UK: Senior management in FSA firing line

One of the Financial Services Authority's (FSA) current priorities is to change individuals' behaviour through taking enforcement action against them and publicising this to provide a clear example of what is not acceptable.

FSA believes that holding senior management to account is key to achieving the desired corporate culture, and its stated policy is to consider taking such action where a senior manager is personally culpable or where his behaviour falls beneath an acceptable standard.

Two recent cases, where the individuals accepted the penalty without referring the matter to the Tribunal, have highlighted how FSA will punish senior management when they are at fault for the shortcomings of the firms they manage: Ram Melwani was fined for his firm's failures over money laundering, while Idris Nagaty was prohibited for his firm's compliance failings.

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One of the Financial Services Authority's (FSA) current priorities is to change individuals' behaviour through taking enforcement action against them and publicising this to provide a clear example of what is not acceptable. FSA believes that holding senior management to account is key to achieving the desired corporate culture, and its stated policy is to consider taking such action where a senior manager is personally culpable or where his behaviour falls beneath an acceptable standard.

Two recent cases, where the individuals accepted the penalty without referring the matter to the Tribunal, have highlighted how FSA will punish senior management when they are at fault for the shortcomings of the firms they manage: Ram Melwani was fined for his firm's failures over money laundering, while Idris Nagaty was prohibited for his firm's compliance failings.

Ram Melwani is the managing director ("MD") of Investment Services UK Limited ("ISUK"), a small FSA-regulated bond broker with an offshore, corporate client base. Behind these corporate entities sit non-resident, high net worth individuals, whose identities firms must obtain and record for anti-money laundering purposes. ISUK arranged banking/trading facilities in the UK for its clients but subdivided the accounts of some, thereby effectively providing anonymous accounts without the bank's knowledge.

As MD, Melwani was knowingly concerned in ISUK's breaches of the FSA Principles and Money Laundering Sourcebook, and so acted without due skill, care and diligence. FSA noted in particular that he:

• put in place the arrangements that allowed non-resident, high net worth individuals access to banking facilities in the UK without disclosing their existence to the bank;

• verified neither the identity of the beneficial owners nor the source of the funds;

• signed all the Introduction Certificates presented by ISUK to the bank without checking whether ISUK could evidence the representations within them; and

• relied on the bank's account opening procedures, rather than ensuring that ISUK had its own in place, thereby failing to obtain and record sufficient evidence of ISUK's client identities.

FSA fined Ram Melwani personally £30,000 bearing in mind the seriousness of the misconduct, the risks posed and how deliberate the breach was. However, the penalty could have been more severe had Melwani and ISUK not mitigated the impact of the breaches. ISUK took steps to review its procedures and ensure future compliance, and cooperated fully with FSA.

Nagaty was a director of a firm that provided financial advice and in particular the selling of Structured Capital at Risk Products ("SCARPs"), also known as "precipice bonds". He personally held the key controlled functions of – and hence the personal responsibilities associated with being – director, apportionment and oversight officer, compliance oversight officer, and money laundering reporting officer, as well as performing a managerial role.

FSA considers that it should have been obvious to Nagaty that he was unable to carry out all of his duties properly, particularly in light of the wide geographical spread of the firm's advisers. He fell short of the standards set by FSA's Statement of Principles for approved persons by:

not scrutinising advised sales of SCARPs by his firm;

not visiting advisers in their offices and allowing them to select files for his review;

not investigating adequately the "own account" activities of one of the firm's advisers;

failing to implement comprehensive complaints handling procedures and to keep clear, accurate records; and

not providing the firm with an internal manual that met FSA standards, which led to a transfer of the burden of dealing with complaints against the firm to the Financial Ombudsman Service and customers themselves.

Therefore, as FSA put it, Nagaty was, "not of sufficient competence and capability to be a fit and proper person to perform any controlled function involving the exercise of significant influence over any person in relation to a regulated activity carried on by an authorised person".

FSA made a two-year prohibition order against Nagaty occupying a senior management position in a firm carrying on regulated activities.

It is surprising that FSA so rarely takes action against firms' senior management, and then predominantly against the management of small rather than large firms. Perhaps this is because it is easier to attribute misconduct to an individual in a small firm, as in these two cases. The message, however, is clear: senior management is ultimately responsible for ensuring firms meet FSA standards, and these two cases show how FSA can hold an individual senior manager liable for the failings of the firm where they are his responsibility.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 30/11/2005.