We consider here the decision of the Upper Tribunal (Tax and Chancery Chamber) in which the tribunal upheld the FCA's decision to fine and prohibit a financial adviser, Clive Rosier, for poor record keeping and compliance failures.

Background

Bayliss & Co (Financial Services) Limited (firm) was a small independent financial advisory firm. The firm focused on providing investment planning services to retail clients. Mr Rosier was the sole director and approved person at the firm. At various times. Mr Rosier was approved for the following controlled functions: CF1 (Director), CF10 (Compliance Oversight), CF11 (Money Laundering Reporting), CF21 (Investment Adviser), CF27 (Investment Management), CF8 (Apportionment and Oversight) and CF30 (Customer).

Between 2001 and 2004 the firm recommended that clients invest in Geared Traded Endowment Policies (GTEPs). Between 2001 and 2009 the firm advised clients to invest in two unregulated collective investment schemes (UCISs).

In early 2010, the FSA (as it then was) conducted a telephone assessment of the firm's fair treatment of customers. As a result of concerns identified by that call, the firm was visited by representatives of the FSA. This visit failed to alleviate the FSA's concerns about the firm and, as a result, the FSA launched an enforcement investigation into firm and Mr Rosier.

Following the commencement of the FSA's investigation, the firm agreed to vary its regulatory permissions such that it would not undertake regulated business without an approved third party reviewing that business prior to execution. The firm then appointed a skilled person under section 166 of the Financial Services and Markets Act 2000 (FSMA) to approve new business and to conduct a past business review. The past business review involved a review of the last 20 pieces of regulated business conducted by the firm to assess the suitability of that business for the customer in question. In each case, the skilled person found that the customer files contained insufficient information to enable it to assess the suitability of the advice provided by the firm.

FCA decision notice

FCA findings

In November 2013, the FCA published a decision notice setting out its proposed findings in relation to Mr Rosier. The FCA alleged that Mr Rosier had failed to:

• Act with due skill, care and diligence in breach of Principle 2 of the FCA's Statements of Principle and Code of Practice for Approved Persons (APER) in connection with maintenance of client information, as well as in failing to keep records of advice provided to clients. In addition, the FCA found that Mr Rosier's failure to notify the FSA (as it was at the time) that he was unable to carry out a past business review of advice provided to customers in relation to GTEPs (which the FSA had requested him to carry out) demonstrated a lack of due skill, care and diligence on his part.
• Take reasonable steps to ensure that the business of the firm for which he was responsible as a Significant Influence Function (SIF) holder complied with the relevant requirements and standards of the regulatory system, contrary to APER Principle 7. The FCA alleged that Mr Rosier had breached APER Principle 7 in relation to a number of issues, including his failure to ensure that the firm:
  • treated customers fairly when responding to complaints relating to GTEPs;
  • had adequate processes in place to establish and record how exemptions to section 238(1) FSMA (which contains restrictions relating to the promotion of UCIS) applied to the firm and its customers;
  • had adequate compliance monitoring procedures in place, including the gathering of sufficient and appropriate management information, as well as monitoring and assessing his own performance to ensure that he was up-to-date with regulatory requirements; and
  • addressed these failings once they were brought to his attention.

It is important to note that the FCA did not seek to criticise the suitability of the advice that Mr Rosier had given to his clients. Rather, the FCA focused on the records Mr Rosier kept of financial advice he had provided to clients, which it found were inadequate to evidence that the financial advice he provided to clients was suitable.

Proposed sanctions

The FCA proposed to impose a financial penalty of £10,000 as well as a prohibition order on Mr Rosier. The FCA also proposed to cancel the firm's authorisation on the basis that:

• If Mr Rosier, the firm's sole director and approved person, was prohibited, the firm would lack adequate resources, thereby breaching the FCA's Threshold Conditions (TC).
• The firm had failed to pay certain fees owed to the Financial Services Compensation Scheme (FSCS).

The firm and Mr Rosier disputed the FCA's findings and referred the FCA's proposed findings and sanctions to the tribunal.

Criticism of the FCA's approach to publicising the decision notice

When it published the decision notice concerning Mr Rosier, the FCA also publicised the decision notice by sending an email to certain media outlets (FCA press email). Mr Rosier heard about the FCA press email from one of the media outlets that received it from the FCA. Mr Rosier complained to the FCA and subsequently to the tribunal about the contents of the FCA press email, claiming that its contents gave media outlets a misleading impression of the status and nature of the FCA's proceedings against him and the firm.

The FCA press email and the FCA's overall approach to publicising the decision notice issued to Mr Rosier were criticised by the tribunal.

The tribunal's decision

Mr Rosier sought to argue that the FCA was out of time to impose a financial penalty on him. However, the tribunal rejected this argument in the light of the decision in Arch Financial Products LLP, Robert Farrell, Robert Addison v Financial Conduct Authority [2015] UKUT 0013 (TCC) which had been heard, but not decided, at the time of the substantive hearing of the references made by the firm and Mr Rosier to the tribunal).  However, the tribunal did criticise what it called the "excessive" amount of time that it took for the FSA and the FCA to investigate and issue a warning notice in this case.

The tribunal upheld all but one of the FCA's proposed findings in respect of Mr Rosier.

Inadequate record-keeping

Mr Rosier accepted that the client records that had been inspected by the FCA were incomplete and fell short of the FCA's expectations. Notwithstanding this, Mr Rosier attempted to argue before the tribunal that he:

• Held additional information about his clients in other files that had not been inspected by the FCA. However, when Mr Rosier was asked to produce these other files, they were not forthcoming.
• Was sufficiently familiar with his clients' affairs through a long association with them and, as a result, it did not matter that his paper client records were incomplete. The tribunal rejected this argument, holding that the FCA's rules relating to assessing and evidencing suitability of financial advice envisage that information about clients should be recorded and readily available.

As a result, the tribunal concluded that Mr Rosier's record-keeping was inadequate, meaning that he could not demonstrate the suitability of the advice he had given to clients, in breach of APER Principle 2.

Inadequate suitability reports

The tribunal described suitability reports that Mr Rosier had produced for his clients as being "grossly inadequate" on the basis that:

• The description of a client's attitude to risk was not personalised in any respect and no details of a client's tolerance for losses were provided.
• There was no evidence as to how an investment recommended to clients by Mr Rosier was consistent with a client's aims and objectives or with their risk profiles and there was no adequate description of clients' needs or demands.
• It was unclear how Mr Rosier concluded that a recommended transaction was suitable for a particular client, having regard to the information obtained from the client.

The tribunal concluded that the inadequacies identified in relation to suitability reports demonstrated a lack of due skill, care and diligence on the part of Mr Rosier, in breach of APER Principle 2.

Failure to communicate inability to carry out a past business review to the FSA

In 2006 and 2007 the FSA (as it then was) required the firm to conduct past business reviews of its advice to clients in respect of GTEPs. By his own admission, Mr Rosier failed to undertake these past business reviews, principally due to him not having access to the records he required to do so (they had been taken by two individuals who had left Bayliss previously). However, the FCA alleged that Mr Rosier had failed to inform the FSA that he was unable to undertake the past business reviews. Mr Rosier could not point to any evidence to show that he had informed the FSA of his inability to undertake the past business reviews and admitted that when the FSA failed to follow-up with the firm about whether the past business reviews had been completed, he hoped that the matter had simply gone away.

The tribunal was critical of the FSA's failure to follow-up with the firm about the past business reviews and described this as the FSA having "demonstrated a lack of diligence in relation to this issue". Nonetheless, despite the FSA's own inertia, the tribunal found that Mr Rosier should have informed the FSA when it became apparent to him that he could not conduct the past business reviews. By failing to do so, the tribunal agreed with the FCA that Mr Rosier had failed to act with due skill, care and diligence in breach of APER Principle 2.

Failure to take reasonable steps in connection with the promotion of UCIS

The tribunal held that the approach to the promotion of UCIS (which is restricted under section 238(1) FSMA) was "totally inadequate" in that he "made no meaningful attempt to comply with the necessarily strict restrictions on promotion of such schemes to retail investors despite being aware in general terms of the requirements". As a result, the tribunal upheld the FCA's finding that Mr Rosier had failed to take reasonable steps to ensure that the firm promoted, and could demonstrate that it promoted, UCIS to customers to whom an exception under section 238(1) FSMA applied, in breach of APER Principle 7.

The tribunal suggested that if Mr Rosier was, as he claimed, unclear about the application of the restrictions relating to the promotion of UCIS to the products he was recommending to his clients, then he should have sought specialist advice.

Poor handling of customer complaints

The FCA identified a number of issues with the way in which Mr Rosier had handled complaints made by clients. These complaints included some that had made by clients who had been advised by two individuals who had left the firm previously, who took with them all of their clients' records and files. For example, the FCA alleged that Mr Rosier had failed to implement a written complaints handling policy for the firm and that his tone in correspondence with complainants was "unnecessarily hostile and unsympathetic".

The tribunal upheld the FCA's criticisms of the way Mr Rosier had handled complaints and that he had breached APER Principle 7 in this respect. However, the tribunal did not make any criticism of the time it took Mr Rosier to handle certain complaints. It appears that this was due to the tribunal recognising the difficulties that Mr Rosier faced when trying to deal with complaints made by clients who had been advised by the two individuals who had previously left the firm.

Lack of management information and compliance procedures

In mid-2004, the firm's compliance officer left. After this point, the FCA found that Mr Rosier failed to take reasonable steps to ensure that the firm gathered and maintained appropriate Management Information (MI) and records of compliance monitoring in breach of APER Principle 7. For example, the FCA concluded that Mr Rosier:

• Failed to ensure that the firm could demonstrate that it had undertaken any monitoring of his performance.
• Failed to ensure that a replacement compliance officer was hired.
• Implemented no formal procedures to review the quality of advice he provided to clients.
• Did not maintain a formal record of training that he received.

Mr Rosier asserted before the tribunal that he kept records of his training, monitored his own performance and gathered and analysed MI. However, Mr Rosier was unable to produce any written records to support this assertion. As a result, the tribunal upheld the FCA's findings in this respect and found that Mr Rosier had breached APER Principle 7.

Failure to address issues previously raised by the FSA

The FSA's Supervision Division visited the firm in mid-2010. Following that visit, FSA Supervision wrote to the firm, expressing dissatisfaction with the firm's performance in a number of areas, including the firm' inability to demonstrate that it treated customers fairly, as well as the firm not having a complaints procedure. The firm was requested by the FSA to take various steps to rectify these issues.

Before the tribunal, the FCA argued that Mr Rosier had failed to take reasonable steps to ensure that the firm completed the various remedial steps specified by FSA Supervision following its visit in mid-2010. It appears that the FCA offered no evidence in support of this proposition and the tribunal did not uphold the FCA's case on this point.

Sanctions

The tribunal upheld the FCA's decision to impose a financial penalty of £10,000 on Mr Rosier.

The FCA proposed to impose a complete prohibition order on Mr Rosier which would prevent him from holding any SIFs in the future. Mr Rosier sought to argue that the prohibition order imposed on him should not cover all SIFs. Rather, Mr Rosier attempted to persuade the tribunal that, given the failings identified by the FCA in respect of him related only to compliance issues, he should be allowed to continue to act as a Director (CF1). The tribunal appeared to be receptive to this argument and stated that it would not be appropriate to prohibit Mr Rosier from performing SIFs in this case, but only if it were "satisfied that he had learned lessons from his failures and would not make the same mistakes were he to continue in such a role".

However, the tribunal was not convinced that Mr Rosier had demonstrated that he had learned any lessons from the matters it had considered, even when he was specifically asked by the tribunal what he would do differently if he continued to hold a SIF. As a result, the tribunal dismissed Mr Rosier's reference challenging the imposition of a prohibition order on him which prohibited from holding any SIFs in the future.

In the light of the prohibition order imposed on Mr Rosier, the tribunal agreed with the FCA's proposal that it would cancel the firm's permission on the basis that the firm would not have adequate human resources to satisfy the TC requirements.

Criticism of the FCA's approach to disclosure

At a late stage in the proceedings (ten days before the tribunal hearing was due to take place), the FCA disclosed several documents that had not previously been provided to the tribunal or Mr Rosier and also sought to file an additional witness statement. These steps were taken without the prior permission of the tribunal.

In its decision, the tribunal criticised the FCA for this conduct, describing it as having displayed "an unacceptable degree of arrogance" and warning it that this conduct should not be repeated in other cases.

Comment

The importance of good record-keeping

The quality or suitability of the advice that Mr Rosier provided to his clients was not called into question by either the FCA or the tribunal. Rather, the focus of this case was on Mr Rosier's inability to evidence that the advice he provided to clients was suitable. This speaks to a broader issue in the financial services industry about good record-keeping practices and the importance of maintaining robust audit trails so that the rationale for advice and decisions can be evidenced at a later date, if necessary.

Striking the balance between corporate failings and individual culpability

Mr Rosier attempted to argue that the financial penalty in this case should be imposed on the firm instead of him personally. Although the tribunal disagreed with this argument, it nonetheless made some interesting comments about the "balance to be struck where both corporate and individual failings" are identified, in particular the need for the FCA to avoid "double jeopardy" when it proposes to impose financial penalties on firms and individuals in connection with the same matter.

Can demonstrating that lessons have been learned help an individual avoid a prohibition order?

It is not clear in this case whether, after the tribunal came to its conclusions, Mr Rosier was allowed to make submissions about lessons he had learned from this matter. If not, it is perhaps unsurprising that Mr Rosier declined to make any admissions before the tribunal in terms of things he might do differently in the future as a SIF due to the risk of such admissions prejudicing his defence. However, what is clear from the tribunal's comments about Mr Rosier not having learned lessons from the FCA's findings is how much bearing remarks from a subject about remorse and lessons learned in relation to a case can have on the decision (whether made by the tribunal or the FCA's Regulatory Decisions Committee (RDC)) as to whether a reference relating to a proposed prohibition order should be dismissed or remitted to the FCA for re-consideration. However, the tribunal is perhaps unlikely to attach so much weight to comments about remorse and lessons learned in cases involving alleged dishonesty or lack of integrity on the part of a subject.

Limitation periods applying to individuals facing FCA enforcement action: the tribunal's decision in Arch

Mr Rosier sought to argue before the tribunal that in so far as he was guilty of misconduct, the FSA knew of this conduct in mid-2010 at the time of the FSA Supervision Division's visit to the firm. At that time, section 66(4) of FSMA required the FSA to issue a warning notice if it proposed to impose a financial penalty within two years of it becoming aware of the misconduct in question. Since the FSA issued a warning notice in respect of Mr Rosier on 17 January 2013 (that is, more than two years since its visit to the firm), Mr Rosier sought to argue that the FSA was out of time to impose a financial penalty on him.

However, section 66(4) of FSMA was amended on 8 June 2010 and the time limit on the FSA to issue a warning notice was extended to three years from the time when it became aware of the misconduct. At the time when section 66(4) of FSMA was amended, the FSA was not time-barred from taking action against Mr Rosier (as this was less than two years since the FSA's visit to the firm). As a consequence, the FCA argued before the tribunal that the relevant time limit that applied to Mr Rosier was three years rather than two years and that as the warning notice was issued before April 2013 (that is, less than three years since the FSA Supervision Division's visit to the firm) it was lawful for the FCA to impose a financial penalty on Mr Rosier.

The tribunal turned to consider this very point in Arch Financial Products LLP, Robert Farrell, Robert Addison v Financial Conduct Authority [2015] UKUT 0013 (TCC) which had been heard, but not decided, at the time of the substantive hearing of the references made by the firm and Mr Rosier to the tribunal. In Arch the tribunal held that individuals in a position like Mr Rosier's had not accrued a right under FSMA to rely on the original two year time limit in section 66(4) FSMA, meaning that the FCA could rely on the extended three year time limit which was in place from 8 June 2010. This meant that the FCA was not time-barred from imposing a financial penalty on Mr Rosier in this case.

The argument Mr Rosier made about the FCA's limitation period before the FCA is one which has been made in several recent references to the tribunal. It is likely that such arguments will be met with a similar response to the one that the tribunal gave in respect of Mr Rosier in this case.

Decision

Bayliss and Co (Financial Services) Ltd and Clive John Rosier v FCA [2015] UKUT 0265 (TCC) (21 May 2015).

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