UK Financial Services Regulators Take Action for Tax Misconduct

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On 18 November 2019, the UK’s prudential and conduct financial regulators, in a joint investigation, decided to impose a ban and fine of over £150,000 on Stuart Forsyth, the former CEO of Scottish mutual insurer, SBMIA, for misconduct involving his liability to tax. Decision Notices issued by the Prudential Regulation Authority (PRA) (here) and Financial Conduct Authority (FCA) (here) have concluded that Mr Forsyth, an approved person, was not fit and proper and that he breached Statement of Principle 1 (Integrity) of the Statements of Principle of Approved Persons and its successor provision in the Conduct Rules. As misconduct over the payment of tax lies at the heart of this matter and is the primary responsibility of HM Revenue & Customs (HMRC), it might be asked if the PRA and FCA are now more disposed to take action against a wider range of misconduct? It should be noted here that these allegations are in dispute and the matter is with the Upper Tribunal for a fresh re-hearing.

Tax Arrangements

In 2003, Mr Forsyth arranged for SBMIA to employ his wife to carry out some administrative tasks for him and provide occasional hospitality services, for which she received a proportion of his salary. The effect was to reduce the cost of national insurance for SBMIA and Mr Forsyth’s own liability to national insurance and income tax. Both regulators accept that Mrs Forsyth carried out work and that the amount was “not obviously unreasonable for the work she was undertaking.”

However after 2010 Mr Forsyth began to split his bonus with his wife and, in particular, for the three years from 2013 to 2015, he arranged for an increased proportion of his salary to be paid to his wife (e.g. in 2015 of a salary of £180,000, Mrs Forsyth received £40,000). The FCA says this level of salary was not reasonable for the work she undertook; that Mr Forsyth knew this and his motivation was to reduce his tax liability. Moreover, Mr Forsyth was found to have engaged in the “falsification” of minutes, and have misled both SBMIA’s board and the PRA. These secondary aspects arose out of an auditor’s report to the board, and a PRA supervisory visit, when Mr Forsyth attempted to show to the PRA that the board and its remuneration committee knew about and had agreed to the salary arrangements.

Regulatory Rules

At its heart this matter illustrates the wide scope of the regulatory rules governing misconduct. The Conduct Rules extend to behaviour concerning the performance of functions relating to the carrying on activities (whether or not regulated) by an authorised firm. Although these rules do not apply to an individual’s actions in their private life, misconduct outside the office can be relevant to a person’s fitness and propriety (e.g. honesty and integrity) to work in the financial sector. The greater the distance from an individual’s responsibilities at work, the more difficult it can be to apply these standards.

Misconduct Not Involving Financial Services

The Forsyth case, in so far it concerns misconduct over tax, does not arise directly from the provision of financial services, (e.g. mis-selling); rather it involves the payment of an excessive proportion of an individual’s salary to his wife for limited work to save tax.

Another high profile case on misconduct, not related to the provision of financial services, is the FCA’s 2014 enforcement case against Jonathan Burrows (here) who held a CF30 Customer function at an investment manager. This individual deliberately and knowingly failed to buy train tickets for his daily commute. Although this transpired entirely outside the workplace, given its seriousness it was judged to go to his fitness and propriety to work in financial services. The question arises whether, with the action against Mr Forsyth, we are seeing an increasing appetite by regulators to take action over a wider range of conduct, or if it is simply a continuation of their policing standards of fitness and propriety. One might think that HMRC would normally be the most appropriate authority to act in this case – particularly as the PRA and FCA required disgorgement of the tax saved – and it is possible it is taking steps. However, the fact that the alleged tax misconduct spilt over into misleading SBMIA’s board and the PRA is likely to have tipped the balance in favour of the financial services regulators taking action – although one asks whether both needed to do so?

Non-financial Misconduct

In this context, it should also be said that regulators are paying increasing attention to non-financial misconduct, which does not concern regulated activity but, for example, bullying and sexual harassment. Speeches by Chris Woolard (here) and other FCA leaders have flagged up the importance of non-financial misconduct to a person’s character. It is said that: “non-financial misconduct is misconduct, plain and simple.”

Increasing Regulatory Scrutiny

In December 2019, the Senior Managers & Certification Regime will be extended to most financial services business. With an increased emphasis on individual accountability, those employed in the sector should know that the chances of being held to account for behaviour outside of their strict duties are growing. By doing so regulators hope to improve culture within financial services and thereby improve customer outcomes.

Mark Simpson is a partner in Baker McKenzie's Financial Services Group in London, specializing in advising financial institutions on regulatory and compliance matters.
Philip Annett is a partner with the Financial Services Regulatory team in Baker McKenzie's London office. He has an in-depth knowledge of working with the UK regulators, having previously been a senior lawyer in the Enforcement Division at the Financial Conduct Authority (FCA), where he led some of the regulator's highest-profile enforcement cases, and was recently seconded to the Bribery and Corruption Division at the Serious Fraud Office.
Richard Powell is a Knowledge Lawyer within Baker McKenzie's global financial services group where he is responsible for supporting the group's legal and technical knowledge.