The FSA has published Decision Notices in respect of Arch Financial Products (AFP), its chief executive Robin Farrell and its senior partner and former compliance officer Robert Addison. The three Decision Notices are here, here and here.
AFP was investment manager of two UK authorised funds that in turn predominantly invested in 22 Guernsey cell companies of which AFP was also investment manager.
The Decision Notices have been challenged by each of the above recipients, with the cases to be determined anew by the Upper Tribunal. The Decision Notices set out the FSA's decision to date, which can be summarised on the basis of the following four aspects:
- Conflicts of interest: the FSA says that AFP and each of the two individuals was reckless as to the risk that conflicts of interest would not be managed fairly.
- Material non-public information: insufficient controls were put in place over such information by both the firm and Mr Addison.
- Liquidity risks: AFP pursued an investment strategy which resulted in significant liquidity risks for the UK funds. AFP and Mr Farrell failed to ensure that the funds aimed to provide a prudent spread of risk.
- Compliance monitoring: AFP and Mr Addison adopted an informal and ad hoc approach to compliance monitoring with insufficient recording of the monitoring that was undertaken.
There were over 6,000 investors in the UK funds. (In fact, the number of individual investors is likely to be much higher as many were nominee holders for underlying beneficial investors). At their peak in September 2008, the total sum under management was approximately £648m. The UK funds were suspended in March 2009 as a result of liquidity concerns.
AFP would have been fined £9m. However, due to its financial position, no fine was levied and AFP received instead a public censure. Mr Farrell was fined £650,000 and Mr Addison was fined £200,000. Both were prohibited from carrying out any regulated function. These decisions will be reviewed by the Upper Tribunal.
In addition, Capita Financial Managers has settled with the FSA and received a Final Notice. Capita was the Authorised Corporate Director (ACD) of the CF Arch Cru Funds. It delegated investment management of the UK funds to AFP. Whilst it delegated investment management, it remained responsible for the overall performance of the regulatory obligations in relation to the funds. The FSA found that it failed in its oversight, breaching both Principle 2 (skill, care and diligence) and Principle 3 (management and control). Its failings were neither deliberate nor reckless. Were it not for the raft of measures it took subsequently (including making the significant payments referred to below), it would have been fined a headline figure of £5.75m.
Whilst the FSA stated that neither Mr Farrell nor Mr Addison acted deliberately, both were found to have been reckless. Integrity and competence failings were found. The FSA looks to have considered the
cases to be at the most severe end of the spectrum that exists short of deliberate or dishonest conduct.
The cases are a reminder that FSA enforcement action is only one of a raft of potential consequences of failures:
- As at November last year (prior to publication), it appears that: AFP was a defendant to proceedings in the Commercial Court in which transactions that are criticised in the Decision Notices formed a part; Mr Farrell was also a Defendant to those proceedings (and is accused of dishonesty in relation to one of the transactions that appears in his Decision Notice); Mr Addison was a defendant to proceedings in Guernsey arising from his directorships of the Guernsey cells.
- Capita agreed voluntarily to contribute, without admission of liability, the sum of £32m towards a £54m payment scheme for investors in the funds.
- Capita established a hardship fund in December 2009 for investors experiencing financial difficulty. As at 30 June 2011, payments of approximately £660,000 had been made to investors.
- The FSA is obliging firms who advised on investments in the funds to contact their clients to ask if they want their case reviewed, in order to determine whether they were mis-sold the funds and may be eligible for redress. Investors will have the right to apply separately to the Capita payment scheme above.
The two individuals sought to argue that the FSA was time barred in imposing a penalty on them. They argued this on the basis that the Warning Notices were issued more than two years after time began to run. However, given that the two year period was extended to three years by statute before the two year period had run its course, the FSA decided that the individuals were subject to the three year period and that it was accordingly in time.
The FSA recognised that payment of the £650,000 penalty by Mr Farrell may cause him serious financial hardship or financial difficulties. However, it chose not to reduce the penalty as it would reduce its deterrent effect.
In October 2010, the FSA gained the ability to publish Decision Notices, rather than awaiting the decision of the Upper Tribunal (see Enforcement Watch 4: "FSA presses on with enforcement sanctions changes"). It is possible to make an application to the Tribunal to restrain publication pending the outcome of the Upper Tribunal proceedings, and this is what AFP and the two individuals did. They were unsuccessful in their application. The reasoning of the Upper Tribunal is interesting and is covered elsewhere in this edition (see "Tribunal rules in favour of publication of Decision Notices").