Approved persons should be open and co-operative with their regulators, as highlighted by the FCA's recent enforcement action against Craig McNeil, former Keydata finance director. Whilst the FCA has occasionally taken action against individuals for breaches of Statement of Principle 4 ('Prin 4') of the Statements of Principle for Approved Persons ('APER'), this is quite unusual action; and it may be a timely reminder to individuals of their responsibilities ahead of the coming into force of the new Conduct Rules next year.
On 21 September 2015, the FCA issued a final notice to Craig McNeil, former finance director of Keydata Investment Services Ltd, fining him £350,000 (after 30% settlement discount) and prohibiting him from performing any significant influence function. The FCA took this action on the basis that Mr McNeil had failed to comply with Prin 4 as well as Principle 6 of APER ('Prin 6'). Prin 4 places an obligation on all approved persons to deal with their regulators "in an open and cooperative way and ...disclose appropriately any information of which the FCA or the PRA would reasonably expect notice." Prin 6 places an obligation on holders of significant influence functions to "exercise due skill, care and diligence in managing the business of the firm for which he is responsible in his accountable function".
Keydata Investment Services Ltd (Keydata) designed and sold investment products which were underpinned by investments in bonds issued by Luxembourg special purpose vehicles. After Keydata was put into administration in June 2009, the administrators discovered that one of the bond providers had failed, since early 2008, to make certain payments that were due to Keydata. Keydata had instead funded £4.2 million in income payments to investors from its own company resources. Other members of senior management are being pursued by the FCA (with three decision notices having been referred to the Upper Tribunal). For those following this saga, the Craig McNeil Final Notice represents an intriguing insight into what happened at Keydata.
The FCA said that, as finance director, Mr McNeil was aware that Keydata had funded the income payments, but failed either to ensure that Keydata reported the matter to the FCA, or to inform the FCA himself when he knew that the matter had not been reported. This constituted the breach of Prin 4.
The FCA also criticised Mr McNeil for having failed to challenge a decision in late 2008 to enter into a transaction which attempted to obtain security for the missed income payments. Although Keydata paid the funds to the seller, Keydata did not, in fact, obtain the security. This constituted the breach of Prin 6.
The FCA's press release for this final notice emphasised the breach of Prin 4. Indeed, Georgina Philippou (formerly acting director of enforcement and market oversight) was quoted: "The FCA relies on senior directors such as Mr McNeil to let us know about significant risks in their firms, especially when they have a direct bearing on customers' investments. It was not reasonable in the circumstances for Mr McNeil to rely on the fact that other directors might eventually tell us what was happening."
As of 7 March 2016, new Conduct Rules will come into force. These new rules will apply to many within firms caught by the new Senior Managers Regime and Senior Insurance Managers Regime. The new rules are meant to underpin the drive to increase personal accountability within financial services. The FCA and PRA are keen to stress the importance of compliance with these new rules. Here, the emphasis on the breach of Prin 4 is interesting, because under the new rules there will be an increased expectation on senior management to blow the whistle to the regulators on problems arising within their firms.