The Prudential Regulation Authority (PRA) has banned non-approved person Mr Michael Graeme Grimsdale and former director Mr Richard Charles Nichols from the financial services industry on the grounds of lack of integrity (and dishonesty on the part of Mr Grimsdale). It has also issued public censures to Mr Nichols and former directors Ms Gillian Birkett and Mr Phil Neale. All were involved in the failure of Enterprise the Business Credit Union Ltd (EBCU) in 2015, which had 1,900 members and £7m in savings.
This enforcement action is the PRA’s first against individuals involved in a credit union and the first action against a non-approved person. The PRA expects directors and senior managers to understand their responsibilities with regards to governance and the management of conflicts of interest, and to ensure they and the firm comply with the PRA’s regulatory requirements. The careful and prudent management of a firm’s financial resources is paramount to its safety and soundness. The PRA will consider enforcement action where an individual’s misconduct puts the safety and soundness of a firm at risk.
EBCU entered into administration and subsequently liquidation in 2015 for failing to meet the requisite capital requirement. Before this, the individuals’ misconduct contributed to EBCU breaching a PRA requirement not to accept deposits, issue new loans or vary the terms of existing loans, which had been imposed in 2014 as a result of the credit union’s deteriorating capital position.
Mr Grimsdale’s conduct demonstrated a lack of integrity and in some respects dishonesty, which has resulted in his ban. As director of EBCU’s outsourced service-provider, he paid out c. £650,000 of loans in contravention of the PRA’s requirement and concealed his actions from EBCU. He also exploited his involvement with EBCU to invoice and improperly pay fees to the outsourced third-party provider on materially higher terms than those agreed by the EBCU Board.
Mr Nichols, Ms Birkett and Mr Neale have been censured for failing to act with due skill, care and diligence in performing their director roles at EBCU. They all held roles as remunerated directors at companies that received fees and commission – directly and indirectly – from EBCU.
In addition, Mr Nichols has been banned for acting recklessly as to the accuracy of information he provided to EBCU’s auditors and the PRA concerning the credit union’s financial position. Mr Nichols - also a director of the outsourced service-provider - was in a better position than the other directors of EBCU to oversee and monitor the activities of the outsourced service-provider (and those of Mr Grimsdale) but he failed to do so. This demonstrated a lack of integrity. Were it not for Mr Nichols’ financial circumstances, the PRA would also have imposed a financial penalty of £20,000.
Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the PRA said:
“Our first enforcement action against individuals involved in a credit union highlights the importance of strong governance within credit unions. Senior managers who fail to act with integrity in their roles at credit unions can expect to be held to account.”
Ultimately, these individuals’ misconduct contributed to EBCU’s failure. The Financial Services Compensation Scheme (FSCS) has consequently paid out over £7 million to EBCU’s members, of which it has recovered just under £3 million to date.