Arch Financial Products, its chief executive and its compliance director committed “serious”, “repeated” and “prolonged” breaches of the Financial Conduct Authority’s principle of business and as a consequence, a public censure was justified, the Upper Tribunal found.
In December 2012, previous regulator the Financial Services Authority hit AFP, chief executive Robin Farrell and its former compliance director Robert Addison for their role in the Arch Cru debacle.
The enforcement actions, all of which were contested in the Upper Tribunal, saw Mr Farrell and Mr Addison hit with fines totalling £850,000. Arch would have received a £9m fine, but this was waived due to it not having the funds to pay.
The tribunal found that the regulator was right to issue such fines. It also questioned whether AFP really did not have the funds to pay the fine.
The tribunal’s decision said there “can be no question” that the trio committed serious breaches and a “substantial financial penalty” would be justified to deter others from committing the same and due to the “nature, seriousness and impact” of the breach.
In particular, there were “conflicts of interest” within four transactions undertaken by the group - the AGL transaction, the Cru transaction, the Lonscale transaction and the Nice transaction - which were “particularly serious”.
This followed allegations in separate successful legal actions that Arch executives had banked money from “secret profits”. Mr Farrell has revealed he plans to appeal the verdict.
“The failings demonstrated fundamental flaws in AFP’s business model which allowed it to take on a position of trust as a fiduciary and a manager... [and] without any proper thought being given as to how to establish effective arrangements for conflict management.”
The breaches in question extended over a period of nearly three years. At its peak, AFP managed funds of approximately £645m and there were over 6,000 investors in the UK funds. In this period, Arch earned approximately £42m.
The breaches therefore had a “serious market impact” and were “reckless”, the verdict stated.
The tribunal said that while the FCA “proved its case” in respect of all the issues, the authority has “not made its case” on the liquidity issue.
“However, the Authority’s case on that issue was a narrow one and involved finely balanced questions of judgment.”
Neither Mr Farrell nor Mr Addison said they would face serious hardship due to the penalties, so the tribunal upheld their fines of £50,000 and £200,000 respectively.
The tribunal added that the duo “can no longer be regarded as fit and proper persons” to be involved in any regulated activities and their current approvals should be withdrawn.
Last month, a High Court judge ruled against Mr Farrell after finding him guilty of guilty of dishonesty and his firm of negligence.
donia.o’loughlin@ft.com
