Woodford (a prohibition and a fine) and on the investment management firm he founded (a fine).  Both Mr Woodford and the firm have referred the decisions to the Upper Tribunal.  Key takeaways are set out below but for more details see our Notice in a Nutshell.

Although the decisions are made in the context of investment management, they have broader lessons for internal governance and dealing with emerging issues.

In terms of practical steps for firms and senior managers:

  1. Compliance and risk are first line issues: The decision underscores the responsibility that senior managers have to inform themselves and take proactive steps to manage risks in an area of the business for which they are responsible.  Those involved in the first line cannot simply leave such matters to risk or compliance – as the FCA commented: “a responsible professional should not disregard risk because he does not consider it to be part of his role”.  In particular, the FCA will not tolerate a ‘pick and choose’ approach to compliance where senior managers are only willing to challenge aspects of compliance they may not like whilst taking advantage of inadequate controls that might suit them.  The senior management team has a responsibility to ensure that the internal policies and controls are adequate rather than accepting them “in an unquestioning fashion”. It also illustrates the need for senior managers to work together with risk and compliance functions, other relevant parties including advisers and service providers to achieve the right balance in terms of managing the risks whilst allowing opportunities for growth.  
  2. Growth must be pursued with appropriate skill and care:  Any business involved in activity that could give rise to harm to retail investors or consumers more broadly should factor in the potentially severe consequences that may arise from failures to act with appropriate skill, care and diligence and within appropriate limits and controls.  A key reason for the proposed uplifts to the fines in these cases (and reflected in the scope of the proposed prohibition) is the losses suffered by retail investors following the suspension of the fund.  The FCA regards such investors as more vulnerable than other investors and considers that the scale of the losses increases the importance of deterring others managing big, high-profile funds with large numbers of retail investors from taking similar risks.  This has led them to propose increasing the firm’s penalty from around £5 million (based on 15% of the firm’s relevant revenue) to £40 million and doubling Mr Woodford’s.  This is a stark reminder that the FCA remains serious about deterring misconduct in financial services, even where it involves negligence rather than dishonesty, particularly in the context of potential harm to consumers. Firms pursuing growth strategies need to ensure that this is achieved with the appropriate degree of skill and care.
  3. Contractual terms may give rise to regulatory exposure: Part of the case made by the firm and Mr Woodford involved seeking to absolve themselves from regulatory responsibility for compliance with FCA rules on the basis that the firm was not within scope of relevant FCA rules (which applied to a third party entity acting as the firm’s Authorised Corporate Director (ACD).  However, the FCA relied on contractual provisions between the firm and its ACD which included obligations on the firm to comply with rules. The FCA considered these were of fundamental importance in assessing compliance with the requirement to act with due skill and care.  
  4. Dominant individuals and heeding red flags: This is another case involving a firm founded by a senior individual who was “the dominant director and majority shareholder”.  He was apparently “more bullish than consensus” on the prospects of the UK economy following the Brexit vote in 2016 and continued to pursue an investment strategy in the face of worsening performance and numerous warning signs. The FCA comments that the relationship between the firm and its ACD was “clearly fractious” with the ACD seeking to express concerns and impose controls but frequently being met with “intransigence or obstinacy” and its warnings being ignored.  Acting with skill, care and diligence involves heeding warnings from others and reacting appropriately to adverse developments.  The FCA comments that one of the reasons for the proposed prohibition is that Mr Woodford continues to declare publicly in the media that he has done nothing wrong which is relevant to consideration of his fitness and propriety.   

If you would like any more information on the issues raised in this blog please do not hesitate to contact the author. For further knowledge resources in this area, please see our dedicated Financial services interventions and investigations hub.