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Out-Law News 2 min. read

Tribunal upholds FCA bans in Keydata case


Two former senior directors at the now-defunct investment company Keydata Investment Services have failed in their bids to overturn bans preventing them from performing regulated financial services roles. A decision to fine them has been upheld.

The ruling, by the tax and chancery chamber of the Upper Tribunal, concerned an appeal brought by former Keydata chief executive Stewart Ford and the company's former sales director Mark Owen against decisions by the Financial Conduct Authority (FCA) in 2015 to fine and issue prohibition orders against the men in connection with the "unclear, incorrect and misleading" sales of so-called 'death bonds'.

The FCA fined Ford £75 million and Owen £4m after deeming the men had "failed to act with integrity" over the sale of 'death bonds' to retail investors and had misled regulators about the performance of the investments. Peter Johnson, Keydata's former compliance officer, was also subject to FCA action – he was fined £200,000 and also issued with a prohibition order – but he withdrew his appeal before the Upper Tribunal.

Between 2005 and 2009 Keydata sold over £475m worth of retail investments via tax-advantaged individual savings accounts (ISAs). These products were backed by the firm's own investments in bonds issued by two special purpose vehicles in Luxembourg, which in turn had invested in TLPIs. These products were sold as eligible for ISA status, when in fact they were not.

In its ruling, the Upper Tribunal found Ford and Owen had breached regulatory principles, set out in the FCA's Handbook, which apply to 'approved persons'. Specifically, it held that the men breached the requirement to act with integrity and to deal with the regulators in an open and constructive manner.

Increasing Ford's fine to £76m, the Upper Tribunal held that the record breaking fine imposed on Ford "was justified in the circumstances", acknowledging that "it is a very substantial penalty". However, it said the amount "has been determined largely by reference to the fees extracted by Mr Ford ... reflecting the seriousness of Mr Ford’s misconduct and the need for a true penal element to be included within the penalty". The Upper Tribunal found that "the consumer detriment is laid squarely at Mr Ford’s door".  

The Upper Tribunal reduced Owen's fine slightly, from £4m to just under £3.3m. It said it regarded "Mr Ford's misconduct to be materially more serious than that of Mr Owen" and said that "it would be disproportionate, in light of the punitive element of the penalty proposed for Mr Ford" for the punitive element of the penalty for Owen "to be as high as £1.4 million". It reduced that element of his penalty to £700,000.

Given the length of its judgment, the Upper Tribunal has given Ford and Owen 28 days, instead of the usual 14, to consider making an application for permission to appeal. After to the ruling Ford issued a statement setting out his "fundamental belief" that "justice has not been served" by the Upper Tribunal's decision.

"The Upper Tribunal decision demonstrates the wide punitive powers of the FCA when the 'approved person' principles are breached, and also indicates how the Upper Tribunal can also exercise its discretion to increase or decrease any penalty imposed by the FCA," said Tom McDonnell of Pinsent Masons, the law firm behind Out-Law.com, who specialises in regulatory compliance in financial services.

The collapse of Keydata in 2009 led to significant changes in the way in which compensation paid to investors when financial firms fail is funded. The FCA also since banned the sale of traded life policy investments (TLPIs), known as death bonds, and other unregulated investments to ordinary retail investors.

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