The ban relates to the sale of precipice bonds between January 1998 and June 2003. An FSA investigation found that the firm:
- failed to issue advertisements and financial promotions that were clear, fair and not misleading; material included product endorsements presented as "independent" but which were, in fact, paid for
- failed to carry out satisfactory risk assessments or make suitable recommendations; the risk of the bonds was actively downplayed
- failed to maintain adequate records; particularly of risk assessment meetings and sales records; and
- failed to ensure its staff observed FSA compliance regulations.
The FSA decided that these failings warranted the cancellation of the firm's Part IV permission, which removes David M Aaron Ltd's right to conduct business.
Andrew Procter, FSA Director of Enforcement, said:
"This is one of the most serious cases of mis-selling that the FSA has investigated, and the first time the FSA has banned a firm for mis-selling. The problems within David M Aaron Ltd were systemic and went to the very heart of the way the firm operated.
"Firstly, the promotional material quoted comments and risk ratings from supposedly “independent” panellists who were journalists the firm had paid for their comments. These comments and risk ratings created a misleading impression that the product was either of a low risk, or suitable for a cautious customer.
"Furthermore the firm's uncritical use of the quotes, as endorsing its risk ratings, compounded the misleading description given of the true risk of the precipice bonds. The fact that panellists had been paid for their contributions to marketing material was not disclosed or brought to customers' attention. The statements also included unnecessary references to guaranteed bonds and appeared to implicitly link the product to ones which were guaranteed.
"Finally, David M Aaron Ltd failed to maintain adequate compliance arrangements appropriate to its size and the type of business that it operated. The compliance officer himself regularly advised 200-300 customers which called into question the amount of time that he was able to allocate to compliance matters."
He concluded: "We have been very active in stamping out mis-selling of precipice bonds. The message is clear; firms that do not treat customers fairly are not wanted in this industry."
The family run Independent Financial Adviser firm was founded by Mr David Aaron in 1971. With a mailing list of approximately 160,000, potential customers were targeted through publications promoting a variety of financial products and business was transacted with customers on both an "advisory" and "direct offer" (or "execution only") basis. Between January 1998 and June 2003, it sold more than 53,500 regulated products, of which 14,995 were structured. Approximately 85% of these sales were on a direct offer basis. The FSA believes that the Firm sold at least 7,900 precipice bonds.
Following an industry-wide thematic review of the sale of precipice bonds by the FSA, concerns were identified regarding the suitability of sales at David M Aaron Ltd and, as a result, the firm was visited in March 2003.
On 22 April 2003, following this visit, the FSA wrote to David M Aaron Ltd stating it was not satisfied that all the concerns about the suitability of sales had been allayed. The firm was referred to the FSA's enforcement division and investigators were appointed in June 2003. The FSA issued its preliminary findings to David M Aaron Ltd in November and requested the firm to cease selling precipice bonds while the investigation continued.
Prompted by publicity generated by the FSA's £2m fine on Lloyds TSB for sales of a precipice bond product, from September 2003 David M Aaron Ltd received a substantial number of complaints relating to both its marketing and sales of precipice bonds. Following decisions by the Financial Services Ombudsmen Scheme (FOS), David M Aaron Ltd placed itself into voluntary administration in December. It is now in liquidation.
Andrew Procter said:
"We have ensured that David M Aaron Ltd can never again function as a business and we are continuing to consider the roles of the individuals involved with the firm."
The FSA has also set up a separate division to crack down on mis-selling within advertisements and launched a Financial Promotions Hotline in July this year. Any customer who sees advertisements they believe are unfair, unclear or misleading should call 08457 300 168.
Background
- The full text of the Final Notice, dated 1 September 2004, includes the background to the case, the relevant statutory provisions and the regulatory requirements contravened.
- Any customers wishing to complain should write to the liquidator, KPMG, at; KPMG, 8 Salisbury Square, London, EC4Y 8BB.
- Examples of unclear and misleading financial promotions
Introduction
The firm quoted comments and risk ratings from supposedly “independent” panellists who were journalists the firm had paid for their comments. These comments and risk ratings were even less cautious than the firm’s own, and failed to take appropriate account of the products' fixed terms. The firm's uncritical use of the quotes, as endorsing its risk ratings, compounded the misleading description given of the true risk of the precipice bonds. The fact that panellists had been paid for their contributions to marketing material was not disclosed or brought to customers' attention.
Examples
The financial promotions contained statements which downplayed the risk of the product. These statements were attributed to independent experts:
"In today's stockmarket environment (this) Plan is a much better investment than a tracker fund and has a much lower downside risk."
The covering letter explained that the firm had blacklisted two particular precipice bonds as the risk of the products was too great, implying that the product being promoted was of reduced risk. The promotion contained a statement which provided back-testing information on the product:
"The panellists considered the results of 'back testing'… In each and every case capital would have been returned in full, in addition to the income or growth selected.
"Despite recent stockmarket falls, by adding the average of the three final measurement points over the last three months to calculate the final stock price performances there would have been a 100% capital return in all cases."
This statement was located immediately below the section dealing with the return of capital. In addition, the promotion did not contain a statement that back testing information should not be used for assessing the risk of a product.
In other financial promotion contained statements attributed to independent experts downplaying the risk of the product:
"An excellent income product with good downside capital protection. It is difficult to Money and Investor's Week (sic) find elsewhere such a secure investment offering anything like such a high income."
The loss to capital risk warnings within the promotion were inadequate as they were placed after statements regarding the benefits and upside returns of the product. Furthermore, the generic investment warnings were located on the final page of the promotion.
- The relevant statutory provisions and regulatory rules applied in this case are as follows:
SIB Principle 2 provided that a firm should act with due skill, care and diligence.
The FSA's Principles are set out in the part of the FSA's Handbook entitled Principles for Businesses. They are a general statement of the fundamental obligations of authorised persons under the regulatory system. They derive their authority from the FSA's Rule making powers as set out in the Act and reflect the FSA's regulatory objectives.
FSA Principle 2 provides that a firm must conduct its business with due skill, care and diligence.
FSA Principle 7 provides that a firm must pay due regard to the information needs of its clients and communicate information to them in a way that is clear, fair and not misleading.
Section 45 of the Act provides, among other things, that:
"(1) The Authority may exercise its power under this section in relation to an authorised person if it appears to it that-
(a) he is failing, or is likely to fail, to satisfy the threshold conditions;
(2) The Authority's power under this section is the power to vary a Part IV permission in any of the ways mentioned in section 44(1) or to cancel it."
Paragraph 4 of Schedule 6 to the Act ("Threshold condition 4 (Suitability)") states, among other things, that:
"(1) The resources of the person concerned must, in the opinion of the Authority, be adequate in relation to the regulated activities that he seeks to carry on, or carries on."
Paragraph 5 of Schedule 6 to the Act ("Threshold condition 5 (Adequate resources)") states:
"5. The person concerned must satisfy the Authority that he is a fit and proper person having regard to all the circumstances, including-
(a) his connection with any person;
(b) the nature of any regulated activity that he carries on or seeks to carry on; and
(c) the need to ensure that his affairs are conducted soundly and prudently."
The FSA's regulatory objectives established in section 2(2) of the Act include the protection of consumers and maintaining confidence in the financial system.
PIA Rule 1.3.1(2) provided that a PIA member must obey the PIA Rules, which included the Adopted FIMBRA Rules.
PIA Rule 1.3.1(6) provided that a PIA member which failed to comply with, inter alia, the PIA Rules or any of the SIB Principles was liable to disciplinary action.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection of consumers; and fighting financial crime.
- The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.
