UK: FCA Censures Catalyst and Fines its Compliance Officer for Recklessly Misleading Investors


    Catalyst Investment Group Limited (Catalyst) was found to have shown a “reckless disregard for investors’ interests” having failed to disclose the high risk nature of bonds issued by ARM Asset Backed Securities SA (ARM), according to the FCA’s director of enforcement and financial crime, Tracey McDermott.

    Luxembourg based ARM issued ‘death bonds’ (Bonds), where the ultimate investment was based on taking over life assurance policies, paying the premiums and receiving the proceeds upon the original policyholder’s death. The risk is that the policyholder lives longer than expected to the detriment of the yield on the investment. These Bonds were issued to the public in quarterly tranches from October 2007 until October 2009 whereby the tranche would remain open for three months before the Bonds were issued to the investors.

    In 2007 ARM formed the view that it needed a license to issue the Bonds from its regulator, Commission de Surveillance du Secteur Financier (CSSF). The application process began on 23 July 2009. In October 2009, ARM was asked to stop issuing the Bonds by the CSSF pending the CSSF’s decision. ARM faced liquidation in the event their application was refused.

    Catalyst was the primary distributor of the Bonds to intermediaries and independent financial investors (IFA) who in turn sold them to retail investors. Catalyst’s director and principal shareholder from 2005, Mr Timothy Roberts, had also been a director of ARM from 12 March 2007. Between May 2007 and May 2010, Catalyst issued 16 financial promotions relating to the ARM Bonds. These promotions covered the tranches from 1 October 2009 onwards; tranches that ARM did not issue Bonds for at the request of the CSSF. Despite Catalyst having knowledge of the CSSF’s request, and the consequences if ARM’s application was refused, it continued to promote the Bonds. As a result, £17.1 million was invested by UK retail consumers, and a further £1.2 million, US$1.3 million and €1.9 million was invested outside the UK for Bonds that were never issued. The majority of the funds remained in the accounts of the receiving agents. In all financial promotions, Catalyst had failed to make investors aware of ARM’s regulatory position.

    In December 2009, Catalyst wrote a letter to all IFAs who had sold the Bonds to customers. Catalyst advised the IFAs that ARM had applied to the CSSF for a license ‘to offer investors further reassurance’. At no point did Catalyst state ARM was required to hold a license or make the IFAs aware of the threat of liquidation. Similarly, in March 2010, Catalyst wrote to investors in the post October 2009 tranches to state “the ARM board believes that it is advantageous for ARM to be either regulated in Luxembourg or domiciled in Ireland”, suggesting the Luxembourg authorisation was voluntary. Clearly the use of ‘advantageous’ did not reflect the reality that such authorisation was vital to avoid liquidation and loss of the investors’ money.

    The FCA found that Catalyst had not conducted its business with integrity, had failed to show due regard for the information needs of its customers, and their failure to make investors aware of ARM’s precarious regulatory position had shown a reckless disregard for investors’ interests. The FCA also found that the financial promotions and the letters sent to IFAs and investors were unfair and misleading and failed to provide a clear picture of ARM’s regulatory position. As a result, the FCA published a public statement which detailed Catalyst’s contravention of regulatory requirements. This sanction was in lieu of a £450,000 fine which was waived after Catalyst provided evidence of its impecuniosity.

    The FCA also found that Alison Moran, Catalyst’s compliance officer, had been aware of ARM’s situation in December 2009 but failed to take steps to protect investors. Consequently, Ms Moran was fined £20,000 for failing to act with due skill, care and diligence.

    As of 4 December 2013, Catalyst was placed in liquidation and investors in the ARM Bonds have been advised by the Financial Services Compensation Scheme (FSCS) that they can begin to make claims from January 2014. The FSCS expects the claims to run into the ‘tens of millions’ which will have a significant effect on the 2014-2015 FSCS levy.

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