Direct Sharedeal Ltd (DSL) was incorporated on 28 July 1998 as an independent Scottish stockbroker specialising in spread betting and share dealing for both private investors and institutions. They had seven appointed representatives that covered stockbrokers specialising in small capitalised companies, independent financial advisers and a training company, providing training on trading on the stock market.
On 15 February 2010 the Financial Services Authority (FSA) notified Direct Sharedeal that it had decided to impose a financial penalty of £101,500 in relation to the appointment, supervision and monitoring of its appointed representatives after one of these firms, First Colonial Investments, used misleading sales pitches when recommending products to persuade people to buy shares. The fine would have been £145,000 but DSL agreed to settle early and qualified for a 30% discount under the FSA’s executive settlement procedures.
An appointed representative is a firm, not authorised in its own right that conducts business on behalf of an authorised firm that acts as its principal. As a result, firms with appointed representatives need to rigorously supervise and monitor their representatives to ensure they are running correctly and efficiently as ultimate responsibility for compliance remains with the principal company, in this case DSL.
The senior management of DSL was unable to provide evidence that they completed checks prior to taking on their appointed representatives. There was nothing relating to references, financial checks or the competence of a proposed representative. DSL then failed to monitor its appointed representatives instead relying on the representatives to carry out their own compliance monitoring.
First Colonial Investments (FCI) was an appointed representative of DSL between October 2007 and March 2009. It was a stockbroker specialising in recommending and selling higher risk investments issued by smaller capitalised companies. This was undertaken mainly by telephone. FCI’s unacceptable sales practices included failing to carry out adequate checks to establish that the recommended securities were suitable for its clients and they used potentially misleading sales pitches to persuade clients to buy the recommended securities. FCI’s sales advisers were given a script to follow yet despite its existence recommendation was unbalanced and in many instances failed to ensure clients were suitably informed of the possible pitfalls of trading in high risk investments.
First Colonial Investments failed to provide DSL with compliance reports between October 2007 and December 2007 or September 2008 and March 2009. It was only in January 2009 after pressure from DSL that they were informed that no compliance monitoring had been taking place. Despite this, it was not until the following month that DSL organised a compliance visit despite the fact that senior management had concerns about the quality of certain First Colonial Investments sales advisers and their competence to carry out the role. For at least eight months before terminating the agreement with FCI, DSL also had concerns regarding First Colonial Investments financial position following bounced cheques to DSL. However, it was not until February 2009 that DSL requested First Colonial Investments management accounts for 2007 and 2008.
As a result of the failings of monitoring and supervision, Direct Share Deal failed to identify problems with First Colonial Investments and under the Financial Services and Markets Act, Direct Sharedeal were responsible for ensuring clients were suitably informed of the risks and pitfalls of trading in highly leveraged instruments.
In 2011 Direct Sharedeal Limited was officially declared in default when they indicating that they had “lost control” of their business.
In the period between April 2008 and January 2009 FCI earned revenues of £1,373,994 however the company was wound up in November 2009 and placed into liquidation.