One man’s fight against the FSA

Ping! 10:21am, Thursday 14 January and an email arrives in Insurance Times’s inbox. It’s from FSA’s press office and reads: “FSA bans insurance broker for failing in his duties as a director”. It looks like the typical release the authority sends when it bans or fines a broker (and there have been quite a few in recent months). But dig deeper, and there’s a more complicated story.

Stephen Allen, a broker in the London market for almost 30 years and the man at the centre of the aforementioned press release, has had a rough time of it, to put it mildly.

He claims that the FSA’s release, which publicises his ban from holding any management role in the UK financial services industry, only tells part of the story. Far from being the strident watchdog it appears, the authority has, he says, suffered an embarrassing defeat at tribunal. And in a bid to prove it, he is taking on the regulator in a legal fight.

Allen was a director of Fabien Risk Services, a Lloyd’s broker with offices in the City, Romford and Bristol. Between September 2004 and September 2005 a series of events placed him in the firing line.

His colleagues at Fabien, co-director Shane Garvey and office manager Lee Goddard, authorised and colluded in the deliberate misrepresentation of the firm’s true financial position through the preparation of false and misleading accounts. A later tribunal hearing accepted that there was no evidence that Allen knew what was going on.

The business was forced into creditors’ voluntary liquidation in late 2005, with well over half of its £700,000 losses owed to insurers, brokers and underwriters. There has never been any criminal prosecution of the two men.

Shortly before the firm ceased to trade, Allen resigned as a director following disagreements with Goddard and Garvey.

He then received information from an underwriting agency about a “serious shortfall in the firm’s client account” and went straight to the FSA. Allen, a whistleblower who contributed to the FSA starting its investigation, ended up under investigation himself. This, he says, further rubs salt into the wounds.

‘Two auditors didn’t find anything wrong’

“Two independent auditors went through the books on two separate occasions and didn’t find anything wrong,” he explains. “I didn’t spot what was happening. I put money into the company, I bought shares, I took salary sabbaticals, I was a creditor. I was bringing in substantial amounts of brokerage – the best part of £400,000 a year. If I had known there was anything wrong, I wouldn’t have brought the business in.”

The resulting substantial deficiency on the client money bank account led to Allen paying the firm’s bank about £34,000 under the guarantee and indemnity that he had signed on 4 October 2004. He took out an additional mortgage to do this.

Allen says he has spent hundreds of thousands of pounds in his battle against the FSA, but says that his wife doesn’t know the full extent of what has happened; that he has had to keep his family separate from the situation. “I’ve still got my four kids to feed. It’s cost me quite a lot of money obviously. I’ve remortgaged my house to settle bills from the fallen company.

“I’ve had four Christmases where the presents haven’t been quite as large as they were before. There’s been a lot of sleepless nights. The mountains of paperwork that the FSA sent … I’ve tried to keep my wife away from it.”

The authority, which was conducting its own investigation into Fabien following its liquidation, dealt with Goddard and Garvey first.

On 19 September 2007, it hit them both with Final Notices – statutory documents finalising its findings. It said they both lacked integrity. Garvey was banned from working in the regulated financial services industry and Goddard from holding significant influence roles.

Full prohibition order

But fast-forward to 2008 and Allen’s FSA hell was about to hit boiling point. In May the financial watchdog issued a full prohibition order and said that because of his position as a director at the time of the wrongdoings, he should be banned from broking and holding management positions. It accused him of being “reckless” and acting with without “honesty” and “integrity”, as well as not being a “fit and proper person”.

Allen denied that he had known that the firm had used clients’ money improperly. He accepted from an early stage that he should have exercised closer scrutiny over the accounting processes of the firm and to that extent had failed in his duties as a director. He was prepared to stand down as a director of FSA-regulated firms as punishment – what is known as a partial prohibition.

But he refuted the other allegations, and the matter was referred to the Financial Services & Markets Tribunal.

Lie detector test

Allen took a polygraph (lie detector) test in a bid to prove that he had no knowledge of the misuse of client funds and that he had attempted to seek answers over the version of company accounts he was sent.

This tribunal, which sat over five days from 28 September last year, did not rely on the results of Allen’s polygraph test, but focused on key emails sent to Allen from Goddard and Garvey, and whether he knew that the firm had mishandled clients’ money.

“It was just me and a junior barrister,” said Allen. “They had a netball team of people there. It was David and Goliath.”

It decided that the quality of the financial information in the emails was not enough for it to conclude that Allen was dishonest. It said that there were severe limitations in the quality of the evidence presented by the FSA. It also said that it did not believe Allen “knowingly took an unreasonable risk” and so decided he was not reckless.

Separate consideration was given to whether he was reckless to ignore cumulative warning signs. It decided that the collusion of Goddard and Garvey to misrepresent the firm’s financial position meant that Allen may have been misled.

“We do not consider that Mr Allen turned a blind eye to the obvious or failed to follow up suspicious signs,” its report said. There was also evidence that he did follow up some suspicions and the tribunal concluded that he did not act without integrity.

This report relieved Allen as the tribunal overturned the full prohibition order of May 2008, instead deciding that a partial prohibition was appropriate – banning him from performing any management or controlled function.

But what tasted like victory soon turned sour when the FSA issued him with a Final Notice and draft of a press release it wanted to send out in January.

Allen and his legal team will claim the FSA was wrong to issue the Final Notice when it did, that it had not taken the full findings of the tribunal into account. Similarly, with the press release, Allen’s legal team will claim there were several misrepresentations.

“It wasn’t a fair reflection of what the tribunal said; very, very one-sided,” he says.

Allen, who is currently working as a broker for a London firm, says the publicity has also cost him his biggest account – a trade association with 400 members – but he hopes to win it back.

Application for revocation

Today, Allen is challenging the FSA through clauses in the Financial Services and Markets Act, issuing an application for revocation and claiming costs, which could see the case return to tribunal.

The FSA would only give this short statement: “The case has been through the due process.

An independent tribunal found that Mr Allen should be banned, and that is the action we have taken.” It refused to comment further.

Asked if he would go through with the whistleblowing again, Allen says: “Absolutely. There’s a guiding light above the FSA that’s impartial and that’s the tribunal. Whether the FSA gets it right or wrong, it’s there and it’s the best insurance policy in the world.” IT