Alison Moran, the compliance officer at Catalyst, has been fined £20,000 for her part in the non-compliant selling of structured products.

Alison Moran, the compliance officer at Catalyst, has been fined
£20,000 for her part in the non-compliant selling of structured
products.

She held controlled function 10 between 3 August 2006 and 7
October 2011. She was fined under s66 Financial Services and
Markets Act 2000 (as amended), which deals with the Financial Conduct Authority’s disciplinary powers, and under APER Statement
of Principle 6, which states that an approved person performing
an accountable significant-influence function must exercise
due skill, care and diligence in managing the business of the
firm for which he is responsible in his or her accountable function.
Catalyst, for its part, transgressed against principle 1 (a firm must
conduct its business with integrity) and principle 7 (a firm must
pay due regard to the information needs of its clients, and communicate
information to them in a way which is clear, fair and not
misleading). APER is the Code of Practice for Approved Persons.

Catalyst was the primary distributor of ARM bonds (structured
products issued by a Luxembourg entity, ARM) in the UK between
2007 and 2009. The underlying assets of such bonds were senior
life settlements purchased in the United States. Catalyst promoted
and distributed ARM bonds to investment intermediaries and independent
financial advisers in the UK, who in turn promoted and sold them to private investors. Ms Moran turned a blind eye to
licensing problems.

Although the Financial Conduct Authority’s recent censure of Catalyst Investment Group Limited seems to be an open-and-shut case
of mis-selling, there is more to the final notice than meets the eye,
perhaps because of bad drafting. Catalyst’s case, which it made to the
FCA, was that it was driven out of business solely by regulatory action.
The FCA’s argument against this seems tenuous in places where
it ought not to be.

The FCA’s reasons for merely censuring the British company are
twofold: the first is to set the scene for a full-scale banning and fining
of the principals, namely Timothy Roberts, the chief executive,
and Andrew Wilkins, a former director; the second is because Catalyst’s
monetary problems preclude the regulator from imposing a
fine. Catalyst, according to para 4.26 of the final notice, is in deep
financial trouble: “The position of investors in unclear: the pending
investors...risk losing some or all of their investment, pending a
decision on legal ownership of the funds. None of the investors is
currently receiving interest.”

BONDS IN LUXEMBOURG, INVESTORS IN THE UK

Catalyst was the primary UK distributor of the ARM Capital Growth
Bond – issued by ARM, a securitisation company, in Luxembourg –
and the ARM Assured Income Plan. The bonds were listed on the Irish
Stock Exchange until November 2010. These products are a form of
‘traded life policy investment’ based on life insurance policies purchased
in the United States. Securitisation firms typically purchase
these policies from policyholders for a lump sum and take on the
burden of paying them their regular premium. When an original policyholder
dies, the firm receives the insurance payment.

All was going well at ARM until its internal compliance department
‘formed a legal opinion’ on 19 November 2007 that it had been issuing
bonds in a non-compliant way. The FCA, at para 2.3, states this in
the vaguest (and least grammatical) way possible, commenting that
ARM thought that it needed a licence from the CSSF, Luxembourg’s
regulator, to continue to issue its bonds “as inter alia it [whatever
‘it’ is] fell within the CSSF’s interpretation of ‘issuing on a continuous
basis.’ With these mysterious words hanging in the air, the FCA mentions
that Catalyst knew of this opinion at the time ARM formed it
and then turns to ARM’s application for a licence in July 2009.

The FCA takes up the subject of ‘continuous issuance’ again at para
4.15. Luxembourg law, it says, provides that securitisation undertakings
which issue securities to the public on a continuous basis must
be licensed by the Luxembourg financial regulator, the CSSF. Another
piece of the jigsaw pops out at para 4.16 with ARM’s opinion, formed
on 19 November 2007, that it thought it needed a licence because it
because it issued bonds more than three times a year – one wonders,
but one is never told, whether this might have made it an ‘issuer on
a continuous basis’ – and that this might make it a ‘securitisation undertaking’
in the eyes of the CSSF, with the implication that the CSSF’s
opinion on this was important in some way.

In the footnotes there are more tantalysing clues about the relationship
between the CSSF and the law. Here, in a message to the
FCA, (Annex B 1.1d) Catalyst states that, in its own eyes, “the position under Luxembourg law is unresolved as to whether ARM actually
required a licence – if so this was only because the CSSF had
changed the way it chose to interpret the 2004 Securitisation Law.”
This throws up several questions. Why would anyone care what the
CSSF thinks? (According to the FCA, it is not even ARM’s regulator – at
4.8 it states baldly: “ARM is not regulated.”) What powers does the
CSSF have to interpret statutes? Is this not the job of a Luxembourg
judge? Does the CSSF have any powers over securities firms and
bond-issuers other than the power to distribute licences for various
things? What are the Luxembourg courts’ view of that doubtless important
but unexplained phrase, ‘issuing on a continuous basis’? The
document does not bother to answer even one of these questions.

OPENNESS ABOUT THE REGULATORY SITUATION

The FCA states that every firm in Catalyst’s position is obliged under
APER principles 1 and 7 (conducting business with integrity and
meeting the information needs of clients) to point out anything that
might be bad or unfavourable to investors about the bond-issuer’s
regulatory position. In this case the ‘regulatory position’ – a phrase it
repeats over and over – was that ARM did not have a licence from the
CSSF, but considered that it required one. We can extrapolate from
this that, in the FCA’s eyes, if any firm in the supply chain believes that
regulatory trouble might affect business, the firm that deals with the
high-net-worth investors is obliged to tell them that.

DICING WITH DEATH: THE LUXEMBOURG LICENCE APPLICATION PROCESS

The FCA makes a disconcerting observation about the CSSF licenceissuing
process at para 2.4: “One consequence of the refusal of a licence
under Luxembourg law is that the issuer of the bonds must
be liquidated.” In other words, any Luxembourg securities firm that
wants to issue bonds is taking its life in its hands every time it asks the
CSSF for permission to do so – a very serious deterrent to business of
this kind. CM asked the CSSF to comment on this, but had received
no reply 24 hours later.

Catalyst clearly transgressed against APER principle 1 (“a firm must
conduct its business with integrity”) by failing to point out the fact
that ARM thought that it was staring liquidation in the face, something
that ARM told it as soon as it had formed the opinion itself
on 19 November 2007. Much later, on 20 November 2009, Catalyst
knew that ARM would not issue any more bonds, at least until it had
a licence, but also said nothing. Because of this and its secrecy about
the aforementioned opinion it transgressed against principle 7 (paying
due regard to the information needs of clients and passing information
to them in a clear, fair and not misleading way) throughout
the period of the censure.

Catalyst sent letters to independent financial advisers in December
2009 and to investors in March 2010. These were, indeed, misleading
about ARM’s predicament. They intimated that the Luxembourg
firm’s application for a licence was voluntary and steered clear of any
mention of liquidation.

THE IRISH ESCAPE-HATCH THAT NEVER OPENED

There were also plans afoot from early 2010 for ARM to relocate to
Ireland. Here it would not need clearance from the regulator to operate,
although regulatory approval would have been necessary for the prospectus and other odds and ends. A shell company was set up for
this purpose but the crossover from Luxembourg never happened.
In the letter to investors of March 2010 (para 4.31) Catalyst told investors
that a move to Ireland would be ‘advantageous’ if it could
not be ‘regulated in Luxembourg.’ The FCA thought that this was a
disingenuous understatement.

In making its representation to the FCA, Catalyst wrote: “Catalyst
reasonably believed at all times that either the CSSF licence would
be granted or the re-domicile to Ireland would succeed, but believed
that knowledge of those difficulties could cause a run on
the bonds by consumers.” This may have been so – the FCA paper
is unclear about what happened to the Irish escape plan and never
states that it was not viable. It does not even state that ARM
was right to believe that it needed a licence from the Luxembourg
regulator.

CAUSING UNDUE ALARM TO FUTURE VICTIMS

Catalyst’s proposition that its decision to keep information away
from the investors was legitimate, however, does seem far-fetched
as principles 1 and 7 make it obvious that investors must be put in
full possession of all the material facts. In another representation
in Annex B 1.5a, the FCA remembers that Catalyst made the rather
rum suggestion that a disclosure about the CSSF application was best
avoided because it might cause “undue alarm to...pending investors,”
a phrase that sounds remarkably close to an admission of mis-selling.

It also, however, refused to do so to avoid causing alarm to existing
investors and causing a run on the ARM bonds. Here it was on
firmer ground. The FCA itself states at Annex B 1.9b: “Catalyst was
never required by the Authority (and ARM was never required by the
CSSF) to write to investors regarding CSSF authorisation of ARM. This
was clearly because nothing positive would have been achieved by
doing so and there was a serious risk of precipitating a run on the
bonds if that explicit message had been given.” Nonetheless, it is a
different story when the FCA evaluates Catalyst’s decision to keep
quiet to the investors at 1.10b by saying “...the Supervisory Notice
is not relevant to the case against Catalyst. Further, the prospect of
a run on the bonds would not have been a legitimate reason to issue
misleading promotions.”

Other holes exist in the document. For one thing, at paragraph 2.10
the FCA states that “any loss is currently unknown.” In other words, the
FCA has not tracked down even one loss. Despite the general soundness
of its conclusion, the tricky puzzles and blind alleyways that the
Catalyst censure document presents to the reader are noticeable.

THE FCA’S INTERPRETATION OF RECKLESSNESS

In previous final notices the FCA and its predecessor-body have
struggled with the definition of ‘recklessness’, a word that often justifies
a fine. In the final notice the regulator often states that Catalyst’s
continuing promotion of bonds throughout the long crisis showed “a
reckless disregard for the interests of investors.” Its decision whether
a firm acts recklessly (Annex A 3.8) rests on “giving consideration to
factors such as whether the person has given no apparent consideration
to the consequences of the behaviour that constitutes the
breach.” Expressing itself differently, it states at Annex B 1.6b: “Catalyst
acted recklessly in closing its mind to the risks to investors when
sending the letter.” It imposes even heavier penalties if it thinks that
the behaviour it is punishing was deliberate.

A GENEROUS PENALTY...IN PRINCIPLE

The award of penalties, in view of Catalyst’s inability to pay, are
largely academic. The FCA does, however, say that since most of the
conduct it is censuring occurred before the new and more stringent
penalty regime began operating on 5 March 2010, it would only
have charged Catalyst a fine of £450,000 in accordance with the
old regime. This might have repercussions for other persons whose
misdeeds straddle the two periods and who are able to pay.

DIRECTORS’ DEALINGS

Following hard on the heels of the censure for the firm came the FCA’s
decision to banish Roberts and Wilkins from exercising ‘functions of significant
influence’, in Wilkins’ case under s56 FSMA. It stated that Roberts
breached statement of principle 1 (integrity) and 6 (due skill, care and
diligence) and fined him £450,000, while saying that Wilkins breached
APER statement 6 and fining him £100,000. Roberts and Wilkins have
referred their cases to the Upper Tribunal, which will reconsider the case
and may uphold, vary or cancel the FCA’s decision.