A recent UK FCA decision highlights the FCA’s expectation that, in certain circumstances, issues relating to the conduct of senior managers outside and unrelated to the workplace should nevertheless be disclosed to it promptly. The decision makes clear that there is no hard separation between ‘personal’ and ‘work’ related issues when it comes to reporting the conduct of Senior Managers in respect of their fitness and propriety. The FCA’s Final Notice provides useful guidance on its expectations regarding the self-notification of matters relevant to fitness and propriety, in particular those which may have an adverse impact on an individual or firm’s reputation.
Decision against Mr Käärmann
In a decision dated 27 October 2024, the FCA fined Mr Käärmann, CEO of Wise plc and senior manager of Wise Assets UK Ltd (an electronic payment firm) (together the Wise Companies), £350,000 for breaching Senior Manager Conduct Rule 4 (which stipulates that Senior Managers must 'disclose appropriately any information of which the FCA… would reasonably expect notice’).
In February 2021, Mr Käärmann had been fined £365,651 by HM Revenue & Customs (HMRC) for deliberately failing to notify it of a capital gains tax liability arising from the sale of shares worth £10m in 2017. Mr Käärmann was subsequently added to HMRC’s public tax defaulters list in September 2021.
Although Mr Käärmann became aware of the tax issues on 7 February 2021, he did not notify them to the FCA at that time. They were instead brought to its attention in September 2021 by a journalist requesting comment.
In its Final Notice, the FCA stated that it should have been notified of the tax issues by Mr Käärmann in a timely and appropriate manner (albeit that it recognised that Mr Käärmann’s failure to notify had been “careless, as opposed to deliberate or reckless”). Such issues were relevant to the FCA’s assessment of Mr Käärmann’s fitness and propriety to perform his senior manager and director roles in the Wise Companies. Specifically, an adverse finding had been made against him by another statutory / regulatory body and both the nature of the determination and the fact that it had been a deliberate tax default were significant. The size of the penalty and the potential for public censure via inclusion on HMRC’s tax defaulters list were also significant factors which fell to be disclosed in accordance with the FCA’s Fit and Proper guidance.
The FCA made clear that the tax issues also fell for disclosure because of their relevance and significance to its ongoing supervision of the Wise Companies, and their notification obligations as authorised firms. Against this background, the FCA noted the need for Senior Managers properly to consider the fact that their actions may have an adverse reputational and/or regulatory impact not only on themselves, but also on their firms. Mr Käärmann should therefore have brought the tax issues to the FCA’s attention in a timely and appropriate manner and reported them to the Wise Companies to allow them to comply with their own notification obligations.
Mr Käärmann’s belief that the tax issues were personal matters, unrelated to his fitness and propriety was not accepted by the FCA. The FCA’s view was that he should have considered his obligations more carefully in light of his significant knowledge and experience; if in doubt Mr Käärmann could have obtained independent advice as to his disclosure obligations.
Although the failure to disclose to the FCA and the Wise companies was not deliberate, Mr Käärmann still faced a substantial penalty, demonstrating the FCA’s desire for the decision to have a deterrent effect. The stage 2 penalty figure of £41,493 amounted to 20% of Mr Käärmann’s income during the relevant period (level 3 seriousness). The FCA then used its discretion significantly to increase the penalty, in stage 4, to £500,000 to ensure that it would act as a real deterrent to Mr Käärmann and others holding similar positions from committing similar or further breaches. Mr Käärmann agreed to resolve this matter and qualified for a 30% discount under the FCA’s executive settlement procedure.
Comment
In recent years the FCA has brought enforcement actions against a number of senior managers for misconduct occurring outside of the workplace. Its Consultation Paper (CP23/20 ‘Diversity and inclusion in the financial sector – working together to drive change’) also sought, amongst other things, to clarify and strengthen its expectations around non-financial misconduct where relevant for regulatory purposes. CP23/20 also set out proposals to better integrate non-financial misconduct considerations into fitness and propriety assessments and proposed certain amendments to the FCA’s Fit and Proper guidance in this respect. The FCA is continuing to consider feedback received in response to the consultation. Certain points in this decision are of wider application.
- The FCA reminds Senior Managers of the need to consider the fact that their conduct outside the workplace has the potential adversely to affect their firms’ reputations as well as their own, and that such matters may impact the FCA’s assessment of fitness and propriety.
- Senior managers are held to high standards of conduct to set an example to employees and customers, and to maintain the reputation of the financial sector as a whole.
- A matter that is likely to receive significant press attention is clearly a matter that may be likely to affect a firm’s reputation.
- Senior manager conduct rule 4 confers a continuous self-reporting obligation.
- The FCA expects to be informed of matters relevant to a senior manager’s fitness and propriety by the senior manager and/or their firm. Prompt disclosure shows openness in dealing with the regulator.
- Regulated firms also have an obligation to report any issues relating to the fitness and propriety of their senior managers. The FCA criticised Mr Käärmann for not reporting the issues to the Wise Companies which would have enabled them to assess the need to report in line with their own regulatory obligations.
More generally, the decision is a reminder to firms and individuals that if information about them which they have not disclosed is brought to the FCA’s attention by a third party, aggressive enforcement action may be taken if the FCA considers the information significant.
