Breaches of the Disclosure and Transparency Rules

Merrill Lynch International, 18 October 2017

The Financial Conduct Authority (FCA) has reached a settlement with Merrill Lynch International (MLI), under which it has imposed a fine of £34,524,000 on MLI in relation to failures in its reporting of exchange traded derivative (ETD) transactions over a two-year period. The size of the fine reflects the importance the FCA places on accurate transaction reporting. The Final Notice is also interesting for its description of what the FCA considers went wrong at a practical level for MLI – it accepts the genuine difficulties faced by the firm, but illustrates that the FCA expects such difficulties to be overcome.

Unlike previous FCA fines relating to MiFID reporting, the source of the reporting requirement relevant to the Final Notice is the European Markets Infrastructure Regulation (EMIR). Article 9 of EMIR requires counterparties to ETDs, inter alia, to report certain transaction details to a registered trade repository. In August 2013, some six months before its planned implementation date, the European Securities and Markets Authority (ESMA) recommended a delay in implementation of one year for the relevant Article 9 requirement. The European Commission rejected ESMA's recommendation, but did not do so until November 2013. The transaction reporting requirement for ETDs therefore began on 12 February 2014 as originally planned.

The FCA accepted that the bank's ability to carry out testing in the initial period after 12 February 2014 was affected by issues with the data that it received from the trade repositories, themselves suffering from technical issues.

The FCA's fine was imposed both for breaches of EMIR and for breaches of Principle 3, which requires firms to "take reasonable care to organise and control [their] affairs responsibly and effectively, with adequate risk management systems". The FCA's conclusions in this area are of general relevance to firms in relation to transaction reporting, and indeed more widely. The main points to be drawn from the final notice include:

  • the bank failed to allocate sufficient personnel, or personnel with the right expertise – these failings continued, in one form or another, until July 2015;
  • the bank implemented oversight arrangements for ETD reporting, but such oversight did not scrutinise MLI's compliance in detail; and
  • the bank failed to implement adequate completeness and accuracy testing.

FCA fines and bans wife and bans husband financial advisor for lack of integrity

Final Notices have been published by the FCA in respect of Colette and John Chiesa, in connection with integrity failings. Mr and Mrs Chiesa were founders of Westwood Independent Financial Planners (Westwood), which entered sequestration following FCA action in 2011. As partners with unlimited liability in Westwood, Mr and Mrs Chiesa had substantial liabilities arising from claims which had been filed with the Financial Ombudsman Service.

In late 2011, a Trustee was engaged to evaluate the Chiesas' assets and liabilities with a view to allowing them to repay their creditors. The Chiesas made incomplete, inadequate and misleading disclosures to the Trustee. This included failing to disclose that they were in receipt of around £2.6 million from an offshore remuneration trust in the form of loans made between April 2012 and December 2014. The FCA concluded that these loans had never been intended to be repaid.

Westwood's liabilities to customers were ultimately borne by the financial services industry. By late 2016 the Financial Services Compensation Scheme had paid out over £3.8 million in connection with Westwood's activities. During the sequestration, Mr and Mrs Chiesa each paid only £200 per month to their creditors.

Mr and Mrs Chiesa have been banned from working in financial services. In addition, Mrs Chiesa was fined £50,000 for attempting to mislead the FCA during an FCA interview. No settlement discount applies to the financial penalty imposed on Mrs Chiesa. See below for a summary of the decision of the Upper Tribunal in relation to a reference made by Mr and Mrs Chiesa.

Following on from engagement with the FCA, Caversham Finance Limited, trading as the rent-to-own provider BrightHouse, has committed to engaging in a customer redress scheme. As part of the redress, BrightHouse has agreed to pay over £14.8 million to 249,000 customers in respect of 384,000 agreements for lending which may not have been affordable and payments which should have been refunded.

Jonathan Davidson, Executive Director of Supervision – Retail and Authorisations at the FCA, stated that BrightHouse "was not a responsible lender" and failed to meet the FCA's "expectations of firms in this sector". One of the key concerns identified by the FCA was that BrightHouse's "lending application affordability assessment procedures and collections processes" did not always deliver good outcomes for customers. There was a particular focus on those customers who were at a higher risk of falling into financial difficulty at the outset of any agreement.

The customer redress scheme proposed by BrightHouse separates customers into two groups:

  • customers who may not have been assessed properly at the outset of the loan. Customers who handed back the goods will be paid back the interest fees charged under the agreement, plus compensatory interest of 8 per cent. Customers who retained the goods will have their balances written off. This seeks to deal with 114,000 agreements entered into between 1 April 2014 and 30 September 2016; and
  • customers who made the first payment due under an agreement with the firm which was cancelled prior to the delivery of the goods. The first payment in such cases was not returned to all customers. BrightHouse will refund this first payment plus compensatory interest of 8 per cent. This seeks to deal with agreements entered into after 1 April 2010.

The FCA is aware that some customers are likely to fall into both groups. Furthermore, the FCA has confirmed that BrightHouse will write to all affected customers to explain the refund or balance adjustment that they will receive.

The FCA's treatment of this case is part of a continuum of cases relating to poor sales practices, and demonstrates that its interest in this area is ongoing.

Capita Financial Managers to pay up to £66 million for the benefits of investors in the Connaught Income Fund, Series 1

Capita Financial Managers Limited, 10 November 2017

A Final Notice has been published by the FCA in respect of Capita Financial Managers Limited (CFM). CFM was the Operator of the Guaranteed Low Risk Income Fund, Series 1 which later became known as the Connaught Income Fund, Series 1 (the Fund). The Fund was an unregulated collective investment scheme, operating from March 2008 until it went into liquidation on 3 December 2012. CFM had resigned as Operator on 25 September 2009.

CFM was found to have breached two of the FCA's Principles for Businesses during its time as Operator:

  • Principle 2 (Skill, care and diligence) - CFM failed to conduct adequate due diligence on the Fund and also failed to correct this when it became aware of the shortcomings in its procedures. CFM further failed to monitor the Fund adequately during its period acting as Operator.
  • Principle 7 (Communications with clients) - the FCA found that CFM failed to communicate with the Fund's investors in a way that was clear, fair and not misleading.

CFM has been publicly censured by the FCA and will be making a payment of up to £66 million, via the FCA, for the benefit of the Fund's investors. The FCA would ordinarily impose a financial penalty but chose not to on this occasion, as this would prevent CFM from making this payment, which aims to return the amount originally invested. The size of the payment has been determined taking account of the £22 million that has already been distributed to investors in the Fund by the liquidators.

The FCA fined Paul Walter, a bond trader of some 20 years' experience, £60,090 for engaging in market abuse contrary to section 118(5) of FSMA. The relevant market abuse took place in the summer of 2014. It consisted of Mr Walter placing quotes on an inter-dealer trading platform in relation to six Dutch State Loans (DSLs). The quotes indicated that Mr Walter's intention was the opposite to what it actually was, i.e. when he wanted to sell, he represented to the market that he wanted to buy, and vice versa. So, for example, when Mr Walter's intention was to sell, he placed a high bid quote. This encouraged other market participants who were tracking his quotes using algorithms to raise their own bid quotes, such that Mr Walter was able to sell at a higher price than he could otherwise have achieved. He then cancelled his bid. The FCA found that this created a misleading impression as to the price and supply or demand of the DSLs. It also found that Mr Walter did not appreciate that his actions constituted market abuse, but that he should have done, particularly given the length of his experience and the fact that he was an approved person.

The case is a reminder that market abuse continues to be a high priority for FCA enforcement action. FCA statistics show that numbers of market abuse investigations opened by the FCA have risen in the last year.

The FCA has announced that it has started a civil claim in relation to misleading statements made in a pension report service, and is seeking orders for restitution and ancillary declarations and injunctions.

Bluefin Insurance Services Limited, 06 December 2017

A Final Notice has been published in respect of Bluefin Insurance Services Limited (Bluefin). Bluefin is an insurance broker which was wholly owned by a large insurance group until 31 December 2016 but had held itself out to be "truly independent" during the period between 9 March 2011 and 31 March 2014. This was despite having a policy (which was not disclosed to customers by Bluefin brokers) that focused on increasing the business placed with its parent company. The FCA found that Bluefin failed to implement adequate controls to manage this conflict, meaning there was a risk that customers were misled into believing the Bluefin brokers would conduct an unbiased search of the market.

As a result, Bluefin was fined £4,023,800 (including a 30 per cent discount for early settlement). The Final Notice is a further example of the FCA's ongoing concern, over a number of years, in relation to conflicts of interest and their potentially prejudicial effects.