The Financial Services Commission (Bailiwick of GUernsey) Law, 1987 ("the Financial Services Commission Law")
The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000 ("the Fiduciaries Law")
Certes Capital Limited (formerly Marlborough Pension Trustees Limited) ("Certes")
On 18 October 2019, the Guernsey Financial Services Commission ("the Commission") decided to make a public statement under section 11C of the Financial Services Commission Law in relation to Certes.
Certes is in voluntary liquidation, and the liquidators have confirmed that Certes is insolvent, and it is doubtful whether funds will remain for any significant dividend for creditors; but for that fact the Commission would have imposed a financial penalty in the sum of £30,000 upon Certes under section 11D of the Financial Services Commission Law. Any financial penalty imposed by the Commission therefore, would have adversely affected creditors or potential creditors of Certes.
The Commission considered it reasonable and necessary to make these decisions having concluded that Certes did not fulfil the requirements of the Minimum Criteria for Licensing, pursuant to Schedule 1 of the Fiduciaries Law, in particular in relation to the fit and proper criteria (paragraph 3) and integrity and skill criteria (paragraph 1), whilst it was licensed by the Commission.
In particular, with reference to Schedule 1 of the Fiduciaries Law, failings have been found in relation to:
1. Competence and soundness of judgement: paragraph 3(2)(a);
2. Compliance with rules, codes, guidance, principles and instructions issued by the Commission: paragraph 1(2)(b).
At the relevant time, Certes was licensed by the Commission under the Fiduciaries Law. Certes provided pension and savings solutions to both individual and corporate clients.
In October 2016, Certes became a managed trust company of another licensee under the Fiduciaries Law (Licensee A). Licensee A commissioned a review of investments held by pension schemes administered by Certes, which raised a number of concerns, that arose during the period from August 2009 until October 2016. The concerns centred around pension scheme members, introduced by one introducer, who were mainly former UK military personnel and who had transferred their UK Government defined benefit pension scheme to a defined contribution pension scheme administered by Certes. Certes, at the prompting of Licensee A, reported these concerns to the Commission in May 2017.
Appointment of Investment Managers
The pension scheme’s trust deed set out that the trustees (ie Certes) may appoint one or more persons whom they consider to be suitably qualified and competent to manage the investment of any part or all of the pension fund to act as Investment Manager.
Certes appointed the introducer as the Investment Manager for the scheme members’ accounts. A Certes file note records that the introducer was not regulated. The file note also notes that the introducer has considerable UK pension experience. However, there was little evidence to corroborate this statement. Given that Certes was aware that the introducer was not regulated, it is not clear, on the evidence that was provided to the Commission, how Certes reached the conclusion that the introducer was suitably qualified and competent to be appointed as Investment Manager.
Certes subsequently removed the introducer as Investment Manager for scheme members’ accounts. The Commission was informed that the introducer was not performing in a sufficient way as Investment Manager and Certes felt it needed to appoint a qualified investment house.
The introducer was replaced as Investment Manager with an Isle of Man regulated investment management firm. However, Certes’ records show that this appointment was made on the recommendation of the introducer. There was no evidence to demonstrate whether any compliance checks or due diligence was undertaken in respect of the new Investment Manager, except to note that it was a regulated Isle of Man investment firm.
Certes failed to demonstrate that appropriate consideration, or investigation was undertaken, in respect of the new Investment Manager’s qualifications and competence. Certes appeared to have accepted their suggested appointment entirely on the recommendation of the introducer.
Certes failed to show sufficient competence, experience and soundness of judgement, as required by paragraph 3(2)(a) of Schedule 1 of the Fiduciaries Law by failing to ensure that the introducer and the Investment Managers were competent and suitably qualified.
Certes accepted the introducer on 5 August 2009 and this was communicated to the introducer. However, Certes’ internal due diligence approval form for the introducer was not completed by Certes until 13 August 2009, it was not signed off by the compliance officer until 26 November 2009 and senior management until 30 November 2009.
The due diligence forms and compliance checks on the introducer had not been completed prior to the acceptance of the introducer and were still being completed after it had been accepted.
Certes failed to show sufficient competence, experience and soundness of judgement, as required by paragraph 3(2)(a) of Schedule 1 of the Fiduciaries Law by accepting the introducer prior to completing its due diligence checks.
Failure during client take on
The introducer was not a regulated entity, although there was no requirement for it to be regulated in its home country. As part of the acceptance of the introducer, Certes requested that clear pension transfer advice be provided on each case. Given the introducer was unregulated, this was a method by which Certes could assure itself of the introducer’s suitability and competence.
However, Certes only received and viewed the first few reports of pension advice, but as the advice was all very similar Certes felt that there was no need to continue to see the advice being provided by the introducer. Certes was unable to adequately explain how it satisfied itself that it was in each member’s best interest to transfer to the Certes managed pension scheme, from a UK Government defined benefit scheme, given that each member’s position would be different.
Certes was unable to provide copies of any pension transfer advice that it received when requested by the Commission. Certes subsequently explained to the Commission that it was not party to the pension transfer advice and that the discussions in respect of the transfer took place between the introducer and the member. This suggests that Certes did not see the pension transfer advice at all.
Certes failed to show sufficient competence, experience and soundness of judgement, as required by paragraph 3(2)(a) of Schedule 1 of the Fiduciaries Law by failing to monitor the pension transfer advice, even where it had been identified that Certes should receive and review the advice so as to satisfy themselves that the introducer was competent.
Oversight of Investments
Certes provided annual valuations of its pension funds to its members. However, following a review carried out by an independent third party in 2017, the independent third party noted that the valuations may not have given an accurate reflection of the investments, due to the fact that a number of funds were suspended. The suspended funds had been given a full market value and not all assets had been revalued on a regular basis. Accordingly, the annual valuations were potentially misleading and suggestive that the investments were performing better than they were.
Certes appointed the independent third party to perform reviews of investments in 2012 and 2017. The review of client files showed, in many instances, that the underlying investments appeared to be in high risk investments, despite most members requesting a low or medium risk strategy.
Certes therefore failed to ensure that the investments were managed professionally, and responsibly, as required by section 4 of the Code of Practice – Trust Service Providers. In addition, this demonstrates Certes’ failure to show sufficient competence, experience and soundness of judgement, as required by paragraph 3(2)(a) of Schedule 1 of the Fiduciaries Law.
Certes has received a number of complaints from the former members of the UK Government pension schemes about the performance of their pension.
Certes made minor efforts to rectify the issues identified, although they did not take sufficient steps to effectively remedy the issues.
Certes was open and co-operative with the Commission and has assisted with its enquiries. In addition, Certes brought the matters to the attention of the Commission.