In a recent decision notice, the Financial Conduct Authority (FCA) imposed a significant financial penalty, prohibition, and withdrawal of approvals on David Brian Price, a former executive director and Money Laundering Reporting Officer (MLRO) at CFP Management Ltd.[1]
This hasn’t happened since the MLRO of Sonali Bank was fined in 2016 (£17,900).[2] The breaches in that case primarily concerned Principle 3, a firm must take reasonable care to organize and control its affairs responsibly and effectively, with adequate risk management systems, and Principle 11, a firm must deal with its regulators in an open and cooperative way, and must disclose to the FCA appropriately anything relating to the firm of which that regulator would reasonably expect notice.
Other issues in the Sonali Bank case also included its former MLRO failing to:
• put in place an AML monitoring arrangement
• identify serious weaknesses in operational controls
• address training deficiencies
• report internal auditors’ concerns
• impress upon senior management the need for more resources.
This latest fine for CFP’s MLRO raises some interesting questions for current MLROs. It sends a strong message to the financial industry, particularly those who work in senior management functions and those with oversight responsibilities.
It is a different sort of case to Sonali Bank because no real financial crime compliance issues are noted within the notice. The case relates primarily to failings of integrity and risk management because Mr. Price held another controlled function where he effectively benefitted from the risky business model that he was meant to be overseeing.
This creates an interesting scenario around ethics and integrity, conflict-of-interest management, the culture of the firm, consumer protection, and the senior management regime finally being enforced.
The Consequences Of The FCA Penalty
In this case, the FCA consequences have been severe.
1. Financial penalty: The FCA has imposed a substantial financial penalty of £632,594 on Mr. Price under Section 66 of the Financial Services and Markets Act 2000 (FSMA).
2. Prohibition order: Additionally, the FCA has issued a prohibition order, preventing Mr. Price from performing any function related to regulated activities conducted by authorized entities, exempt persons, or exempt professional firms, as per Section 56 of the FSMA.
3. Withdrawal of approvals: The FCA has withdrawn Mr. Price’s approvals to perform the senior management functions of SMF 3 (Executive Director) and SMF 17 (Money Laundering Reporting Officer) at CFP Management Ltd, citing Section 63 of the FSMA.
The rationale behind the FCA’s actions sends a clear message to MLROs and those in senior management functions.
Five Key Issues
It is worthwhile to examine five key issues identified by the FCA in this notice and the questions each raises for other MLROs.
1. Flawed pension transfer model
During the relevant period (21 April 2015 to 31 October 2017), CFP Management Ltd and its appointed representative, Company B, employed a seriously flawed pension transfer advice model which exposed clients to the risk of receiving unsuitable pension transfer advice. Mr. Price oversaw this risky business model and financially benefitted from the unsuitable advice given to vulnerable customers.
Questions for other MLROs:
- Do you fully understand the business models outside of the financial crime risks?
- Do you fully understand the compensation model in your organization and are appropriate safeguards put in place?
- Do you review the suitability of advice; does it sit within your current remit of responsibilities? Should it?
- Have you checked whether any other general compliance responsibilities should sit within your remit (depending on the size/nature of the organization and/or if somebody else has accountability for these)?
- Has it been documented? In this instance, both the SMF 16 (compliance oversight) and the SMF 17 (MLRO) received an FCA fine, prohibition order, and withdrawal of approvals.
2. Failure to act with integrity
The FCA asserts that Mr. Price, as a director at CFP and Company B, failed to act with integrity in carrying out his role as CF1 (Director) at CFP. He was responsible for ensuring that the pension transfer model complied with regulatory requirements, but he did not do so effectively.
Questions for other MLROs:
- Have you defined integrity within your organization? Has it been documented?
- Do you put customers’ interests first? Can you demonstrate this?
- Do you hold any other controlled functions? If so, could conflicts of interest arise?
3. Recklessness
Mr. Price’s actions were deemed reckless. He oversaw and participated in an advice process that lacked proper safeguards, enabled pension transfer specialists to issue unclear or misleading reports, and did not adequately consider clients’ financial circumstances and objectives.
Questions for other MLROs:
- Have you documented your risks appropriately in a risk assessment?
- Have you had others review your risks to challenge the status quo?
- Have the inherent risk, control effectiveness, and residual risk ratings been given rationales, or is there a documented methodology for the calculation of the risk?
- Do you receive any personal reward that could conflict with your accountability for the controlled function?
- Are any conflicts of interest effectively assessed, documented, mitigated, and monitored?
4. Unsuitable advice
As a result of these failures, a vast majority of clients received recommendations to transfer their pension benefits, potentially putting them at a financial disadvantage. This was contrary to regulatory guidance that generally discourages transferring out of defined benefit pension schemes.
Questions for other MLROs:
- How far does your monitoring overlap with other compliance areas?
- With whom should the accountability for suitability sit?
- Do you review or monitor the potential impact of variable income streams within the firm?
5. Financial gain Mr. Price benefitted financially from these breaches and the unsuitable advice given, receiving substantial remuneration during the relevant period.
Questions for other MLROs:
- Have you fully considered the risks of holding both a senior management role as well as any additional controlled functions, and have you done enough to mitigate those risks?
A Stark Reminder For The Future
The FCA’s decision notice serves as a stark reminder that individuals in senior management and MLRO roles are entrusted with significant responsibility and will be held accountable. Failure to uphold the highest standards of integrity and compliance can result in severe financial penalties, prohibition orders, and the withdrawal of approvals in order to protect the interests of clients and the integrity of the financial industry.
References:
[1] https://www.fca.org.uk/publication/decision-notices/david-brian-price-2023.pdf
[2] https://www.fca.org.uk/publication/final-notices/steven-smith-2016.pdf
Written by Ariane Baldwin-Webb
This article was first published by the International Compliance Association (ICA), the leading professional body for the global regulatory and financial crime compliance community. For more information on the benefits of becoming an ICA member, including access to the ICA’s complete content library of articles, videos, podcasts, blogs, and e-books, visit: Become an ICA Member – Application Form (int-comp.org)