Why Compliance Officers Need To Know Their Responsibilities

By The Enforcd TeamThe Enforcd Team
Compliance

Spare a thought for Gregory Rupert Nathan. Recently, the FCA publicly rejected his application for approval to carry out the controlled functions of Compliance Oversight and Money Laundering Reporting Officer at Goldenway Global Investments (UK) Limited. The firm offered contracts for difference trading to Chinese nationals. 

Rather coyly, the FCA did not spell out Nathan’s employment history. A look at the FCA Register filled in the blanks. He had worked at Beaufort Securities, and Mint Financial (UK) Limited.

Beaufort Securities was the former Hoodless Brennan, censured twice by the Financial Services Authority. The FCA restricted its permissions earlier this year, to make clear that it cannot take on new discretionary fund management clients. This was because it stuffed at least one of its customers’ accounts with AIM listed securities it owned. The issuer went bust not long after. It’s also been covered by Share Prophets, providing high interest loans to Eurasian Mining at the same time as acting as its broker.

Mint Financial (UK) trades as Fat Prophets, and has been slammed multiple times by the Financial Ombudsman Service, for accepting fees for services it did not deliver.

His most recent employer Fortrade Limited is doing well, based on its latest Companies House returns. Director Nick Collison joined from Saxon Financials. A limited company of that name became insolvent in 2013, leaving unsecured debts of £ 5 million and sundry tax authorities and inter-dealer brokers out of pocket. Nick Collison was a Director of Saxon.

A few lessons here. Those proposing themselves for controlled functions should do their homework on the risks for which they will be responsible. This includes the firm’s customers, products, operating model (including third party suppliers), and legal entity structure.

The FCA’s view was very clear here:

During the second of the Interviews, Mr Nathan had characterised the Firm’s business model as “very, very simple”, which the Authority considers demonstrates that Mr Nathan failed to recognise the complex nature of the CFD products offered by the Firm to retail clients and the complexities arising from the composition of the Firm’s client base, the reliance on other parties, the concern over managing the risk of offering inappropriate products to clients and the implications of the Firm’s being authorised in a different jurisdiction to the majority of its client base.

Money laundering risk was very, very simple (performing sufficient know your customer checks), but here Nathan slipped up by not having a sufficiently detailed understanding of the actual process:

Mr Nathan did not show sufficient in-depth knowledge and understanding regarding the third party provider which operated the database tasked with confirming the authenticity of Chinese National Identity Cards, which was a key step in the client on-boarding process; nor was he sufficiently familiar with how the confirmation process worked. This meant that Mr Nathan was unable to appreciate the limitations of the system and he appeared not to have anticipated the concerns about the consequence of this lack of knowledge and the other issues and risks that need to be addressed in verifying clients based in China.

Those seeking to hire compliance officers should not rely on the FCA to perform their due diligence for them. The FCA’s process was a two panel interview, a scan of his CV, and a reference to any material held by the Financial Ombudsman Service. This was enough to damn Mr. Nathan.


The Brooklands SIPP Scheme

By The Enforcd TeamThe Enforcd Team
Brooklands

Brooklands Trustees Limited languishes on the Financial Services Compensation Scheme (FSCS) complex cases page. It was established in 2006, and operated subsidiaries in the UK, New Zealand, Dubai, Australia and Gibraltar. According to its insolvency practitioners, it acted as trustee to over 6,000 individual pension schemes worldwide. Because it operated self-invested pension plans, it was regulated by the Financial Services Authority, and its successor the Financial Conduct Authority. Its pension schemes were also registered with Her Majesty’s Revenue and Customs, and held funds of £650 million.

In August 2015, the firm recorded a liability of £1.6mn, rendering it insolvent. It transpired that the Financial Ombudsman Scheme had ruled against it in several complaints. Brooklands’ protestations that the complaints were the sole liability of the Independent Financial Advisors (IFAs) who had placed their clients’ assets with Brooklands, had fallen on deaf ears. Clyde & Co, a London firm of solicitors, advised that a judicial review of the Ombudsman’s adjudications would have less than a 50% chance of success.

The firm could not renew its professional indemnity (PI) cover economically, having notified its insurers who explained that the notification may have come too late. Without adequate cover, it could not accept new business.

A note in the insolvency practitioner’s report tells an all too common tale: Brooklands SIPP members were being charged annual management charges, for managing funds which may permanently remain illiquid, or remain so for a period of five to ten years.

The dispute with the PI insurers falls on the affected creditors (some 160 complainants at February 2017). Meanwhile, the firm’s Directors and Officers insurers were notified of the potential claim against them for late notification of the professional indemnity claims.

Looking at the firm’s shareholder register, 80% its shares were owned by BIP Group Distribution Ltd (officers Nigel, Julian and Paul Evans).

One of Brooklands’ directors, Paul Martin Evans, owns 70% of IVCM (Dubai). HPL, the buyer of the SIPP accounts and customer relationships, is paying his firm to provide ongoing administration support. IVCM offers SIPPs in the UK, Gibraltar, New Zealand and Australia. The accounts of UK registered IVCM Distribution Limited are currently overdue.

A look at the Financial Ombudsman Service’s Ombudsman Decisions page showed three complaints. One of these related to Stirling Mortimer. This was an operator of unregulated collective investment schemes, investing in “right to purchase” contracts in overseas property developments in Spain, Cape Verde, Mexico and Morocco. Redemptions are frozen and the enterprise is being investigated by the Serious Fraud Office.

The complainant had been advised by Birmingham-based Aspire Personal Finance, but this firm had become insolvent. IFA Paul Brian Reynolds was banned by the FCA and fined £290k (having earned commissions of £600k). He’d also convinced clients to take out mortgages on their homes, in order to buy geared traded endowment policies. Reynolds forged signatures, and documents to try to throw the FCA. He then moved to Dubai, where International Adviser linked him to Globaleye and Holborn Assets (Globaleye operates in much the same way as deVere Group). In 2016, he was sentenced for defrauding two insurance companies (he’d sold himself and his wife pensions, to generate commission payments of £65,000).

The National, an English language newspaper operating in the United Arab Emirates, covered the state of independent financial advice in a 2014 article:

British expat Pete Manzi, 54, says he ended up losing £11,000 (Dh65,462) on investments when he was hooked by a financial adviser.

“There is no one to go to,” says Mr Manzi. “I went to the administrator of the fund I was put into and they basically ignored me. They said tough luck. The problem in the UAE is that there isn’t a regulatory body and you can actually become a financial adviser without any qualifications. You can walk off the street and say you want to become one. So buyer beware, caveat emptor as my father used to say.”

Mr Manzi became a client of Dubai-based Globaleye after receiving a cold call in 2012 from an adviser offering to manage his £33,000 UK pension for him. Mr Manzi later sold all his holdings at a loss.

He says this is because after requesting to put 75 per cent of his investment into low-risk funds, 15 per cent in medium risk and 10 per cent in high risk, he discovered that all of his money had been transferred to a fund in Hong Kong without his permission – a fund that he was given no information about.

The article also featured deVere Group:

Kuben Naidoo, from South Africa, ended up with “a dud investment” that he claims was sold to him without highlighting important facts. These include the 25 years of management fees he would pay even if he chose to exit the plan early, a plan he says he was unwittingly locked into by a pushy adviser.

“I urge other expats to tread carefully when making long-term offshore investments,” says the married father, who had signed up with Zurich-based deVere.

In the meantime, Mr Naidoo says he is paying 1.5 per cent a quarter in fees on his investment plan, which translates into a 6 per cent annual fee – a rate that in the long run eats deeply into returns. Already he has paid more than $9,000 in fees in five years on an investment that’s valued at about $90,000. If he cancelled his policy today, he would lose about $36,000.

On top of that, the IT executive was told in 2012 that one of the funds he had invested most of the his money in had been frozen after a wave of redemptions.

He had been putting 50 per cent of his monthly contributions, or US$1,000 a month, into deVere’s Strategic Growth Fund, which promised investments into companies that sell baby food and pharmaceuticals, industries he was told would weather any downturn in the economy because people always buy food for their babies and drugs.

A spokesman from deVere said the only information he had on the Strategic Growth Fund was that it is a medium-risk fund, managed outside of deVere, and that it invested a small amount in private equity in 2012.

The Strategic Growth Fund was covered by the South China Morning Post in 2013, which proved that Nigel Green, Chief Executive of deVere Group, controlled the fund’s investment adviser.

British expats taking financial advice from other British expats should remember that UK protections do not apply to them. UK residents should remain wary of small pension SIPP providers and high yielding investments.


Update on CFD Leverage Regulatory Changes

By The Enforcd TeamThe Enforcd Team
In December 2016, the Financial Conduct Authority (FCA) announced their proposals to tighten the rules around selling contracts for difference (CFDs). These complex and highly leveraged financial instruments have become extremely easy for retail investors to access in recent years. This has raised concerns that consumers are not being properly informed and are therefore not adequately prepared for the risks involved.

CFDs

CFDs are contracts between a trader and the provider of the product. Upon termination of the contract, the difference between the price at which the product was initiated at, and the price it was closed at, is exchanged between the two parties. When taking out the contract, a trader is able to speculate on whether the price is likely to move up or down. Whether they benefit from the price movement, or the provider does, is down to whether the market moves in their favour or against them.

A form of derivative, CFDs enable traders to gain exposure to a range of different markets, including commodities, cryptocurrencies, shares, indices, and Forex. However, many of these markets can be extremely volatile. As CFDs are highly leveraged, even with a small margin – the amount required to keep the trade open – a trader can very quickly suffer substantial losses that far exceed their margin value, if the market moves against them.

As an example, a trader can buy contracts based on the movements of FTSE100. With leverage levels of 300:1 (which is offered by many existing regulated brokers), with an initial margin of £100, clients can magnify their exposure to the market changes by up to 300 times. In this case, the value of their transaction would be around £30,000 with the outstanding amount borrowed from the provider. If the market moves against the trader by 2%, this can result in the value of their trade dropping to around £29,400, with a loss to the trader of around £600 if they have sufficient capital deposited in their account. It follows that if a trader does not adequately understand the effects of leverage, they can be devastated by such significant losses.

Online Platforms

In spite of this, CFDs have become much easier for retail clients to access. One reason for this is that the industry has seen a boom in online platforms as new technology has lowered the operating costs for providers. The FCA have granted authorisation to an increasing number of CFD providers in recent years, and firms regulated in the EEA have taken advantage of passporting arrangements to offer their services to customers within the UK. In December 2016, there were 97 FCA authorised CFD providers and 130 EEA firms operating in the UK, with an estimated 125,000 registered clients (source: FCA CP16/40). In addition to this, there are also numerous platforms that can be easily accessed by traders in the UK, but do not hold authorisation to transact such products in the UK, which adds another layer of risk to the client.

This technology made it much easier for retail traders with little experience and knowledge to have access to high risk financial instruments without adequately understanding them. As reviews by the FCA and other regulators revealed, even when investors use regulated brokers who are required to adhere to the high standards set by their regulators, there are still inherent risks for less sophisticated investors.

Reviews by Regulators

In the lead up to releasing their proposals for change in December 2016, the FCA had detected evidence of poor conduct within the industry, which was becoming an increasing concern. Even regulated firms were not adequately warning their clients of the risks, and were allowing investors to begin trading without robust appropriateness assessments, such as anti-money laundering and suitability checks (COGS 10). Their review found that 82% of clients from a sample of retail CFD providers were losing money on CFD trading, with the average loss per client equating to around £2,200.

Other regulators throughout Europe were also arriving at similar conclusions. In their 2014 study, France’s Autorité des Marchés Financiers (AMF) found that 89% of consumers were losing money, with a median loss of €1,843 and an average loss of €10,887. In 2015, the Central Bank of Ireland (CBI) found an average loss to consumers of €6,900 with 75% losing money. In a follow-up study, the figures had reduced to 74% and €2,700, but there was still a long way to go.

Regime Changes

On February 2016, the FCA issued a Dear CEO letter to CFD providers, warning them to tighten their processes around onboarding new clients. At the end of the year, the FCA released their proposals for new measures with regards to leverage, capping it at 50:1, with even lower leverage levels set for new and inexperienced clients. The directive also proposed to ban the use of bonuses to entice new clients into trading leveraged products.

Christopher Woolard, executive director of strategy and competition at the FCA, said at the time:

“We have serious concerns that an increasing number of retail clients are trading in CFD products without an adequate understanding of the risks involved, and as a result can incur rapid, large and unexpected losses.

“We are introducing stricter rules for CFD products to ensure the sector addresses the shortcomings identified, and that firms make sure that retail clients are aware of the high risks involved in trading these complex products.”

In November 2016, the Cyprus Securities and Exchange Commission (CySEC) issued a circular concerning the marketing and sale of such products, which led to them prohibiting firms from offering bonuses to retail clients. In addition, firms were required to offer a maximum default leverage ratio of 50:1, which only can be exceeded if the client specifically requests it and robust appropriateness testing has been carried out.

In Australia, the Australian Securities and Investments Commission (ASIC), backed a new bill that put constraints on the use of client money for OTC derivatives.

In France and Holland, an advertising ban has been imposed on leveraged products.

The Central Bank of Ireland proposed to ban the sale of CFDs to retail customers, or at least ensure that additional measures are implemented to provide better protection, which includes limiting leverage levels to 25:1 for retail clients and negative balance protection.

In Germany, the Federal Financial Supervisory Authority (BaFin) proposed changes with regards to negative balance protection on the 8th December 2016, and subsequently imposed the rule changes.

Industry Response

Whilst many welcomed the regulatory changes with regards to negative balance protection, they have implied that changes to leverage levels could have an adverse effect on their business. They have also presented the argument that the strict controls may lead to clients seeking the leverage from unregulated brokers. Few of the primary CFD brokers in the UK have implemented a bonus ban or changes to leverage limits since the proposals were announced.

The Future for CFD Providers

The consultation period for the FCA’s CP16/40 ended on the 7th March 2017 and the regulator have specified the areas they intend to focus on going forward. These include appropriateness testing, prudential requirements, client money, financial promotions and best execution. Although no specific details have been released yet with regards to leverage, there has been speculation that a soft leverage limit may be imposed, similar to that offered by CySEC, which would allow more sophisticated investors to increase their leverage upon request.

The European Securities and Markets Authority (ESMA) released a public statement on 29th June 2017, providing an update on their position with regards to CFDs and other speculatory products. The statement confirmed that their concerns for the industry remain, and warned that the possibility of using their product intervention powers under MiFIR Article 40 is under discussion.

Measures proposed by regulatory bodies throughout Europe, including lowering leverage limits and banning financial promotions, will be taken into account. If used, these intervention measures may be applied after 3rd January 2018.

Conclusion

The CFD sector is in a period of transition, with many more changes looking likely to be applied within the industry in the coming months and years. Brokers who respond well to the changes, adapting their processes and controls to promote client protection are better placed survive the upheaval and lead the market forward. Whereas it seems increasingly likely that governing authorities are going to use their intervention powers to make an example of those who are not compliant with the regulatory changes.


The De Vere Group

By The Enforcd TeamThe Enforcd Team
De Vere Group

In the 2017 Finance Bill, Her Majesty’s Revenue and Customs (HMRC) proposed that:

Transfers to qualifying recognised overseas pension schemes (QROPS) requested on or after 9 March 2017 will be taxed at a rate of 25% unless at least one of the following apply:

·         both the individual and the QROPS are in the same country after the transfer

·         the QROPS is in one country in the EEA (an EU Member State, Norway, Iceland or Liechtenstein) and the individual is resident in another EEA after the transfer

·         the QROPS is an occupational pension scheme sponsored by the individual’s employer

In response, the DeVere Group announced a strategic review. According to a statement printed by FT Adviser, at March 2017 QROPS represented approximately 20% of its business. In 2010, DeVere claimed to have advised on around a third of all QROPS transfers (since the creation of QROPS in 2006).

The DeVere Group (also styled deVere, and not to be confused with Charles de Vere, the UK independent financial advisor), is dogged by online controversy in almost all the jurisdictions they operate. Their business model is to hire advisors without industry experience, and place them wherever there are British expatriates, paying them commission only. All set up costs are met by the adviser (training, flights, and accommodation deposit). They’re also in charge of finding their own clients.

Group subsidiaries have been found by regulators to advise on products for which they lack the appropriate regulatory permissions. In 2011, the Daily Mail published an article entitled “Publish at your peril”. This set out the case of a British couple, retired to Cyprus, who were advised to invest in two Premier funds (one was compulsorily redeemed, the other was frozen, the couple lost around £60,000). It was then that they, and the journalist, found that deVere had passported its permissions from Belgium, where its license only covered insurance intermediation (not investment advice). In 2013, the Mail covered a similar case, involving four unnamed funds, a failed investment of £285k, and advice given by a Spanish office of deVere, under the same Belgian insurance license. Also in 2013, the Belgian regulator (the Financial Services Market Authority) confirmed that deVere and Partners (Belgium) ltd BVBA was included on a list of “disappeared intermediaries”.

A 2014 article by the Mail described an investment in the UAM Strategic Growth Fund (suspended in February 2013). The Mail connected the fund with United Asset Management in Valais, Switzerland: “records in Valais show that until September 2012 UAM was wholly owned by deVere boss Nigel Green.”

The client complained that that the fund did not meet their attitude to risk, and had lost a quarter of their savings. The journalist contacted deVere’s London office, and soon after the client “emailed … to say that [they] could ‘not discuss this matter any further’”.

In 2013, the South China Morning Post said “Global chief Nigel Green owned shares in several subsidiary businesses that profited from the insurance plans sold by deVere”.  The article continued:

Generali, the vendor of one insurance plan linked to the Valais fund, inserted a statement revealing Green’s position on the fund, saying: “Nigel Green, CEO of deVere Group, is a director of and holds a majority shareholding in Valais Investment Management Sarl, the fund adviser.”

Valais Investment Management and United Asset Management share the same business address, according to the commercial register of Low-Valais, which lists Frontier Holdings as the sole shareholder of United Asset Management.

Frontier is registered in Gibraltar, and it has changed its name to Titanium Advisers, according to the companies registry in Gibraltar.

The registry has no record of Green’s involvement in Frontier, but it does record that Beverley Yeomans was a director of the company from November 2009 to October last year. Yeomans is Green’s personal assistant.

Searching for references to the Strategic Growth Fund and its suspension led to a South African website named Moneyweb. This reported one side of a dispute between the South African operators of Belvedere, and deVere Group’s Nigel Green. Belvedere was covered by Offshore Alert, a newsletter published by David Marchant. The main story resides behind a $90/month paywall, but the summary is enough: “Offshore fund group Belvedere Management, which claims to have $16 billion of assets under administration, management and advisory, appears to be one of the biggest criminal financial enterprises in history, headed by David Cosgrove, Cobus Kellermann and Kenneth Maillard.”

Later, deVere Group revealed that it was behind information received by Marchant (who specialises in exposing international financial scams). In the meanwhile, Alec Hogg, writing on biznews.com explained that Belvedere (via Kellermann) was UAM’s fund manager.

In the US, deVere failed to progress a lawsuit against pissedconsumer.com (and its parent Opinion Corporation). Rather than focusing on defamation, it tried and failed to argue that Opinion Corporation’s use of the deVere trade names violated section 43(a) of the Lanham Act. UK readers should know that the US usage of “pissed” indicates dissatisfaction.

Finally in the UK, and as covered in another article, a deVere subsidiary (deVere and Partners (UK) Limited) has been required by the Financial Conduct Authority to “Immediately cease to provide third party companies with TVAS/DBAR reports or other similar report of information designed to assist third parties companies in transferring customers DB pensions to an alternative arrangement.”

The third parties may well have been other non-UK regulated group subsidiaries. And the Transfer Value Analysis (TVAS) reports might not have covered the very significant costs levied by the QROPS operator. A case of HMRC advancing the FCA’s position.

Whither next? Well, DeVere Group has just acquired a St. Lucia based private bank (Arton Bank). The Guernsey Financial Services Regulator took the firms controlling the Belvedere funds into administration, citing “systemic failings in corporate governance and the application of law, regulation, code and principle”.

And anyone reading this should suspect offshore investments delivering high returns whilst describing themselves as low risk.


The Bank of England confirms Enforcd can help best practice and compliance

By The Enforcd TeamThe Enforcd Team
Bank of England

Today the Bank of England has published its third round of Proofs of Concept (POCs) completed by its FinTech Accelerator, which includes Enforcd.

The FinTech Accelerator was set up a year ago to deploy innovative technologies on issues relevant to the Bank’s mission and operations. Working in partnership with FinTech firms the Bank is seeking to develop new approaches, build its understanding of these new technologies and support development of the sector.

As part of the FinTech Accelerator programme, the Bank of England trialled Enforcd with the aim of identifying and applying cross-cutting legal themes from regulatory enforcement actions.

The Bank Of England writes:

“We worked with Enforcd, giving a group of staff from our Regulatory Action Division (RAD) access to a cloud-based database of regulatory enforcement actions with supporting commentary and trend analysis. Having easy access to relevant published regulatory enforcement decisions can be an important input to financial firms’ overall compliance programmes.   This PoC demonstrated how technology could potentially facilitate compliance and the development of best practice in some key areas of regulation.”

Commenting on the latest POCs, Andrew Hauser, Executive Director for Banking, Payments and Financial Resilience, said:

We have learnt a great deal through these latest Proofs of Concept, both in terms of what FinTech can do, but in also in terms of how it can help us work, think and communicate differently.  The breadth of topics covered by these projects, and the Accelerator programme as a whole, shows how much central banks potentially have to gain from continued engagement with the sector in delivering their mission of monetary and financial stability. ”

Jane Walshe, CEO and Co-Founder of Enforcd said:

We felt very privileged to get such early engagement from the Bank of England and regard their work with us as a testament to the strength of our idea and vision.  We are delighted they will remain as a client.

Our roadmap for the next few months contains significant growth plans which will see us bringing in new jurisdictions,  functionality and converting the numerous proofs of concept we are engaged in to long term client relationships.

We are responding to the feedback from the Bank and have already built an API.  We are actively speaking to a number of regulators and clients in the USA and elsewhere will have a convincing transatlantic, and subsequently global, offering soon.

The full Proof of Concept report is available here .