Topic: FCA Disciplinary Process
Subject of Enforcement: LF Woodford Equity Income Fund
Date of Notice: 28 May 2021
Overview: On 28 May 2021, Nikhil Rathi, the Chief Executive of the FCA wrote to Rt Hon. Mel Stride MP, Chair of the Treasury Select Committee to provide an update on the progress of the FCA investigation into LF Woodford Equity Fund.
Mr Rathi noted that the investigation has made substantial progress having conducted 14 witness interviews, with all key interviews now completed. The investigation team has also issued over 30 information requirements which has led to the gathering of over 20, 000 items of relevant material from all the key parties. The Information gathering in relation to current lines of enquiries is, accordingly, nearly complete.
Further steps will involve further analysis of this information and engagement with experts, including individuals who are able to give expert evidence in any potential proceedings. Mr. Rathi noted that in considering cases of this kind, it is normal to engage subject matter experts whose opinion can be relied upon by the FCA and any potential decision-maker in potential proceedings. The FCA are confident the investigation work will be completed by the end of this year.
Mr. Rathi referred to the FCA’s disciplinary procedures, where, following an investigation, the FCA have found a case to answer. These processes are in place to ensure fair decision-making. Mr. Rathi noted confirmed that the FCA’s disciplinary powers are extensive including the ability to impose financial penalties, secure redress, suspend a firm for up to 12 months from undertaking specific regulated activities, and prohibit someone from operating in financial services.
Topic: Fraudulent Trading and Carrying on Regulated Activities without Authorisation
Subject of Enforcement: Ian Hudson
Date of Notice: 20 May 2021
Overview: Following an investigation, the FCA has commenced criminal proceedings against Ian James Hudson. Mr Hudson appeared at Westminster Magistrates’ Court in relation to the following charges:
• carrying on a business, namely Richmond Associates, with the intention to defraud creditors; and
• carrying on regulated activities namely advising on investments and accepting deposits without authorisation.
The FCA alleges that between 1 January 2008 and 31 July 2019, Mr Hudson advised on investments and purported to invest deposits received by him from clients on their behalf. At no point during this time was he authorised by the FCA to undertake these financial services, as is required by law.
Further, while Mr Hudson told clients that the money they deposited with his business, Richmond Associates, would be invested in various financial vehicles or otherwise put to specific uses, this was not always the case.
Mr Hudson will appear at Southwark Crown Court for a Plea and Trial Preparation Hearing on 17 June 2021.
Topic: Financial Crime/AML Systems and Controls
Subject of Enforcement: Sapien Capital Ltd (“Sapien”).
Date of Notice: 6 May 2021
Overview: The FCA found that Sapien failed to have in place adequate systems and controls to identify and mitigate the risk of being used to facilitate fraudulent trading and money laundering in relation to business introduced by the Solo Group.
The Solo trading was characterised by what appeared to be a circular pattern of extremely high value trades undertaken to avoid the normal need for payments and delivery of securities in the settlement process. The trading pattern involved the use of OTC equity trading, securities lending and forward transactions, involving EU equities, on or around the last day securities were cum dividend. The FCA investigation found no evidence of change of ownership of the shares traded by the Solo clients, or custody of the shares and settlement of the trades by the Solo Group. The way these trades were conducted by the Solo Group and their clients, in combination with their scale and volume, were highly suggestive of financial crime, and appear to have been undertaken to create an audit trail to support withholding tax reclaims in Denmark and Belgium.
Sapien executed purported OTC equity trades to the value of approximately £2.5 billion in Danish equities and £3.8 billion in Belgian equities. In addition, Sapien failed to exercise due skill, care and diligence in applying anti-money laundering policies and procedures and in failing properly to assess, monitor and mitigate the risk of financial crime in relation to clients introduced by the Solo Group and the purported trading.
Sapien did not undertake appropriate due diligence and failed to perform effective risk assessments on the Solo clients.
Mark Steward, Director of Enforcement and Market Oversight, stated:
‘These transactions ran money laundering and other financial crime risks which Sapien incompetently failed to see.”
‘The FCA expects firms have systems and controls that test the purpose and legitimacy of transactions, reflecting scepticism and alertness to the risk of money laundering and financial crime, and failures here constitute serious misconduct.’
Sapien qualified for a 30% discount to the Fine as they agreed to resolve all issues of fact and liability and entered a Focused Resolution Agreement, under the Authority’s executive settlement procedures. The amount was further reduced from £219,100 to reflect Sapien’s serious financial hardship.
The publication of this Final Notice is part of a range of measures taken in connection with cum/ex dividend arbitrage cases, and WHT schemes. This has involved the proactive engagement with EU regulators and global law enforcement.
The FCA’s investigation into the involvement of UK based brokers in cum/ex dividend arbitrage schemes is continuing.
Penalty: Fine of GBP178,000