Emma RadmoreThe Upper Tribunal has published its decision on a reference by Darren Reynolds relating to an FCA Warning Notice in which the FCA said it would ban and fine Mr Reynolds for failing to meet the fit and proper test.
In August 2022, the FCA concluded that Mr Reynolds lacked honesty and integrity and issued the Warning Notice. Mr Reynolds’ dispute of the notice evolved over time, from an initial indication that he wished only to challenge the proposed fine and even then only on limited grounds, to an indication that he also wished to challenge limited aspects of the ban while not disputing the FCA’s overall findings, to a further application to allow him to challenge the factual findings and conclusion. But then, shortly before the hearing, many of the challenges were withdrawn. Mr Reynolds accepted the findings and also withdrew his challenge to the fine on the basis of serious financial hardship. During the hearing he also withdrew his challenge to the scope of the ban.
The behaviour which had led to the Warning Notice took place between March 2015 and February 2018 and related to Mr Reynolds’ activities as an approved person at Active Wealth (UK) Limited, where he was a financial adviser. The FCA found that he dishonestly advised several retail customers to invest in a portfolio of high risk, illiquid investments which he knew was not suitable for all retail customers (the Greyfriars/P6 model) but nevertheless arranged for customers to invest a higher proportion of their SIPP funds into the investment than was suitable – leading to the significant risk that the customers would suffer losses they could not bear.
Between December 2016 and November 2017 the firm also advised hundreds of its customers to switch or transfer their pensions to SIPPs and to invest in sub-funds of UCITS products that the firm promoted. Mr Reynolds dishonestly failed to disclose the existence of an exit fee for disinvesting from these funds, which the FCA concluded was done to ensure the customers invested in the funds, which would lead to commission for the firm’s advisors.
Mr Reynolds was also found to have dishonestly advised and persuaded BSPS pensioners to transfer their pension, usually to a SIPP, many of which were destined to invest in these same UCITS sub-funds. The FCA found that Mr Reynolds would have know the transfer was unsuitable, and also found that the suitability reports the firm prepared suggested that the customers had insisted on transferring against Mr Reynolds’ advice, when this was not the case.
Finally, the FCA had found that Mr Reynolds knowingly allowed two individuals to provide pensions advice to Active Wealth’s customers without being approved, or in one case qualified – and then misled the FCA and the Insolvency Service about this. He had also recklessly allowed his work email account to be destroyed and had transferred his family home to a trust.
All of this led to the FCAC paying out over £17.6m to over 470 of the firm’s customers – around half of whom had suffered losses that exceeded the compensation cap.
In 2021, Mr Reynolds was disqualified from being a company director for 13 years.
In calculating its fine on Mr Reynolds, the FCA proposed that;
- the disgorgement amount comprise the prohibited commissions Mr Reynolds received, his entire salary during the relevant period (totalling a little over £1m), and interest on both of these;
- a punitive element of the highest level, so setting this at 40% of the relevant income;
- the “step 3” figure, designed to reflect any mitigating or aggravating circumstances, was set at 100% uplift of the step 2 figure because of the serious aggravating factors. So the total fine was a little over £821,000 in addition to the disgorgement.
Mr Reynolds claimed that:
- no penalty should have been imposed in respect of any conduct which the FCA should reasonably have inferred from information it had before 10 August 2016, because this was more than 6 years before the date of the notice;
- certain amounts included in the disgorgement figures should not have been taken into account because they were the subject, variously, of a claim by a liquidator of a company through which he received payments, or of a dispute with HMRC over taxes.
The FCA had been actively looking at both firms connected with non-standard investments generally and the Greyfriars/P6 model from mid-late 2015. However, only in May 2016 did Active Wealth’s name come to the FCA’s attention as part of a list of firms who had promoted the investment. The FCA opened a file on Active Wealth in June 2016 and by August had asked Mr Reynolds to supply specific client files and other information, which Mr Reynolds provided on 17 August 2016. So, the FCA contended that it was the information produced then that enabled it to fully assess the position, and that even though it had general knowledge of the Greyfriars/P6 model and had concluded it was unsuitable before then, it did not necessarily follow that any income Mr Reynolds had accrued before the August date would not fall to be disgorged anyway. The Tribunal agreed with the FCA, that it did not have information from which the dishonest misconducted could reasonably be inferred until after 17 August 2016. It did however agree that the disgorgement figure should be based on the net position of Mr Reynolds having regard to the liabilities he claimed. However, given the uncertainty about the outcome of those claims, and the impracticality of waiting for their resolution before knowing the final disgorgement figure on which the fine would be based, the only adjustment should be that the FCA had conceded the interest rate should not automatically be 8%. It said that, especially given that the complexities wer all of Mr Reynolds’ own making, the penalty should be fixed now.
All of this is likely to be moot, however, since as soon as the penalty is finally issued Mr Reynolds will very likely be declared bankrupt. However, the decision is interesting for its discussion and the distinctions it draws with several other cases.