On 20 December 2012 the FSA issued a Final Notice to Gracechurch Investments Limited in respect of breaches to FSA Principles in the light of how they conducted their business.
Gracechurch Investments Limited was a stock broking firm which advised clients as to their investments in the shares of small companies (“small-cap stock”), either unlisted or listed on the London Stock Exchange’s Alternative Investment Market (“AIM”) or the PLUS Stock Exchange.
Sam Thomas Kenny was the chief executive, as well as a broker at Gracechurch Investments Limited and Carl Peter Davey was the firm’s Compliance Officer, both were approved by the FSA in their roles. The firm had 35 brokers approved by the FSA during the period 1st April 2008 to 4th November 2009 with an average of 15 to 20 individuals operating at any one time. The brokers made telephone sales to customers and during the above period advised approximately 340 clients to buy about £4 million of small company stocks. The company received the majority of its revenue in the form of commission from the companies whose shares it advised its clients to buy. This resulted in many clients being mis-sold, often deliberately and caused at least £2 million in client losses.
The FSA considers that as a results of its own and Gracechurch Investments Limited compliance consultant’s sample reviews it was clear that pressure sale methods, misrepresentations and misleading advice were routinely and deliberately used by most of Gracechurch Investments Limited brokers, including Mr Kenny and as such amount to a serious lack of integrity at the heart of a regulated business.
Calls reviewed by the FSA showed pressure selling techniques that persistently ignored refusals by clients to buy stock. The brokers failed as a matter of course, to give generic risk warnings in relation to the small-cap stock; lied to at least one client about the amount other clients were investing and told at least one client that the recommendation was based on inside information.
Gracechurch Investments Limited brokers’ remuneration was designed with Mr Kenny and Mr Davey’s input after Mr Davey was approved as compliance officer. The brokers were paid a small salary plus commission on the volume of their sales, this did not take into account the quality of advice and compliance with relevant requirements, in fact on at least one occasion, emails were sent threatening brokers with disciplinary action if they failed to reach monthly advised sales targets. This substantially increased the risk that brokers would say anything for a sale. In addition to being Chief Executive Mr Kenny also trained the brokers how to overcome client objections to buying stock.
During the above period, Gracechurch Investments Limited employed an individual primarily responsible for broker recruitment and alongside Mr Kenny for broker training, despite knowing that he was investigated by the FSA as being responsible for the unacceptable pressure sales culture at his previous employer, they continued to employ him for at least eight months despite the fact that he was actively maintaining the same culture within Gracechurch Investments Limited.
On 20 December 2012, Gracechurch Investments Limited compliance officer Carl Peter Davey was banned from working in financial services. In his roles as compliance officer and also responsible for systems and controls reporting, the FSA considers that Mr Davey acted dishonestly in writing on more than one occasion, that a particular recording of a call between an employee and a client had not been made or could not be found, when that was untrue.
The FSA considers that Mr Davey also failed to take reasonable steps to put a stop to the risk of brokers mis-selling to clients and to ensure that the firm complied with the relevant requirements and standards of the regulatory system and Mr Davey failed to properly discharge his responsibilities as the firm’s compliance officer. The FSA would have fined Mr Davey £175,000; however, due to his serious financial hardship, this penalty was reduced to nil.
The FSA decided that considering the repeated instances of dishonesty and lack of integrity, Sam Thomas Kenny is not a fit or proper person to perform any function in relation to any regulated activity and prohibited him from holding a position in the financial services industry. Mr Kenny was find £450,000.
Gracechurch Investments Limited is now in liquidation, having ceased business in February 2010. The FSA was informed by the Official Receiver that the firm was not only insolvent but had no assets and as such any financial penalty imposed would not be paid. If it were not for their financial circumstances, the FSA would have imposed a financial penalty of £1.5 million on the firm.