Rayner & Anor v The Financial Services Authority, Court of Appeal - United Kingdom Financial Services and Markets Tribunals, August 06, 2004,  UKFSM FSM010
|Resolution Date:||August 06, 2004|
|Issuing Organization:||United Kingdom Financial Services and Markets Tribunals|
|Actores:||Rayner & Anor v The Financial Services Authority|
FSA: REGULATORY ACTION AGAINST INDIVIDUALS withdrawal of approval prohibition order fit and proper obligations under Pensions Review importance of compliance disposal of assets without making proper provision for review lack of integrity proportionality of action test to be applied THE FINANCIAL SERVICES AND MARKETS TRIBUNAL (1) ERNEST THOMAS RAYNER (2) JOHN ROBERT TOWNSEND Applicants - and - THE FINANCIAL SERVICES AUTHORITY Respondent Tribunal: WILLIAM BLAIR QC (Chairman) MAURICE BATES KEITH PALMER Sitting in London on 14, 15, 16, 19 and 20 July 2004 Mr Peter Dodge, instructed by Vincent Sykes, for the Applicants Mr David Mayhew, instructed by the Respondent, for the Respondent © CROWN COPYRIGHT 2004 DECISION
1. The Applicants are both financial advisers. The present matter arises out of the sale of their business on 20 October 2000. In summary, the Financial Services Authority ("FSA") contends that the sale was in deliberate disregard of their obligations under the5 Pension Review, the burden of proof being on the FSA. The Applicants on the other hand contend that the sale was a proper one, and that they had no reason to suppose that it would be likely to lead to a failure to comply with the Review.
2. Two decisions of the Regulatory Decisions Committee of the FSA both dated10 17 October 2003 have been referred to the Tribunal. By the first, a prohibition order was made against Mr Ernest Rayner, by which he was prohibited from performing any controlled function relating to any regulated activity carried on by any authorised person. A financial penalty of £128,000 was also imposed on him. By the second, a prohibition order and financial penalty in identical terms were imposed on Mr John15 Townsend, and in addition his approval to perform the investment adviser function with a firm called Croesus Financial Services Ltd was withdrawn.
3. The Applicants contend in their References (both of which are dated 12 November 2003) that these decisions were inappropriate and disproportionate. In effect,20 they maintain that they should be able to resume their business as investment advisers. The position as regards the financial penalties is no longer relevant. Since the Decision Notices, the FSA has subsequently concluded that the operation of the two-year time limit in section 66(4) of the Financial Services and Markets Act 2000 prevented it from imposing penalties under that section. This is not an issue which has been re-opened25 before the Tribunal, though the Applicants have understandably said that the imposition of the penalties caused them considerable anxiety and distress.
4. Very similar issues arise in the case of each Applicant, and their References have been heard together, pursuant to the Tribunal's directions of 15 March 2004 under rule 930 of the Financial Services and Markets Tribunal Rules 2001. The Pension Review
5. We must begin by giving a short description of the Pension Review. In 1988, a35 new type of pension was created. It was called the "personal pension", and such products were put on the market by most if not all major insurance companies. Individuals could choose to "opt out" of their employers' "occupational" pension schemes, and were given the right to transfer the cash equivalent of the pension benefits they had built up in the schemes into personal pensions. The evidence before the40 Tribunal is that more than 550,000 personal pensions were sold in the first two months. In the next five years, more than five and a half million were sold.
6. By 1992, it had become clear that a large number of people may have lost out, and may have been mis-sold personal pensions. They would have been better off joining,45 or remaining within, their occupational schemes. There were complaints about the manner in which the personal pensions had been sold to them. In December 1993, according to the evidence before us, KPMG reported that the applicable code of business requirements had been followed in less than one in ten of the pension transfer cases they had looked at.50 3
7. In 1994, the Securities and Investments Board ("SIB"), which was then the "umbrella" financial services regulator in the United Kingdom, launched the Pensions Review, and initiated a programme of compulsory investigation for all product providers and intermediaries. This process took considerably longer than had been initially anticipated. It involved a very large number of firms including most life assurance5 companies, banks, and financial advisers. Because there were so many people potentially affected, firms had to look at the people most at risk first. These were those who had already retired, were close to retirement or who had died. They were called `priority cases'. Priority cases were to be dealt with in Phase 1 of the Pensions Review. Following subsequent consultation, the FSA and the Personal Investment Authority10 ("PIA") issued a joint statement in 1998 setting out the policy for the review of the lower priority cases, which were called Phase 2 cases. The Applicants and their company had responsibilities under both Phase 1 and Phase 2. Through the course of the review, guidance was issued on a regular basis to the firms concerned.
8. According to the evidence of Mr Heather of the FSA, both phases of the pension review are now more or less done, although he also said that some three hundred firms failed to meet the deadlines set, and a substantial number still have not done so. 1.6 million people have had their pensions reviewed, and 1.1 million have been compensated. The scale of the task is shown by the fact that by the time all cases are20 finished, the industry will have paid out more than £11.5 billion in compensation, in addition, it will also have cost the industry some £2 billion to do the review work. The Applicants
9. Most of the history of the Applicants and their business are not in dispute, though some of the key facts certainly are. Our findings of fact are as follows. Mr Townsend went into the insurance industry in 1979. Some years later, he set up on his own, and in 1983 he went into partnership with a Mr Michael Bugg. In 1986, he met Mr Rayner, who after training, was invited into the partnership. In 1989, Townsend & Bugg30 Financial Services was incorporated as Townsend & Bugg Financial Services Ltd, a company which in 1996 changed its name to Townsend Rayner Associates Ltd following what we were told by Mr Townsend was an amicable parting of the ways with Mr Bugg. This company has been referred to during the hearing as "TRAL".
10. Townsend Rayner Associates Ltd carried on business as Independent Financial Advisers ("IFAs") in the Kettering area, and according to the letterhead, the company sold investments, pensions and life assurance. Under the Financial Services Act 1986, which was then the applicable legislation, Townsend Rayner Associates Ltd required authorisation to carry on such business, which it obtained by way its membership of40 the PIA, one of the self regulatory organisations operating beneath the SIB. Mr Townsend and Mr Rayner were the directors of the company, and as directors and advisers, they were required to be (and were) registered with the PIA as Registered Individuals. (The equivalent term under the Financial Services and Markets Act 2000 is "Approved Person".)45 Townsend Rayner Associates Ltd and the Pension Review
11. Mr Dodge, counsel for the Applicants, contends that these References are not about the competence of the Applicants in conducting the Pension Review. In that50 regard, their case was that whilst with hindsight they may have "bitten off more than 4 they could chew", they did their honest best. They believe that they devoted greater resources to the Review than many of their peer group.
12. The Tribunal agrees that the subject of the References is not the Applicants' competence or otherwise in conducting the Pensions Review. The FSA's case is one of5 lack of integrity in connection with the sale of the business, not lack of competence in carrying out the review. Nevertheless, it is clear that the manner in which the Applicants dealt with the Pension Review constitutes an essential part of the factual background, and we shall have to consider it in some detail.
13. The Applicants' evidence is that they began to undertake Phase 1 of the Pension Review in 1995. Their witness statements (standing as evidence in chief) explain the very considerable amount of work involved. In 1996, the company wrote to the PIA accepting liability for clients of Townsend & Bugg Financial Services (the partnership) for the purposes of the pension review. On 22 December 1998, Mr15 Rayner returned a form to the FSA indicating that Phase 1 had been completed. We note that as the result of the internal assessments carried out, none of the clients either of the partnership or the company had been offered redress.
14. On 21 January 1999, the FSA's Desk Based Monitoring wrote rejecting the20 assertion that the Review had been completed. (By now, the FSA was acting on behalf of the PIA. It only later assumed its statutory responsibilities under the Financial Services and Markets Act 2000 at the so-called "N2" being the day when the 2000 Act came into force on 1 December 2001).
15. There is one other background matter to mention which happened at this time. In January 1999, the excess under the Professional Indemnity Policy which covered Townsend Rayner Associates Ltd for claims relating to the Pension Review was increased from £2,500 to £10,000. The practical effect was significantly to increase the company's exposure in respect of any such claims reported after January 1999.30
16. On 10 June 1999, the Pension Advisers Support System (PASS Review Ltd, known as "PASS") conducted what was called a "Healthcheck Identification Population Visit" at the company's premises. PASS is a body that was set up to help IFAs, though as Mr Townsend reminded the Tribunal, the visit was at...
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