Criteria Wealth Management Limited, Mark Peter Penney, Marc Adam Roxby

4th May 2020

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 (the “Financial Services Commission Law”)

The Protection of Investors (Bailiwick of Guernsey) Law, 1987 (the “POI Law”)

The Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002 (the “IMII Law”)

The Insurance Business (Bailiwick of Guernsey) Law, 2002 (the “Insurance Law”)

The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000 (the “Fiduciaries Law”)

The Banking Supervision (Bailiwick of Guernsey) Law, 1994 (the “Banking Law”) (together the “Regulatory Laws”)

Criteria Wealth Management Limited (“CWM”)

Mr Mark Peter Penney (“Mr Penney”)

Mr Marc Adam Roxby (“Mr Roxby”)

On 4 May 2020, the Guernsey Financial Services Commission (the “Commission”) decided:

1. As a result of the company having been compulsorily wound up as at 31 January 2019, with no funds available for distribution to unsecured creditors, to impose no penalty on CWM under section 11D of the Financial Services Commission Law; it should be noted that, but for the insolvent liquidation of CWM, the Commission considered that a discretionary penalty of £50,000 on CWM pursuant to section 11D of the FSC Law would have been appropriate (ceteris paribus);

2. To impose a financial penalty of £40,000 under section 11D of the Financial Services Commission Law on Mr Penney;

3. To make orders under section 34E of the POI Law, section 18A of the IMII Law, section 28A of the Insurance Law, section 17A of the Banking Law and section 17A of the Fiduciaries Law, prohibiting Mr Penney from holding the position of director, controller, partner, manager, financial advisor, general representative or authorised insurance representative for a period of 6 years;

4. To disapply the exemption set out in section 3(1)(g) of the Fiduciaries Law in respect of Mr Penney for a period of 6 years;

5. To impose a financial penalty of £20,000 under section 11D of the Financial Services Commission Law on Mr Roxby;

6. To make orders under section 34E of the POI Law, section 18A of the IMII Law, section 28A of the Insurance Law, section 17A of the Banking Law and section 17A of the Fiduciaries Law, prohibiting Mr Roxby, from holding the position of director, controller, partner or manager for a period of 4 years;

7. To disapply the exemption set out in section 3(1)(g) of the Fiduciaries Law in respect of Mr Roxby for a period of 4 years; and

8. To make a public statement under section 11C of the Financial Services Commission Law.

The Commission considered it reasonable, proportionate and necessary to make these decisions having concluded that CWM, Mr Penney and Mr Roxby failed to fulfil the minimum criteria for licensing, and in particular that Mr Penney was not a fit and proper person to hold the positions of director, controller, partner, manager, financial adviser, general representative or authorised insurance representative and Mr Roxby was not a fit and proper person to hold the positions of director, controller, partner or manager under Schedule 4 to the POI Law and the IMII Law (and also were not fit and proper persons to hold those respective positions in terms of Schedule 1 to the Fiduciaries Law, Schedule 7 to the Insurance Law and Schedule 3 to the Banking Law, which set out the minimum criteria under these Laws).

Background

CWM is a Guernsey company, incorporated on 27 September 2012. CWM had six full time employees until 2018, including three financial advisors, which included Mr Penney and Mr Roxby (from 25 February 2013 to 29 June 2018). Mr Penney was the Managing Director of CWM from incorporation until 31 January 2019 and Mr Roxby was a director of CWM from 2 December 2014 to 15 June 2018.

CWM was licensed under the POI Law and the IMII Law on 20 December 2012. CWM was licensed under POI Law to carry on the restricted activities of Advice and Promotion in connection with Category 1 Controlled Investments – Collective Investment Schemes. CWM was not at any material time licensed to carry out any restricted activity in relation to Category 2 Controlled Investments - General securities and derivatives. CWM was licensed under the IMII Law as an insurance intermediary, to advise on and arrange long-term life insurance, savings products and single premium business.

The Commission conducted an on-site thematic visit at CWM in October 2013 (“the 2013 Visit”). Following the 2013 Visit, CWM wrote to the Commission outlining improvements in CWMs processes and procedures. The Commission wrote to CWM again in July 2015 warning CWM against switching clients without proper consideration of rebalancing risks within existing products and had set out the Commission’s expectation that exit penalties, investment timeframes, adviser remuneration and product provider charges should form part of the assessment underlying any recommendation. The Commission conducted a further on-site visit of CWM in April 2016 (“the 2016 Visit”). The purpose of this visit was to ascertain compliance with the Commission’s letter of July 2015. The Commission found issues including lack of evidence that recommended surrender/withdrawal was in clients’ best interests; ineffective peer review of Advice provided to clients; and acting outside the terms of CWM’s licence by performing the restricted activity of Management. Whilst CWM disagreed with the Commission’s findings from the 2016 Visit, CWM committed to implement a Risk Mitigation Plan.

In May 2017, a complaint was made to the Commission by a licensed entity - on behalf of its client, and CWM’s former client, Client X. Client X was an elderly client and CWM’s largest client from December 2013 onwards until the end of the client relationship. The licensee also provided the Commission with copies of documents provided by CWM to Client X. These documents disclosed a sale of CWM’s own shares to Client X by Mr Penney. The documents also identified advice provided to Client X relating to the surrender of long-term insurance bonds. The pattern of advice evidenced in the Client X file raised concerns of widespread similar practice of unsuitable advice and led to the Commission reviewing a sample of other client files to determine if the pattern of unsuitable advice was more widespread.

Following consideration of the investment advice in the client files, the Commission noted that CWM was advising on and promoting Structured Notes, which the Commission believed were Category 2 Controlled Investments. CWM was not licensed to advise on and promote Category 2 Controlled Investments.

Mr Roxby resigned from CWM with effect from 16 June 2018. Mr Penney and a Non-Executive Director sought a purchaser for CWM’s book of business, but ultimately this search was not successful. An order for the compulsory winding up of CWM was obtained dated 31 January 2019. The Commission accepted surrender of CWM’s licences under the POI Law and the IMII Law on 28 February 2019.

Findings

CWM’s Sale of Structured Notes

CWM was licensed under the POI Law to carry on the restricted activities of “Advice” and “Promotion” in connection with Category 1 Controlled Investments – Collective Investment Schemes. It is not disputed by CWM, Mr Penney or by Mr Roxby that CWM was not licensed at any time to carry out any restricted activity in relation to Category 2 Controlled Investments – General Securities and Derivatives.

The Structured Notes advised on and promoted by CWM are contracts that fall within the classification of Category 2 Controlled Investments under Schedule 1 of the POI Law by reason of the investments comprising derivatives. Some of the Structured Note fact sheets seen by the Commission state that the product is a derivative instrument.

The Structured Notes that CWM was promoting to and recommending to its clients were typically structured products comprising a bond plus a derivative instrument or instruments (typically linked to the value of one or more equities). CWM engaged in the Restricted Activities of Promotion and Advice in relation to the Structured Notes. CWM was not licensed to promote or advise on Category 2 Controlled Investments and therefore in promoting and/or advising on Structured Notes, CWM was conducting unlicensed business.

Mr Penney and Mr Roxby’s position in response to the Commission was that the categorisation of the Structured Notes was a “grey area” and they believed that the Structured Notes did not fall within Category 2 Controlled Investments.

The question of whether the licence of a business extends to cover the business being conducted is so fundamental, and the consequences of conducting unlicensed business are so serious, that the CWM Directors ought to have taken legal/expert advice on what they considered at the time to be a “grey area” to resolve the issue before starting to sell Structured Notes to their clients. It was not disputed that no such advice was taken at that time.

The consequences of conducting unlicensed business in Structured Notes

The Structured Notes comprised a significant part of CWM’s business. In the period 11 March 2014 to 26 April 2018, Mr Roxby advised CWM’s clients to invest a total of £2,865,000 in 148 Structured Notes. In the same period, Mr Penney advised CWM’s clients to invest a total of £745,000 in Structured Notes. The consequences of CWM conducting unlicensed business in relation to Structured Notes, and of Mr Penney and Mr Roxby collectively failing to prevent CWM undertaking controlled investment business for which it was not licenced, have been, predictably, serious in that –

• CWM has contravened section 1(1) of the POI Law in relation to advice, promotion and sales of Structured Notes to its clients over the years 2014 - 2018;

• CWM’s professional indemnity insurers have to date refused to provide indemnity in relation to advice, promotion and sales of Structured Notes by CWM, because it was unlicensed business and thus clients of CWM, Mr Penney and Mr Roxby have been exposed to, and in some cases have suffered, uninsured losses (although there may be recourse through an award by the Channel Islands Ombudsman in respect of a small number of complainants and professional indemnity insurance may respond in respect of these albeit no awards nor confirmation of the insurance position have been confirmed to date); and

• CWM has been exposed to reputational risk, legal risk and regulatory risks.

As at 31 December 2018, CWM had received requests for compensation in relation to the Structured Notes in the sum of £79,000 and had settled one complaint in the sum of £4,000 compensation.

The contraventions and the conduct by CWM, of unlicensed business, is evidence of a failure on the part of CWM to fulfil the Minimum Criteria for Licencing under Schedule 4 of the POI Law in the following respects:

• Paragraph 1(2)(b)(i), ‘contravened any provision contained in or made under this Law’; and

• Paragraphs 2(1)(b) and (c) which state the ‘business of the applicant or licensee… will be carried on’, ‘with professional skill appropriate to the nature of the activities’ and ‘in a manner which will not tend to bring the Bailiwick into disrepute as an international finance centre’.

Both Mr Penney and Mr Roxby failed to fulfil the Minimum Criteria for Licencing under Schedule 4 of the POI Law in the following respects:

• Paragraph 1(1)(a), ‘competence’ and ‘soundness of judgement’ by giving advice to clients recommending Structured Notes, which comprised Category 2 Controlled Investment Business for which CWM was not licensed and failing to obtain proper advice about the controlled investment status of the Structured Notes;

• Paragraph 1(1)(c), jeopardising the ‘reputation of the Bailiwick as a reputable finance centre’, evidenced by investor complaints resulting from CWM’s Category 2 Controlled Investment Advice;

• Paragraph 1(1)(e), ‘knowledge and understanding of the legal and professional obligations to be assumed or undertaken’ in terms of the failure to realise their recommended Structured Notes investments as Category 2 Controlled Investments under the POI Law;

• Paragraph 1(1)(g), ‘policies, procedures and controls to comply with any rules, codes, guidance, principles and instructions’ by the failure of CWM’s investment policy and committee to correctly identify that CWM’s licence did not include advice or promotion of Category 2 Controlled Investments under the POI Law and under the POI Law; and

• Paragraph 2(b) “contravened any provision contained in or made under – this Law …or the regulatory laws”.

Whether CWM provided suitable Advice and Information to its clients about Structured Notes

The Structured Notes were complex and high risk investments and each of the financial advisors promoting and recommending these products to clients (had this been licenced business of CWM which as set out above, it was not) ought not to have done so, without a proper understanding of the risks and the disadvantages of investing in these products, and without communicating those risks to the clients. Over the period 2014 to 2016, CWM, Mr Penney and Mr Roxby wrongly categorised the Structured Notes as low risk when they were high risk and this led to unsuitable recommendations being made to many of their retail clients, who had low risk appetites, to purchase Structured Notes. This was a breach of Rule 5.2.2(c)(i) of the Licensees (Conduct of Business) Rules, 2009, 2014 and 2016 (“the Licensee Rules”). Clients were therefore not made aware of the true nature of the risks of the Structured Notes, in particular the risks of capital loss up to 100% of capital invested, which is a breach of Rule 5.2.3(d) of the Licensee Rules.

Further, CWM did not provide a clear statement of prior disclosure in relation to all remuneration that it was to receive for the Structured Notes transactions, indeed it made statements that failed to disclose the distribution fees paid to CWM on the Structured Notes which could be as high as 8% of the capital invested. This was a breach of Rule 5.2.4 of the Licensee Rules. This comprised a breach of Rule 5.2.3(a) of The Licensees (Conduct of Business Rules) 2009 which obliged the Firm to provide prior disclosure to its client of “the basis or amount of its charges” for the provision of services and a breach of Rule 5.2.3(d) of The Licensees (Conduct of Business Rules) 2009 which obliged the Firm not to recommend a transaction to a client unless it had taken “reasonable steps to make him aware of the risks involved including conflicts of interest” and a breach of Principle 5. From 1 January 2015, this also comprised a breach of Rule 5.2.4(b) of The Licensees (Conduct of Business Rules) 2014 and 2016 which requires the Firm to provide prior disclosure of all charges/remuneration to be received in connection with each associated transaction and again a breach of Principle 5 as set out above.

CWM’s Financial Advisors, including Mr Penney and Mr Roxby, were required only to provide advice on matters upon which they were competent and qualified to advise. CWM’s Board failed to ensure that each of its financial advisers held such qualifications to at least the minimum standard as published by the Commission. CWM’s Advisors did not have qualifications meeting the Commission’s published minimum requirements relating to Category 2 Controlled Investments when they should have both had the requisite qualifications no later than 31 March 2016. This was a breach of Rule 3.5.3(e) of the Licensee Rules.

The contraventions set out above represent a failure by CWM to fulfil the Minimum Criteria for Licencing in terms of the POI Law Schedule 4, Paragraph 2(1)(b) ‘with professional skill appropriate to the nature and scale of his activities’ and 2(2)(b) ‘act in accordance with’ the Principles of Conduct of Finance Business (“the Principles”); and in terms of the IMII Law Schedule 4, Paragraph 1(1)(b) ‘with professional skill appropriate to the nature and scale of his activities’ and 1(2)(a)(i) ‘act in accordance with’ the Principles.

Mr Penney failed to ensure CWM adhered to Principle 2 of the Principles. In this regard Mr Penney failed to fulfil the Minimum Criteria for Licencing as described in Schedule 4 to both the POI Law and IMII Law in terms of:

• Paragraph 1(1)(a) of the POI Law and Paragraph 3(2)(a) of the IMII Law, “competence” and “soundness of judgement” in relation to unsuitable Advice provided to CWM’s clients recommended Structured Notes; and

Mr Roxby also provided unsuitable Advice to CWM’s clients, recommending Structured Notes investments. Mr Roxby failed to ensure CWM adhered to Principle 2 of the Principles. Mr Roxby therefore failed to fulfil the Minimum Criteria for Licencing as described in Schedule 4 to both the POI Law and the IMII Law in terms of:

• Paragraph 1(1)(a) and Paragraph 3(2)(a) of IMII Law, “competence” and “soundness of judgement” in relation to his unsuitable Structured Note Advice to CWM’s clients; and

CWM’s Advice to and Dealings with Client X

Whether CWM provided suitable advice to Client X

Mr Penney

Client X was at the relevant time an elderly retail client with some knowledge of financial transactions but no professional expertise. Mr Penney advised Client X to surrender two insurance bonds in February/March 2014. Mr Penney advised Client X to reinvest the proceeds of one bond (“the larger insurance bond”) into three similar bonds from the same provider in order to provide for Client X’s heirs. Mr Penney advised Client X to reinvest the proceeds of the second bond (“the smaller insurance bond”) into a discretionary managed portfolio. This advice was unsuitable.

In particular:

1. Mr Penney failed to establish and/or record Client X’s investment objectives and risk tolerance properly or consistently. File notes made by Mr Penney and the recommendation letters were inconsistent with regard to investment objectives and risk tolerance. Mr Penney would record his advice in these documents as if the idea for the advice or strategy had come from Client X, when in fact it had been Mr Penney’s advice or suggested strategy. This was seen throughout the documentation and was disingenuous at best, and, at worst, thoroughly misleading.

2. Mr Penney provided unsuitable advice and, in some cases, misleading advice (including tax advice on which he was not qualified to advise) to Client X, in relation to the larger insurance bond. Mr Penney failed to establish that the transaction he recommended in relation to the larger insurance bond was in Client X’s best interests.

3. Mr Penny also gave misleading advice about the tax liabilities that Client X had “accrued”, giving the impression, as recorded in his recommendation letters and his file notes of conversations with Client X, that they had somehow accrued a tax bill of nearly £600,000. He later made admissions to the Commission that the tax had not in fact accrued (and was not in fact payable at the time and would not be payable at all by Client X’s heirs on the demise of Client X) and further that the maximum tax payable by a Guernsey resident was £220,000 in any one year. Despite these facts, Mr Penney repeatedly gave the impression to Client X that his suggested restructure of the insurance bonds would save Client X’s tax liabilities and allow Client X “to take advantage” of the tax cap of £220,000 when the truth was that the tax cap was always available.

4. Mr Penney should not have recommended this complex and difficult transaction without independent expert tax advice which Client X should have received in writing and which stipulated that the transaction was in their best interests. Without this, it was impossible for Mr Penney to reconcile his conflict of interest – CWM would earn no trail fees on the existing insurance bonds (ie. if the original structure was left in place) but would only earn initial, and trail fees, on new or restructured products. This was not disclosed to Client X, and the conflict of interest neither disclosed nor managed.

5. In relation to the smaller insurance bond, which had no tax issues, Mr Penney’s recommendation was to encash this bond in its entirety and invest in a discretionary managed portfolio – thus paying new on-boarding fees (and generating initial and trail fees for CWM which would otherwise not have been available to CWM had the initial structure remained in place). Mr Penney failed to establish that the transaction he recommended in relation to the smaller insurance bond was in Client X’s best interests.

6. Mr Penney failed to advise Client X about alternative restructures or investments that might be more cost effective and tax efficient solutions for them.

7. Mr Penney failed to disclose remuneration to be earned by CWM on products sold to Client X, and recommendation letters were in some cases misleading in implying that CWM would not earn commissions or fees on particular products sold to Client X, when they would in fact do so; and

8. Mr Penney made internal file notes, which purported to be contemporaneous records of advice given to Client X and of conversations held with Client X. These were in fact so confusing and internally contradictory that they could not be relied upon as contemporaneous evidence unless also corroborated by external evidence; Mr Penney had in fact drafted several file notes relating to Client X during 2017 in response to a request for more information from his compliance officer, but had backdated these file notes to give the appearance that they were contemporaneous notes recording advice given to Client X in 2014.

During the period 2014 to 2016, Mr Penney gave additional unsuitable advice to Client X in relation to Structured Notes and other investments. In particular:

1. Mr Penney failed to establish and/or record Client X’s investment objectives and risk tolerance properly or consistently.

2. Mr Penney provided unsuitable advice to Client X and failed to give proper risk warnings in relation to the Structured Notes and other investments over the period 2014-2017, in that the Structured Notes were proposed as low risk when they were in fact high risk and warnings given about the risk of capital losses were either absent or insufficient; and

3. Mr Penney failed to disclose, sufficiently or at all, the remuneration to be earned by CWM on products sold to Client X, and recommendation letters were in some cases misleading in implying that CWM would not earn commissions or fees on particular products sold to Client X, when they would in fact do so.

Overall, the advice provided to Client X by Mr Penney was neither suitable nor provided by CWM’s Advisor with “integrity”, nor with “due skill, care and diligence towards its customers”; and conflicts of interest were not managed, in contravention of Principle 1, 2 and 3 of the Principles. In this regard Mr Penney failed to fulfil the Minimum Criteria for Licencing as described in Schedule 4 to both the POI Law and the IMII Law in terms of fit and proper person considerations:

• Paragraph 1(1)(a) of the POI Law and paragraph 3(2)(a) of the IMII Law, “probity”, “competence” and “soundness of judgement” in relation to unsuitable advice provided to Client X; and

• Paragraph 1(1)(e) of the POI Law and paragraph 3(2)(e) of the IMII Law, ‘knowledge and understanding of the legal and professional obligations to be assumed or undertaken’, demonstrated by the multiple contraventions contained in advice provided to Client X written by Mr Penney.

Mr Roxby

During the period 2014-2017, Mr Roxby was in all cases the Advisor tasked with the responsibility for reviewing and checking Mr Penney’s advice to Client X. Mr Roxby was supposed to provide “four eyes” review for each piece of advice Client X received as CWM’s authorised Financial Advisor (and also as a Director, from December 2014).

There was no evidence of Mr Roxby providing any effective check or challenge to Mr Penney – he simply signed off Mr Penney’s advice, even when there were obviously questions to be asked about the tax position and the suitability of the advice being provided. Mr Roxby abdicated responsibility and endorsed all of the advice given by Mr Penney, thus providing no check or challenge to Mr Penney, and therefore did not perform his allotted function within CWM.

Mr Roxby, by his failures in lack of care and diligence when peer reviewing Mr Penney’s advice to Client X and his failures to challenge, correct or prevent the provision of unsuitable advice to Client X thereby failed to adhere to Principle 1, 2 and 3 of the Principles. Mr Roxby therefore failed to fulfil the Minimum Criteria for Licencing as described in Schedule 4 to both the Laws in terms of fit and proper person considerations:

• Paragraph 1(1)(a) of the POI Law and paragraph 3(2)(a) of the IMII Law “competence” and “soundness of judgement” in relation to his failure properly to peer review and his tacit approval of advice given by Mr Penney to Client X on behalf of CWM which was unsuitable advice; and

• Paragraph 1(1)(e) of the POI Law and paragraph 3(2)(e) of the IMII Law, ‘knowledge and understanding of the legal and professional obligations to be assume or undertaken’, demonstrated by his failure properly to peer review and tacit approval of Mr Penney’s unsuitable advice to Client X.

The failures to fulfil the Minimum Criteria for Licensing by Mr Penney and Mr Roxby contributed to a failure by CWM to meet the Minimum Criteria for Licensing in terms of the POI Law Schedule 4, Paragraph 2(1)(b) ‘with professional skill appropriate to the nature and scale of his activities’ and 2(2)(a) ‘act in accordance with’, the Principles. Under similar provisions in the IMII Law Schedule 4 Paragraph 2(1)(b) and 1(2)(a)(ii) the behaviours of Mr Penney and Mr Roxby also contributed to CWM Firm failing to meet the Minimum Criteria for Licencing.

Conflicts of interest in relation to the private sale of CWM shares by Mr Penney to Client X in January and July 2016

Client X acquired 5% of CWM’s shares from Mr Penney for £65,000 in January 2016. Client X paid the £65,000 purchase monies into Mr Penney’s personal bank account. Mr Penney personally retained £60,000 of the £65,000 in relation to this transaction while the balance was paid to CWM.

The updated share register was ratified at a CWM board meeting on 28 January 2016, at which Mr Roxby was present. This was the only reference in the minutes to the first share sale transaction between Mr Penney and Client X. Mr Penney did not declare any conflict of interest at the board meeting in relation to the sale of shares to Client X.

In July 2016, Mr Penney emailed the CWM directors, including Mr Roxby, stating that Client X wished to increase their shareholding in CWM to 10% and that he had agreed in principle to sell Client X a further 5% of his own shares in CWM. Mr Penney asked for confirmation from the other directors whether they had any objections. Mr Roxby confirmed he had no objections.

Client X purchased a further 5% shareholding in CWM from Mr Penney in July 2016 for £65,000. As with the first share sale transaction, the £65,000 was transferred by Client X to Mr Penney’s personal bank account. None of the £65,000 was loaned to CWM by Mr Penney. He retained the entire sum for his personal benefit.

Mr Penney and another director had signed off the company accounts on 20 June 2016 which showed that, for the prior financial year, CWM was trading at a loss. It was unlikely, therefore, that any dividend would be paid by the end of the year, contrary to what Mr Penney had stated twice to Client X.

Client X was at all times categorised by Mr Penney himself as a “lower risk” or “medium risk” retail investor, and not at any stage a high risk investor. The letters of 2 January and 19 July 2016 from Mr Penny to Client X describing the share sale transactions are wholly inadequate in bringing to their attention all the matters that Client X, and/or any independent financial/legal advisor, needed to know about the transaction.

Mr Penney ought to have set out in writing and in clear terms, at minimum, the following information: (i) Mr Penney was acting in his personal capacity in the transaction and was not acting as Client X’s financial advisor; (ii) Client X should take independent legal and/or financial advice on this transaction; (iii) CWM would not receive the funds. The share purchase monies were for Mr Penney’s private account and that he would personally profit from the sale; (iv) Mr Penney had not undertaken an independent share valuation and Client X should have the shares valued independently; (v) CWM was presently loss making, and there were no plans to declare a dividend during 2016; (vi) an audited set of the latest accounts to be enclosed which should be shown to the independent advisor/s and (vii) a clear risk warning to the effect that the purchase of the shares was a high risk investment, which could result in 100% loss of capital since these shares were illiquid investments in a private company which was presently loss making. If Client X had appointed an independent legal/financial advisor, then Mr Penney ought to have requested a signed letter from her independent advisor stating such advice had been given before the transaction could proceed.

Mr Penney did not act in an open and transparent manner in relation to the share sales to Client X. In relation to both share purchase transactions, it was a situation where the onus lay on Mr Penney to give Client X full disclosure of his conflict of interest and also of all the risks involved in the transaction and there is no evidence that he did so. Instead, Mr Penney, even at interview, appeared to consider it was sufficient to give Client X the opportunity to take independent legal advice. But, to Mr Penney’s knowledge, Client X did not take independent legal or financial advice on the transactions, and nor did they have the full disclosure needed from Mr Penney to make an informed decision on the risks of the transactions. In those circumstances, Mr Penney ought not to have proceeded with the transactions given the glaring conflict of interest he faced, being both financial advisor to Client X and beneficiary, personally, of the proceeds of the transactions.

Client X was significantly disadvantaged by both transactions. They transferred cash/medium risk assets into very high risk illiquid shares in a private, loss making company with no security and a high prospect of substantial or total capital loss. Client X did indeed lose the entire capital invested in the shares in the sum of £130,000.

Mr Penney could not establish that the price paid by Client X was a fair price for the shares for the following reasons: (i) Mr Penney did not himself obtain an independent valuation of the shares; (ii) Mr Penney’s calculation of the price of the shares was subjective, informal, undocumented and based on assumptions as to future fees and earnings for CWM that were not reconciled with existing management or audited accounts; on a market valuation method, the transaction for the purchase of 50 shares in CWM from another shareholder in January 2016 was the closest and most relevant comparator but Mr Penney had paid £500 per share to that shareholder in January 2016 and yet Mr Penney charged Client X £1,300 per share per share for the January and July 2016 share sale transactions which raises a serious question as to whether Mr Penney was charging Client X a fair price for the shares; and on a multiples method of valuation, there was no contemporaneous documentation (ie, at the time of the share sales transaction) or independent valuation advice to support the valuation Mr Penney arrived at.

The sale of CWM’s shares by Mr Penney to Client X in January and July 2016 demonstrates the failure of CWM and its Directors to identify, mitigate and manage the serious conflict of interest. The fact that Mr Penney sold CWM’s shares to Client X at a price he cannot establish on the evidence as fair, and that he personally profited from the sale proceeds without full disclosure to Client X (and/or insisting that they took independent advice) was improper and aggravates the breaches on the part of Mr Penney. This demonstrated a lack of personal probity by Mr Penney. Together these matters demonstrate that Mr Penney acted with a lack of probity, competence and soundness of judgement, and evidence his failure to fulfil the Minimum Criteria for Licencing under the Regulatory Laws.

CWM had an opportunity to prevent Mr Penney selling CWM’s shares to Client X when Mr Penney discussed the January share sale in advance with Mr Roxby. Mr Roxby and Mr Penney did not tell CWM’s other director about the January 2016 sale. The consequence of Mr Penney’s and Mr Roxby’s failures meant the conflict of interest was neither identified nor managed adequately by CWM.

By his lack of care and diligence, and failures to avoid and manage conflicts of interest, Mr Penney failed to ensure CWM adhered to the Principles 1, 2 and 3. Mr Penney failed to fulfil the Minimum Criteria for Licencing as described in Schedule 4 to both the Laws in terms of fit and proper person considerations:

• Paragraph 1(1)(a) of the POI Law and Paragraph 3(2)(a) of the IMII Law, ‘probity’, ‘competence’ and ‘soundness of judgement’ in relation to the sale of his shares in CWM to Client X;

• Paragraph 2(c)(i) of the POI Law and Paragraph 3(3)(c)(i) of the IMII Law ‘engaged in a business practice’ that ‘appears to the Commission to be deceitful or oppressive or otherwise improper’.

Mr Roxby, by his lack of care and diligence, and failures to prevent and manage conflicts of interest, failed to ensure CWM adhered to Principles 1, 2 and 3 of the Principles. Mr Roxby failed to fulfil the Minimum Criteria for Licencing as described in Schedule 4 to both the Laws in terms of fit and proper person considerations:

• Paragraph 1(1)(a) of the POI Law and Paragraph 3(2)(a) of the IMII Law, ‘competence’ and ‘soundness of judgement’ in relation to his failure to raise questions and concerns in relation to the sale of CWM’s shares to Client X; and

• Paragraph 1(1)(e) of the POI Law and Paragraph 3(2)(e) of the IMII Law, ‘knowledge and understanding of the legal and professional obligations to be assumed or undertaken’, demonstrated by his lack of challenge to, and tacit approval of, the private share sale to Client X and the resultant unmitigated conflict of interest. Mr Roxby did not think to intervene in the share sale transactions, despite the fact that Mr Roxby had overseen the recommendation letters and correspondence between Mr Penney and Client X for two years in his role as peer reviewer, and therefore understood how Mr Penney was a trusted advisor to Client X.

The contraventions set out above demonstrate CWM’s failure in terms of Principles 1, 2 and 3. These breaches also represent a failure by CWM to meet the Minimum Criteria for Licensing in terms of the POI Law, Schedule 4 paragraph 1(1)(g) and the IMII Law, Schedule 4 paragraph 3(2)(g), ‘policies procedures and controls to comply with any rules, codes, guidance, principles and instructions’.

CWM’s Records were insufficient in many cases to show the provision of suitable advice to other clients

Analysis of CWM’s investment surrender log and some sample examples of written advice provided to clients other than Client X demonstrated patterns of switching, underpinned by generic reasoning that failed to document sufficiently, or at all, in the following three areas: (i) the reasons for the recommended investment switches; and/or (ii) the costs savings or other advantages that would accrue to the client from the switching; and/or (iii) the costs of the proposed new investments.

The repeated similar justifications for product surrender and reinvestment in 2016 and further repeated wording in 2017 suggest that the recommendations to clients were not sufficiently personalised but that CWM’s financial advisors adopted formulaic or generic standard templates. The advisors to the clients included Mr Penney and Mr Roxby. CWM by its advisors frequently did not fully document to the clients how much the alleged “cost savings” added up to, and how those cost savings justified the recommendation to switch. CWM and its advisors, including Mr Penney and Mr Roxby, ought to have documented this clearly and set out a comparison between the costs under the existing investment and the costs under the recommended new investment in order to assist clients to decide whether to accept his recommendations. CWM’s records were therefore in several cases, in addition to Client X, insufficient to demonstrate and fully document that the surrender was in the clients’ best interests.

Finally, to the extent that any of the CWM clients were recommended Structured Notes, the same issues arose in relation to a failure on the part of CWM, and its Advisors, to warn of the significant risks of loss of capital, a failure to document the high risk rating for Structured Notes, and a failure to establish suitability, and/or to document appropriately why these recommendations were in the best interests of each client.

The contraventions outlined above demonstrate CWM’s failure to adhere to Principle 2, ‘A licensee should act with due skill, care and diligence towards its customers and counterparties.

The breaches also constitute a failure by CWM to fulfil the Minimum Criteria for Licencing in terms of the POI Law, Paragraph 1(1)(b) ‘diligence’ and Paragraph 1(1)(g) ‘polices procedures and controls to comply with any rules, codes, guidance, principles and instructions’. In addition, the same contraventions represent similar failures under the IMII Law to fulfil the Minimum Criteria for Licencing with particular regard to, Paragraph 1(1)(b) ‘professional skill appropriate to the nature and scale of his activities’ and Paragraph 2(a) ‘act in accordance with’, ‘(i) the Principles of Conduct of Finance Business’ and ‘(ii) any rules, codes, guidance, principles and instructions issued from time to time under this law’.

By their failures to observe high standards of integrity and act with due skill, care and diligence in relation to the matters set out above, Mr Penney and Mr Roxby (until July 2015), failed to ensure CWM adhered to the Licensee Rules, the Code of Conduct for Authorised Insurance Representatives (until 31 December 2014), the Code of Conduct for Financial Advisors (from 1 January 2015), and Principle 2 of the Principles. Therefore, CWM failed to fulfil the requirement of the Minimum Criteria for Licencing in terms of the POI Law Schedule 4, Paragraph 2(1)(b) ‘with professional skill appropriate to the nature and scale of his activities’ and 2(2)(a) ‘act in accordance with’ the Principles. Under similar provisions in the IMII Law Schedule 4 Paragraphs 1(1)(b) and 1(2)(a)(i) CWM also failed to fulfil the Minimum Criteria for Licencing.

Aggravating Factors

Other than the complaint from Client X and the complaints of Structured Notes holders, none of the matters comprising breaches set out above were brought to the attention of the Commission.

In relation to the advice given by CWM, Mr Penney and Mr Roxby and the failures to document reasons for recommendations and failures to disclose remuneration, CWM has a poor regulatory history as far back as the first Commission visit in 2013, and again highlighted by the Commission’s visit of 2016.

The failure to take legal advice in relation to the nature of the Structured Notes and the consequent conduct of unlicensed business in selling approximately 200 Structured Notes to clients has resulted, in some cases, in uninsured losses for clients.

Mr Penney’s advice to Client X, an elderly client, resulted in a significant tax bill for Client X, as well as significant commission income for CWM. The commission from restructuring Client X’s insurance bonds generated 15-20% of CWM’s income for 2014.

In relation to the share sales to Client X, Mr Penney engaged in very deliberate improper conduct, profiting to the sum of over £100,000.

Mr Roxby failed to provide any check or challenge to Mr Penney in relation to the failures relating to Client X and this meant that he provided no protection to Client X in relation to very serious failures and contraventions by CWM and Mr Penney.

Mitigating Factors

CWM appointed a third party consultant to assist with remediation following the 2016 Visit. Thereafter, CWM completed a remediation plan to the satisfaction of the Commission. The remediation improved CWM’s compliance with regulatory requirements.

In relation to the conflicts of interest regarding the sale of shares to Client X, Mr Penney and Mr Roxby admitted during the Investigation that the conflicts of interest policies at CWM were inadequate and that they did not manage the conflicts of interest as they were obliged to. CWM subsequently revised its conflicts of interest policy and amended its articles to prevent the sale of shares to its clients.

Mr Roxby did not make any personal gain from the sale of shares to Client X.

Following the Commission’s letter of July 2015, Mr Roxby appears to have taken into account the Commission’s comments in his advice to clients.

CWM, Mr Penney and Mr Roxby co-operated with the investigation.

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Criteria Wealth Management Limited, Mark Peter Penney, Marc Adam Roxby

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