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Beams and Motes
November 30 2019
The FCA has been in the news lately though, perhaps, not for the reasons it would like. (How wonderfully appropriate was the last syllable of the name of the FCA manager having to remind staff how to behave, Georgina Philippou). But it has been other conduct by FCA staff which is perhaps more concerning for those hoping to rely on its protection.
Over the summer, the FCA’s Head of Conduct, David Blunt, gave an interview about the FCA’s expectations with regard to certification and regulatory references, in particular, what firms should be doing when staff left to work for other firms within the sector. Regulatory references were key, said Mr Blunt.
“What we want to do with this regime is to stop people who’ve got poor conduct histories simply moving from firm to firm because the new hiring firm should be able to get the information they need better to understand the conduct history of their new hires.”
Well, indeed. Having bad apples move from firm to firm is a very bad idea. All too tempting to get rid of someone and make them another firm’s problem. The new regime is intended to stop firms doing that by imposing an obligation on them to reveal not just conduct rules breaches leading to disciplinary action but also “any other relevant conduct matters.” What a marvellously flexible phrase that is!
Still, what of the FCA itself when it becomes aware of poor conduct by those it regulates? The obligation to prevent bad actors from moving round the industry cannot just be down to firms themselves. Consumers surely expect the regulator to take some action. And yet, as the dismal saga of the Woodford Equity Income and other Woodford funds shows, this expectation may be a touch too trusting.
This article describes the role of Link, the authorised corporate director of the Woodford funds, in the events leading up to their closure, trapping many investors in funds which will take time to liquidate, with many facing the prospect of losses. Link’s role in this affair is to be examined by the investigation set up by the FCA. It has already been publicly attacked by Andrew Bailey, the FCA’s director, for failing to inform the FCA about the Woodford funds’ decision to list illiquid shares in Guernsey in order to get round the rules limiting its investments in unlisted shares, a manoeuvre described by Bailey as “regulatory arbitrage”.
All very true. But what has also come out is that the directors of Link had been involved as the corporate director of two other funds (now closed) involved in questionable behaviour, resulting in investors being misled, losing substantial amounts and having to be compensated: Arch Cru (2009) and Connaught Income (2012 ). In the latter case, Link (then owned by Capita) was censured by the FCA for a string of failings and made to pay compensation to investors. As one of those advising the misled Connaught investors put it: “You have to ask the question why were they allowed to continue to operate with all their permissions intact after Connaught?”. Why indeed? Why – when the Woodford funds were being scrutinised by the FCA – was the involvement of Link and its previous history not noticed by the FCA and, if noticed, no action – apparently – taken?
Similar questions can be raised in relation to some of the directors involved in another company which has gone bust, leaving its investors stranded – London Capital & Finance. There too it appears that there were close links between it and companies which the FCA had previously censured. No doubt the full story will be revealed when the FCA’s investigation into this is – finally – published.
But for consumers who have entrusted their savings to such companies, this will often come too late. If firms and individuals are regulated by the FCA, consumers will assume that the regulator has thoroughly investigated the past history of all those associated with the firms they authorise, the past history of those working in it, that it will have noticed when those firms and individuals have come to its notice for bad or poor behaviour and that it will take this into account when deciding whether to permit them to continue working in the sector.
After all, there is little point collecting intelligence (or being given it by whistleblowers, as was the case with Connaught) – or even publicly ticking off a company or individual – if it is not followed up with effective action.
This is not a new problem for regulators. One Robert Maxwell was described by the Department of Trade and Industry in 1971 as unfit to run a public company. Despite this damning verdict, no action was ever taken to prevent him – legally – becoming a director of such a company. That failure cost Mirror Group pensioners very dearly when, 20 years later, Maxwell’s various companies went bust with the loss of pension fund assets which had been used in a vain attempt to keep his companies afloat. In the lead up to the trial of two of Maxwell’s sons, one of the many advisors acting for Maxwell was asked why they did not steer clear of him, given the DTI’s earlier well-publicised verdict. Their reply was that, since the DTI had taken no action to disbar Maxwell from acting as a director, why should the advisors apply a higher standard than the regulator.
Good question. And we know today’s answer. Firms have their own responsibility to ensure high standards of conduct in their staff. They cannot simply outsource their judgment to the regulator.
But that does not absolve the FCA from acting – and rather more effectively than simply describing what has happened – when it too becomes aware of misconduct or gross incompetence by those it regulates. It is surely the very minimum consumers have a right to expect from a body which has their protection as one of its statutory objectives.
February 16 2018
Oxfam is only the latest institution to find that good intentions are not enough to make it immune from disgraceful behaviour or a culture which sees such behaviour as the norm or something which cannot be challenged.
On Radio 4’s The World at One on 13 February an interviewee said this about the aid sector: “There is a pack mentality….. The majority don’t want to encourage this sort of behaviour but do nothing because they are afraid of being seen as not being part of that male society, they don’t want to be ostracised. It’s not about grassing on your mate. It is about upholding the law”.
It could have been said about finance, Hollywood, Parliament, football or churches.
It is all too common in scandals – wherever they occur – to find that:-
- There were warning signs about an individual which were ignored.
- Due diligence was ineffective, cursory or non-existent when hiring decisions were made. See here.
- Concerns that others had were ignored or rationalised away
- People were dazzled by by a person’s reputation and/or money-making skills (sometimes more apparent than real)
- Whistleblowers were ignored or felt unsupported or were told that this was how things were
- Whatever initial investigation was carried out was too limited and nothing much was done as a result
- Leadership was inadequate
- When matters become public a response is given, usually focusing on procedures, which is wholly inadequate to how the allegations are perceived by key stakeholders.
- The entity becomes defensive and lashes out at its critics. Click here for an example.
A combination of some or all these factors combine to make a serious situation much worse than it need be. The embattled entity no longer dictates the narrative but becomes its subject.
There are many lessons to be learned. But one above all: thorough timely investigations matter.
GETTING AWAY WITH IT
January 19 2018
“The Financial Conduct Authority (FCA) has prosecuted eight cases of insider trading in the past five years and secured 12 convictions.”
It is all the more important for firms to establish and reinforce – continuously – the right culture themselves rather than rely on wrongdoers being caught by others. Markets and market participants we can trust are key to the reputation of the financial sector.