Ford and Owen v Financial Conduct Authority [2018] UKUT 0358 (TCC)
Upper Tribunal, Tax and Chancery Chamber, 6 November 2018.
The Upper Tribunal upheld prohibition orders against Stewart Owen Ford and Mark John Owen, former senior executives of Keydata Investment Services Ltd. It found serious regulatory misconduct involving lack of integrity and failures to deal openly and cooperatively with the regulator. It directed financial penalties of £76 million for Ford and £3,240,787 for Owen.
The investments and regulatory proceedings
Keydata distributed investment products through independent financial advisers. The underlying bonds were issued by Luxembourg companies SLS Capital SA and Lifemark SA and backed by second-hand US life insurance policies, known as life settlements. Between July 2005 and June 2009, more than £475 million was invested by over 37,000 retail investors.
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Ford was Keydata’s former chief executive and Owen its former sales director. In November 2014, the FCA issued decision notices proposing prohibition orders and penalties of £75 million and £4 million respectively. Both men referred the decisions to the tribunal. The FCA subsequently sought an increased penalty of £76 million for Ford. The final outcome therefore differed from the figures in the original decision notices.
Integrity and openness to the regulator
The case concerned the Statements of Principle applicable to the conduct in question. Principle 1 required an approved person to act with integrity when carrying out a controlled function. Principle 4 required open and cooperative dealings with regulators and appropriate disclosure of information the regulator would reasonably expect to receive.
The tribunal explained that lack of integrity was not confined to dishonesty. Reckless disregard of obvious warning signs could also qualify. It distinguished that standard from mere negligence and considered what a person in the same position would reasonably have appreciated. The inquiry concerned integrity in carrying out regulated functions, rather than a person’s reputation in unrelated areas of life.
The FCA bore the burden of proving its case on the balance of probabilities. The tribunal rejected the suggestion that the seriousness of the allegations changed the standard of proof. The quality of the evidence and any inherent improbability still had to be considered, but there was only one civil standard.
The findings against Ford
The tribunal found that Ford consistently put personal financial gain ahead of his regulatory responsibilities. He received substantial benefits from the investment structures without proper disclosure. These included a fee linked to sums invested in SLS and payments extracted from Lifemark through companies associated with him.
The findings were more precise than a conclusion that every payment lacked any commercial background. The tribunal accepted that some services had been provided under certain arrangements, but held that the undisclosed extraction of investor-derived funds was improper. Other payments through LAS International had no commercial justification. The arrangements created conflicts of interest and affected the financial position of the products.
Ford also concealed serious product concerns from investors, advisers, Keydata’s compliance officer and the regulator. Sales continued despite misleading promotional material, inadequate modelling and professional warnings. His regulatory failures included misleading statements and failures to correct information supplied to the regulator. The tribunal found that he regarded problems as matters for him to resolve privately, although those with a material interest should have been informed.
Although the tribunal did not accept every detail of the FCA’s case, its findings established extensive misconduct. It concluded that Ford was not fit and proper to perform functions in the financial services industry and that a prohibition order was justified.
The separate assessment of Owen
Owen’s position was assessed individually. He knew less than Ford about important matters, including the detailed fee arrangements, and his misconduct was less serious. The tribunal did not treat all Ford’s knowledge or conduct as automatically attributable to him.
Nevertheless, Owen permitted misleading promotions, failed to act adequately on professional advice and continued marketing products without the necessary independent verification. He also failed to disclose material information and made misleading statements to the regulator. What he knew was sufficient to require action, even though he did not know everything Ford knew.
The tribunal found that £2,540,787 paid to or for Owen represented commissions calculated by reference to Lifemark sales. It rejected the later explanation that these were loans, preferring the contemporaneous evidence. Owen had also denied receiving commissions when specifically asked by the regulator. The tribunal found that his conduct demonstrated lack of integrity and justified a prohibition order.
How the financial penalties were calculated
The penalties combined removal of financial benefits from misconduct, commonly called disgorgement, with an additional punitive element.
For Ford, the accepted financial-benefit figure was £73,359,400. Adding £2,640,600 produced the £76 million penalty. The tribunal rejected a reduction for expenditure Ford said had protected investors: it found that the supposed rescue efforts were principally directed at preserving the appearance of stability and his own financial benefit.
For Owen, the benefit was £2,540,787. The tribunal considered that the punitive element implicit in the FCA’s £4 million proposal was disproportionate. It set that element at £700,000, producing a total penalty of £3,240,787. It also rejected a double-counting objection: the purpose was to deprive each individual of his own benefit, even where payments to one originated in funds extracted by the other.
Decision and significance
The decision was unanimous. The tribunal dismissed both references against the section 56 prohibition orders. On the financial-penalty references under section 66 of the Financial Services and Markets Act 2000, it remitted the matters to the FCA with directions to impose the amounts specified above.
The distinction matters: the tribunal’s powers on the prohibition references differed from its powers to determine the appropriate financial penalties. The case also shows why shared involvement in the same business does not dispense with an individual assessment of knowledge, misconduct and financial benefit.
Source: Full Upper Tribunal decision, particularly paragraphs 1–4, 13–44 and 645–688.
