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The Financial Services Authority (FSA) has publicly censured Gracechurch Investments Limited (Gracechurch) for misconduct, including using pressure-selling tactics with customers to invest in the shares of small companies, resulting in client losses of at least £2 million. The FSA would have fined Gracechurch £1.5 million had the firm not been in liquidation.
The FSA has decided to fine Sam Thomas Kenny, the former chief executive of Gracechurch, £450,000 and prohibit him from holding a position in the financial services industry. Kenny has referred the matter to the Upper Tribunal where the FSA and Kenny will be able to present their case. The Tribunal will then determine the appropriate action for the FSA to take in relation to Kenny, which may be to uphold, vary or cancel the FSA’s decision.
Subject to the Tribunal’s decision, the FSA has found that Kenny personally pressurised, or misrepresented material facts to clients and in his role as chief executive Kenny trained and encouraged his staff to pressure clients.
Gracechurch’s brokers used pressure sales tactics to coerce its clients to invest in risky small company stocks which were listed on AIM and PLUS or not listed at all. The firm misrepresented, for instance, the financial performance of stocks both orally and in writing. Brokers ignored requests for further information and protests that clients had no funds to invest. In at least one case a broker claimed that the recommendation was based on inside information.
Between 1 April 2008 and 4 November 2009, Gracechurch advised approximately 340 clients to buy about £4 million of small company stocks. Gracechurch’s clients would have lost 72% of the amount they had invested in eight of the top ten stocks (based on financial volume) sold by the firm if they had held those small-cap stocks until 12 October 2011.
The firm also provided the FSA with false dates for internal committee meetings and deliberately withheld a recording of a non-compliant advised sales call requested by the FSA. Finally, the firm knowingly employed someone in a senior position who was not approved by the FSA and who was linked to pressure-selling tactics.
The FSA has also prohibited former Gracechurch compliance officer Carl Peter Davey from working in the financial services industry. The FSA would have fined Davey £175,000 if it were not for the serious financial hardship that such a fine would cause him.
As compliance officer, Davey was also involved in the deliberate withholding of the non-compliant advised sales call requested by the FSA. Despite Davey’s efforts to improve the firm’s systems and controls, the monitoring of advised calls by the firm’s brokers was inadequate and brokers were regularly making misrepresentations about stocks to clients.
Tracey McDermott, director of enforcement and financial crime at the FSA, said:
“High pressure sales tactics and systematic misrepresentation to clients are wholly unacceptable practices. The FSA will not tolerate firms coercing clients into buying financial products or services that aren’t suitable for them.
“Senior management of stockbroking firms should be clear that the buck will stop with them.”
Background
- The Final Notices for Gracechurch Investments Limited and Carl Peter Daveyand the Decision Notice for Sam Thomas Kenny.
- The FSA has previously taken action against other firms for pressure-selling of shares: Hoodless Brennan, Square Mile Securities, Wills & Co Stockbrokers (October 2007 and February 2010), Mansion House Securities, Pacific Continental Securities, Falcon Securities (UIK) Limited, Direct Sharedeal, andHythe Securities.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.
- The FSA will be replaced by the Financial Conduct Authority and Prudential Regulation Authority in 2013 as required by the Financial Services Act 2012.
