PUBLIC STATEMENT CONCERNING THE IMPOSITION OF A DISCRETIONARY CIVIL PENALTY UNDER SECTION 16 OF THE FINANCIAL SERVICES ACT 2008
Island Financial Solutions Limited (“IFSL”)
1.1 The Isle of Man Financial Services Authority (the “Authority”) makes this public statement in accordance with powers conferred upon it under section 13 of the Financial Services Act 2008 (the “Act”).
1.2 The making of such public statement supports the Authority’s statutory objectives of, among other things, securing an appropriate degree of protection for customers of persons carrying on a regulated activity, reducing financial crime and maintaining confidence in the Isle of Man’s financial services industry.
1.3 Following an investigation into IFSL by the Authority, which identified a number of regulatory failings in relation to its provision of financial advice to its customers, the Authority has deemed it necessary and proportionate, in all the circumstances, that IFSL be issued with a discretionary civil penalty under section 16 of the Act in the sum of £89,994 discounted by 30% to £62,996 (the “Civil Penalty”)
1.4 The level of the financial penalty reflects the fact that IFSL co-operated with the Authority and agreed settlement at an early stage, through the employment of the Authority’s Enforcement Decision-Making Process (“EDMP”).
1.5 The Civil Penalty imposed further reflects the fact that the breaches demonstrated organisational failings and failings of particular individuals for whom IFSL was required to ensure were subject to appropriate oversight and appropriate governance and compliance controls. In particular, the Authority imposes obligations on companies such as IFSL that their directors are accountable for ensuring the good governance of and compliance with regulatory requirements.
2.1 IFSL is licensed by the Authority in accordance with section 7 of the Act. IFSL is licensed to undertake certain investment business and operates as a financial advisor.
2.2 In November 2018, IFSL was the subject of a supervisory inspection by the Authority in accordance with its statutory powers under Schedule 2 to the Act.
2.3 Upon identification of certain issues in relation to the provision of financial advice, the Authority decided to investigate whether IFSL continued to satisfy the Authority that it is ‘fit and proper’ to hold a licence under section 7 of the Act (the “Investigation”). To hold a licence, a regulated person is required to satisfy the Authority that both it, and its key staff, are fit and proper. This ‘test’ is an initial test at licensing and an ongoing one.
3. Investigation conclusions
3.1 Having obtained consent from a Justice of the Peace to exercise its compulsion powers under paragraph 3 of Schedule 2 to the Act, the Authority undertook a range of interviews with relevant IFSL personnel (former and present) as well as customers of IFSL and other parties with whom it undertakes business.
3.2 The Investigation identified a range of issues that, on reasonable grounds, brought into question IFSL’s fitness and propriety. Amongst those matters established were that:–
3.2.1 IFSL, as a standard practice for UK Defined Benefit Scheme transfers, disaggregated the advisory process (treating the pension transfer process as ‘execution only’). Although the clients were provided with UK FCA authorised advice regarding the transfer, this was a false partition of the true nature of the transaction. These practices were contrary to regulatory requirements and failed to ensure the suitability of the overall advice provided to its clients;
3.2.2 IFSL misused its own group pension scheme (regular contributions only), with such activity being contrary to the terms agreed with the product provider, and without ensuring that its clients were fully informed of the product into which they were exposed;
3.2.3 IFSL had an ineffective compliance regime that failed to prevent the backdating and pre-signing of documents;
3.2.4 An ex IFSL financial advisor (employee) applied a client’s signature (on the client’s behalf) to a client file with no recorded rationale, authority or instruction; and
3.2.5 IFSL failed to ensure that its employees on every occasion adequately disclosed its commission or fee arrangements to clients, contrary to the regulatory regime with which they were required to comply.
3.3 Despite IFSL’s shortcomings, customers interviewed by the Authority appeared to be content with the ‘suitability’ of the products (pension and investment) recommended to them.
3.4 Notwithstanding these findings, the Authority has concluded that, in all the circumstances, apart from the Civil Penalty, no further regulatory sanction is necessary in respect of IFSL and therefore IFSL remains permitted and licensed to carry on undertaking the regulated activity for which it is currently licensed.
The Authority is satisfied that the imposition of the Civil Penalty on IFSL reflects the serious nature of the regulatory, directional, governance, control and compliance failings identified by the Investigation and that this public statement will encourage others to comply with the legal and regulatory requirements and obligations that are fundamental to the conduct of business in the regulated sector. The Authority is satisfied that the directors of IFSL recognise and accept their failings.
In accordance with the Authority’s EDMP, IFSL entered into settlement discussions with the Authority and, having accepted the Investigation conclusions, sought to finalise matters expeditiously.
5. Cooperation and Remediation
5.1 The Authority is satisfied that IFSL cooperated fully and engaged positively with the Authority’s EDMP. IFSL took the opportunity to engage in the Authority’s EDMP and settlement procedure.
5.2 The directors of IFSL have taken responsibility for the failures of IFSL.
5.3 As at the date of the settlement agreement made between IFSL and the Authority (the “Settlement Agreement”), IFSL had already implemented new procedures which have sought to address the failings which had resulted in the imposition of the Civil Penalty.
5.4 At the date of the Settlement Agreement, IFSL is actively engaged with the Authority to ensure compliance with its regulatory obligations.
6. Key Learning Points for Industry
- The overriding culture pervading all financial advisor businesses needs to be that of ensuring that customers are treated fairly.
- The rules set out in the Financial Services Rule Book 2016 (as amended and updated from time to time), as applicable to financial advisors, are intended to ensure that customers are treated fairly, within an environment that is transparent allowing and empowering customers to make fully informed decisions. The Authority’s ‘step by step’ guidance for financial advisor’s offers clarity on the advisory process to be followed.
- A robust approach to compliance, governance and client-focussed outcomes should all, by necessity, be amplified in environments where staff typically receive a proportion of their income in direct correlation and as a result of having achieved a ‘sale’.