FCA Ordered to Pay Compensation to Banned Chief Executive
The Financial Conduct Authority (FCA) has been directed to pay a proportion of the costs incurred by an individual following a 26 January 2019 decision from the Upper Tribunal (the Tribunal) in a financial misconduct case. The Tribunal considered an application for costs made by Alistair Rae Burns (Burns), who contended that both an FCA Decision Notice dated July 2016, and the FCA’s conduct in relation to the proceedings on his subsequent reference to the tribunal were unreasonable. Burns contended that both instances were because of how the FCA had dealt with an advice limitation issue, and how the FCA had handled its disclosure obligations.
Burns, was the CEO and a 30% shareholder TailorMade Independent Limited (TMI) when it ceased trading in 2013. In July 2016, the FCA notified Burns of its decision to impose a financial penalty of £233,600 on him, and to make an order prohibiting him from performing any senior management function and any significant influence function in relation to regulated activity in financial services. The FCA found that between 22 January 2010 and 20 January 2013, TMI provided advice to customers who were considering transferring their pension funds or switching their pension funds into a SIPP (Self-Invested Personal Pension), because they wished to use their pension funds to invest in alternative investments. The alternative investments were unregulated, typically high-risk, illiquid, or esoteric investments, which were not suitable for all retail customers. The FCA found that Burns failed to ensure that TMI:
Provided suitable advice to its clients;
Fairly managed and clearly disclosed Burns’s own personal conflicts of interest and the conflicts of interest relating to other individuals at TMI.
The FCA found that Burns, as a director of TMI, was jointly responsible for providing inadequate personal recommendations to 1,661 customers. In fact, rather than taking account of the customer’s individual circumstances, demands, and needs, TMI made personal recommendations predominantly on the basis of the customer’s objective of using pension funds to purchase alternative investments. This process resulted in customers being misled, not being treated fairly, and being given unsuitable advice. Customers thought that the personal recommendation they received reflected their individual circumstances, demands, and needs, when they did not. The Financial Services Compensation Scheme (FSCS) has upheld 919 claims of unsuitable advice against TMI, with compensation of over £55.6 million paid to date. This does not cover all the losses suffered by investors, which the FSCS assesses at more than £106.5 million.
TMI failed to comply with Principles 6 (Customers' interests), 7 (Communications with clients) and 9 (Customers: relationships of trust) of the FCA Principles for Business, as well as with several Conduct of Business rules (COBS 2, 9, 19), and rules on conflict of interest. In addition, Burns received significant financial benefits from his position as a director and shareholder, which were paid to him either directly or through a remuneration trust linked to TMI.
Burns denied he was personally culpable for these alleged failings, arguing that the advice model and all processes, governance, systems and controls together with compliance oversight in the creation and the giving of personal recommendations to clients was devised, implemented, maintained, and controlled by one of his co-directors, Lloyd Pope (Pope), and that no other TMI director, including himself, had the ability to do this. Burns contended that it was more than reasonable for him to rely on Pope to ensure compliance with the regulatory regime.
It is noteworthy that in 2015, the FCA imposed a financial penalty on Pope of £ 93,800 (with the 30% early stage settlement discount), and banned him from performing any significant influence function in the regulated rector.
On 7 September 2016 Burns referred the FCA’s July 2016 Decision Notice to the Tribunal. In July 2018, the Tribunal upheld the FCA decision, however it determined that the financial penalty to be imposed on Burns should be reduced to £60,000.
In August 2018 Burns made an application for costs and did not seek to challenge the Tribunal’s decision. Instead he contended the FCA’s conduct, such as the originally proposed fine for time barred matters, which did not lead Burns to opt for an early settlement. Should this have been the case, reference to the Tribunal would have not been necessary. The Tribunal decision requires the FCA to pay a proportion of the costs incurred by Burns which represents 20% of the costs Burns incurred. Burn represented himself through these proceedings and so the cost award is based in part on his time spent in preparation of his case.
Judge Timothy Herrington concluded that the FCA acted unreasonably in the conduct of the proceedings, and commented that making a limited costs order sends out an important message to the FCA that, “even in circumstances of what is found to be serious misconduct on the part of the applicant (…), it is imperative that all subjects of investigation and enforcement proceedings should be treated fairly and reasonably.” He also noted that there have been a number of significant instances in this case; where he had found the FCA had “…fallen below the standards that should reasonably be expected of it.”
This case is particularly notable as it reminds public authorities that they may come under scrutiny and be required to justify their decisions, internal processes and steps taken to come to a conclusion, in the same way that they scrutinise firms. They are expected to act in accordance to certain standards and treat individuals involved in regulatory matters in the same way that they expect firms to treat their customers: fairly.
To date the FCA has not commented on this decision nor has any reference to the case made public on the FCA website. Is it not time for the FCA to acknowledge this decision and share the lessons learnt?