Mr Burns was a director (CF1) for a firm called TailorMade Independent Limited ("TMI"). This is a tragic case which led to retail investors losing over £100m in pension assets as a result of a flawed advice model. Mr Burns made an unsuccessful challenge to the FCA's decision to impose a prohibition order. Although the facts are not of general relevance, the recent Tribunal decision serves as a useful reminder of a number of important points on the scope of responsibility for those holding significant influence functions. Although this is a pre-SMCR case, the same principles are likely to be equally applicable to those holding Senior Management Functions, particularly those with SMF3 (executive director). The decision also raises questions about the FCA’s own level of accountability for a significant financial scandal.
Your scope of accountability may be broader than your responsibilities
Mr Burns argued that as compliance issues were the responsibility of another director, he should not be accountable for compliance failures. The Tribunal accepted that it is obviously permissible for "a board to vest responsibility for matters such as compliance in one of their number who is more expert than the others on such matters" but "that does not absolve the other members of the board from obtaining a sufficient understanding of the business of the firm which they are ultimately responsible for managing, the key issues that are likely to arise out of its business model, and the manner in which they are being addressed". In reference to Mr Burns' claimed inexperience in relation to regulatory matters, the Tribunal notes that if "an individual board member is not able to acquire the necessary expertise to undertake that task within a regulated firm, then he should not accept the appointment". This decision is not at all surprising – the decision simply follows the long-standing guidance in APER (Statements of Principle and Code of Practice for Approved Persons) on the joint and several responsibility of boards. It nonetheless serves as a useful reminder of the point. A similar approach would no doubt be followed under the Senior Managers and Certification Regime. Although the FCA's approach will have to be tailored to the size of the relevant business, it is unlikely that just because one director has compliance oversight within their Statement of Responsibility, all other directors are relieved of any obligation in relation to that issue. It should be noted that the director responsible for compliance was fined £93,800 and made subject to a prohibition order – clearly reinforcing the fact that more than one individual can be accountable for the same issue.
This approach can be contrasted with English company law, under which a director's duty to exercise reasonable care, skill and diligence is assessed by reference to combined objective and subjective tests. A director must exercise the care, skill and diligence which would be exercised by a reasonably diligent person with both the general knowledge, skill and experience that may be reasonably expected of a person carrying out the functions carried out by the director in relation to the company (the objective test) and the general knowledge, skill and experience that the particular director actually has (the subjective test). Under the objective limb, the director's performance is assessed against what a reasonably diligent and experienced person in the same role might reasonably have been expected to do in the same circumstances. For example, a sales director would not be expected to have the same general skills as a typical finance director, and vice versa. Under the subjective limb, the director must exercise the general knowledge, skill and experience that he actually has where that is greater that the objective standard. The FCA's decision is consistent with the broad position that directors should acquire and maintain sufficient knowledge and understanding of the company's business to enable them to discharge their general duties as director and may not just abdicate their responsibilities to another.
Get the right advice
Mr Burns pointed out that that the firm had taken advice from external lawyers. That advice was not disclosed in the proceedings so we do not know what was advised, but the Tribunal concluded that "at the very least a competent firm of lawyers would have said that they had some concerns about the model". The Tribunal noted that had TMI "had advice from a competent firm of lawyers that its advice model was compliant, then there would be the case for saying that reasonable steps to ensure compliance with the regulatory system had been taken". This clearly reinforces the importance or external validation and assurance – provided it comes from a competent adviser!
The FCA and Glass Houses
The case invites the question of whether the FCA took reasonable steps in relation to the authorisation and supervision of TMI. In relation to the authorisation process and the lack of clarity as to what advice was to be given to customers, the Tribunal noted that "…in view of the lack of clarity in the explanation given we would have expected that the Authority would have needed to have clarified these issues before approving the application, bearing in mind the inherent risks of investing in overseas property". In relation to the FCA’s supervisory approach, the Tribunal pointed both to the levels of concern regarding the use of SIPPS at the relevant time and the information available to the FCA and concluded that "it is perhaps surprising that the particular problem that arose out of the business model of TMI and other firms operating in a similar fashion was not detected earlier". However, as the Tribunal noted, "none of these matters can help Mr Burns".
https://assets.publishing.service.gov.uk/media/5b61add9e5274a5f5a33a3ec/Alistair_Rae_Burns_v_FCA.pdf
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