In this case report we consider enforcement action taken by the FCA in relation to three former senior executives of a large retail insurance firm (the former Chief Executive, Finance Director and Marketing Director).  This is a further example of enforcement action by the FCA against members of senior management.

The Swinton Group

The Swinton Group Limited (Swinton) is a large general insurance intermediary firm which offers a wide range of retail insurance services.

Swinton offered various monthly add-on insurance products  to existing and new customers who had taken on other, ‘core’ insurance products (the Monthly Policies). Swinton also told the Monthly Policies on a standalone basis to customers who had purchased ‘core’ insurance products through other insurance brokers.

Customers were not charged for the Monthly Policies for an initial period of three months, after which monthly premiums became payable and were taken automatically from their accounts if they did not cancel their Monthly Policies.

FCA enforcement action taken against Swinton

In July 2013, the FCA fined Swinton GBP7,380,400 for breaches of Principles 3, 6 and 7 of the FCA’s Principles for Businesses for:

• failing to provide customers with adequate information about the Monthly Policies at the point of sale;
• not having adequate compliance monitoring processes to identify flaws relating to how Monthly Policies were sold; and
• adopting an ‘aggressive sales strategy’ which ‘focused on maximising sales at the expense of treating customers fairly and putting them at the heart of its business’.   

Enforcement action against former members of Swinton’s senior management

In November 2014, over a year after the publication of the FCA’s enforcement action against Swinton, the FCA published Final Notices in respect of three former members of Swinton’s senior management in connection with the findings made by the FCA in relation to Swinton’s sale of the Monthly Policies:

• Peter Halpin, the former Chief Executive of Swinton, was fined GBP412,700 and was also prohibited from acting as a Chief Executive of another FCA authorised firm.
• Anthony Clare, the former Finance Director of Swinton, was fined GBP208,600 and was also prohibited from performing a Significant Influence Function in any FCA authorised firm.
• Nicholas Bowyer, the former Marketing Director of Swinton, was fined GBP306,700 and was also prohibited from performing a Significant Influence Function in any FCA authorised firm.

Further details about the FCA’s findings made in respect of these three former members of Swinton’s senior management are set out below. Although specific to the facts of the case, the FCA’s findings provide a helpful insight into the factors that the FCA will consider when determining whether Significant Influence Function holders have discharged their regulatory obligations. 

Paul Halpin: Former Chief Executive Officer

Role and responsibilities

Mr Halpin had been the Chief Executive of Swinton since April 2009. He was approved by the FCA to perform the CF1 (Director) and CF3 (Chief Executive) Significant Influence Functions.

Mr Halpin held a number of roles that gave him oversight responsibility for Swinton’s compliance with regulatory standards. For example, Mr Halpin was the Chairman of Swinton’s Compliance Board, which the FCA found meant that he had oversight of compliance issues and for measuring Swinton’s performance relating to treating customers fairly. As a Significant Influence Function holder, the FCA also found that Mr Halpin was also responsible for taking reasonable steps to ensure that Swinton’s systems and controls complied with regulatory requirements.

FCA’s findings

The FCA concluded that Mr Halpin had failed to comply with Principle 7 of the FCA’s Statements of Principle and Code of Practice for Approved Persons (APER).

In particular, the FCA found that:

• Mr Halpin did not adequately deal with a number of important compliance risks and warnings relating to the monthly add-on products, including poor call monitoring results.

The FCA found that Mr Halpin received a number of indicators of compliance problems relating to the Monthly Policies. For example, the FCA concluded that:

• Mr Halpin was aware or poor sales call monitoring results and high levels of complaints which suggested that there were compliance failings in relation to the sale of the Monthly Policies;
• the high cancellation rates for the Monthly Policies indicated that Swinton was selling them to customers who had no real need for the product, and that Swinton was selling Monthly Policies to customers without their knowledge or authorisation; and 
• a number of poor audit reports should have alerted Mr Halpin to the potential for Swinton’s sales incentive scheme to improperly motivate sales executives to missell products in order to achieve sales targets and claim bonuses.

The FCA concluded that these indicators pointed to a risk of widespread misselling of the Monthly Policies. Although Mr Halpin took steps to address some of these indicators, the FCA found that Mr Halpin addressed each issue in isolation and that he did not assess whether, when considered as a whole, these indicators pointed to fundamental problems in relation to Swinton’s sale of the Monthly Policies.

• Mr Halpin’s positions as Chief Executive and Chairman of the Compliance Board gave him an oversight responsibility to ensure the accuracy, reliability and fitness for purpose of the Management Information presented to the Compliance Board. In this regard, he failed to identify and act on weaknesses when he ought reasonably to have done so.

The FCA found that the Management Information that was presented to the Compliance Board was inadequate. For example, the sample size of aggregated call monitoring results was found to be too small and Swinton’s processes for recording customer complaints were inadequate. As a result, the FCA concluded that the Management Information that was presented to the Compliance Board understated the true level of customer complaints relating to the Monthly Policies.

The FCA acknowledged that Mr Halpin took steps to improve the Management Information presented to the Compliance Board. However, the FCA found that these improvements were not adequately implemented.

• Mr Halpin failed in respect of his oversight responsibility for ensuring that the process control framework put in place in relation to the Monthly Policies, and the questions customers were asked as part of the process, were adequate to properly monitor whether customers were being treated fairly.

In particular, the FCA found that Mr Halpin ought reasonably to have been aware of weaknesses in the control framework for the Monthly Policies in light of the guidance that was published at the time by the FSA an the FCA in relation to treating customers fairly.

• Mr Halpin failed to recognise the risk that Swinton’s directors’ share scheme (the DSS) and Swinton’s business strategy to maximise profits in 2011 might give rise to a culture in which the delivery of profits might negatively impact upon treating customers fairly. However, the FCA noted that it has not identified any evidence to suggest that Mr Halpin was improperly motivated by the DSS. 

The FCA found that Swinton’s business strategy and the DSS created a risk that the delivery of profit might conflict with the fair treatment of customers and that Mr Halpin ought to have been alert to the risk that the DSS, like other incentive schemes, could drive non-compliance conduct among its participants.

Penalty

In addition to fining Mr Halpin GBP412,700, the FCA also exercised its powers under section 56 of the Financial Services and Markets Act 2000 (FSMA) to impose a prohibition order on Mr Halpin. The terms of this prohibition order prevent Mr Halpin from performing the CF3 (Chief Executive) Significant Influence Function in relation to any regulated activity on the basis that he is not a fit and proper person in terms of his competence and capability.

Anthony Clare: Former Finance Director

Role and responsibilities

Mr Clare was Swinton’s Finance Director and was approved by the FCA to perform the CF1 (Director) Significant Influence Function.

Mr Clare's role was a broad one and went beyond the responsibilities that are typically allocated to finance directors in regulated firms. For example, Mr Clare sat on Swinton’s Compliance Board and was the executive director who had oversight of Swinton’s Compliance Function. The FCA found that the combination of Mr Clare’s responsibilities meant that he had a particular responsibility for ensuring that Swinton’s customers were treated fairly.

FCA findings

The FCA found that Mr Clare breached APER Principles 6 and 7.

In particular, the FCA found that Mr Claire breached APER Principle 6 in the following ways:

• Mr Clare failed to appreciate the risk that the manner in which Swinton developed and sold its Monthly Policies could result in it not treating its customers fairly.

In particular, the FCA found that Mr Clare should have:

• noticed that there were very low levels of claims made under the Monthly Policies sold to customers in 2010 and 2011 and investigated whether this was as a result of the Monthly Policies having been missold; and
• taken the spike in the cancellation rate of Monthly Policies after the expiry of the initial free period as an indication that customers who had been sold Monthly Policies had no real need for them.

• Mr Clare was involved in decisions relating to the development of the Monthly Policies, aspects of which were found to be unfair to customers.
• As Finance Director, Mr Clare played a key role in designing and implementing the DSS.

The FCA concluded that Mr Clare failed to appreciate that the DSS led to an inherent risk of engendering a culture that prioritised profitability in 2011 over the fair treatment of customers and that he also failed to identify  various factors, such as warnings that sales staff were under increasing pressure which may have resulted in compliance errors.

The FCA also pointed to the following factors as reasons for Mr Clare failing to comply with APER Principle 7:

• Given his role in overseeing the Compliance Function, Mr Clare failed to ensure that the Compliance function produced reliable Compliance Board Reports containing sufficient data to allow the Compliance Board adequately to monitor and deal with compliance issues.
• Mr Clare failed to ensure that the Compliance Function produced Management Information relating to certain Monthly Policies that was fit for purpose and capable of being relied on by the Compliance Board and others responsible for monitoring compliance.

For example, the FCA found that Mr Clare failed to ensure that the sampling of sales calls was sufficient for the Compliance Board to judge whether customers were being treated fairly in relation to the sale of the Monthly Products.

In addition, with regards to the complaints Management Information, the FCA concluded that Mr Clare was aware of some practices that resulted in the data that was presented to the Compliance Board understating the true level of customer complaints received by Swinton in respect of the Monthly Policies.

• Despite Mr Clare’s particular responsibility for ensuring that Swinton treated its customers fairly, the FCA found that he failed to ensure that the process controls for certain Monthly Policies, and the questions asked, were sufficiently robust to monitor whether customers were being treated fairly and to mitigate the risk of misselling.

Swinton’s Compliance function undertook sales call monitoring by surveying of up to six customers of a staff member identified as ‘high risk’. The FCA highlighted that during these surveys, the Compliance function did not ask any questions to assess the way in which sales staff provided information to customers, the extent of a customer’s understanding of the product that they had purchased, the order in which information was provided or customers’ experience of objection handling.

• Mr Clare also failed to ensure the Compliance Board was presented with Management Information for a certain type of Monthly Policy that allowed it to adequately monitor whether customers were being treated fairly in the sales of the product.

Penalty

The FCA imposed a financial penalty on Mr Clare of GBP208,600. In addition, the FCA also imposed a prohibition order on Mr Clare which prevents him from performing any Significant Influence Function in relation to any regulated activity on the basis that he is not a fit and proper person in terms of his competence and capability.

Nicholas Bowyer: Former Marketing Director

Role and Responsibilities

Mr Bowyer was Swinton’s Marketing Director and was approved by the FCA to perform CF1 (Director) Significant Influence Function.

Mr Bowyer had a number of roles that made him responsible for ensuring that the design, development and sales process of the Monthly Policies complied with applicable regulatory standards. For example, Mr Bowyer was the ‘Project Sponsor’ for the Monthly Policies, which meant that he had responsibility for all aspects of the product development process, including those relating to compliance with regulatory standards (including treating customers fairly).

FCA findings

The FCA concluded that Mr Bowyer had failed to comply with APE Principle 6.  The FCA concluded that in designing and developing the Monthly Policies, Mr Bowyer was involved in a number of decisions which maximised Swinton’s opportunity to generate profits but which also risked Swinton’s fair treatment of customers.

In particular, the FCA found that:

• Mr Bowyer failed to address the risk that Swinton was selling the Monthly Policies to customers without their knowledge.

The FCA found that Mr Bowyer failed to identify that the draft sales script used to sell the Monthly Policies (which he went on to approve) did not present the Monthly Policies to customers as a separate, optional product. In addition, soon after the launch of the Monthly Policies, the FCA noted that Mr Bowyer was informed that customers did not always know or understand that they were purchasing an add-on insurance product.

The FCA added that Mr Bowyer should have been particularly alive to the risk of selling products to customers without their knowledge as a result of the Final Notice which was issued to Swinton in 2009 for failings in relation to the sale of PPI.

• Mr Bowyer was heavily involved in developing a sales process for the Monthly Policies which was designed to steer customers to the most expensive level of cover, without taking into account customers’ needs.

Although Mr Bowyer assumed that as Swinton’s Compliance function had signed-off on the Monthly Policies and that this meant that they complied with regulatory requirements, the FCA concluded that Mr Bowyer should have still been alive to and aware of the risks attached to steering customers towards more expensive insurance add-on products, especially in light of the previous enforcement action taken against Swinton in 2009 for failings in relation to the sale of PPI.

• Mr Bowyer encouraged Swinton to sell Monthly Policies to customers who already had insurance cover for the same risks with another provider.
• Mr Bowyer contributed to a culture within the firm that was overly focused on sales and put at risk the fair treatment of customers.

The FCA concluded that Mr Bowyer was motivated by the DSS and the bonus he potentially stood to earn as a result of maximising Swinton’s profits. As a result, the FCA found that Mr Bowyer encouraged the development of a culture within Swinton that encouraged the pursuit of profits at the expense of treating customers fairly. In doing so, Mr Bowyer was found to have failed to have recognised that, as Marketing Director and a CF1 (Director), he had a role to play in embedding a culture within Swinton in which regulatory requirements and the fair treatment of customers were given due priority. 

Penalty

The FCA imposed a financial penalty of GBP306,797 on Mr Bowyer. In addition, the FCA also imposed a prohibition order on Mr Bowyer which prevents him from performing any Significant Influence Function in relation to any regulated activity on the basis that he is not a fit and proper person in terms of his competence and capability.

Comment

These three cases reinforce the FCA’s continued focus on taking enforcement action against members of senior management who are found to have fallen below the regulatory standards expected of them. This was a prominent theme in the FCA’s Annual Report for 2013/14 and Business Plan for 2014/15.

In particular, the FCA’s findings in respect of Mr Halpin, Mr Clare and Mr Bowyer serve as an example of the FCA’s expectations of senior management in terms of embedding a compliance culture within their firms and setting the ‘right’ tone from the top of an organisation, as well as how the FCA may scrutinise incentive schemes in order to assess whether they promote regulatory compliance.

The Final Notices for Mr Halpin, Mr Clare and Mr Bowyer indicate that they did not, at times, appreciate the full extent of their responsibilities relating to treating customers fairly and embedding a compliance culture within Swinton that resulted from their roles. This finding emphasises the need for members of senior management to be clear about the scope of their role and responsibilities. However, this issue will, to some extent, be addressed in financial institutions by the introduction of Statements of Responsibilities under the new Senior Managers Regime, which need to detail the affairs of a firm for which a Senior Manager is (or will be) responsible.

This article first appeared on Practical Law  and is published with the permission of the publishers.