A cluster of directors from investment advisory firms, along with one of the firms, are appealing against various prohibitions and fines that the UK's Financial Conduct Authority has levelled at them. The firm stands accused of breaking Principle for Business 1 and section 20 Financial Services and Markets Act 2000.

The FCA's decision notice against Financial Page Ltd (in liquidation) is the subject of an appeal by Andrew Page, a director of that company. The FCA believes that FPL flouted principle 1 (to do with integrity), the first of its so-called Principles for Businesses, by acting dishonestly and recklessly in relation to its pension advice business and broke section 20 Financial Services and Markets Act 2000 by giving out advice about pension transfers without the FCA's say-so.

The FPL set-up

FPL is a small firm, now in liquidation, that was licensed to give advice about investments (excluding pension transfers) and to arrange (i.e. bring about) deals in investments. Andrew Page was the sole approved person there during the relevant period of 2014-16, licensed to perform the 'controlled functions' of CF1 (director), CF10 (compliance oversight), CF11 (money laundering reporting) and CF30 (customer). The FCA wants to fine him £416,558 and ban him from the financial business. FPL also had a de facto director, Thomas Ward, whom the FCA likewise wants to ban and fine £416,558.

FPL used something that it called the Pension Review and Advice Process, which it based on a pension-switching advice model. The FCA says that it told prospective customers that it provided bespoke, 'independent' (whatever that means) investment advice that rested on a comprehensive and fair analysis of the whole market, which was not the case. This is where the regulator believes that 'dishonesty' and lack of integrity (to do with principle 1) comes in.

FPL advised various selected customers to switch their pensions to SIPPs (self-invested pension plans) that invested in illiquid, highly risky assets which consisted of loan notes and a bond. HJL, a firm that FPL had hired to help it develop the model, had a considerable financial interest in the loan notes, but the FCA says that FPL did not tell the customers that. It also accuses FPL of not overseeing HJL in a meaningful way and of not running adequate checks on the loan notes and the bond, doing most of its checking by reading documents from HJL, which of course had a vested interest in making the loan notes look good. It also accuses it of giving customers advice before doing the necessary checks. Page, it says, did not scrutinise the insurance policies that were intended to provide a capital guarantee for the loan notes, thereby failing to understand how the insurance policies might work. It believes that all this bespeaks a lack of integrity, in breach of Principle 1.

FPL checked a few facts about HJL, but only after it had begun to do business with it, and it did nothing to probe CAL, another service provider connected to HJL.

By allowing the service providers to perform outsourced functions on its behalf without adequate supervision, failing to review advice given through the Pension Review and Advice Process in any meaningful way and failing to put in place good systems and controls, the FCA believes that the firm carried on a regulated activity without the right permission, in breach of section 20. It says that this happened when FPL gave advice to at least 22 customers to transfer their pensions from an occupational pension scheme to SIPPs.

During the relevant period, moreover, the FCA was actually in touch with FPL and asking it questions about pension switches and SIPPs. It asked the firm for a list of 'all business' that it had arranged through SIPPs. Even though it had just advised 15 customers to transfer their pensions to SIPPs, it allegedly left their names off the list that it sent to the regulator, thus allegedly deceiving the FCA.

Cold calls and regulators

COBS 4.8.2 dictates that no firm ought to make a cold call to prospective customers unless the recipient has an established 'client relationship' with it, or the product is of a certain type, or the cold call relates to a 'controlled activity' under certain circumstances. Despite popular calls for a general ban, this has not happened yet in the UK. Nevertheless, the press has been pressurising the FCA to come down harder on cold calls and this decision notice might be the result.

With this in mind, the FCA called Page in 2014 to discuss information that it had received which suggested that customers were being cold called on behalf of FPL. Page allegedly failed to tell it that his lead generation company apparently cold-called people.

The FCA also accuses Page of misleadingly tellling it in an email that FPL did not use lead generation companies as part of its business model. When it imposed restrictions on FPL (instructing it to retain various assets etc) in 2015, the firm allegedly acted in breach of them twice, under the leadership of Page.

Bank House Investment Management

The FCA has also imposed a penalty of £311,639 on Bank House Investment Management Ltd. It believes that Bank House, too, breached principle 1 and section 20. Its decision notice is the subject of another appeal.

Bank House is a small firm that was licensed, like FPL and during the same 'time of troubles,' to give advice about investments (excluding pension transfers) and to arrange deals in investments. It, too, used the Pension Review and Advice Process which involved HJL extracting leads from lead-generation companies and introducing customers to it. Once again, CAL was involved and after October 2014 it performed the outsourced functions. Bank House, like FPL, presented itself to customers as a provider of bespoke investment advice, which the FCA disputes. Once again, HJL's  involvement in the process and financial interest in a number of the bonds created a fatal conflict of interest.

In this case, according to the FCA, the relevant fact-finds (questionnaires for customers) contained leading questions intended to steer customers towards the features of the products that the firm wanted to recommend. The 'suitability' reports did not include enough information to provide customers with compliant personal recommendations, and information provided to customers about the bonds did not tell them enough about their costs and benefits or the risks that one might associate with them.

The FCA accuses Bank House of failing to keep control of the Pension Review and Advice Process and putting the right systems and controls in place to oversee it. It also allegedly agreed to work with HJL and CAL without giving any proper thought to whether they were suitable to perform services on its behalf.

As the FCA tells the story, the Pension Review and Advice Process failed to distinguish properly between pension transfers (which include the transfer of deferred benefits from an occupational pension scheme into a SIPP) and pension switches (which involve the movement of funds from one personal pension scheme to another where no safeguarded benefits are involved). As a result, the FCA says, despite Bank House not having the necessary permission to provide advice on about pension transfers, in at least five cases its advisors did indeed give advice about pension transfers to customers in breach of section 20.

All this aside, the FCA reviewed 20 files that Bank House kept on customers. The advisors, it says, provided all 20 with bad advice and Bank House broke at least one rule in every case.

The imposition of something voluntary

On 17 September 2015 the FCA imposed something it calls a "voluntary requirement" on the firm. This obliged it not ro do anything in relation to pension switches and/or pension transfers to any SIPP until someone gave the FCA some kind of 'independent verification' that a robust and compliant advisory process was in place for pension switching advice. The FCA accuses Bank House of breaking this agreement because after that date it advised 77 customers to switch pension funds totalling £2.9 million to SIPPs.

Principle 3 and related rules

In the decision notice the FCA makes occasional reference to principle 3, which dictates that a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems. For instance, it says: "In light of Principle 3 and this guidance, Bank House Investment Management should have taken reasonable steps, such as conducting adequate due diligence, to ensure that HJL was suitable to perform the functions that were outsourced to it. BHIM did not take reasonable steps..."

Under the aegis of principle 3, the FCA goes on to accuse Bank House of breaking rules in the systems-and-controls (SYSC) part of its rulebook. The firm was obliged to take reasonable steps to identify risks relating to the firm’s activities, processes and systems (SYSC 7.1.2R and SYSC 7.1.2AG); it allegedly agreed to HJL acting as introducer and to HJL and CAL performing the outsourced functions on its behalf without giving any proper consideration to whether they were suitable to perform those activities. When relying on some other firm to perform operational functions that are crucial for the performance of regulated activities, the firm should have made them take reasonable steps to avoid additional operational risk (SYSC 8.1.1R and SYSC 8.1.1AG); instead, Bank House allegedly agreed to work with HJL two days after the initial meeting of Robert Ward (who, along with Tristan Freer, was the most senior person there) with a representative of the company, having done no checking on HJL (other than in connection with its role in relation to the companies issuing the bonds). Despite these alleged transgressions, the decision notice dwells almost exclusively on principle 1 and section 20 in its complaints against the firm. Freer and Ward are appealing to the Upper Tribunal against their prohibitions and penalties, which are £52,725 in the case of the former and £88,100 in the case of the latter.