FCA fine individual £350k for failure to disclose tax issues, highlighting importance of fitness & propriety declarations & board oversight

The FCA has fined Kristo Käärmann, CEO of Wise PLC and Senior Manager of Wise Assets UK Ltd, £350,000 after he failed to disclose tax evasion which later emerged via a third party.

In February 2021 Käärmann paid a £365,000 fine to HM Revenue & Customs (HMRC) for deliberately failing to declare Capital Gains Tax, after his sale of £10m worth of shares in 2017 generated a capital gains liability of over £700,000, which he failed to disclose.

Käärmann did not notify the FCA of his tax issues, failing to recognise their relevance to an assessment of his fitness and propriety between February 2021 and September 2021, during which time he held two Senior Managers functions at Wise Assets UK Ltd (SMF1, Chief executive and SMF3, Executive director).

As a Senior Manager, Käärmann would have been expected to notify the FCA of matters relevant to an assessment of his fitness and propriety- including those which may have adversely impacted his, or his firms’, reputation. Therefore, the FCA found him to have breached Senior Manager Conduct Rule 4 to “disclose appropriately any information of which the FCA would reasonably expect notice”.

The FCA subsequently commented that Käärmann’s actions “fell below the standards expected of those holding senior positions” at authorised firms, noting that “[a] CEO, in particular, is expected to set an example to their staff and their customers”.

Lessons to Learn

Firstly, this incident emphasises that Senior Managers in authorised firms must uphold their responsibility to inform the FCA of any changes to fitness and propriety.

Whilst a change to fitness and propriety does not automatically guarantee that the regulator will strip an individual of their approval (although the FCA must still assess whether they remain suitable to hold a senior position), openness and honesty is key. The regulator will not take kindly to individuals attempting to hide information, or discovering it via a third party, and this will likely result in a much worse outcome.

Secondly, firms’ boards should ensure all directors complete full fitness and propriety declarations annually (the equivalent of the F&P section of the FCA’s ‘Long Form A’) and that they fully understand their disclosure requirements if, at any time, their answers to the questions should change.

Aside from senior managers, firms should ask all staff to complete an annual fitness and propriety declaration, albeit a shortened version of the one used for senior managers. It is a requirement under SYSC 28.1 of the FCA rules that all relevant staff at all levels employed by a firm involved in insurance distribution are fit and proper.

However, the fining of Käärmann is also significant to the findings of the FCA’s recent culture and non-financial misconduct survey, which highlighted a lack of robust reporting processes and governance and oversight arrangements in many firms, causing the FCA to express concern that firms were ill equipped to effectively tackle non-financial misconduct and improve workplace culture.

The survey revealed that relevant whistleblowing and disciplinary policies were not in place at all firms it surveyed, 38% of respondents stated that boards and board level committees did not receive management information about non-financial misconduct, and a significant number of larger firms had no formal governance structure to determine outcomes/disciplinary action, and/or no board-level management information on non-financial misconduct.

Both the Käärmann case and the findings of the survey undermine the aim of SMCR and fitness and propriety tests and declarations to reduce harm and strengthen market integrity by creating a system that allows firms and regulators to hold people to account. If senior managers fail to disclose key information, and governance and oversight arrangements fail to adequately detect and deal with conduct issues, both the culture of the financial services and consumer trust within the sector will be adversely affected.

Whilst Kaartmann’s offence was initially financial, and later ruled a breach of the conduct rules due to his failure to disclose to the regulator, there is a chance that, if fitness and propriety assessments or declarations are not adequate, non-financial misconduct could also be perpetrated without detection or consequence.

For a sector already reeling from the reputational damage inflicted by the findings of the Sexism in the City report, firms should therefore reflect on their systems and processes to ensure that they are robust enough to decrease the risk of harm and protect the reputation of the sector.