FCA Final Notice: Keydata Compliance Officer

This high profile and long running retail investigation by the Financial Conduct Authority (FCA) took yet another surprising turn last month, with the unexpected publication of a final notice to Peter Johnson, Keydata’s compliance officer, on 19 May 2016. The FCA held that Mr Johnson was not fit and proper and had breached Principle 1 (Integrity) and Principle 4 (Cooperation) of the Statements of Principle for Approved Persons.

Mr Johnson is one of three senior managers being pursued by the FCA for failings in respect of the management of Keydata Investment Services Limited, the now dissolved structured product provider and the failure to deal with the regulator in an open and cooperative way. Stewart Ford (CEO) and Mark Owen (Sales Director) continue to pursue their respective appeals against the Decision Notices issued by the FCA on 07 November 2014 before the Upper Tribunal.

This note highlights the chronology of the Keydata investigation to date, the key findings against Mr Johnson in respect of his role as compliance officer (CF10) and provides some practical guidance for dealings with the regulators.

The Keydata investigation to date

Keydata designed and distributed structured products to retail customers through a network of independent financial advisers, as well as offering third party administration services to other financial institutions. From 26 July 2005 to 08 June 2009 Keydata designed and distributed four investment products which were invested in US senior life settlement policies through the purchase of bonds issued by special purpose vehicles incorporated in Luxembourg (“SLS Products”, “Lifemark Products”, or together “the Products”). Over the relevant period, 37,000 retail customers invested over £475m in the SLS Products and Lifemark Products, as designed and distributed by Keydata.

Chronology of key events

• December 2007 - Keydata was placed under investigation by the FSA
• June and November 2008 - Mr Johnson attended compelled interviews with the FSA and gave misleading representations about the performance of the Products
• 29 August 2008 - Mr Johnson was placed under personal investigation by the FSA
• December 2008 - FSA raised concerns with Keydata about the eligibility of the SLS Products for the ISA tax exemptions1
• 23 January 2009 - Mr Johnson attended a meeting with the FSA to discuss the performance of the Products and did not inform the FSA of his knowledge about the Products
• 08 June 2009 - Keydata was placed into administration on application by the FSA
• July 2009 - High Court dismissed Mr Ford’s injunction which sought to prevent the FSA from examining material held on a computer server2 on the grounds that the material was not relevant
• 01 October 2009 - SLS placed in liquidation in Luxembourg
• 11 October 2011 - Mr Ford’s judicial review against the FSA determined that the regulator may not rely on two of eight disputed documents on the grounds that Mr Ford enjoys joint legal advice privilege in the documents3
• 11 May 2012 - Lifemark placed into liquidation in Luxembourg
• 07 November 2014 - Decision Notices issued by FCA to Mr Johnson, Mr Owen and Mr Ford. FCA proposes to prohibit each individual and impose financial penalties of £200,000, £4m and £75m respectively. The notices were published on 26 May 2015 after the dismissal of a privacy application by the Upper Tribunal
• 05 June 2015 - AAI Consulting Limited (assignee of Mr Ford) issued £462m claim in the High Court against the FCA for malfeasance in public office for its handling of the Keydata matter
• 23 February 2016 - FCA applied to strike out Mr Ford’s malfeasance claim. The outcome is still pending
• 19 May 2016 - FCA published Final Notice to Mr Johnson. Mr Ford and Mr Owen continue to pursue the matter before the Upper Tribunal.

Lack of Integrity

The Final Notice issued to Mr Johnson details a pattern of behaviour over many years, however the key integrity breaches can be summarised as follows:

• failing to act on professional advice - Mr Johnson was aware that Keydata had received advice on numerous occasions and recklessly failed to take steps to remedy the issues:
  • inadequate due diligence in respect of the Products
  • unclear, incorrect and misleading statements within the financial promotions for the Products
  • risk of non-performance of the underlying portfolios.
• recklessly failing to take steps to prevent the ongoing sales of the Lifemark Products until these issues had been remedied, despite becoming aware of the increasing risk of non-performance

• deliberately misleading the FCA - falsely representing in compelled interviews that the Products “were on target to meet their obligations” despite being aware of performance issues

Lack of cooperation

Mr Johnson failed to deal with the FCA (and its predecessor FSA) in an open and cooperative way by:

• making misleading misrepresentations - Mr Johnson made misleading representations to the FSA during the course of the Keydata investigation:
  • during two compelled interviews (June and November 2008)
  • during a meeting with the FSA concerning the performance of the Products (January 2009)
  • was aware that Keydata had supplied information (through Keydata’s solicitors) which was likely to mislead the FSA and failed to correct the information (05 June 2009)
• failing to take steps to prevent the ongoing sales of the Lifemark Products until these issues had been remedied, despite becoming aware of the increasing risk of non-performance.

Sanctions

The Regulatory Decisions Committee of the FCA had previously decided to impose a financial penalty of £200,000 on Mr Johnson in respect of the failings detailed in the Decision Notice. However notwithstanding that the failings have not materially altered, the FCA was provided with verifiable evidence that this penalty would result in serious financial hardship for Mr Johnson (who earned £673,000 from Keydata over the relevant period). But for this the FCA would have imposed a financial penalty of £200,000 on Mr Johnson.

Mr Johnson has been subject to a public censure by the FCA and has been prohibited from performing any function in relation to any regulated financial activity.

Cooperation with the regulators - practical guidance

The duty to cooperate continues to be a high profile issue with both the FCA and the Prudential Regulatory Authority. This Final Notice joins a number of other high profile cases during 2016 (Macris and two senior managers at the Co-operative Bank) which demonstrate the standard of openness, transparency and cooperation expected from the regulators:

• reassurances given must be balanced, measured and open
• notifications must be timely and pro-active
• if you are aware that misleading information has been provided, steps should be taken to correct the information as soon as possible
• ensure all information provided is clear, complete and accurate - keep a precise record of what is provided
• do not place unreasonable reliance on others to notify the regulator - it is a personal obligation

The introduction of the Senior Managers and Certification Regime further reinforces this pre-existing obligation for all of those who are subject to Code of Conduct (COCON) (as senior managers or within the wide remit of the certification regime):

“You must be open and cooperative with the FCA, the Prudential Regulation Authority (PRA) and other regulators” (Individuals, Rule 3)

“You must disclose appropriately any information of which the FCA or PRA would reasonably expect notice” (Senior Managers, SC4)

However firms and individuals, who remain outside this regime at this time should remember that the obligation to be open and cooperative still applies (pursuant to the existing Principles for Businesses and the Statements of Principle for Approved Persons).

1     Individual Savings Account Regulations 1998 (SI 1998/1870)

2     Fieldglen Ltd v Financial Services Authority [2009] EWHC 1939 (Ch)

3_    R (on the application of Ford) v Financial Services Authority_ [2011] EWHC 2583 (Admin)