Background

Charles Palmer (“Mr Palmer”) was the CEO and majority shareholder of Standard Financial Group Limited and a director/de facto CEO of the adviser network which comprised of Financial Limited and Investments Limited (“Firms”).   At its its hight  (in 2011) the network boasted 397 appointed representatives (“ARs“) and 516 registered individuals (“RIs“), whom between them advised circa 40,000 customers over a 22 month period (2010 to 2012). Mr Palmer held the CF1 (Director) controlled function at each of the Firms.   He was responsible for “developing and maintaining the Firm’s business model”, for implementation of the model in practice and he had oversight of the conduct of the Firms. By way of further context, the Firms were acquired (along with their parent company – Standard Financial Group Limited) by Tavistock Investments Plc in February 2015.

FCA decision

On 25 September 2015 the FCA announced  that it was fining Mr Palmer £86,691 on Mr Palmer and prohibiting him from performing significant influence functions at an authorised firm.

The FCA considered that, Mr Palmer had a responsibility to exercise due skill, care and diligence in ensuring that he (and other board members) understood the extent to which the Firm’s business model gave rise to material risks to underlying customers and that appropriate controls/mitigating measures were in place in respect of those risks. A key risk was, of course, that underlying customers could receive unsuitable advice from the adviser network. In the FCA’s view, the business model ultimately formed by Mr Palmer gave the ARs and RIs a high level of freedom, thereby increasing risk to underlying customers and also increasing the risk that the Firms would not be aware of (and as such could not take steps to prevent) the provision of unsuitable advice or sale of unsuitable investments by the ARs/RIs, in particualr with regard to high risk products like UCIS.

The FCA decided that, during the relevant period (February 2010 – December 2012) “the Firms failed to implement an effective risk management framework and control framework to ensure that: (i) the materials risks to underlying customers arising from the Firms’ business model were identified and understood by the Board; (ii) appropriate controls and mitigating measures were put in place in relation to these risks; (iii) the effectiveness of controls and mitigating measures was being objectively assessed; and (iv) sufficient, relevant and reliable information was provided to the Board in relation to the controls and mitigating measures”.

The FCA also issued Final Notices to the Firms in July 2014, the Firms’ Compliance Director in March 2015, and their Risk Director, in December 2015.

The Upper Tribunal’s decision

Mr Palmer appealed to the Tribunal contending that: (i) the Firms’ compliance director should have been responsible for failures in compliance systems and controls; (ii) the Firms’ risk management director should have been responsible for the management of customer risk; (iii) the Firms’ board of directors should have been responsible for the monitoring and performance of the above executives, rather than him personally; and (iv) the FCA had “cherry-picked” certain incidents in an attempt to claim he had set an inappropriate tone and culture at the Firms.

Earlier this week it was announced that the  Tribunal had unanimously upheld the FCA’s decision and dismissed Mr Palmer’s reference.

The Tribunal agreed with the FCA that Mr Palmer had breached Principle 6 of the Statement of Principles and Code of Practice for Approved Persons.

Overall, the Tribunal agreed with the FCA that Mr Palmer had failed “to act with due skill, care and diligence in performing his functions as a director of the Firms”. The finding was largely based on the premise that the Firms’ business model gave rise to enhanced risks, which should have required robust systems, control and monitoring to be in place. The Tribunal disagreed with Mr Palmer’s submissions and stated that the onus should have been on him to continually and proactively challenge those responsible for putting systems and controls in place in order to be satisfied that the procedures were operating as they should. Instead, “this was a fundamental point Mr Palmer never grasped”, which in turn, went to the issue of Mr Palmer’s competence.

The Tribunal therefore decided that Mr Palmer’s failings were sufficient to justify the FCA’s financial penalty.

The severity of the fine imposed on Mr Palmer was, in part, due to aggravating factors. In particular, Mr Palmer had been the subject of previous enforcement action in February 2010 when he was fined £49,000 by the FSA for breaches of Statements of Principle 5 and 7 of the FSA’s Statements of Principle and Code of Practice for Approved Persons between 6 April 2006 and 19 August 2008 in performing the significant influence functions of CF1 (Director) and CF8 (Apportionment and Oversight) at the Firms.

As Mr Palmer clearly demonstrated a lack of competence and capability, the Tribunal upheld  the FCA’s decision to prohibit him from performing any significant influence function with respect to regulated activities. The Tribunal found that Mr Palmer showed limited insight into the seriousness of his misconduct and that there was a clear risk that his actions might be repeated in the future.

FCA executive director of enforcement and market oversight Mark Steward commented said “Mr Palmer’s conduct fell well below the standards the FCA would expect of a senior manager of an authorised firm. His conduct was made worse by the fact that he did not learn lessons from, and address the failings highlighted to him in 2010.”

We await hearing as to whether Mr Palmer now seeks permission to appeal the Upper Tribunal’s decision to the Court of Appeal.