Between 2010 and 2013, TailorMade Independent Limited gave advice on pension transfers and switches involving investment in high-risk assets such as overseas property.
That advice was subsequently found to be unsuitable. The resulting loss to investors was estimated to be over £100m.
In 2014, TMI went into default, leaving the Financial Services Compensation Scheme to pick up a portion of the losses in yet another pensions scandal.
In 2015, the Financial Conduct Authority (FCA) sought to fine and ban the four directors of TMI. The FCA argued that the various directors had failed to take reasonable steps to ensure TMI’s advice process complied with regulatory requirements or that conflicts of interest were properly disclosed.
Appeal hearing
Three of the directors accepted their punishment but Mr Burns took his case on appeal to the Upper Tribunal.
Three years later, his appeal has now been dismissed.
Mr Burns’ defence was pretty simple – it was not his job to deal with compliance issues. He argued that another of TMI’s directors, a Mr Pope, had been assigned that role (he was the CF10 and therefore holder of the compliance function) and that it was more than reasonable for Mr Burns to rely on his fellow director to perform that function.
Not surprisingly, the Tribunal rejected that argument. While it was accepted that a board may vest responsibility for compliance in one of their number, the Tribunal said: “That does not absolve the other members of the board from obtaining a sufficient understanding of the business of the firm which they are ultimately responsible for managing, the key issues that are likely to arise out of its business model, and the manner in which they are
being addressed”. The Tribunal was also unimpressed by Mr Burns’ self-professed inexperience of regulatory matters and consequent lack of challenge to Mr Pope: “If an individual board member is not able to acquire the necessary expertise to undertake that task within a regulated firm, then he should not accept the appointment”.
The Tribunal’s decision follows long-established regulatory guidance on the joint and the several responsibilities of directors for regulatory compliance.
This could easily be misconstrued as implying that all directors have the same or similar regulatory obligations.
That is not necessarily the case. What amounts to reasonable steps would be quite different as between Mr Pope and Mr Burns.
Key Points
- In 2015 the FCA sought to ban four directors of TailorMade Independent over unsuitable advice on pension transfers
- The decision was challenged by one director, but this was rejected on appeal
- The Upper Tribunal, who heard the appeal, also expressed concern about the regulator’s role
Mr Pope should have taken reasonable steps to ensure that TMI was compliant – he failed to do so and was fined and banned from holding a similar position. Mr Burns’ responsibility was to take reasonable steps to satisfy himself that Mr Pope had
done what was required. The Tribunal found that Mr Burns “made no challenge to Mr Pope as to the basis on which the advice model was designed or operated”.
That is ultimately why he ended up being culpable along with Mr Pope.
Had Mr Burns been able to demonstrate that he had sought and been given some degree of reasonable assurance from Mr Pope, the outcome may well have been different.
Directors and other approved persons will be pleased to know that competent legal advice may offer something of a safe-harbour. The Tribunal noted that if TMI “had advice from a competent firm of lawyers that its advice model was compliant, then there would be the case for saying that reasonable steps to ensure compliance with the regulatory system had been taken”.
Clearly, the FCA may well dispute whether advice was competent but (at the risk of rampant self-promotion), it does underline the importance of external assurance and validation.
Lack of awareness
Aside from failing to get the right advice on TMI’s advice model, the real failure in this case was the directors’ general lack of awareness of the scope of their responsibilities. It is quite possible that had Mr Burns understood that he was potentially culpable for any regulatory failures, he would have paid closer attention to compliance issues.
It is also possible that there are many other approved persons who similarly fail to recognise the scope of their potential culpability. That is in part what the Senior Managers and Certification Regime is designed to address. Cases such as Mr Burns’ simply serve to reinforce the point.
Avoiding a similar fate is simple – understand your responsibilities and take reasonable steps to fulfil them. This is obviously easier said than done, but it really does come down to that basic proposition.
As a first step, firms and individuals need to educate themselves on the precise scope of their potential regulatory accountability.
Only then can individuals begin to consider what might amount to reasonable steps in their particular role. As firms prepare for the extension of SMCR, there will be a significant focus on individual statements of responsibilities.
While that should introduce greater clarity and demarcation of roles, it may also lead some people to assume that it represents the full scope of their potential accountability to the FCA.
The Burns case is a timely reminder that this may not always be the case – at least not for those holding governing functions (for example, SMF3, an executive director function).
Clearly, much depends on the size and complexity of the business, but in smaller organisations, the board is likely to retain joint responsibility even after SMCR.
Just because an issue is not in your statement of responsibilities does not mean you can ignore it.
The Tribunal does not appear to have been particularly impressed by the FCA’s role in relation to TMI.
Having criticised the silo management approach at TMI, the Tribunal noted that there was also a “hint of a degree of a ‘silo’ approach” at the FCA.
The Tribunal did not stop there. In examining the authorisation process and the lack of clarity surrounding what advice was to be given to TMI’s customers, the Tribunal noted that: “…in view of the lack of clarity in the explanation given [by TMI] we would have expected that the Authority would have needed to have clarified these issues before approving the application, bearing in mind the inherent risks of investing in overseas property”.
The Tribunal also referred to information available to the FCA at the relevant time (both in respect of concerns around self-invested personal pension transfers and TMI’s business model) and concluded that “it is perhaps surprising that the particular problem that arose out of the business model of TMI and other firms operating in a similar fashion was not detected earlier”.
Chris Brennan is a partner at White & Case in its global litigation practice
