The FCA has fined Arian Financial LLP (Arian) £288,962.53 in respect of deficiencies in its systems and controls against financial crime. However, the Final Notice follows an Upper Tribunal judgment in which the proposed fine, as set out in the Decision Notice, was reduced from £744,745. The judgment is considered further below.
Background
Arian acted as an interdealer broker and was introduced to and onboarded 166 clients, on whose behalf it executed high volumes of OTC equity trades. The purpose of that trading was to enable a group of companies to make withholding tax reclaims from the Danish and Belgian tax authorities. The reclaims led to those authorities making payments of almost £900 million. The FCA considered various factors to be suggestive of sophisticated financial crime. Accordingly, the Decision Notice found that: a) in breach of Principle 3 Arian had inadequate systems and controls to identify and mitigate the risk of being used to facilitate fraudulent trading and money laundering in relation to business introduced by four authorised entities (referred to as the 'Solo Entities'); and b) in breach of Principle 2, Arian did not exercise due skill, care and diligence in applying its anti-money laundering policies and procedures, and failed properly to assess, monitor and mitigate the risk of financial crime in relation to the Solo Entities.
Arian did not dispute the breaches of Principles 2 and 3, but contested the amount of the financial penalty and referred the Decision Notice to the Upper Tribunal on the basis that the FCA failed to apply DEPP 6.2 of the FCA Handbook or its previous decisions, and overstated the seriousness of the breaches committed by Arian.
In its judgment, the Upper Tribunal disagreed with the FCA's application of Step 1 (disgorgement), and Step 4 (adjustment for deterrence).
Disgorgement
Arian contended that the FCA had incorrectly failed to deduct commission payments to a third party company, Hopa Financial Ltd (which had been incorporated for the purpose of receiving commissions owed to one of the shareholders of Arian) from gross revenue. Arian's position was that such sums were an expense and not for Arian's benefit. The FCA's position was that the payments to Hopa were remuneration, and therefore a general expense of Arian which should not be deductible in calculating financial benefit received.
The Upper Tribunal found in favour of Arian. It reiterated the position that in appropriate cases, it is correct to deduct expenses which are directly referable to the generation of the revenue concerned. and placed particular emphasis on the RDC's consideration of the FCA's disciplinary action against Sapien Capital Limited (Sapien), which concerned similar activities to those of Arian, noting that there was "great merit in consistency of decision-making when it comes to the setting of financial penalties". The Upper Tribunal noted, amongst other things, that: a) commission payments to Hopa were expenses directly referable to the trading that was the subject of enforcement and should be deducted from gross revenue for the purpose of disgorgement; b) commission payments were paid pursuant to pre-agreed contractual terms, and were not of the same character as salary payments; and c) to seek to disgorge the full amount of the commissions payable to Arian would "amount to the imposition of a further penal sanction beyond that arrived at by the application of Steps 2 to 4 of the policy framework".
Adjustment for deterrence
The Upper Tribunal considered that one rational approach in relation to Step 4 is to look at the ratio between the disgorgement figure and the penal element, which was consistent with the approach adopted in the Sapien case (though noted that this was not the correct approach in every case). Accordingly, the Upper Tribunal found that the FCA's proposed multiplier of four was too high, and that a multiplier of two was more appropriate.
Comment
The judgment is an interesting reminder of the importance of scrutinising the FCA's application of DEPP 6.2, including Step 4, in respect of which, one might expect deference to the FCA's discretion to apply the appropriate adjustment for deterrence. Further, the judgment emphasises the relevance of not just previous Final Notices, but also relevant RDC commentary, in order to ensure consistency of decision making by the FCA. The subjects of enforcement action should therefore be encouraged, and open to the possibility of challenging financial penalties in circumstances where there is ambiguity as to the financial benefit that the subjects of enforcement action have accrued.