I previously wrote an article entitled It’s Just Human Nature, with examples I had come across of advisers who had decided it was easier to fast-track any cases they had erred on, by adding their own embellishments, rather than going back to see a client, or contacting the Compliance team, to correct any mistakes.
I now work for a provider of regulatory information and part of my role is to review announcements from regulators around the world, on enforcement action taken against firms and advisers. These highlight similarities between the problems that regulatory regimes of different countries encounter, and the commonality of some of the less than appropriate actions by individuals.
These cases generally relate to activities undertaken as part of an adviser’s role, or at the firm level, in relation to clients, whether this be related to administrative errors, or more serious issues such as dishonesty, forgery, lying, fraud or theft. Normally, such cases come from the various countries across the globe where their regulatory regimes are still developing.
Based upon discussions held with the individual and an assessment of the evidence, the regulator concluded the actions that had led to the criminal conviction evidenced dishonesty, and that this was consistent with a lack of integrity
However, I came across a case recently from an authority with a well-developed regulatory regime that piqued my interest. This was because it came from a different angle, with certain actions in an individual’s private life being the source of concern, rather than those in the work environment. The reaction of relevant regulator was interesting, and matched the actions that I believe that the FCA would also have taken in the UK.
Background
The case concerned an individual who held the functions of Head of Compliance and Money Laundering Reporting Officer, and as a Permitted Person, licensed to undertake certain investment business for clients.
The regulatory issues that were identified did not relate to any of these roles directly but, outside of their work environment, they were found guilty of a criminal offence of perverting the course of public justice, which was deemed to involve dishonesty.
The individual concerned had been going through contested divorce proceedings, which can be both stressful and emotional, regardless how much the parties might agree. However, the individual’s solution to a monetary issue was, during the maintenance proceedings as part of the divorce, to deliberately alter three separate estate agent property valuations for the family home, reducing the values provided. They had then referred to those altered figures, in sworn evidence, knowing those altered valuations would be used in those proceedings, thereby misleading the Court.
When the changes the individual had made were challenged in Court, their actions were exposed, and the individual was subsequently charged. In the later trial they then admitted their guilt, which resulted in the Court sentencing them to spend a number of weeks in jail.
Investigation
This led to the relevant regulator beginning an investigation into the circumstances of the case. Based upon discussions held with the individual and an assessment of the evidence, the regulator concluded the actions that had led to the criminal conviction evidenced dishonesty, and that this was consistent with a lack of integrity.
The regulator therefore prohibited the individual from performing any controlled functions and/or key person roles, and from performing any controlled function in relation to any regulated activity. Also issuing them with a prohibition from being a member of the governing body of any scheme.
Dishonesty, forgery and lying to a Court isn’t a good record for anyone involved in providing advice, let alone for a Head of Compliance, or a person acting as a Money Laundering Reporting Officer. However, these were things that had occurred in the individual’s private life, not in their work environment, so should the relevant regulator have taken such an approach to what was, in fact, a private matter?
I suspect that the answer from the regulators point of view would potentially be a resounding Yes because who is to say that having been successful in being dishonest with the Court in a private matter, there may not be a temptation to try to bend the rules in their work environment?
However, there is a psychological premise that suggests it is possible for individuals to have different moral codes for distinct parts of their lives, This individual might therefore have had very different moral scruples in their working life, faced with the demands of those roles, than were shown in their personal life in these divorce proceedings. But if you were a regulator, would you take the chance?
Ramifications
The irony is that through what might have been simply a private error of judgement to save money on maintenance payments, the individual involved had lost their livelihood, had been found guilty of a crime, and spent time in prison. There would also have been repercussions in their private life as, to use a hackneyed phrase, they would have found out who their loyal friends were.
As for the future, this individual will have to declare this when seeking future employment, and their previous firm would have to include the details in the references they provide, for roles inside or outside financial services. This means the effects of their error of judgement could last many years.
Training & Competence Issues
There are T&C and Compliance issues with such cases, not just because some firms require either the T&C or the Compliance teams to provide input to reference requests for previous employees, to confirm their integrity.
Another T&C specific issue is that, if someone with such a conviction came back to a role where they were providing advice in the future, how should a T&C Supervisor document their assessment of the risks posed by the individual in their client facing work? In addition, how should they demonstrate proportionality to a regulator?
However, both observations fall into the adage of shutting the stable door once the horse has bolted. The more immediate question is, how much effort should a T&C supervisor put into ensuring that those they have under their wing understand the pitfalls and penalties associated with the judgements they make, and the actions they take, both inside and outside of a work environment.
This individual undertook a course of action that led a regulator to question their overall integrity, in view of the positions they held, but what other forms of offence could blight a promising career?
Every edition of the tabloids can provide stories of alcohol fuelled events, road rage and neighbour disputes in people’s private lives that have escalated to a police intervention, and/or to criminal proceedings that might, in turn, affect someone’s working life, if they have a criminal record. Many of these would also have been a result of the individuals making emotional, rather than rational decisions, at a time of stress.
In terms of responsibility, while T&C Supervisors are not always the line manager of those that they supervise, where this is the case, they should collaborate with the relevant manager to ensure that they are both aware of any potential issues, inside or outside of work, so that they can be adequately managed. This includes T&C Supervisors asking relevant questions as part of their 1 to 1 meetings with supervisors, to ensure that there are no problems that need to be addressed.
In short, T&C Supervisors are part of the in-house prevention mechanism, like an employee’s line manager, if these roles are separate. Their documentation of 1 to 1’s, especially relating to employee responses to questions about issues they are encountering either in or outside of work, is important evidence. This is not only to evidence the level of care provided for each employee for which they are responsible, but because it can also function as a form of defence for the firm, if any subsequent action proves necessary.
