Financial Services Authority v Fox Hayes

The Court of Appeal held that Fox Hayes did not take reasonable steps to ensure that the non-real time financial promotions approved by it were clear, fair and not misleading within the meaning of Conduct of Business Rule 3.8.4R.1 because the true promotional purpose was disguised. The court also held that Fox Hayes had reason to doubt that the overseas promoters would deal with United Kingdom customers in an honest and reliable way under COB rule 3.12.6R(2) from the outset of the promotions. The court treated the collective knowledge of the partnership as relevant, including undisclosed commissions received by the senior partner, and applied the evidential guidance in COB 3.8.5E regarding disguised promotional purpose. The Tribunal below was held to have erred in law in its contrary conclusions and declarations of breach were ordered; the question of penalty was remitted for further consideration because of unresolved issues about which individual partners would be liable and their financial circumstances.

Background and parties. The Financial Services Authority (the Authority) appealed from a decision of the Financial Services and Markets Tribunal arising from its decision notice imposing a £150,000 penalty on Fox Hayes, a firm of solicitors authorised under the Financial Services and Markets Act 2000. Fox Hayes had approved promotional literature for a number of unauthorised overseas companies seeking United Kingdom investors in OTC Bulletin Board and Regulation S shares. As a result of the promotions 670 investors invested a total of $20,350,986.83 and most of that money was lost.

Nature of the application and procedural history. Fox Hayes referred the Authority's decision to the Tribunal, which heard the matter in June 2007 and made findings, answering specific questions about compliance with the Conduct of Business Rules (COB) and Principle 2. The Tribunal concluded that Fox Hayes had taken reasonable steps under COB 3.8.4R.1 and had no reason to doubt the overseas persons under COB 3.12.6R(2) until mid-November 2003. The FSA obtained permission to appeal to the Court of Appeal on points of law.

Key facts and issues.

• Promotions were based on offering a free research report into a United Kingdom company as a device to obtain consent to be contacted about purchase opportunities in high-risk, illiquid OTC shares.
• Fox Hayes approved the promotional letter, response form and terms and conditions for the overseas companies and operated an "escrow" client account to receive investor funds.
• The senior partner, Mr Manning, received undisclosed commissions (stated in the determination to total the U.S. dollar equivalent of £454,770) which were not revealed to investors and were concealed from fellow partners until shortly before the Tribunal hearing.

Issues for the Court of Appeal. The court considered whether the Tribunal erred in law in (i) finding the promotions clear, fair and not misleading under COB 3.8.4R.1, (ii) finding that Fox Hayes had no reason to doubt the honesty and reliability of the overseas persons until mid-November 2003 under COB 3.12.6R(2), and (iii) finding that Fox Hayes conducted its business with due skill, care and diligence.

Reasoning and disposition. The Court of Appeal concluded that the promotional purpose was disguised and that COB 3.8.5E supported the inference that Fox Hayes did not take reasonable steps to ensure the promotions were clear, fair and not misleading. Given the disguised purpose and the senior partner's undisclosed commissions, the court concluded that there was reason to doubt the honesty and reliability of the overseas promoters from the start. The Tribunal's contrary legal conclusions were held to be erroneous. The court made declarations of breach of COB 3.8.4R.1 and COB 3.12.6R(2). On penalty the court reasoned through the statutory factors, observed the seriousness and recklessness of the misconduct and discussed an appropriate starting point for penalty, but remitted determination of the final penalty and which partners were liable to the Tribunal to resolve questions of partner identity and their financial circumstances.

Appeal allowed in part. The Court of Appeal declared that Fox Hayes breached Conduct of Business Rule 3.8.4R.1 (failed to take reasonable steps to ensure non-real time promotions were clear, fair and not misleading) and COB 3.12.6R(2) (had reason to doubt the honesty and/or reliability of the overseas persons at the time the promotions began). The Tribunal below erred in law in reaching the contrary conclusions. Because of unresolved questions as to which partners are legally liable and their means, the court remitted the penalty questions to the Tribunal for determination.

Appeal from the Financial Services and Markets Tribunal (FIN/2006/0015). The Tribunal conducted an eight day hearing in June 2007 and made a determination on 24 September 2007, with a further determination on 29 February 2008 reducing the penalty to £146,000 and addressing secret commissions. The Tribunal granted permission to the FSA to appeal on points of law on 23 April 2008. The appeal was heard in the Court of Appeal and resulted in the present judgment [2009] EWCA Civ 76.