FCA Public Censure: Keydata Compliance Officer should have resigned

The Financial Conduct Authority (FCA) has published a final notice against Peter Johnson, the former compliance officer at Keydata, which concluded that he had breached requirements of integrity and openness. 

Johnson was publicly censured but no financial penalty was applied since he had proved that he was in reduced financial circumstances. The FCA said he should have made it clear to Keydata's board of directors what actions needed to be carried out and should have considered resigning as compliance officer if the board did not heed his advice.


Keydata was involved in the manufacture of structured products and their distribution via independent financial advisers. It also administered products of other institutions. The events in question concerned two products: SLS and Lifemark. Both of these products were invested into U.S. senior life settlement policies. 

Such policies are life insurance policies that are sold by the person insured for a sum that is more than its surrender value but less than its death benefit. The idea behind the product is that the buyer will continue to pay the premiums and, on the death of the life assured, receive the benefit. There is no certainty about when the death will occur and hence when payment will be received.

Financial Services Authority guidance

Following the collapse of Keydata, the then-regulator, the Financial Services Authority (FSA) issued guidance in April 2012 on traded life policy investments (TLPIs) in which it strongly recommended that such products "should not reach the vast majority of retail clients". 

Rather like a parent addressing an errant child, the FSA said: "This is not the first time we have warned the industry about these products." 

The FSA's concern was that the products were complex and high-risk in nature. The regulator offered the following thoughts in particular:
    • The assured individuals may live longer than expected.

    • The life policies are a highly illiquid investment.

    • Parties connected with the TLPI may become insolvent, for example the insurer.

  • There were concerns about governance, for example, conflicts of interest and the location of assets offshore.
The collapse of Keydata

The FCA found that the problems with the SLS portfolio had begun in November 2006. As long ago as January 2007 there were rumours about the longevity of Keydata's SLS product and Johnson was told by email that it would "go into default in the next 20 days. This means that income payments will stop and capital will be recovered on a partial basis." 

Payments from SLS were received late by Keydata and payments stopped entirely from August 2008 onwards. Keydata itself, however, continued to make the payments to underpin the product, until Keydata was put into administration in June 2009.

FCA action against individuals

In 2015 the FCA issued decision notices proposing fines and banning orders for Stewart FordMark Owen, Peter Johnson and Craig McNeil. 

McNeil was issued with a final notice in September 2015 and was given a financial penalty of £350,000 and an order prohibiting him from performing any significant influence function in relation to any regulated activity. 

Ford, Owen and Johnson referred their cases to the Upper Tribunal for rehearing. In an interim tribunal decision earlier this year it was clarified that: "Mr Johnson now accepts that his conduct during the relevant period fell below the standard to be expected of him as a compliance officer and has conceded that his conduct reflected a lack of experience and professional judgement."

Ford, Owen and (initially) Johnson were parties to an action launched in June 2015 against the FCA claiming, among other things, that the FCA had acted unlawfully in that it had an ulterior motive for its interventions against Keydata and that it had engaged in "deliberate acts and/or omissions which were wrongful and which represented an abuse of, and misfeasance in, public office and that the Authority had acted in bad faith". 

This action has yet to conclude and, from the tribunal's decision, it seems unlikely that the FCA's actions against Ford and Owen will be finalised before that action is dealt with.

Johnson's wrongdoing

Johnson's failings were collated as breaches of Statement of Principle 1 (integrity) and Statement of Principle 4 (openness with the regulator). 

Statement of Principle 1

The FCA found that Johnson had received professional advice on a number of occasions from December 2008 onwards, and that this had flagged up, among other things, a problem with Lifemark's financial promotions. 

The FCA said that Johnson "recklessly failed either to take adequate steps to ensure that Keydata addressed the issues and risks that had been identified in relation to the Lifemark products or to take adequate steps to stop Keydata from marketing and selling the Lifemark products until effective remedial steps were taken".

Johnson had also "deliberately misled the Authority" by representing that there had never been problems with income payments on the SLS products when he was aware that there had previously been problems with income and that there was "considerable doubt about whether SLS would make income payments and of the serious liquidity and other risks with the Lifemark Portfolio".

Statement of Principle 4

As suggested above, the FCA found that Johnson had not been open with it. In June 2009, Keydata had provided the regulator with a detailed spreadsheet representing that Keydata expected to receive income payments from SLS in 2009 and 2010. 

The FCA found that "at this time Mr Johnson was aware that SLS had not paid income in 2007 and 2008 and that there was considerable doubt about whether SLS would do so in future".

Johnson failed to notify the FCA at any stage about the failure of the SLS products to perform or that there was a risk of failure of the portfolio.

What Johnson could have done

The FCA pointed to actions that Johnson might have taken, for example:
    • refused to sign off financial promotions for the Lifemark products; and/or

  • made it clear that, if the Keydata board of directors did not commit Keydata to taking actions he knew needed to be taken, he would have no alternative but to resign from his position and/or notify the FCA of the issues.
These nuclear remedies are known to all compliance officers as the final steps they need to be prepared to take in extreme situations. It is not, of course, known why Johnson did not take them. 

There may possibly be three factors involved. First, he may share a trait common to many disgraced persons in having started out gradually along a behavioural route from which he later (but too late) realised he could not return. Secondly, he may have been able to justify to himself that things were not as bad as they really were, a form of optimism amounting to wishful thinking. Thirdly, he may have drawn comfort from the knowledge he was acting in the same enterprise with other people, particularly under the leadership of a charismatic chief executive. 

What this case shows once again is that the responsibilities of senior management under the regulatory regime are strictly personal and each person is solely responsible for his own actions. It is no defence to say that others behaved badly, or worse, or to claim that actions were dictated by others under the influence of the firm's hierarchy.

Compliance officers need to protect themselves against a firm's culture of wishful thinking which might be used to justify subjectively actions that are objectively wrongful. Maintaining objectivity requires a curiosity about the applicable standards in other firms and an understanding of what others might do in any given situation. 

Networking, courses, seminars, continuing professional development and participation in professional bodies are all ways in which people can try to remain grounded.


  • Ashley Kovas is a member of the regulatory intelligence team at Thomson Reuters Regulatory Intelligence. A Chartered Fellow of the Chartered Institute for Securities and Investment (CISI), he has worked for the Financial Services Authority, asset managers, banks and insurance companies. He is the author of "Understanding the Financial Conduct Authority: a Guide for Senior Managers"; the views expressed are his own.

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