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Criteria Wealth Management Limited, Mark Peter Penney, Marc Adam Roxby | Guernsey Financial Services Commission

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The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 (the “Financial Services  Commission Law”)

The Protection of Investors (Bailiwick of Guernsey) Law, 1987 (the “POI Law”)  

The Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002 (the  “IMII Law”)  

The Insurance Business (Bailiwick of Guernsey) Law, 2002 (the “Insurance Law”)  

The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick  of Guernsey) Law, 2000 (the “Fiduciaries Law”)  

The Banking Supervision (Bailiwick of Guernsey) Law, 1994 (the “Banking Law”) (together the  “Regulatory Laws”) 

Criteria Wealth Management Limited (“CWM”) 

Mr Mark Peter Penney (“Mr Penney”) 

Mr Marc Adam Roxby (“Mr Roxby”) 

On 4 May 2020, the Guernsey Financial Services Commission (the “Commission”) decided:

1. As a result of the company having been compulsorily wound up as at 31 January 2019, with no  funds available for distribution to unsecured creditors, to impose no penalty on CWM under section  11D of the Financial Services Commission Law; it should be noted that, but for the insolvent  liquidation of CWM, the Commission considered that a discretionary penalty of £50,000 on CWM  pursuant to section 11D of the FSC Law would have been appropriate (ceteris paribus);

2. To impose a financial penalty of £40,000 under section 11D of the Financial Services Commission  Law on Mr Penney;

3. To make orders under section 34E of the POI Law, section 18A of the IMII Law, section 28A of  the Insurance Law, section 17A of the Banking Law and section 17A of the Fiduciaries Law,  prohibiting Mr Penney from holding the position of director, controller, partner, manager, financial  advisor, general representative or authorised insurance representative for a period of 6 years;

4. To disapply the exemption set out in section 3(1)(g) of the Fiduciaries Law in respect of Mr Penney  for a period of 6 years;

5. To impose a financial penalty of £20,000 under section 11D of the Financial Services Commission  Law on Mr Roxby;

6. To make orders under section 34E of the POI Law, section 18A of the IMII Law, section 28A of  the Insurance Law, section 17A of the Banking Law and section 17A of the Fiduciaries Law,  prohibiting Mr Roxby, from holding the position of director, controller, partner or manager for a  period of 4 years;

7. To disapply the exemption set out in section 3(1)(g) of the Fiduciaries Law in respect of Mr Roxby  for a period of 4 years; and

8. To make a public statement under section 11C of the Financial Services Commission Law.

The Commission considered it reasonable, proportionate and necessary to make these decisions having  concluded that CWM, Mr Penney and Mr Roxby failed to fulfil the minimum criteria for licensing, and  in particular that Mr Penney was not a fit and proper person to hold the positions of director, controller,  partner, manager, financial adviser, general representative or authorised insurance representative and  Mr Roxby was not a fit and proper person to hold the positions of director, controller, partner or manager  under Schedule 4 to the POI Law and the IMII Law (and also were not fit and proper persons to hold  those respective positions in terms of Schedule 1 to the Fiduciaries Law, Schedule 7 to the Insurance  Law and Schedule 3 to the Banking Law, which set out the minimum criteria under these Laws).

Background 

CWM is a Guernsey company, incorporated on 27 September 2012. CWM had six full time employees  until 2018, including three financial advisors, which included Mr Penney and Mr Roxby (from 25 February 2013 to 29 June 2018). Mr Penney was the Managing Director of CWM from incorporation  until 31 January 2019 and Mr Roxby was a director of CWM from 2 December 2014 to 15 June 2018.

CWM was licensed under the POI Law and the IMII Law on 20 December 2012. CWM was licensed  under POI Law to carry on the restricted activities of Advice and Promotion in connection with  Category 1 Controlled Investments – Collective Investment Schemes.  CWM was not at any material  time licensed to carry out any restricted activity in relation to Category 2 Controlled Investments –  General securities and derivatives.  CWM was licensed under the IMII Law as an insurance  intermediary, to advise on and arrange long-term life insurance, savings products and single premium  business.

The Commission conducted an on-site thematic visit at CWM in October 2013 (“the 2013 Visit”).   Following the 2013 Visit, CWM wrote to the Commission outlining improvements in CWMs processes  and procedures.  The Commission wrote to CWM again in July 2015 warning CWM against switching  clients without proper consideration of rebalancing risks within existing products and had set out the  Commission’s expectation that exit penalties, investment timeframes, adviser remuneration and product  provider charges should form part of the assessment underlying any recommendation. The Commission  conducted a further on-site visit of CWM in April 2016 (“the 2016 Visit”). The purpose of this visit  was to ascertain compliance with the Commission’s letter of July 2015.  The Commission found issues  including lack of evidence that recommended surrender/withdrawal was in clients’ best interests;  ineffective peer review of Advice provided to clients; and acting outside the terms of CWM’s licence  by performing the restricted activity of Management. Whilst CWM disagreed with the Commission’s  findings from the 2016 Visit, CWM committed to implement a Risk Mitigation Plan.

In May 2017, a complaint was made to the Commission by a licensed entity – on behalf of its client,  and CWM’s former client, Client X.  Client X was an elderly client and CWM’s largest client from  December 2013 onwards until the end of the client relationship.  The licensee also provided the  Commission with copies of documents provided by CWM to Client X.  These documents disclosed a  sale of CWM’s own shares to Client X by Mr Penney.  The documents also identified advice provided  to Client X relating to the surrender of long-term insurance bonds.  The pattern of advice evidenced in  the Client X file raised concerns of widespread similar practice of unsuitable advice and led to the  Commission reviewing a sample of other client files to determine if the pattern of unsuitable advice was  more widespread.

Following consideration of the investment advice in the client files, the Commission noted that CWM  was advising on and promoting Structured Notes, which the Commission believed were Category 2  Controlled Investments.  CWM was not licensed to advise on and promote Category 2 Controlled  Investments.

Mr Roxby resigned from CWM with effect from 16 June 2018. Mr Penney and a Non-Executive  Director sought a purchaser for CWM’s book of business, but ultimately this search was not successful.  An order for the compulsory winding up of CWM was obtained dated 31 January 2019. The  Commission accepted surrender of CWM’s licences under the POI Law and the IMII Law on 28  February 2019.

Findings 

CWM’s Sale of Structured Notes 

CWM was licensed under the POI Law to carry on the restricted activities of “Advice” and “Promotion”  in connection with Category 1 Controlled Investments – Collective Investment Schemes.  It is not  disputed by CWM, Mr Penney or by Mr Roxby that CWM was not licensed at any time to carry out  any restricted activity in relation to Category 2 Controlled Investments – General Securities and  Derivatives.

The Structured Notes advised on and promoted by CWM are contracts that fall within the classification  of Category 2 Controlled Investments under Schedule 1 of the POI Law by reason of the investments  comprising derivatives.  Some of the Structured Note fact sheets seen by the Commission state that the  product is a derivative instrument.

The Structured Notes that CWM was promoting to and recommending to its clients were typically  structured products comprising a bond plus a derivative instrument or instruments (typically linked to  the value of one or more equities). CWM engaged in the Restricted Activities of Promotion and Advice  in relation to the Structured Notes.  CWM was not licensed to promote or advise on Category 2  Controlled Investments and therefore in promoting and/or advising on Structured Notes, CWM was  conducting unlicensed business.

Mr Penney and Mr Roxby’s position in response to the Commission was that the categorisation of the  Structured Notes was a “grey area” and they believed that the Structured Notes did not fall within  Category 2 Controlled Investments.

The question of whether the licence of a business extends to cover the business being conducted is so  fundamental, and the consequences of conducting unlicensed business are so serious, that the CWM  Directors ought to have taken legal/expert advice on what they considered at the time to be a “grey  area” to resolve the issue before starting to sell Structured Notes to their clients. It was not disputed that  no such advice was taken at that time.

The consequences of conducting unlicensed business in Structured Notes  

The Structured Notes comprised a significant part of CWM’s business.  In the period 11 March 2014 to  26 April 2018, Mr Roxby advised CWM’s clients to invest a total of £2,865,000 in 148 Structured  Notes.  In the same period, Mr Penney advised CWM’s clients to invest a total of £745,000 in Structured  Notes. The consequences of CWM conducting unlicensed business in relation to Structured Notes, and  of Mr Penney and Mr Roxby collectively failing to prevent CWM undertaking controlled investment  business for which it was not licenced, have been, predictably, serious in that –

• CWM has contravened section 1(1) of the POI Law in relation to advice, promotion and sales of  Structured Notes to its clients over the years 2014 – 2018;

• CWM’s professional indemnity insurers have to date refused to provide indemnity in relation to  advice, promotion and sales of Structured Notes by CWM, because it was unlicensed business and  thus clients of CWM, Mr Penney and Mr Roxby have been exposed to, and in some cases have  suffered, uninsured losses (although there may be recourse through an award by the Channel  Islands Ombudsman in respect of a small number of complainants and professional indemnity  insurance may respond in respect of these albeit no awards nor confirmation of the insurance  position have been confirmed to date); and

• CWM has been exposed to reputational risk, legal risk and regulatory risks.

As at 31 December 2018, CWM had received requests for compensation in relation to the Structured  Notes in the sum of £79,000 and had settled one complaint in the sum of £4,000 compensation.

The contraventions and the conduct by CWM, of unlicensed business, is evidence of a failure on the  part of CWM to fulfil the Minimum Criteria for Licencing under Schedule 4 of the POI Law in the  following respects:

• Paragraph 1(2)(b)(i), ‘contravened any provision contained in or made under this Law’; and

• Paragraphs 2(1)(b) and (c) which state the ‘business of the applicant or licensee… will be carried  on’, ‘with professional skill appropriate to the nature of the activities’ and ‘in a manner which will  not tend to bring the Bailiwick into disrepute as an international finance centre’.

Both Mr Penney and Mr Roxby failed to fulfil the Minimum Criteria for Licencing under Schedule 4  of the POI Law in the following respects:

• Paragraph 1(1)(a), ‘competence’ and ‘soundness of judgement’ by giving advice to clients  recommending Structured Notes, which comprised Category 2 Controlled Investment Business for which CWM was not licensed and failing to obtain proper advice about the controlled investment  status of the Structured Notes;

• Paragraph 1(1)(c), jeopardising the ‘reputation of the Bailiwick as a reputable finance centre’,  evidenced by investor complaints resulting from CWM’s Category 2 Controlled Investment  Advice;

• Paragraph 1(1)(e), ‘knowledge and understanding of the legal and professional obligations to be  assumed or undertaken’ in terms of the failure to realise their recommended Structured Notes  investments as Category 2 Controlled Investments under the POI Law;

• Paragraph 1(1)(g), ‘policies, procedures and controls to comply with any rules, codes, guidance,  principles and instructions’ by the failure of CWM’s investment policy and committee to correctly  identify that CWM’s licence did not include advice or promotion of Category 2 Controlled  Investments under the POI Law and under the POI Law; and

• Paragraph 2(b) “contravened any provision contained in or made under – this Law …or the  regulatory laws”.

Whether CWM provided suitable Advice and Information to its clients about Structured Notes 

The Structured Notes were complex and high risk investments and each of the financial advisors  promoting and recommending these products to clients (had this been licenced business of CWM which  as set out above, it was not) ought not to have done so, without a proper understanding of the risks and  the disadvantages of investing in these products, and without communicating those risks to the clients.  Over the period 2014 to 2016, CWM, Mr Penney and Mr Roxby wrongly categorised the Structured  Notes as low risk when they were high risk and this led to unsuitable recommendations being made to  many of their retail clients, who had low risk appetites, to purchase Structured Notes.  This was a breach  of Rule 5.2.2(c)(i)  of the Licensees (Conduct of Business) Rules, 2009, 2014 and 2016 (“the Licensee  Rules”).  Clients were therefore not made aware of the true nature of the risks of the Structured Notes,  in particular the risks of capital loss up to 100% of capital invested, which is a breach of Rule 5.2.3(d)  of the Licensee Rules.

Further, CWM did not provide a clear statement of prior disclosure in relation to all remuneration that  it was to receive for the Structured Notes transactions, indeed it made statements that failed to disclose  the distribution fees paid to CWM on the Structured Notes which could be as high as 8% of the capital  invested.  This was a breach of Rule 5.2.4 of the Licensee Rules. This comprised a breach of Rule  5.2.3(a) of The Licensees (Conduct of Business Rules) 2009 which obliged the Firm to provide prior  disclosure to its client of “the basis or amount of its charges” for the provision of services and a breach  of Rule 5.2.3(d) of The Licensees (Conduct of Business Rules) 2009 which obliged the Firm not to  recommend a transaction to a client unless it had taken “reasonable steps to make him aware of the risks  involved including conflicts of interest” and a breach of Principle 5.  From 1 January 2015, this also  comprised a breach of Rule 5.2.4(b) of The Licensees (Conduct of Business Rules) 2014 and 2016  which requires the Firm to provide prior disclosure of all charges/remuneration to be received in  connection with each associated transaction and again a breach of Principle 5 as set out above.

CWM’s Financial Advisors, including Mr Penney and Mr Roxby, were required only to provide advice  on matters upon which they were competent and qualified to advise.  CWM’s Board failed to ensure  that each of its financial advisers held such qualifications to at least the minimum standard as published  by the Commission. CWM’s Advisors did not have qualifications meeting the Commission’s published  minimum requirements relating to Category 2 Controlled Investments when they should have both had  the requisite qualifications no later than 31 March 2016.  This was a breach of Rule 3.5.3(e) of the  Licensee Rules.

The contraventions set out above represent a failure by CWM to fulfil the Minimum Criteria for  Licencing in terms of the POI Law Schedule 4, Paragraph 2(1)(b) ‘with professional skill appropriate  to the nature and scale of his activities’ and 2(2)(b) ‘act in accordance with’ the Principles of Conduct  of Finance Business (“the Principles”); and in terms of the IMII Law Schedule 4, Paragraph 1(1)(b)  ‘with professional skill appropriate to the nature and scale of his activities’ and 1(2)(a)(i) ‘act in accordance with’ the Principles.

Mr Penney failed to ensure CWM adhered to Principle 2 of the Principles.  In this regard Mr Penney  failed to fulfil the Minimum Criteria for Licencing as described in Schedule 4 to both the POI Law and  IMII Law in terms of:

• Paragraph 1(1)(a) of the POI Law and Paragraph 3(2)(a) of the IMII Law, “competence” and  “soundness of judgement” in relation to unsuitable Advice provided to CWM’s clients  recommended Structured Notes; and

• Paragraph 1(1)(e) of the POI Law and Paragraph 3(2)(e) of the IMII Law, ‘knowledge and  understanding of the legal and professional obligations to be assumed or undertaken’,  demonstrated by the multiple contraventions contained in Structured Notes recommendations,  advice and information provided by Mr Penney.

Mr Roxby also provided unsuitable Advice to CWM’s clients, recommending Structured Notes  investments. Mr Roxby failed to ensure CWM adhered to Principle 2 of the Principles.  Mr Roxby  therefore failed to fulfil the Minimum Criteria for Licencing as described in Schedule 4 to both the POI  Law and the IMII Law in terms of:

• Paragraph 1(1)(a) and Paragraph 3(2)(a) of IMII Law, “competence” and “soundness of  judgement” in relation to his unsuitable Structured Note Advice to CWM’s clients; and

• Paragraph 1(1)(e) of the POI Law and Paragraph 3(2)(e) of the IMII Law, ‘knowledge and  understanding of the legal and professional obligations to be assumed or undertaken’,  demonstrated by the multiple contraventions contained in Structured Notes recommendations,  advice and information provided by Mr Roxby.

CWM’s Advice to and Dealings with Client X 

Whether CWM provided suitable advice to Client X

Mr Penney  

Client X was at the relevant time an elderly retail client with some knowledge of financial transactions  but no professional expertise. Mr Penney advised Client X to surrender two insurance bonds in  February/March 2014.  Mr Penney advised Client X to reinvest the proceeds of one bond (“the larger  insurance bond”) into three similar bonds from the same provider in order to provide for Client X’s  heirs.  Mr Penney advised Client X to reinvest the proceeds of the second bond (“the smaller insurance  bond”) into a discretionary managed portfolio.  This advice was unsuitable.

In particular:

1. Mr Penney failed to establish and/or record Client X’s investment objectives and risk tolerance  properly or consistently.  File notes made by Mr Penney and the recommendation letters were  inconsistent with regard to investment objectives and risk tolerance. Mr Penney would record  his advice in these documents as if the idea for the advice or strategy had come from Client X,  when in fact it had been Mr Penney’s advice or suggested strategy.  This was seen throughout  the documentation and was disingenuous at best, and, at worst, thoroughly misleading.

2. Mr Penney provided unsuitable advice and, in some cases, misleading advice (including tax  advice on which he was not qualified to advise) to Client X, in relation to the larger insurance  bond.  Mr Penney failed to establish that the transaction he recommended in relation to the  larger insurance bond was in Client X’s best interests.

3. Mr Penny also gave misleading advice about the tax liabilities that Client X had “accrued”,  giving the impression, as recorded in his recommendation letters and his file notes of  conversations with Client X, that they had somehow accrued a tax bill of nearly £600,000. He  later made admissions to the Commission that the tax had not in fact accrued (and was not in  fact payable at the time and would not be payable at all by Client X’s heirs on the demise of  Client X) and further that the maximum tax payable by a Guernsey resident was £220,000 in  any one year.  Despite these facts, Mr Penney repeatedly gave the impression to Client X that  his suggested restructure of the insurance bonds would save Client X’s tax liabilities and allow  Client X “to take advantage” of the tax cap of £220,000 when the truth was that the tax cap was  always available.

4. Mr Penney should not have recommended this complex and difficult transaction without  independent expert tax advice which Client X should have received in writing and which  stipulated that the transaction was in their best interests.  Without this, it was impossible for Mr  Penney to reconcile his conflict of interest – CWM would earn no trail fees on the existing  insurance bonds (ie. if the original structure was left in place) but would only earn initial, and  trail fees, on new or restructured products. This was not disclosed to Client X, and the conflict  of interest neither disclosed nor managed.

5. In relation to the smaller insurance bond, which had no tax issues, Mr Penney’s  recommendation was to encash this bond in its entirety and invest in a discretionary managed  portfolio – thus paying new on-boarding fees (and generating initial and trail fees for CWM  which would otherwise not have been available to CWM had the initial structure remained in  place). Mr Penney failed to establish that the transaction he recommended in relation to the  smaller insurance bond was in Client X’s best interests.

6. Mr Penney failed to advise Client X about alternative restructures or investments that might be  more cost effective and tax efficient solutions for them.

7. Mr Penney failed to disclose remuneration to be earned by CWM on products sold to Client X,  and recommendation letters were in some cases misleading in implying that CWM would not  earn commissions or fees on particular products sold to Client X, when they would in fact do  so; and

8. Mr Penney made internal file notes, which purported to be contemporaneous records of advice  given to Client X and of conversations held with Client X.  These were in fact so confusing and  internally contradictory that they could not be relied upon as contemporaneous evidence unless  also corroborated by external evidence; Mr Penney had in fact drafted several file notes relating  to Client X during 2017 in response to a request for more information from his compliance  officer, but had backdated these file notes to give the appearance that they were  contemporaneous notes recording advice given to Client X in 2014.

During the period 2014 to 2016, Mr Penney gave additional unsuitable advice to Client X in relation to  Structured Notes and other investments.  In particular:

1. Mr Penney failed to establish and/or record Client X’s investment objectives and risk tolerance  properly or consistently.

2. Mr Penney provided unsuitable advice to Client X and failed to give proper risk warnings in  relation to the Structured Notes and other investments over the period 2014-2017, in that the  Structured Notes were proposed as low risk when they were in fact high risk and warnings  given about the risk of capital losses were either absent or insufficient; and

3. Mr Penney failed to disclose, sufficiently or at all, the remuneration to be earned by CWM on  products sold to Client X, and recommendation letters were in some cases misleading in  implying that CWM would not earn commissions or fees on particular products sold to Client  X, when they would in fact do so.

Overall, the advice provided to Client X by Mr Penney was neither suitable nor provided by CWM’s  Advisor with “integrity”, nor with “due skill, care and diligence towards its customers”; and conflicts  of interest were not managed, in contravention of Principle 1, 2 and 3 of the Principles. In this regard  Mr Penney failed to fulfil the Minimum Criteria for Licencing as described in Schedule 4 to both the  POI Law and the IMII Law in terms of fit and proper person considerations:

• Paragraph 1(1)(a) of the POI Law and paragraph 3(2)(a) of the IMII Law, “probity”, “competence”  and “soundness of judgement” in relation to unsuitable advice provided to Client X; and

• Paragraph 1(1)(e) of the POI Law and paragraph 3(2)(e) of the IMII Law, ‘knowledge and  understanding of the legal and professional obligations to be assumed or undertaken’,  demonstrated by the multiple contraventions contained in advice provided to Client X written by  Mr Penney.

Mr Roxby 

During the period 2014-2017, Mr Roxby was in all cases the Advisor tasked with the responsibility for  reviewing and checking Mr Penney’s advice to Client X. Mr Roxby was supposed to provide “four  eyes” review for each piece of advice Client X received as CWM’s authorised Financial Advisor (and  also as a Director, from December 2014).

There was no evidence of Mr Roxby providing any effective check or challenge to Mr Penney – he  simply signed off Mr Penney’s advice, even when there were obviously questions to be asked about the  tax position and the suitability of the advice being provided. Mr Roxby abdicated responsibility and  endorsed all of the advice given by Mr Penney, thus providing no check or challenge to Mr Penney, and  therefore did not perform his allotted function within CWM.

Mr Roxby, by his failures in lack of care and diligence when peer reviewing Mr Penney’s advice to  Client X and his failures to challenge, correct or prevent the provision of unsuitable advice to Client X  thereby failed to adhere to Principle 1, 2 and 3 of the Principles.  Mr Roxby therefore failed to fulfil the  Minimum Criteria for Licencing as described in Schedule 4 to both the Laws in terms of fit and proper  person considerations:

• Paragraph 1(1)(a) of the POI Law and paragraph 3(2)(a) of the IMII Law “competence” and  “soundness of judgement” in relation to his failure properly to peer review and his tacit approval  of advice given by Mr Penney to Client X on behalf of CWM which was unsuitable advice; and

• Paragraph 1(1)(e) of the POI Law and paragraph 3(2)(e) of the IMII Law, ‘knowledge and  understanding of the legal and professional obligations to be assume or undertaken’, demonstrated  by his failure properly to peer review and tacit approval of Mr Penney’s unsuitable advice to Client  X.

The failures to fulfil the Minimum Criteria for Licensing by Mr Penney and Mr Roxby contributed to a  failure by CWM to meet the Minimum Criteria for Licensing in terms of the POI Law Schedule 4,  Paragraph 2(1)(b) ‘with professional skill appropriate to the nature and scale of his activities’ and  2(2)(a) ‘act in accordance with’, the Principles. Under similar provisions in the IMII Law Schedule 4  Paragraph 2(1)(b) and 1(2)(a)(ii) the behaviours of Mr Penney and Mr Roxby also contributed to CWM  Firm failing to meet the Minimum Criteria for Licencing.

Conflicts of interest in relation to the private sale of CWM shares by Mr Penney to Client X in  January and July 2016 

Client X acquired 5% of CWM’s shares from Mr Penney for £65,000 in January 2016.  Client X paid  the £65,000 purchase monies into Mr Penney’s personal bank account.  Mr Penney personally retained  £60,000 of the £65,000 in relation to this transaction while the balance was paid to CWM.

The updated share register was ratified at a CWM board meeting on 28 January 2016, at which Mr  Roxby was present.  This was the only reference in the minutes to the first share sale transaction between  Mr Penney and Client X. Mr Penney did not declare any conflict of interest at the board meeting in  relation to the sale of shares to Client X.

In July 2016, Mr Penney emailed the CWM directors, including Mr Roxby, stating that Client X wished  to increase their shareholding in CWM to 10% and that he had agreed in principle to sell Client X  a  further 5% of his own shares in CWM.  Mr Penney asked for confirmation from the other directors  whether they had any objections.  Mr Roxby confirmed he had no objections.

Client X purchased a further 5% shareholding in CWM from Mr Penney in July 2016 for £65,000.  As  with the first share sale transaction, the £65,000 was transferred by Client X to Mr Penney’s personal  bank account.  None of the £65,000 was loaned to CWM by Mr Penney.  He retained the entire sum for his personal benefit.

Mr Penney and another director had signed off the company accounts on 20 June 2016 which showed  that, for the prior financial year, CWM was trading at a loss.  It was unlikely, therefore, that any dividend  would be paid by the end of the year, contrary to what Mr Penney had stated twice to Client X.

Client X was at all times categorised by Mr Penney himself as a “lower risk” or “medium risk” retail  investor, and not at any stage a high risk investor.  The letters of 2 January and 19 July 2016 from Mr  Penny to Client X describing the share sale transactions are wholly inadequate in bringing to their  attention all the matters that Client X, and/or any independent financial/legal advisor, needed to know  about the transaction.

Mr Penney ought to have set out in writing and in clear terms, at minimum, the following information:  (i) Mr Penney was acting in his personal capacity in the transaction and was not acting as Client X’s  financial advisor; (ii) Client X should take independent legal and/or financial advice on this transaction;  (iii) CWM would not receive the funds. The share purchase monies were for Mr Penney’s private  account and that he would personally profit from the sale; (iv) Mr Penney had not undertaken an  independent share valuation and Client X should have the shares valued independently; (v) CWM was  presently loss making, and there were no plans to declare a dividend during 2016; (vi) an audited set of  the latest accounts to be enclosed which should be shown to the independent advisor/s and (vii) a clear  risk warning to the effect that the purchase of the shares was a high risk investment, which could result  in 100% loss of capital since these shares were illiquid investments in a private company which was  presently loss making.  If Client X had appointed an independent legal/financial advisor, then Mr  Penney ought to have requested a signed letter from her independent advisor stating such advice had  been given before the transaction could proceed.

Mr Penney did not act in an open and transparent manner in relation to the share sales to Client X. In  relation to both share purchase transactions, it was a situation where the onus lay on Mr Penney to give  Client X full disclosure of his conflict of interest and also of all the risks involved in the transaction and  there is no evidence that he did so. Instead, Mr Penney, even at interview, appeared to consider it was  sufficient to give Client X the opportunity to take independent legal advice.  But, to Mr Penney’s  knowledge, Client X did not take independent legal or financial advice on the transactions, and nor did  they have the full disclosure needed from Mr Penney to make an informed decision on the risks of the  transactions. In those circumstances, Mr Penney ought not to have proceeded with the transactions given  the glaring conflict of interest he faced, being both financial advisor to Client X and beneficiary,  personally, of the proceeds of the transactions.

Client X was significantly disadvantaged by both transactions. They transferred cash/medium risk  assets into very high risk illiquid shares in a private, loss making company with no security and a high  prospect of substantial or total capital loss.  Client X did indeed lose the entire capital invested in the  shares in the sum of £130,000.

Mr Penney could not establish that the price paid by Client X was a fair price for the shares for the  following reasons: (i) Mr Penney did not himself obtain an independent valuation of the shares; (ii) Mr  Penney’s calculation of the price of the shares was subjective, informal, undocumented and based on  assumptions as to future fees and earnings for CWM that were not reconciled with existing management  or audited accounts; on a market valuation method, the transaction for the purchase of 50 shares in  CWM from another shareholder in January 2016 was the closest and most relevant comparator but Mr  Penney had paid £500 per share to that shareholder in January 2016 and yet Mr Penney charged Client  X £1,300 per share per share for the January and July 2016 share sale transactions which raises a serious  question as to whether Mr Penney was charging Client X a fair price for the shares; and on a multiples  method of valuation, there was no contemporaneous documentation (ie, at the time of the share sales  transaction) or independent valuation advice to support the valuation Mr Penney arrived at.

The sale of CWM’s shares by Mr Penney to Client X in January and July 2016 demonstrates the failure of CWM and its Directors to identify, mitigate and manage the serious conflict of interest. The fact that  Mr Penney sold CWM’s shares to Client X at a price he cannot establish on the evidence as fair, and  that he personally profited from the sale proceeds without full disclosure to Client X (and/or insisting  that they took independent advice) was improper and aggravates the breaches on the part of Mr Penney.   This demonstrated a lack of personal probity by Mr Penney.  Together these matters demonstrate that  Mr Penney acted with a lack of probity, competence and soundness of judgement, and evidence his  failure to fulfil the Minimum Criteria for Licencing under the Regulatory Laws.

CWM had an opportunity to prevent Mr Penney selling CWM’s shares to Client X when Mr Penney  discussed the January share sale in advance with Mr Roxby. Mr Roxby and Mr Penney did not tell  CWM’s other director about the January 2016 sale.  The consequence of Mr Penney’s and Mr Roxby’s  failures meant the conflict of interest was neither identified nor managed adequately by CWM.

By his lack of care and diligence, and failures to avoid and manage conflicts of interest, Mr Penney  failed to ensure CWM adhered to the Principles 1, 2 and 3.  Mr Penney failed to fulfil the Minimum  Criteria for Licencing as described in Schedule 4 to both the Laws in terms of fit and proper person  considerations:

• Paragraph 1(1)(a) of the POI Law and Paragraph 3(2)(a) of the IMII Law, ‘probity’, ‘competence’  and ‘soundness of judgement’ in relation to the sale of his shares in CWM to Client X;

• Paragraph 1(1)(e) of the POI Law and Paragraph 3(2)(e) of the IMII Law, ‘knowledge and  understanding of the legal and professional obligations to be assumed or undertaken’,  demonstrated by the private share sale to Client X despite the conflict of interests; and

• Paragraph 2(c)(i) of the POI Law and Paragraph 3(3)(c)(i) of the IMII Law ‘engaged in a business practice’ that ‘appears to the Commission to be deceitful or oppressive or otherwise improper’.

Mr Roxby, by his lack of care and diligence, and failures to prevent and manage conflicts of interest,  failed to ensure CWM adhered to Principles 1, 2 and 3 of the Principles.  Mr Roxby failed to fulfil the  Minimum Criteria for Licencing as described in Schedule 4 to both the Laws in terms of fit and proper  person considerations:

• Paragraph 1(1)(a) of the POI Law and Paragraph 3(2)(a) of the IMII Law, ‘competence’ and  ‘soundness of judgement’ in relation to his failure to raise questions and concerns in relation to the  sale of CWM’s shares to Client X; and

• Paragraph 1(1)(e) of the POI Law and Paragraph 3(2)(e) of the IMII Law, ‘knowledge and  understanding of the legal and professional obligations to be assumed or undertaken’,  demonstrated by his lack of challenge to, and tacit approval of, the private share sale to Client X  and the resultant unmitigated conflict of interest.  Mr Roxby did not think to intervene in the share  sale transactions, despite the fact that Mr Roxby had overseen the recommendation letters and  correspondence between Mr Penney and Client X for two years in his role as peer reviewer, and  therefore understood how Mr Penney was a trusted advisor to Client X.

The contraventions set out above demonstrate CWM’s failure in terms of Principles 1, 2 and 3.  These  breaches also represent a failure by CWM to meet the Minimum Criteria for Licensing in terms of the  POI Law, Schedule 4 paragraph 1(1)(g) and the IMII Law, Schedule 4 paragraph 3(2)(g), ‘policies  procedures and controls to comply with any rules, codes, guidance, principles and instructions’.

CWM’s Records were insufficient in many cases to show the provision of suitable advice to other  clients 

Analysis of CWM’s investment surrender log and some sample examples of written advice provided to  clients other than Client X demonstrated patterns of switching, underpinned by generic reasoning that  failed to document sufficiently, or at all, in the following three areas: (i) the reasons for the  recommended investment switches; and/or (ii) the costs savings or other advantages that would accrue  to the client from the switching; and/or (iii) the costs of the proposed new investments.

The repeated similar justifications for product surrender and reinvestment in 2016 and further repeated  wording in 2017 suggest that the recommendations to clients were not sufficiently personalised but that  CWM’s financial advisors adopted formulaic or generic standard templates. The advisors to the clients  included Mr Penney and Mr Roxby.  CWM by its advisors frequently did not fully document to the  clients how much the alleged “cost savings” added up to, and how those cost savings justified the  recommendation to switch.  CWM and its advisors, including Mr Penney and Mr Roxby, ought to have  documented this clearly and set out a comparison between the costs under the existing investment and  the costs under the recommended new investment in order to assist clients to decide whether to accept  his recommendations.  CWM’s records were therefore in several cases, in addition to Client X,  insufficient to demonstrate and fully document that the surrender was in the clients’ best interests.

Finally, to the extent that any of the CWM clients were recommended Structured Notes, the same issues  arose in relation to a failure on the part of CWM, and its Advisors, to warn of the significant risks of  loss of capital, a failure to document the high risk rating for Structured Notes, and a failure to establish  suitability, and/or to document appropriately why these recommendations were in the best interests of each client.

The contraventions outlined above demonstrate CWM’s failure to adhere to Principle 2, ‘A licensee  should act with due skill, care and diligence towards its customers and counterparties.

The breaches also constitute a failure by CWM to fulfil the Minimum Criteria for Licencing in terms of  the POI Law, Paragraph 1(1)(b) ‘diligence’ and Paragraph 1(1)(g) ‘polices procedures and controls to  comply with any rules, codes, guidance, principles and instructions’. In addition, the same  contraventions represent similar failures under the IMII Law to fulfil the Minimum Criteria for  Licencing with particular regard to, Paragraph 1(1)(b) ‘professional skill appropriate to the nature and  scale of his activities’ and Paragraph 2(a) ‘act in accordance with’,  ‘(i) the Principles of Conduct of  Finance Business’ and ‘(ii) any rules, codes, guidance, principles and instructions issued from time to  time under this law’.

By their failures to observe high standards of integrity and act with due skill, care and diligence in relation to the matters set out above, Mr Penney and Mr Roxby (until July 2015), failed to ensure CWM  adhered to the Licensee Rules, the Code of Conduct for Authorised Insurance Representatives (until 31  December 2014), the Code of Conduct for Financial Advisors (from 1 January 2015), and Principle 2  of the Principles.  Therefore, CWM failed to fulfil the requirement of the Minimum Criteria for  Licencing in terms of the POI Law Schedule 4, Paragraph 2(1)(b) ‘with professional skill appropriate  to the nature and scale of his activities’ and 2(2)(a) ‘act in accordance with’ the Principles. Under  similar provisions in the IMII Law Schedule 4 Paragraphs 1(1)(b) and 1(2)(a)(i) CWM also failed to  fulfil the Minimum Criteria for Licencing.

Aggravating Factors 

Other than the complaint from Client X and the complaints of Structured Notes holders, none of the  matters comprising breaches set out above were brought to the attention of the Commission.

In relation to the advice given by CWM, Mr Penney and Mr Roxby and the failures to document reasons  for recommendations and failures to disclose remuneration, CWM has a poor regulatory history as far  back as the first Commission visit in 2013, and again highlighted by the Commission’s visit of 2016.

The failure to take legal advice in relation to the nature of the Structured Notes and the consequent  conduct of unlicensed business in selling approximately 200 Structured Notes to clients has resulted, in  some cases, in uninsured losses for clients.

Mr Penney’s advice to Client X, an elderly client, resulted in a significant tax bill for Client X, as well as significant commission income for CWM.  The commission from restructuring Client X’s insurance bonds generated 15-20% of CWM’s income for 2014.

In relation to the share sales to Client X, Mr Penney engaged in very deliberate improper conduct,  profiting to the sum of over £100,000.

Mr Roxby failed to provide any check or challenge to Mr Penney in relation to the failures relating to Client X and this meant that he provided no protection to Client X in relation to very serious failures and contraventions by CWM and Mr Penney.

Mitigating Factors 

CWM appointed a third party consultant to assist with remediation following the 2016 Visit.  Thereafter,  CWM completed a remediation plan to the satisfaction of the Commission.  The remediation improved  CWM’s compliance with regulatory requirements.

In relation to the conflicts of interest regarding the sale of shares to Client X, Mr Penney and Mr Roxby  admitted during the Investigation that the conflicts of interest policies at CWM were inadequate and  that they did not manage the conflicts of interest as they were obliged to.  CWM subsequently revised  its conflicts of interest policy and amended its articles to prevent the sale of shares to its clients.

Mr Roxby did not make any personal gain from the sale of shares to Client X.

Following the Commission’s letter of July 2015, Mr Roxby appears to have taken into account the  Commission’s comments in his advice to clients.

CWM, Mr Penney and Mr Roxby co-operated with the investigation.

Regulator Information

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