FINAL NOTICE

To:
Mr George McGregor (“Mr McGregor”)

Number:
GXN01326

1.
ACTION

1.1.
For the reasons given in this notice, the Financial Services Authority (“FSA”) hereby:

(1)
imposes on Mr McGregor a financial penalty of £109,000; and

(2)
makes an order prohibiting Mr McGregor from performing any

function in relation to any regulated activities carried on by any

authorised or exempt persons, or exempt professional firm (“the

Prohibition Order”).

1.2.
The FSA considers that Mr McGregor’s misconduct warrants a penalty of £1 million.

However, the FSA is mindful that such a penalty would result in serious financial

hardship for Mr McGregor and so the FSA has reduced the level of penalty. In

addition, McGregor agreed to settle at an early stage of the FSA’s investigation. He

therefore qualified for a 30% (stage 1) discount under the FSA’s executive settlement

procedures.

2.
SUMMARY OF REASONS

2.1.
The FSA has imposed the Prohibition Order and financial penalty on Mr McGregor as

a result of his conduct as an approved person under section 59 of the Financial

Services and Markets Act 2000 (“the Act”), for breaches of the FSA’s Statements of

Principle for Approved Persons (“APER”) in relation to his conduct as Finance

Director of Royal Liver Assurance Limited (“RLA”).

2.2.
From May 2009 until November 2009 (“the Relevant Period”) Mr McGregor was the

Finance Director and had Controlled Function 1 (Director) responsibilities. During the

Relevant Period he failed to act with honesty and integrity in carrying out his

controlled function, in breach of Statement of Principle 1, in that he:

(1)
failed to follow RLA’s internal procedures in relation to entering an

investment services contract between RLA and “Company A” and a

further such contract between RLA and “Company B” despite his

knowledge of those procedures;

(2)
failed to inform RLA’s Capital Management Group of the two

contracts in advance of entering into them despite knowing that he

should have done;

(3)
knowingly withheld the fact that he was making bonus payments to a

former employee through the mechanism of these two contracts from

others at RLA; and

(4)
falsified the necessary authorising signature of RLA’s CEO to

facilitate two payments by RLA each of approximately £1.8 million

(a total of approximately £3.6 million) under the two contracts.

2.3.
As a result of the above breaches, Mr McGregor was dismissed from his employment

with RLA on 25 March 2010. RLA reported the matter to the FSA on 26 November

2009.

2.4.
These failings are particularly serious because:

(1)
Mr McGregor was a senior Director of RLA and he was in a position

of trust;

(2)
Mr McGregor abused his position in RLA, circumventing systems

and controls which he himself had been instrumental in

implementing;

(3)
Mr McGregor acted dishonestly in falsifying the signature of the

CEO; and

(4)
Mr McGregor’s actions have caused RLA to make payments of at

least £3.6 million and incur a total possible contractual liability of up

to £18 million.

2.5.
Having regard to the nature and seriousness of the breaches, the FSA has concluded

that Mr McGregor fails to meet the minimum regulatory standards in terms of honesty

and integrity and is not a fit and proper person to perform any functions in relation to

regulated activities carried on by authorised persons, exempt persons and professional

firms.

2.6.
The FSA has also concluded that in the circumstances, Mr McGregor has breached

Statement of Principle 1 of the Statements of Principle and Code of Practice for

Approved Persons and it is appropriate to impose on him a financial penalty of

£109,000.

3.
FACTS AND MATTERS

3.1.
During the Relevant Period RLA was an incorporated friendly society and carried on

business as a life insurance company. It managed policies on behalf of its customers.

These customers, as policyholders and accordingly, members of the friendly society,

owned RLA, and the main aim of RLA as a friendly society was to operate for the

benefit of those members. RLA had approximately two million members in the UK

and Republic of Ireland and over three million policies in force.

3.2.
RLA was part of the Royal Liver Group. Its governing body was the Committee of

Management (“the Board”), which operated with the support of a number of Board

Committees. One of the committees that reported to the Board was the Capital

Management Group. The purpose of the Capital Management Group was to ensure

that RLA’s working capital was most effectively deployed at all times and it was

responsible for the selection, appointment and removal of investment managers.

Mr McGregor’s role at RLA

3.3.
Mr McGregor was a member of RLA’s Board from 9 June 2003 to 25 March 2010,

first as Corporate Services Director and subsequently as Finance Director. He was

Chairman of the Capital Management Group and had overall responsibility for that

committee. In his role as Finance Director he was responsible for drafting the

procedures for tendering and executing contracts at RLA.

The two contracts with Company A and Company B

3.4.
Companies A and B were both under the ultimate control and ownership of a third

party who was a former employee of RLA. Mr McGregor was responsible for

negotiating the bonus the former employee was due under the terms of his severance.

Mr McGregor thought that the amount of bonus he had agreed with the former

employee would not have been approved by other members of RLA’s Board.

Therefore, Mr McGregor sought to conceal the former employee’s bonus from others

at RLA by entering into two contracts with Company A and Company B which were

ultimately controlled by the former employee. Pursuant to the terms of both contracts,

RLA would pay substantial sums to Companies A and B.

3.5.
The first contract, signed by Mr McGregor on behalf of RLA, with Company A was

dated 30 June 2009 (the “First Contract”). It was effective for a period of three

months and was superseded by a second contract, which was signed by Mr McGregor

on behalf of RLA with Company B and dated 24 July 2009 (the “Second Contract”).

3.6.
Mr McGregor thought that, in addition to discharging the bonus he had agreed with

the former employee, investment advice would be provided by Companies A and B

under the two contracts. In return, RLA would pay Companies A and B substantial

fees.

3.7.
Mr McGregor instructed RLA’s Legal team to assist with drafting the two contracts.

This it did, entering into correspondence with the former employee regarding them.

However, Mr McGregor did not inform the Legal team of the quantum of any fees

payable under the contracts. Under the First Contract the fees were 0.06% of the value

of the portfolio to be invoiced on 1 July 2009. The portfolio was defined in the

contract and consisted of a large proportion of RLA’s life fund. Invoices subsequently

received from Companies A and B valued the portfolio in excess of £2.5 billion. The

fees payable under the Second Contract were 0.06% of the value of the portfolio to be

calculated and invoiced quarterly from October 2009 to October 2010. Thereafter the

fees were 0.05% of the value of the portfolio, to be calculated and invoiced quarterly

from January 2011 to April 2012.

3.8.
Mr McGregor states that, due to a miscalculation on his part, the fees payable by RLA

under the two contracts were ten times higher than he intended. Mr McGregor agreed

to fees of 0.06% (and later 0.05%) of the portfolio. However, he had intended, and

thought at the time, that he was agreeing to pay amounts which would in fact have

equated to 0.006% (and later 0.005%) of the portfolio.

Negotiation and execution of the contracts without following internal procedures

3.9.
As set out above, Mr McGregor intended Companies A and B to provide investment

advice services. Contracts for such services were subject to the terms of RLA’s

“Procedures for Tenders and Contracts”. Mr McGregor was involved in drafting

these procedures and was well aware of their contents. Irrespective of the mistake

made by Mr McGregor when calculating the fees, the value of the contracts was such

that he was required to follow a tender process and obtain:

(1)
financial reference checks and business reference checks;

(2)
a declaration that the contracting party is not connected to any senior

employee of RLA; and

(3)
a review by RLA’s tax department of the contract terms to be agreed,

prior to agreement of a contract.

He did not obtain or carry out fully any of the above.

3.10. The Capital Management Group (a sub-committee of RLA’s board) was responsible

for ensuring that RLA’s working capital was effectively deployed. Mr McGregor was

Chairman of the Capital Management Group and would have known that the contracts

should have been brought to the attention of the Capital Management Group.

However, neither of the contracts were brought to the attention of the Capital

Management Group.

3.11. RLA’s Board Control Manual required Mr McGregor to seek Board approval before

entering into the contracts, although Mr McGregor did not believe this to be the case,

based upon what he believed was payable under the contract (as a result of his

miscalculation). Mr McGregor did not inform the Board that he was entering into the

contracts and as such did not seek Board approval.

3.12. Mr McGregor’s failure to follow internal procedures and consult the relevant internal

committee led to a significant increase in the risk that his mistake in calculating the

fees would go unnoticed until after the contracts had been entered into.

Falsification of invoice approval forms

3.13. Pursuant to the terms of the contracts entered into with Companies A and B, RLA

received invoices dated 3 July 2009 for £1,814,686 (including VAT) (from Company

A) and 1 October 2009 for £1,826,868 (including VAT) (from Company B). Upon

receiving the first invoice in July 2009, Mr McGregor realised for the first time that he

had miscalculated what he had anticipated would be paid under the contracts. Mr

McGregor was aware that both invoices, being for substantially higher amounts than

he had previously calculated, required approval by RLA’s CEO because they

exceeded his authorisation limit of £500,000 per payment.

3.14. Mr McGregor falsified the signature of RLA’s Chief Executive Officer on internal

invoice approval forms to facilitate payment of the invoices to each of Company A

and Company B. He falsified the signature because he knew that if the invoices had

7


been brought to the CEO’s attention for approval, they would not have been approved

and his miscalculation of the fees would have come to light.

3.15. The invoices appeared to have been approved within RLA’s payment authorisation

systems and as a consequence £1,814,686 (including VAT) was paid to Company A

on 4 August 2009 and £1,826,868 (including VAT) was paid to Company B on 19

October 2009.

4.
FAILINGS

4.1.
The regulatory provisions relevant to this Final Notice are referred to in Annex A.

Breach of Statement of Principle 1

4.2.
Mr McGregor was RLA’s Finance Director, a member of the Board and he chaired

the Capital Management Group. He held a responsible and senior position at RLA

and exercised a significant influence over RLA’s business. It was his responsibility to

ensure that he adhered to the procurement and authorisation of contracts requirements,

and the Board was entitled to expect and assume that he would follow its policies and

procedures. Mr McGregor used his position deliberately to subvert and bypass RLA’s

governance and authorisation procedures in the following material respects:

(1)
Mr McGregor failed to follow RLA’s internal procedures in relation

to entering investment services contracts between RLA and

Companies A and B notwithstanding his knowledge of those

procedures;

(2)
Mr McGregor failed to inform RLA’s Capital Management Group of

the two contracts in advance of entering into them despite knowing

that he should have done;

(3)
Mr McGregor knowingly withheld the fact that he was making bonus

payments to a former employee through the mechanism of these two

contracts from others at RLA; and

(4)
Mr McGregor falsified the necessary authorising signature of RLA’s

CEO to facilitate two payments by RLA each of approximately £1.8

million under the two contracts.

4.3.
In respect of the above matters Mr McGregor acted without integrity in breach of

Statement of Principle 1 and dishonestly in falsifying the necessary authorising

signature of RLA’s CEO.

Fit and Proper

4.4.
Mr McGregor’s conduct fell short of the standards required by the FSA’s Fit and

Proper Test for Approved Persons. For the reasons set out above, Mr McGregor

failed to act with honesty and integrity. As such, he is not a fit and proper to perform

any functions in relation to regulated activities.

5.
SANCTION

Prohibition order

5.1.
In considering whether to impose a prohibition order, the FSA has had regard to the

provisions of the FSA's Enforcement Guide ("EG") and in particular the provisions of

5.2.
Mr McGregor’s conduct is so serious that he has failed to act with integrity which is

necessary to be considered fit and proper to perform any functions in relation to

regulated activities.

5.3.
Having regard to its regulatory objectives, including the need to maintain confidence

in the financial system and to secure the appropriate degree of protection for

consumers, the FSA considers it necessary to impose a Prohibition Order on Mr

McGregor.

5.4.
The FSA's policy on the imposition of financial penalties is set out in Chapter 6 of the

Decision Procedures and Penalties Manual ("DEPP") part of the FSA Handbook.

This sets out a non-exhaustive list of criteria that may be of particular relevance in

determining the appropriate level of financial penalty for an approved person.

5.5.
In determining that a financial penalty is appropriate and proportionate in this case,

the FSA has considered the facts and matters involved in the breach of Statement of

Principle 1 set out above and all the relevant circumstances of the case. The FSA

considers the following factors to be particularly important:

(1)
In determining the appropriate level of penalty, the FSA has had

regard to the need to promote high standards of regulatory conduct by

deterring those who have committed breaches from committing

further breaches and to help to deter others from committing similar

breaches.

The nature, seriousness and impact of the breach

(2)
Mr McGregor’s conduct was particularly serious given his senior role

as Financial Director, and his abuse of that responsibility and position

to enable him to enter into contracts on behalf of RLA and procure

payment to Company A and Company B without the necessary

authorisation. The impact of the breach is also serious as it has

resulted in making payments to the companies of at least £3.6 million

and incurring a possible contractual liability for RLA of up to £18

million.

The extent to which the breach was deliberate or reckless

(3)
The authorisation of payments under the two contracts was as a result

of a deliberate course of conduct on Mr McGregor’s part.

Whether the person on whom the penalty is to be imposed is an individual


(4)
The FSA recognises that the financial penalty imposed on Mr

McGregor is likely to have a significant impact on him as an

individual.

The size, financial resources and other circumstances of the person on whom the

penalty is to be imposed

(5)
There is evidence to suggest that Mr McGregor would be unable to

pay the proposed penalty of £1 million. Accordingly the penalty has

been reduced to £155,771 (and further reduced by 30% in accordance

with the FSA’s early settlement scheme).

The amount of benefit gained or loss avoided

(6)
The FSA has no evidence to suggest that Mr McGregor made any

financial gain from his course of conduct.

Conduct following the breach

(7)
Mr McGregor has co-operated fully with the FSA in its investigation

and admitted to his misconduct from the outset.

Disciplinary record and compliance history


(8)
The FSA has not previously taken any disciplinary action against Mr

McGregor.

Mitigating Factors

(9)
The events relayed above took place during a particularly stressful

period for Mr McGregor at RLA.

5.6.
In light of these factors the FSA considers that a financial penalty of £109,000 is

appropriate in this case.

6.
PROCEDURAL MATTERS

Decision Maker

6.1.
The decision which gave rise to the obligation to give this Notice was made on behalf

of the FSA by the Settlement Decision Makers.

6.2.
This Final Notice is given under sections 57 and 67 and in accordance with section

390 of the Act.

Manner of and time for payment

6.3.
The FSA is in possession of evidence that it would cause Mr McGregor serious

financial hardship or financial difficulties if he was required to pay the full payment in

a single instalment. Accordingly, the financial penalty of £109,000 must be paid in

full in instalments as follows:

(1)
Monthly payments of £564.25 for the 12 calendar months from the date of this

Notice. The first payment will be due on 9 October 2011 and each subsequent

payment will be due one calendar month after the proceeding payment, with

the final such payment due on 9 September 2012.

(2)
£102,229.00 payable within 12 calendar months of the date of this Notice, i.e.

by 9 September 2012.

If the financial penalty is not paid

6.4.
If any or all of the instalments of the financial penalty is outstanding after its due date

for payment, the FSA may recover the outstanding amount as a debt owed by Mr

McGregor and due to the FSA.

6.5.
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of information

about the matter to which this notice relates. Under those provisions, the FSA must

publish such information about the matter to which this notice relates as the FSA

considers appropriate. The information may be published in such manner as the FSA

considers appropriate. However, the FSA may not publish information if such

publication would, in the opinion of the FSA, be unfair to you or prejudicial to the

interests of consumers.

6.6.
The FSA intends to publish such information about the matter to which this Final

Notice relates as it considers appropriate.

FSA contacts

6.7.
For more information concerning this matter generally, contact Greg Sachrajda (direct

line: 020 7066 3746 /fax: 0207 066 3747) of the Enforcement and Financial Crime

Division of the FSA.

FSA Enforcement and Financial Crime Division

ANNEX A

1.
Relevant Statutory Provisions and Guidance

1.1.
The FSA’s statutory objectives, as set out in section 2(2) of the Act, include

maintaining market confidence in the financial system and the protection of

consumers.

1.2.
The FSA has the power pursuant to section 56 of the Act to make an order prohibiting

an individual from performing a specified function, any function falling within a

specified description, or any function, if it appears to the FSA that that individual is

not a fit and proper person to perform functions in relation to a regulated activity

carried on by any authorised person, exempt person or exempt professional person.

1.3.
Section 66 of the Act provides:

(1)
“The Authority may take action against a person under this section if
it appears to the Authority that he is guilty of misconduct; and
the Authority is satisfied that it is appropriate in all the circumstances to take
action against him.


(2)
A person is guilty of misconduct if, while an approved person –
he has failed to comply with a statement of principle issued under section 64;


(3)
If the Authority is entitled to take action under this section against a person, it
may…impose a penalty on him of such amount as it considers appropriate;”


1.4.
The Statements of Principles and Code of Conduct for Approved Persons are issued

under section 64 of the Act. Statement of Principle 1 states “An approved person

must act with integrity in carrying out his controlled function.”

1.5.
The FSA’s general approach to determining whether to impose a financial penalty and

the appropriate level of any such penalty is set out in the Decision Procedures and

Penalties Guide (“DEPP”), which is part of the Handbook of Rules and Guidance.

The applicable penalty regime in this instance is that which was in force prior to 6

March 2010. The principal purpose of imposing a financial penalty is to promote high

standards of regulatory conduct by approved persons who have breached regulatory

requirements from committing further contraventions, helping to deter other approved

persons from committing contraventions and demonstrating, generally, to approved

persons, the benefit of compliant behaviour (DEPP 6.1.2G).

1.6.
DEPP 6.5.2 G sets out a non-exhaustive list of thirteen factors that may be relevant to

determining the appropriate level of financial penalty. In considering whether to

impose a financial penalty and the amount of the penalty to impose, the FSA has also

had regard to the provisions of the Enforcement Guide (“EG”) which were in force

during the Relevant Period.

1.7.
Guidance relating to prohibition orders is also contained in the EG. This states that

the FSA may exercise its power to prohibit individuals where it considers that, to

achieve any of its regulatory objectives, it is appropriate either to prevent an

individual from performing any function in relation to regulated activities or to restrict

the activities which he may perform (EG 9.1).

(1)
“In deciding whether to make a prohibition order the FSA will

consider all the relevant circumstances including whether other

enforcement action should be taken” (EG 9.3). A non-exhaustive list

of nine relevant circumstances is given, including:

“(2)
whether the individual is fit and proper to perform functions in
relation to regulated activities.” The criteria for assessing this
are set out in FIT 2.1, 2.2 and 2.3;

“(3)
whether and to what extent the approved person has:

(a) failed to comply with the Statements of Principle issued by
the FSA with respect to the conduct of approved persons;”

“(5)
The relevance and materiality of any matters indicating
unfitness;”

“(7)
The particular controlled functions the approved person is
performing, the nature and activities of the firm concerned and
the markets in which he operates”; and

“(8)
The severity of the risk which the individual poses to consumers
and to confidence in the financial system.”

(2)
“The scope of a prohibition order will depend on the range of

functions which the individual concerned performs in relation to

regulated activities, the reasons why he is not fit and proper and the

severity of risk which he poses to consumers of the market generally”

(EG 9.5).

1.8.
The FSA Handbook also sets out rules and guidance relating to the Fit and Proper

Test for Approved Persons (“FIT”). FIT 1.1.3 G and 1.3.2 G provide as follows:

“The FSA will have regard to a number of factors when assessing the fitness and
propriety of a person to perform a particular controlled function. The most important
considerations will be the person’s:

honesty, integrity and reputation;

competence and capability; and

financial soundness”. (FIT 1.1.3 G)

“In assessing fitness and propriety, the FSA will also take account of the activities of
the firm for which the controlled function is or is to be performed, the permission held
by that firm and the markets within which it operates.” (FIT 1.3.2 G)

1.9.
FIT 2.1.1 G provides that in determining a person’s honesty, integrity and reputation,

the FSA will have regard to matters including, but not limited to, those set out in FIT

2.1.3 G. FIT 2.1.3 G provides that relevant factors are:

(1)
“(5) whether the person has contravened any of the requirements and

standards of the regulatory system…”; and

(2)
(11) whether the person has been dismissed.....from employment or

from a position of trust, fiduciary appointment or similar”.