Public statement concerning the imposition of a discretionary civil penalty under Section 16 of the Financial Services Act 2008

Fedelta Trust Limited (“FTL”)    

1. Action

1.1 The Financial Services Authority (the “Authority”) makes this public statement in accordance with powers conferred upon it under section 13 of the Financial Services Act 2008 (the “Act”).  

1.2 This action supports the Authority’s statutory objectives of reducing financial crime and maintaining confidence in the Island’s financial services industry.  

1.3 Following an investigation into FTL by the Authority which identified regulatory failings in relation to its provision of corporate services as registered agent only pursuant to FTL’s Class 4 licence permissions to one collective investment scheme (“Client A”), the Authority has deemed it necessary and proportionate, in all the circumstances, that FTL be issued with a discretionary civil penalty under section 16 of the Act in the sum of £73,644 discounted by 30% to £51,551.

1.4 The level of the financial penalty reflects the fact that FTL co-operated with the Authority and agreed settlement at an early stage, employing the Authority’s new Enforcement Decision-Making Process.  

1.5 The penalty, imposed at Level 1, further reflects the fact that:

      1.5.1 The breaches reflected organisational failings rather than failings of a particular individual.

      1.5.2 FTL has already taken substantial steps to remediate the inadvertent failings identified in this Public Statement.             

      1.5.3. Other parts of FTL’s regulated activities were inspected and did not require investigation by the Authority.

2. Background

2.1 FTL is licensed by the Authority in accordance with section 7 of the Act. FTL is licensed to provide services to collective investment schemes and to carry on corporate and trust services.       This Public Statement relates only to breaches of its Class 4 (Corporate Services) licence permissions, a number of which were inadvertent, in relation to Client A.              

2.2 In April 2018, FTL was the subject of a routine supervisory inspection by the Authority in accordance with its statutory powers under Schedule 2 to the Act.  

2.3 Upon identification of certain issues in relation to the provision of Class 4 services to Client A, in April 2018, the Authority decided formally to investigate whether FTL continued to satisfy the Authority that it is ‘fit and proper’ to hold a licence under section 7 of the Act (the “Investigation”). To hold a licence, a regulated person is required to satisfy the Authority that both it, and its key staff, are fit and proper. This ‘test’ is an initial test at licensing and an ongoing one.    

3. Investigation conclusions

3.1 Having obtained consent from a Justice of the Peace to exercise its compulsion powers under paragraph 3 of Schedule 2 to the Act, the Authority undertook a range of interviews with relevant FTL personnel.         

3.2 The Investigation identified a range of issues in relation to the Class 4 services provided to Client A that, on reasonable grounds, brought into question FTL’s fitness and propriety. Amongst those matters established were that:–

3.2.1 FTL provided corporate services pursuant to its Class 4 permissions to Client A without operating an appropriate risk management framework and methodology.      

3.2.2 Whilst FTL did have appropriate documented procedures for the Class 4 services it provided to all other clients, those procedures were not sufficiently tailored to Client A.

3.2.3 In undertaking its own customer risk assessment and ongoing monitoring requirements in respect of Client A, FTL contravened the Code.

3.2.4 A collective investment scheme is defined as a business in the regulated sector (Schedule 4 to the Proceeds of Crime Act 2008). FTL had, inadvertently, paid insufficient regard to Client A’s compliance with the Code.

3.2.5 In providing services to Client A, FTL had breached provisions of the Financial Services Rule Book 2016.   

3.3 Notwithstanding these findings, the Authority has concluded that, in all the circumstances, apart from the civil penalty, no further regulatory sanction is necessary and therefore FTL remains permitted and licensed to carry on undertaking regulated activity.  

4. Statement    

The Authority is satisfied that the imposition of a civil penalty to FTL reflects the serious nature of the regulatory failings identified and that this public statement will encourage others to comply with the legal and regulatory requirements and obligations that are fundamental to the conduct of business in the regulated sector.

In accordance with the Authority’s new Enforcement Decision-Making Process (“DMP”), FTL entered into settlement discussions with the Authority and, having accepted the Investigation conclusions, sought to finalise matters expeditiously. The Authority acknowledges and welcomes FTL’s co-operative approach and believes that this is a positive endorsement of the new DMP (developed pursuant to the Authority’s Strategic Plan). 

5. Cooperation and Remediation         

5.1 The Authority is satisfied that FTL cooperated fully and engaged positively with the Authority’s regulatory enforcement action. FTL took its first opportunity to engage in the Authority’s new DMP and settlement procedure. FTL demonstrated that: 

5.1.1 The breaches identified by the Authority related to the provision of corporate services only to Client A and fees from that relationship represented less than 1.5% of FTL’s turnover;     

5.1.2 At the time of the Investigation, FTL had already commenced a review of its procedures in relation to all clients over the entire range of regulated work it conducted;

5.1.3 At the time of the settlement, FTL had already implemented new procedures which addressed the inadvertent failings which had resulted in the imposition of this Civil Penalty

5.1.4 At the time of this settlement, FTL has been in active engagement with the Authority the better to comply with its regulatory obligations. 

6. Key Learning Points for Industry      

  • A regulated entity’s risk management arrangements, including in respect of anti-money laundering and countering the financing of terrorism, should extend to understanding of the investment and operational activities of its clients even when the regulated entity is, as a registered agent, providing only limited services to its clients.
  • Not all clients have the same characteristics; the risks associated with a particular client may not be mitigated by simply applying ‘standard’ processes and procedures.
  • If a client whose business sits outside of the regulated entity’s documented risk management framework is on-boarded, the reasons for doing so and the enhanced or amended controls being applied, should be clearly documented, evidenced and implemented.
  • A regulated entity should closely monitor the effectiveness of its risk and compliance functions.
  • A regulated entity’s staff should receive training relevant to the particular regulated activity being undertaken.
  • The Authority expects the Board of a regulated firm to establish and encourage a culture which reflects the importance of compliance with regulatory requirements.
  • A regulated entity, having provided full cooperation and assistance to the Authority, may receive a financial, or other regulatory sanction, rather than facing criminal prosecution if found to have contravened the Code.

 

David Griffin  

Head of Enforcement Division