1 Welcome ome and Introdu roduction ion Test? An online test - - PDF document

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Welcome

• me and Introdu

roduction ion

Test? – An online test will be set after today’s event (open next week)

• £100.00 prize for the best result

(A tie breaker question sent in the event of a draw) Contact Comsure for more details

3

We Welcome me and In Intr troduction tion

1. Speakers start time:

12.15

2. Speakers finish time:

13.45

3. Event Finish:

13.45 - 14.00:

4. CPD Value1.5hrs = CPD certificates will ONLY be sent after the event AND ONLY if you have signed in

• n the event register that

will be found at the event registration desk

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TOPICS AND SPEAKERS

• Mathew Beale

 Regulatory update,  Sanctions and  Lesson from the UK - FCA & Invesco Perpetual (£18 million fine)

• Paul Wilson & Mark Rawlins

 Lessons for directors which provide valuable lessons for all businesses and directors.  Look at recent cases, including  Weavering,  Arch Cru and  Horizon,

• ALL

 Corporate governance - throughout the presentation the speakers will consider the main areas for analysis for businesses and directors who wish to meet best industry standards

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Risk Governance [Environmental] Dashboard

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FATCA = US IGAs & UK IGAs.

• 1. 30 JUNE 2015 deadline for the first reports of FATCA information under

the reporting regimes that have been put in place in both Guernsey and Jersey to ensure compliance with the i. US/Jersey (US/Guernsey) Intergovernmental Agreements regarding FATCA (“the US IGAs”).

• 2. The deadline for the first reports in relation to the

i. UK/Jersey (UK/Guernsey) Intergovernmental Agreements regarding a FATCA-type reporting regime (“the UK IGAs”) is 30 JUNE 2016.

• 3. Whilst most list Jersey (Guernsey) funds (“Funds”) may DELEGATE

FATCA reporting to a third party service provider, FATCA reporting

• bligations remain the FUND’S RESPONSIBILITY.

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Regulatory Risk – Fines

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Guernsey

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UK - FCA

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FCA FINES

1.2014 was a bumper year for the FCA in terms of the level of enforcement fines it imposed. 2.A total of over £1.4 billion was levied in fines by the FCA in 2014, 3.This dwarfs the total figure of just under £500 million in 2013.

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2014 FCA

• 1. In keeping with its CREDIBLE DETERRENCE AGENDA, the FCA

continued to take enforcement action in 2014 in other key areas, demonstrating the importance it places on firms complying with its rules on: i. Client money and assets. ii. Financial promotions. iii. Dealing with conflicts of interest. iv. Transaction reporting. v. Senior management responsibility 2. MORE ACTION IS taken for BREACH OF PRINCIPLE 3 (the requirement to have appropriate systems and controls) than any other of the FCA’s Principles.

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Bank of Beirut fined £2.1m

• 1. March 2015 - The FCA fined the Bank of Beirut £2.1m AND prohibited

it from acquiring new customers from high-risk jurisdictions for 126 days i. AS A RESULT OF the bank providing the FCA with misleading information when addressing concerns regarding its financial crime systems and controls.

• 2. The FCA has also fined two approved persons at the bank for failing to

deal with the regulator in an open and cooperative way. i. Anthony Wills, Compliance Officer (former!!)= £19,600.00 ii. Michael Allin, The Internal Auditor = £9,900.00

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FCA update (best practice)

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FCA guidance on financial promotions in social media

• 1. The FCA has published finalised guidance (FG15/4) entitled

i. “Social media and customer communications: The FCA’s supervisory approach to financial promotions in social media”.

• 2. The guidance is designed to:-

i. Assist firms in their use of social media and ii. Ensure that they are COMPLIANT with the FCA’s financial promotion requirements, and iii. Contains EXAMPLES of acceptable and unacceptable financial promotions.

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FCA thematic review on asset management firms and market abuse

• 1. The FCA has published a thematic review (TR15/1) entitled “Asset

management firms and the risk of market abuse”.

• 2. The review (with a primary focus on equities and insider dealing) examined

how firms control the risks of

• 1. insider dealing,
• 2. improper disclosure and
• 3. market manipulation,
• 3. The FCA found that, while firms had put in place some practices and

procedures to control the risk of market abuse, these are only comprehensive in a small number of firms.

• 4. The FCA believes that, in many firms, further work is required to ensure the

procedures operate effectively and cover all material risks.

• 5. The review highlighted a need for firms to pay more attention to the

possibility of receiving inside information through all aspects of the investment process and also a need to improve the effectiveness of post- trade surveillance.

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FCA's Risk Outlook Sets out its top Seven high-level risks The financial services sector Should consider in coming Years…….

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The FCA will continue to look at:

1. TECHNOLOGY DEVELOPMENTS and its impact on firms’ investment, consumers and regulators 2. HOW POOR CULTURE AND CONTROL continues to threaten market integrity 3. IMPACT OF LARGE BACK-BOOKS on how firms deal with existing customers 4. PENSIONS and RETIREMENT INCOME PRODUCTS consumer outcomes Specifically on consumer credit and COMPLEX TERMS AND CONDITIONS the FCA will monitor: 5. poor culture and practice in consumer credit affordability assessments that could result in unaffordable debt 6. impact of the Consumer Rights Act coming into force in the autumn There is one new area of forward looking focus: 7. FIRMS’ SYSTEMS AND CONTROLS IN RELATION TO FINANCIAL CRIME

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JFSC update

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JFSC Regulatory updates

1.Customer Due Diligence – use of smart phone and tablet applications 2.AML/CFT Handbooks: Appendix D2 updated 3.Consultation Paper No. 4 2015: Revisions to the Money Laundering (Jersey) Order 2008 and Commission AML/CFT Handbooks 4.Sanctions…… (More later…!!!!)

23 26 March 2015

RISK AND REGULATORY SEMINAR

Mark Rawlins Paul Wilson

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• Arch Cru
• Weavering
• Horizon

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Arch Cru – The Background

• A complete mess – involving £650m odd of total investments, Greek

ships and student accommodation

• FSA findings/hearings – lack of integrity, compliance monitoring and

failure to manage conflicts properly

• A ‘voluntary’ payment scheme of £54m provided through Capita,

HSBC and BNY

• On going litigation in Guernsey over the GSY fund administrator and

the directors of the GSY funds

• CISX reborn at the hands of John Moulton into the CISE… £190k

fine by GFSC.

• This one is a UK case – delivered at the end of 2014. The judgment

runs to 200 odd pages

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Arch Cru – The Facts

6400 Investors Arch Cru Diversified Fund Arch Cru Investment Fund CAPITA Financial Managers Limited = Authorised Corporate Director Arch Financial Products LLP = Investment Manager

Bordeaux Services (Guernsey) Limited = Administrator GSY ICS (the “Arch Cru Funds”)

22 ICS

• Directors -

Robert Addison (Arch COO) + Bordeaux Directors (Redford + Meader)

Private Equity Real Estate UNDERLYING INVESTMENTS CISX LISTINGS

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Arch Cru - The Investment Manager

• Arch Financial Products LLP

Mr and Mrs Farrell Arch International Group Holdings (AIGH) Robin Farrell/Arch Group (UK) Addison Investment Manager (LLP) Investment Manager (LLP)

CEO = Robin Farrell - FSA approved – previously global head of alternative investments at Dresdner Kleinwort Wasserstein COO = Robert Addison

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Arch Cru - The Deal

• Timing … late 2007 (pre-crash)
• A student accommodation provider - Clubeasy – up for

sale

• A high valuation (based on continued operation) but an

alleged distressed seller, Mr Jason Hayes

• Substantial borrowings by the Clubeasy group
• A JV partner - Foundations - owned by Mr Lee Barkman

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Arch Cru - The Deal Structure

Lee Barkman Phillip Montague Foundations Capital Limited (BVI) Arch UK Foundations Holdings Limited (IoM) Foundations Program Plc (IoM) Directors = Farrell Addison Barkman Montague JV Co 65% 35%

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The Deal - Terms

• A holding company, Lonscale Ltd was established to

acquire the Clubeasy business.

• An initial deposit was paid by one of the ICs (£1m).
• One IC (AT1) was used as a conduit to acquire interests in

Lonscale

• Lonscale issued shares and loan notes to AT1
• AT1 issued loan notes in a total amount of £21m - to the

GSY ICs – for £20.2m; and to FPP for £0.8m.

• The ICs invested under the control of the IM,

Arch Financial Products, appointed under identical investment management agreements.

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The £21m

• The £21m received by AT1 from the GSY ICs – and

indirectly from the UK OIECs was used (via a solicitor’s client account) –

• To repay the bridge finance for the £1m deposit
• To acquire the Clubeasy business from Hayes -

£12.21m

• To fund working capital ~ £1.5m
• To pay transaction costs and stamp duty
• To pay £3m to FCL as a structuring fee
• To pay £3m to Arch the IM as a structuring fee

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The £6m

• The acquisition resulted in the IM receiving £3m in “fees”

and £3m went to the independent third party acquiring interests in the deal (Barkman/Foundations Capital)

• Paid by the ‘portfolio company’, Lonscale
• No documentation
• No clear basis as to exactly who paid what to whom
• No analysis or consideration of or dealing with conflicts

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Follow on investment

• £4m odd was paid by the Real Estate ICs up to the

beginning of 2009, to keep Clubeasy going

• This was used to acquire loan notes from AT1
• AT1 used the money to invest in equivalent notes from

Lonscale

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The fall-out

• Ultimately – the ICs lost most of their investments. The

Clubeasy business was sold to the minority shareholder (Barkman) for £10m (not all of which was collected).

• The FSA (as

was) and the GFSC were involved. Spearpoint were appointed as IM.

• Litigation inevitably followed.

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The complaint

• The investor cells claimed that:
• the IM’s decision to invest in Lonscale (and the

acquisition of Clubeasy) were driven by its financial interest in

• btaining

illegitimate payments – the ‘extraction venture’ rather than a proper consideration

• f the investment’s merits and the interests of the

cells – and so the IM acted in breach of fiduciary duty, in breach of contract and negligently

• Farrell dishonestly assisted the IM to breach its

fiduciary duties and

• Induced its breach of contract

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An Aside: Legal Representation

• Farrell and the IM ceased employing legal counsel 18 months before judgment. It is not

clear whether this is due to legal ‘embarrassment’ suffered by their legal advisors – eg if the defendants had admitted their guilt on a factual basis, or due to costs.

• What is clear is that they themselves suffered a great burden in defending the claim and

a 3 week trial is an arduous process even with a team of lawyers..

• In a recent case by a lawyer against the Solicitors Regulatory Authority, the lawyer

claiming harm states “In my case, the value of expert legal advice and representation given cannot be overemphasised”.

• This is a universal truth – to fight a case such as the Arch Cru case alone is almost

unimaginable.

• So – whenever acting as a professional – a NED or an advisor – we would recommend
• Making sure that there is appropriate D&O cover in place and that it allows for

claims to be drawn down prior to final judgement. This case lasted a long time, with much satellite litigation/regulatory action – and a deep pocket would be required.

• Appropriate other indemnities (it is interesting that no mention is made in the case
• f the no doubt present IMA indemnities).
• It would have been interesting to see whether good legal representation would have

brought a different colour to the proceedings. It will be further a point to watch if an appeal is granted as to whether legal counsel will be employed.

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The decision to invest

• Mr Justice Walker holds that –
• The investment in the Clubeasy business was high risk, and that no

investment committee proposal or consideration of the actual merits

• f the investment were ever made. Save for a minute of the meeting
• f directors of Lonscale, there is no record of board minutes, IM

determinations, recommendations or even trade tickets. This is a negligent oversight by the IM. The IM should have at the very least determined the merits of the investment for each cell.

• It is also questionable whether the ICs themselves (through the

independent NEDs and Addison) should have in some way endorsed the decision. That would have greatly assisted regarding conflicts – see below.

• As a general observation, the lack of contemporaneous notes of

conversations and minutes is a factor against the IM parties, if only

• n an evidential front. Also back-dating was a wider criticism in Arch

Cru

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The ‘Fee’

• Much was made over the fee payment.
• The two sides disagreed on its categorisation.
• The defendants advanced the argument that the fees were simply standard ‘corporate

finance advice’ fees that were adequately disclosed in the terms of the IMAs (which spoke to fees, conflicts and acting as a principal, etc. in the usual fashion).

• The claimants (who’s arguments were ultimately successful) claimed that the monies were

simply part of an arrangement by the IM and FCl/Barkman to share a substantial part of the monies invested by the investors. What was described by one witness as ‘what we can take out of it’, and as the ‘meat left on the bones’ to be taken away.

• The defendants did not assist themselves by seeing after the fact, at the request of

Barkman, to re-categorise the total £6m fee as a capital gain, paid to him and then rebated in part to Arch. This underlines another important point for directors/participants in transactions: do not seek to re-write history, another name for which is to lie about it.

• The way Farrell puts it is that ‘the paperwork did not keep up with [reality].’ – the judge

gives this short shrift, and rules that Farrell deliberately misled the court. There is also stunning disclosure as to how a firm’s tax advice is to be used as a template to avoid tax liabilities.

• The basis of the fees were also disputed by the claimant cells on the basis that the

investment manager would be taking a fee under the IMAs.

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The Fee - how should it have been handled?

• Set out the basis of the fee up-front. “Success terms

must be clear” [UBS v unincorporated FPL] - otherwise there must be a real issue relating to whether the fee is in the investor’s interests.

• Document it.
• Where there is scope for conflicts – unambiguously set
• ut the facts and get investor consents.
• Don’t re-categorise without appropriate justification.

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The Conflicts

• The IM had his finger in several different pies.
• A corporate structuring fee is not in itself a problem – it just

needs to be handled correctly. A key component in the case was the disproportionate size of the fee – and the attendant need for complete specific disclosure.

• In Arch Cru – the fees were the driver for the transaction – and

not adequately disclosed. As such, the IM breached his duties to act in the interests of the cells.

• Advice: the IM actually took advice on how to manage conflicts

‘in situations where it might earn a transaction or advisory fee’. The problem was that it was going through the motions and neither disclosing the situation as contemplated to the advisor nor following the general recommendations of the advisor (which were in line with MIFID and also the JFSC codes).

41

The Law

• Agents acting in cases of trust and confidence owe duties of loyalty to give preference to the

interests of the principal, not themselves.

• Supplementary duties that “reinforce the duty of loyalty” are duties to
• Avoid conflicts/potential conflicts of interest
• Not profit from his position as agent (i.e. a secret profit)
• These duties operate strictly without the need to establish wrong doing or fault.
• The judge did not consider the disclosures in the IMA sufficient. Further, rather general

conversations between the IM/Farrell and the GSY NEDs that some fees would need to be paid was not sufficient. [There is a separate question as to whether the NEDs should have made further enquiry, being on notice that fees were proposed.]

• In addition the FCA principle 8 states:

“A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.” So – where this also applies, the carte blanche IMA conflict provisions are subject to such a principle. The JFSC codes of practice provide similar (although not the same) guidance.

• The judge held that the venture was to extract value for the IM, and not for the interests of the
• investors. As such the agent had breached its duties in contract and at law.
• The IM was also negligent in the determination to invest – reliance on inappropriate valuations,

lack of commitment for future funding needs and in failing to perform a risk/reward analysis.

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Mr Farrell

• Held to have been basically dishonest – in the activities with the IM and in his evidence at

trial.

• Dishonest assistance – PC decision in Barlow Clowes v Eurotrust International Ltd – if –
• Consciousness of those elements of the transaction which make participation

transgress ordinary standards of behaviour

• A dishonest state of mind will exist where there is suspicion of the relevant elements of

the transaction, combined with a conscious decision not to make enquiries which result in knowledge

• Objective tests
• Heightened test on the balance of probabilities, given the charge.
• Judge held that ‘he knew that what he was doing was wrong.’ And at the very least,

took a conscious decision not to make enquiries.

• Inducement to breach contract – if:
• There is knowledge of the contract
• An intention to induce its breach
• Actual breach caused by the person’s conduct.
• As held by the judge, the contract breached was the IMA, under which Farrell knew

the IM was under a duty to manage conflicts of interest fairly. That breach led to the investment which caused loss.

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The Waiver

• The defendants wished to rely on a waiver letter signed on the

appointment of Spearpoint as the new IM, in respect of a ceding of management fees in return for exculpation in connection with possible ‘duplicative’ management fee charging.

• A waiver in very broad terms was executed as part of the

arrangements.

• Whilst very broad in scope, it did not extend to every claim

under the sun, just those in relation to the ‘Cross Investment Fees’.

• In part, this was a try-it-and-see defence, but the moral is that

directors and advisors should be wary of placing reliance on indemnities or waivers, with the possible exception of A74 waivers, in order to proceed with a particular course of conduct.

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Thoughts if this had been under Jersey law

• The Directors of the cells, the IM and the portfolio company:
• Under A74:
• A director, in exercising the director’s powers and discharging the director’s duties, shall –
• (a)

act honestly and in good faith with a view to the best interests of the company; and

• (b)

exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

• Whilst the duties of competence are somewhat subjective, the requirements regarding disclosure and, where applicable, consent to

conflicts between the directors duty to the company and his own or other interests is a strict one, that will be harshly enforced – as a fiduciary the court expects a very high standard of honesty and will apply a stringent test as to what constitutes impropriety, personal advantage or misapplication.

• So – Farrell at least (Dr of IM), and possibly the independent directors and Addison (Drs on Lonscale) would be in trouble – at least - for:
• Lack of honesty
• Acting without good faith – i.e. for a collateral purpose of gain
• Making a secret profit
• Possible breaches of confidentiality (information known in one capacity used for a different capacity/shares with different board

members on other companies)

• Failure to act within actual authority/powers (i.e. the investments and fee payments were not sanctioned)
• Possible breaches of accounting (A103 of Co Law)
• Possible insider dealing under FSJL
• Falsification of company records (A206 Co Law)
• The tort of conversion, resulting in proprietary claims
• The tort of fraud
• The tort of interference with contractual relations
• Negligence
• Farrell – perjury?
• Possible exculpation under A74 (now expanded) or relief under A212, but unlikely in the present case, as honesty is a requirement for

relief.

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What next?

• The case may be appealed. Farrell said – “The findings
• f the court are deeply regrettable. Unfortunately the

findings are underpinned by an appraisal which we believe ignores large swathes of the factual evidence before the court”. So watch this space.

• As always, these cases are highly fact specific.

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• Arch Cru
• Weavering
• Horizon

47

Weavering

Cayman Islands Court of Appeal judgment First Instance facts

48

Issues for the Court of Appeal

• 1. Directors in breach of duty?
• 2. Did the breach constitute wilful neglect and default on

the directors’ part?

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Breach of duty? Yes: a failure to discover that the related party was the counter- party to the interest rate swaps. = breach of duty of care and skill

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Wilful neglect and default? Who cares? A question of personal liability. No: the case had not been proven. No evidence of intent to be in breach of duty.

51

Much ado about nothing? No. First instance judgment still of importance. But Jersey is not Cayman.

52

What about Magnus? Found guilty on 8 counts 13 years at Her Majesty’s Pleasure.

53

• Arch Cru
• Weavering
• Horizon

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Public Statements When: November 2013 July 2014 January 2015 How many: 1 - Horizon 5 - Directors and Employees What are they

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Facts

• Services provided to private fund structures including Film Co
• Customers invested in Film Co direct through shareholding or

through investing in a Media Fund

• Film Co’s AIM listing suspended
• Acquisition of Film Co by Bid Co
• Bid Co beneficially owned by Horizon director
• Film Co’s equity acquired for 1p per share and CLN’s for 55p
• Structure X set up - funded by customers to purchase Film Co’s

CLN’s for £1

• Moneys not pass to Structure X but went direct to Bid Co to pay off

Film Co’s creditors

• Film Co into liquidation just 1 month after Bid Co acquired it
• Valuation to customers made no reference to serious financial

difficulty

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Horizon Public Statement Finding: Breaches of all 7 principles of the Codes

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Individual Public Statements Who was to blame? Directors Key person

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The Issues

The 7 principles of the Code Corporate governance Systems and controls Risk management Understanding

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The Issues

Best interests of the customers Conflicts of interest Delegation Board Meetings The other directors

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Individual Public Statements Findings: Directors / Key person

• breach of duty
• incompetent
• lack of integrity
• reckless

Employee

• incompetent

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Sanctions Directors and key person:

• Not to perform any function for any registered person;
• Not to be employed by any registered person; and
• Not to hold any position at all in the business of any

registered person.

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Sanctions Employee:

• Not to be a key or principal person;
• Not to control client assets in the business of any

registered person;

• Not to provide advice to clients of any registered person;

and

• To provide directors or compliance officer with copies of

his written correspondence.

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Consequences:

Loss of job Reputational damage Closure of business

64

Thank you for listening

65

Contact Mark Rawlins

Partner t: 01534 601 750 e: mark.rawlins@collascrill.com

Paul Wilson

Partner t: 01534 601 752 e: paul.wilson@collascrill.com

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Sanction tion Matt tters rs

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Direct legal bits

• 1. The provisions of the European Union Legislation

(Implementation) (Jersey) Law 2014 empower the States to make regulations or the Minister for External Relations to make an order regarding the implementation

• f a sanctions measure.
• 2. EU Legislation (Sanctions) (General Provisions) (Jersey)

Order 2014…..

• 3. For example

a. ……EU Legislation (Sanctions - Ukraine) (Jersey) Order 2014 on 3 December 2014 as subsequently amended and b. ……. EU Legislation (Sanctions - Russia) (Jersey) Order 2014 on 12 December 2014

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19 March 2015

69

Associated legal bits

70

• (e)

determining whether a business relationship

• r transaction, or proposed business relationship or

transaction, IS WITH…

• …. a person connected with a COUNTRY OR

TERRITORY that is subject to MEASURES for purposes connected with the prevention and detection of money laundering,

• SUCH MEASURES being imposed by one or more

countries or sanctioned by the European Union or the United Nations;

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COUNTER TERRORISM SANCTIONS COUNTER NARCOTICS SANCTIONS

INDIVIDUAL

COUNTRY SANCTIONS E.G. IRAN,SYRIA,CUBA

Sancti tions Programs and d Coun untr try there are a number of different sanctions programs. The sanctions can be either comprehensive or selective, using the blocking of assets and trade restrictions to accomplish foreign policy and national security goals.

NON- PROLIFERATION SANCTIONS

TRADE

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Remember sanctions are a moving target…..

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“X12” FEBRUARY X8 JANAURAY “X14” MARCH

74

Client Activity

Product

• r

Service

Country

Key factors to consider

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PROPORTIONATE SYSTEMS AND CONTROLS

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• 1. Institutions should aim to have

PROPORTIONATE SYSTEMS AND CONTROLS in place to reduce the risk

• f a financial sanctions breach occurring.
• 2. How those systems and controls are

formulated will depend on the BUSINESS MODEL, PROFILE and CUSTOMER BASE of each institution.

• 3. Institutions should FOCUS their

resources and systems and controls on assessing where and how their particular business is most likely to breach sanctions.

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Proportionate Systems and Controls

79

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Good:

• 1. Quality and coverage of the BRA.
• 2. Staff awareness and training.
• 3. Screening at the point of customer take-on.
• 4. Screening of transactions.

81

Requiring Further Focus:

• 1. Automated re-screening of customers.
• 2. Senior management understanding of screening

arrangements.

• 3. Coverage of financial sanctions risks in the BRA.
• 4. Screening system user access controls and IT change

governance.

• 5. Staff procedures for discounting potential target

matches.

• 6. Compliance monitoring.

82

Funds & Fines (in the UK)

83

28 April 2014 Invesco Asset Management Ltd and Invesco Fund Managers Ltd

(together, Invesco Perpetual [IP])

Fined £18,643,000

84

Fine for failings relating to -

• Fund Management

and for

• Exposing investors to greater

levels of risk than they had been led to expect.

85

Breaches

1.The FCA found that for some or all of the period May 2008 to November 2012, Invesco Perpetual breached 2.…Principles 3 (Management and control) and 3.…Principle 7 (Communications with Clients) 4.…The FCA’s Collective Investment Scheme sourcebook (COLL).

86

Fu Futu ture re Fa Fails s as well l as Actual Fails

• 1. This case is an example of:
• 2. ….WHERE THE FCA has taken action against a firm on

the basis of risks that investors were exposed to,

• 3. …..AS OPPOSED to only taking action when investors

have suffered actual detriment.

• 4. Such an approach is not only consistent with the FCA’s

consumer protection objective but also with the FCA’s commitment to "EARLY INTERVENTION" in cases where it appears there is a risk that consumers may suffer detriment.

87

FCA Principle 3

88

• 1. Between May 2008 and May 2012 IP failed to:-
• 2. …..to take reasonable care to ensure that the

systems and controls that it put in place around the front office of its fixed income business were sufficient to record trades on a timely basis to enable it to value the funds it managed accurately.

• 3. …..to have adequate controls relating to partially

executed aggregated trades that gave rise to the risk that some funds or investors in those funds could have been favoured over others, and that as a result investors may have suffered losses.

89

IP persistent and repeated failure….

• 1. IP failed to ensure that it PROMPTLY RECORDED

TRADES in its systems placed its investors at an increased risk of loss as:

• 2. ……any decisions made by IPs fund managers based on

the portfolio at that valuation point may have been inappropriate;

• 3. ……compliance checks would have been carried out

using incomplete data; and

• 4. ……units or shares in the funds may not have been

priced correctly.

90

FCA Principle 7

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The FCA found that:

• 1. IP investors were exposed to increased levels of risk through

its use of derivatives and consequent introduction of up to £1 billion of leverage (which represented 5% of net asset value) into its funds.

• 2. Key investor information and simplified prospectuses that

were provided to those who invested in certain IP funds did not provide sufficient information about the risks associated with their investments.

• 3. For example, although the full version of prospectuses

produced by IP referred to the fact that it was permitted to invest in derivatives on behalf of the funds, the shorter versions of these prospectuses which were provided to investors did not mention this.

92

Breach of Principle 7 meant that:

• 1. Investors May not have been fully aware of the risks involved when

investing their money.

• 2. Investors Were exposed to a higher level of risk than they had been

led to expect.

• 3. Investors May have made investment decisions that, if they had

been provided with appropriate information by Invesco Perpetual, they might not have made.

• 4. IP had an unfair advantage over its competitors, as it may have

benefited from the use of additional funds from investors who would not have invested with IP had it made adequate disclosures regarding the risks associated with their investments.

93

COLL 5.2 (General investment powers and limits for UCITS schemes)

COLL 5.2 (General investment powers and limits for UCITS schemes) sets out a number of investment restrictions that must be followed when investing the scheme property of UCITS schemes.

94

• 1. The FCA found that IP had made trades that breached

the investment restrictions set out in COLL 5.2.

• 2. These breaches exposed investors to greater levels of

risk than they had been led to expect and resulted in certain funds being compensated in respect of losses of nearly £5.3 million.

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Closing sing Remark rks s and Summary ry

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