were treating the ARs as their real customers and not the end-consumers.

Consequences

On 23 July 2014 the FCA, as it now was, issued final notices against the firms for breaking 'principle for business' 3 which states, simplistically, that every firm must take reasonable care to organise and control its affairs responsibly and effectively. The FCA thought that the firms' recruitment processes for ARs, training for RIs, supervisory processes for ARs and RIs and compliance/file checking arrangements were grossly inadequate. It also thought that the firms had no processes that helped senior managers gauge the regulatory risks of the business, with no internal audit function and a resultant tendency for the board to deal only with problems that had already surfaced.

The FCA issued a final notice against compliance director Stephen Bell on 13 March 2015, finding him to have been knowingly concerned in the firms’ breaches of Principle 3. He had to pay £33,800 and give up being a CF10 (Compliance Oversight) man permanently.

In its decision notice of 2015 the FCA said that Palmer failed to exercise due skill, care and diligence in managing the business of the Firms for which he was responsible as a 'CF1,' in breach of Statement of Principle 6. This states that an approved person performing an accountable higher management function must exercise due skill, care and diligence in managing the business of the firm for which he is responsible in his accountable function. The FCA thought his conduct particularly egregious because it had already punished him and because it had already told him to treat his customers fairly and keep a rein on the firms' ARs and RIs so that they did the same.

Another consideration that underpins Palmer's punishment is the fact that "the authority has repeatedly highlighted (by way of guidance it has published) the importance of the fair treatment of customers being central to a firm’s business and of effective control over a firm’s ARs to reduce the level of risk to consumers."

The tribunal's assessment

One section - number 268 - of the tribunal's lengthly decision to back the FCA against Charles Palmer is most revealing. It states: "We are...seriously concerned that even at this stage Mr Palmer shows limited insight into the seriousness of his misconduct and has given no serious thought to what he would need to do to address his failings...When asked...whether there are things that he would have done differently, Mr Palmer could only identify what he had done to antagonise the authority. There was no reference to the risks to underlying customers which had arisen as a result of the failures that we have identified."