Q2 Asset management update: Includes key insights from FCA Quarterly Consultation Paper 44 and Nikhil Rathi speech on investment management
Insight
Financial Institutions 360 - Q2 2024: Asset management update
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FCA supervisory notice to London Stone Securities Ltd
In July 2024 the FCA published a second supervisory notice relating to London Stone Securities Ltd, a wealth management firm. The FCA imposed an OIREQ in April 2024, confirmed in this notice, under which the firm cannot undertake any regulated activity, charge any further fees to existing clients, or take on new clients without the permission of the FCA. It has also been ordered to withdraw its financial promotions and keep assets in the business.
The FCA had the following concerns:
- The firm was targeting its financial promotions at elderly, disabled and vulnerable customers, including saying it had a team of specialists which dealt with older customers, but the entire firm only had four employees.
- It was not clearly communicating to clients the services it was providing and the fee and charging structure.
- The firm was charging excessively high fees (including inactivity fees), regardless of portfolio size, and not providing customers with fair value under the Consumer Duty – for example some customers were paying over 65 per cent of the value of their portfolios in fees.
- The firm was not open with the FCA in its responses to questions about its fees and charges. For example, it claimed that none of its customers were charged more than 5 per cent, but the FCA found that 80 per cent had been.
- It shifted money out of the business into other unregulated entities after engagement with the FCA.
- The FCA therefore considered it was at risk of not being able to meet the threshold conditions.
The firm sent in representations following the first supervisory notice, but the FCA considered they did not affect their position.
As noted above, the FCA made some interesting comments relating to fair value under the Consumer Duty, although it may have limited read-across given that the firm’s behaviour was rather egregious. The FCA set out its expectations that firms should not exploit a customer’s lack of knowledge or behavioural biases to enable unfair prices to be charged, and to ensure that there remains a reasonable relationship between the price customers pay and the benefits of the service provided. The FCA also stated that firms must not discourage customers from leaving products or services that are no longer right for them or accessing better deals.
The FCA also found that the firm had breached the Consumer Duty’s requirements relating toc customer communications, in that it had not supported its customers by disclosing and adequately explaining its service terms or the associated fees. The FCA found that this was exacerbated by firm’s customer base, many of whom had characteristics of vulnerability.
R (on the application of) Linear Investments Ltd v Financial Ombudsman Service
On 13 June the High Court published a judgment, R (on the application of) Linear Investments Ltd v Financial Ombudsman Service, dismissing the judicial review brought by Linear Investments Ltd (Linear) of a FOS decision relating to a complaint brought by Professor Leslie Willcocks (the interested party).
What was the background?
The case related to a Managed Discretionary Advisory Agreement entered into by Professor Willcocks in 2017. He completed an account opening form and the client application and gave a power of attorney to a broker, with whom he deposited funds of £100,000 in 2018. With these funds Linear made trades in CFDs. Linear claimed that it acted exclusively for professional clients and categorised Prof. Willcocks as an elective professional client under COBS 3.5.1R
In 2019 Prof. Willcocks removed his power of attorney and complained to Linear about, among other things, the mismanagement of his account and the term in its T&Cs which purported to exclude his right to complain to the FOS. Linear rejected his complaint and so he complained to the FOS, asking to be put back in the position he would have been in, had he not invested in Linear.
What did the FOS decide?
The FOS found that Prof. Willcocks was an eligible complainant and upheld his complaint. It ordered Linear to pay him the difference between the FTSE Private Investors Income Total Return index and the Linear trading strategy in which he had been invested, plus interest.
Linear applied for a JR of the FOS decision, complaining, among other things, that the FOS should not have categorised Prof. Willcocks as an eligible complainant and that it had erred in law and/or was irrational in a number of areas of its decision.
The court noted that Linear may only treat a client as an elective professional client if it had complied with COBS 3.5.3R, including both the qualitative and quantitative tests, as well as satisfying the procedural requirements. The Ombudsman had reviewed the account opening form completed by Prof. Willcocks, and the court approved of the Ombudsman’s view that the question was whether the answers provided enough information to enable Linear to undertake an adequate assessment. The Ombudsman concluded that they did not, insofar as there were inconsistencies and a lack of required evidence, which Linear had not sought to clarify, and also found that Prof. Willcocks did not satisfy the quantitative test in COBS 3.5.3R.
What was the outcome of the judicial review?
In its analysis, the court noted the following key points:
- It is possible under DISP 2.7.9AR to be both a professional client and a consumer (and therefore an eligible complainant).
- The Ombudsman was entitled to go behind Prof. Willcocks’s wish to be considered a professional client and instead consider whether the firm had conducted an adequate assessment under COBS 3.5.3R, and to make a finding that it had not.
- Linear’s account opening form required evidence of investment experience which Prof. Willcocks did not provide, and that he had replied to a question relating to trading CFDs with an answer relating to his experience in investing in blue chip companies, which the court found indicated that he did not understand CFDs.
The court dismissed all grounds of the applicant’s claim.
FCA decision notice to SVS Securities plc
In June the FCA announced that it had issued decision notices against three individuals from SVS Securities plc, a discretionary fund manager, for the mistreatment of pension funds. Two of the individuals have appealed their decision notices to the Upper Tribunal.
The firm used a business model under which customer funds were directed into high-risk illiquid bonds which were operated by directors of the firm. The model involved inducements to SVS and unauthorised introducers with undisclosed commissions of up to 12 per cent of the customers’ investments. 879 customers invested a total of £69.1m, most of which is lost. Mr Virk was banned from working in financial services and fined £215,000 and the other two individuals (who are appealing) were fined smaller amounts and banned from holding senior roles in financial services.
London Capital & Finance
Following court action, Paul Careless, an ex-police officer accused of netting about £12m by directing people to London Capital & Finance (LCF), is facing a freezing order on his property. Mr Careless is among a group of individuals being sued by LCF’s administrators. LCF in 2019, causing a loss of £237m to around 12,000 consumers. Careless, who denies the claims, allegedly received about £11.9m. The High Court judge has agreed to restrict Careless’s use of proceeds from his property sale, pending a ruling in the case.
Speech by Steve Smart, Joint FCA Executive Director of Enforcement
In June 2024 Steve Smart, Joint Executive Director of Enforcement and Market Oversight, gave a speech at the FS Investigations and Enforcement Summit. He made the following points of note.
- He underscored the FCA’s role in preventing harm and pursuing those responsible for causing it. There were 3.1 million reported incidents of fraud in 2023, a decrease of 16 per cent compared to the previous year. The total losses to fraud were down by 4 per cent to £1.17 billion according to the UK Finance annual fraud report. However, he notes that fraud still accounts for nearly 40 per cent of national crime.
- The FCA has been working on raising awareness through its ScamSmart campaigns and working with tech platforms to tackle illegal financial promotions and scam adverts. Last year, the FCA issued 2,286 warnings about potential unauthorised activity and scams.
- 86 per cent of the initial crypto registrations received were rejected, withdrawn, or refused, but more crypto firms are achieving registration under the Money Laundering Regulations, with a total of 44 firms now registered.
- The FCA charged 21 individuals with financial crime offences last year, more than in any previous year.
This article is part of our Q2 update for Financial Institutions.
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This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, September 2024
