The Upper Tribunal has upheld a decision by the Financial Conduct Authority to prohibit Darren Reynolds, a former independent financial adviser, from working in financial services, and to fine him £2,037,892. The judgment sets out important guidance on the limitation test in s.66 of the Financial Services and Markets Act 2000, and the calculation of penalties where there are competing claims to the proceeds of misconduct.
By Decision Notice dated 2 May 2023 the FCA found that in the period from March 2015 – February 2018, Mr Reynolds advised over 470 customers to transfer their pensions into high-risk and unsuitable products, and that he did so dishonestly, knowing that he was giving unsuitable advice. Mr Reynolds received in excess of £1 million in undisclosed and prohibited commission in respect of those pension transfers. He established structures for the payment of those secret commissions which sought to conceal those payments, and their true nature. Mr Reynolds also made false statements on application forms, which mislead an investment provider as to the suitability of its investment for his clients. Many of Mr Reynolds’ clients were members of the British Steel Pension Scheme. Over £17.6 million has been paid in compensation by the Financial Services Compensation Scheme. The FCA decided to prohibit Mr Reynolds from working in financial services, and impose a penalty of £2,212,316.
Mr Reynolds referred the decision to the Upper Tribunal. By the end of the hearing of his reference only two grounds remained, both of which related to the quantum of the penalty: (i) whether action in respect of any of Mr Reynolds’ conduct was time-barred, and/or (ii) whether any amount of the penalty figure ought to have been excluded, because Mr Reynolds was also subject to claims by HMRC, and by the liquidator of a company through which he received commission payments.
The Upper Tribunal dismissed the first ground. Its judgment contains a detailed analysis of the Upper Tribunal case law on limitation and summarises the applicable principles at [117]. It held that for time to start to run, the FCA must have information which gives it a broad knowledge of the essence of the issue in question, which addresses all the required features of the misconduct (including any subjective factors such as recklessness or dishonesty). That information must be sufficient for the FCA to hold more than merely a suspicion of misconduct. The judgment also clarifies the nature of the “investigation threshold” referred to in earlier case law.
In relation to the “disgorgement” element of the penalty, the Upper Tribunal adopted a nuanced approach to the uncertainty caused by the competing claims. It held that it would be wholly wrong for the calculation of the penalty to await resolution of those claims (at [152]), but gave directions for its potential adjustment in the future if either of the claims were to crystallise and be discharged by Mr Reynolds in full (at [159]-[160]). The Tribunal accepted an undertaking from the FCA in relation to the resolution of the competing claims in the event of Mr Reynolds’ bankruptcy (at [163]). The FCA proposed to use a lower, non-penal, interest rate in its final calculation of the penalty, which was otherwise upheld in full by the Upper Tribunal.
Eleanor Campbell and Richard Nicholl acted for the Financial Conduct Authority.
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