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Financial Institutions FSDR e-briefing: FCA fines IFA network firm for failings relating to suitability of advice and poor systems and controls

    • Financial institutions - Briefings and articles

    12-07-2013

    FCA fines IFA network firm for failings relating to suitability of advice and poor systems and controls

    Summary

    On 5 June 2013, the FCA published the Final Notice it had issued to Sesame Limited, an IFA network firm, for two sets of failings: (1) failing to ensure that investment advice given to its customers relating to Keydata life settlement products was suitable; and (2) failings in the systems and controls that governed the oversight of its appointed representatives (“ARs”).  ARs are individuals or firms that draw their authorisation from a Principal (in this case Sesame), with the Principal ultimately accountable to the regulator for their activities and for good practice.

    The FCA imposed a financial penalty of £6,031,200 on Sesame for failing to comply with Principles 3 (management and control) and 9 (customers: relationships of trust) of the FCA’s Principles for Businesses.  The penalty was made up of a £245,000 fine for the investment advice failings and a £5,786,200 fine for the systems and controls weaknesses.

    Failings

    Between July 2005 and June 2009, Sesame advised 426 customers to invest a total of over £6.1 million in Keydata life settlement products.  However, the vast majority of sales were flawed and breached Principle 9 because:

    • there was a mismatch between customers’ stated investment objectives, attitude to risk and the product sold; 
    • the suitability letters provided to customers stated incorrectly that income or capital growth was guaranteed; and/or
    • customers were advised incorrectly that Keydata life settlement products were low risk.  This was despite Sesame’s own view that the Keydata life settlement products presented investors with “a considerable amount of risk”.  While Sesame communicated its view to its ARs, it failed to take any further steps to prevent and/or identify mis-selling.

    Sesame failed to take reasonable care to ensure the advice given by its ARs and the decisions they made on behalf of customers were suitable.  In every case reviewed by the FCA, Sesame had failed to explain to customers all of the key risks and had failed to give a balanced view of the advantages and disadvantages of the Keydata life settlement products.

    The FCA further concluded, following further supervisory work, that between July 2010 and September 2012, Sesame had breached Principle 3.  In particular, the FCA found that:

    • Sesame had failed to identify and monitor sales of those products and funds which were not suitable for most customers; 
    • the desk-based file reviews and visits by Sesame’s internal compliance team had not always been suitably robust; and 
    • the problems with Sesame’s record-keeping for ARs had continued.

    These failings meant that the unsuitable sales between 2005 and 2009 could have been repeated in relation to other investment products sold between July 2010 and September 2012.

    Comment

    This case shows that punishing firms for advice/systems and controls failings will continue to be enforcement priorities for the new regulator.  Tracey McDermott, FCA Director of Enforcement and Financial Crime, stated, “By allowing ARs to use their regulatory permission to operate, Principals are effectively vouching for them.  Therefore they must keep a close eye on what their ARs do and keep them up to date with the regulator’s expectations.  Critically, they must also act decisively when things go wrong.  Sesame failed on all these counts.

    This is the third financial penalty issued to Sesame by the regulator since 2004.  With the new penalty framework (for misconduct which has taken place since March 2010) being increasingly applied and the policy of “credible deterrence” continuing to feed through, the FCA has been imposing increasingly large financial penalties.  The value of combined FSA/FCA fines for 2013 currently stands at over £150 million.

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