In brief
On 13 February 2024, the FCA issued a Final Notice to Floris Jakobus Huisamen, the former director and compliance officer of London Capital & Finance plc (LCF), fining him GBP 31,800 and banning him from working in financial services in relation to misconduct connected to financial promotions issued by LCF. This Final Notice follows the FCA’s previous censure of LCF in October 2023 for connected behaviour. In this alert we draw out the key takeaways that compliance officers should bear in mind from the FCA’s enforcement action.
Background
The Final Notice is set in the context of the FCA’s action against LCF in relation to the promotion of minibonds – specifically, the failure to ensure that these minibond financial promotions were fair, clear and not misleading.
The compliance officer played a key role in the sign-off process for confirming that LCF’s financial promotions complied with FCA rules and was closely involved in LCF communicating hundreds of financial promotions, which were found by the FCA to be unfair, unclear and misleading.
The FCA found that the compliance officer recklessly signed off certain financial promotions when he was aware of clear risks that they were not compliant and that, as a result of his conduct taken as a whole, the compliance officer lacked integrity and posed a risk to consumers and the integrity of the UK financial system.
Whilst the LCF minibond business failure and subsequent enforcement action has been well-publicised and the subject of significant scrutiny by the FCA and at Government level, the Final Notice against Mr. Huisamen is a useful reminder of the FCA’s expectations on approved individuals. Although the Final Notice covers Mr. Huisamen’s tenure as an approved person, the lessons learned on FCA expectations are equally relevant for Senior Managers considering their roles under the current regime.
Key takeaways
Whilst the facts of the Final Notices issued to Mr. Huisamen and LCF are specific to the business that was being carried out by LCF, the FCA’s findings are a timely reminder on the role of the compliance officer and the FCA’s expectations on how the role should be performed.
Challenging the board
A repeated issue in the Final Notice was that the compliance officer accepted verbal assurances from the board of directors without challenge, even in the face of contrary information or legal advice.
In one particular incident, the compliance officer signed off on an information memorandum for a series of bonds described as “ISA bonds”. Despite having some awareness (whilst not legally qualified) that it was a requirement for a bond to be transferable to be held in an ISA and also being aware that LCF’s bonds were not transferable, the compliance officer signed off on the information memorandum as compliant without taking proper steps to ascertain the legal position. In another incident, the FCA found that the compliance officer chose to accept the assurance of LCF’s senior management (who were not legally qualified) that LCF’s bonds were ISA-compatible based on their interpretation of a certain rule on ISA eligibility, despite being warned that two lawyers had advised that they were not eligible and without requesting evidence supporting the views of the senior management on eligibility or challenging their assertion. The FCA also found that the compliance officer did not challenge the decision by LCF’s senior management to stand down lawyers from advising on this point.
Compliance officers should feel empowered to challenge the board and act on their views where they have misgivings about an approach. This extends beyond financial promotions and applies to all aspects of the compliance officer’s role, but is particularly relevant where the compliance officer is being asked to sign off or approve documentation or a course of action in spite of misgivings as to the compliance of such documents or course of action.
In circumstances where a legal position may be unclear, showing that appropriate advice has been taken (such as internal or external legal advice) to support business/senior management views will help mitigate the risk of a finding that the compliance officer did not take appropriate steps before providing sign-off on a particular matter.
Compliance officers have individual accountability obligations and the FCA expects compliance officers to uphold compliance standards, even where there may be pressure from the board to take (or refrain from taking) certain actions. Acting on board instructions while disregarding known risks may be viewed as reckless conduct by the FCA.
Understanding high-risk areas and tailoring policies and procedures
One of the issues identified in the LCF financial promotion sign-off process was the absence of appropriate scrutiny and challenge, which meant that the process was in no way tailored to the business.
Compliance officers need to understand the business of the firm and where risks may lie, in order to tailor processes and controls. Off-the-shelf approaches that do not take into account the specifics of the firm are unlikely to be sufficient to mitigate compliance risk.
This understanding is particularly important where vulnerable customers may be involved. In this case, because the minibonds were ultimately being distributed to unsophisticated and, in some instances, vulnerable retail investors, and because they were disseminated across such a wide investor base, the ultimate impact of the compliance officer’s actions was particularly magnified. This impact is one of the points the FCA takes into account under DEPP when determining the penalty figure which should apply – there were 11,625 individual bondholders involved with losses of GBP 237.8 million. Although compliance officers are not necessarily in control of the risk profile of their firm’s investment activities, they should be conscious of the increased risks involved around misselling and poor sales practices when operating within a firm with a significant retail client base. The FCA is undertaking considerable work at the moment focusing on the fair treatment of vulnerable customers and compliance officers need to understand the implications of this work for their firms.
Following processes and implementing controls is key to risk mitigation
A key FCA criticism of the compliance officer was that the financial promotion sign-off process was not always followed in full, and in practice became a simple and ineffective tick-box exercise. For many financial promotions, the FCA found that the compliance officer did not complete a verification schedule or financial promotion checklist which formed part of the sign-off process. In other instances, the FCA found that the compliance officer relied on senior management assurances, without reviewing pertinent documentary evidence, that a particular lending process was being followed as forming the basis of signing off elements of financial promotions, when in reality he had some awareness that the lending process actually followed did not match the idealised version presented in the financial promotions.
Firms will have designed processes and implemented controls for compliance with regulatory requirements (including financial promotion approvals), but those processes and controls are clearly only effective when carried out properly. Whilst in the specific findings of the Final Notice, the FCA was focused on the compliance officer’s implementation of his own processes, it is a useful reminder to compliance officers that there is a need to ensure that processes and controls are being followed throughout the firm and compliance does not stop at the creation of the policy.
As well as following agreed processes in their own role, compliance officers should ensure that other members of staff are complying with compliance controls. Ongoing monitoring and checks on the performance of compliance controls are essential to mitigating the risk of compliance breaches.
Keeping on top of the reality of processes followed by the firm is also important – if there are interdependencies between processes (such as in the Final Notice where financial promotions referenced a lending process which was in reality not followed by the firm), compliance officers should take particular care to ensure that those business practices in fact operate as documented. Compliance officers should not rely on the fact that a process has been documented as being proof that it operates in practice.
Corroborating information
The FCA particularly criticised the compliance officer for relying on uncorroborated information in performing his role. When completing a verification schedule for confirming the accuracy of financial promotions as part of the sign-off process, the compliance officer was criticised by the FCA for not reviewing and referencing relevant documentary evidence to support representations made in the documentation and instead relying on the word of LCF’s senior management. This included accepting verbal assurances from LCF’s senior management that there was a lending process that entailed rigorous financial due diligence – with this lending process forming the basis of many of the claims made in financial promotions as noted above.
As already noted, it is important that compliance officers monitor the implementation and use of firm processes and controls and obtain information and data to confirm assurances they’re provided with by the business and senior management. This is particularly important in areas that are higher risk (such as where there is risk of misselling issues) or where compliance officers may have concerns about the processes being followed by the firm.
As a matter of good practice, compliance officers should ensure that they are given accurate and complete information by the business and the board and should use this as evidence to inform their decision-making on compliance matters. Information obtained and used by the compliance officer should also be documented as part of a decision-making process.
For compliance officers who are also board members, using information they obtain from their board position will be particularly important in evidencing that they are conducting their role appropriately.
Financial promotions and approval of financial promotions should be treated with care
Whilst there were particular issues with the LCF financial promotions that won’t be applicable to many firms, it is clear that financial promotions remain a hot topic for the FCA.
Recent rules on high-risk products, the new gateway for financial promotion approvals, and continued FCA focus and publications on scams make clear that financial promotions remain on the FCA’s agenda. As noted above, where the client base is retail in nature and there is the potential for unsophisticated or vulnerable customers to be targeted, this is likely to be subject to even greater scrutiny.
Compliance officers with responsibility for approval of financial promotions should look at their processes and whether they apply stringent enough controls for approval to ensure compliance in this area.
