Financial Services Authority v Fox Hayes (a firm)

An authorised person approving a non-real-time financial promotion must take reasonable steps to ensure that its true promotional purpose is clear, fair and not misleading. A communication which uses an offer of free research to conceal its purpose of obtaining access to investors for the sale of high-risk shares breaches that requirement.

That concealment can itself give the approver reason to doubt whether an overseas promoter will deal with United Kingdom customers honestly and reliably. In assessing a partnership’s regulatory compliance, the relevant knowledge is the partnership’s combined knowledge, including that of a senior partner who has concealed a personal commission from colleagues.

Fox Hayes, an authorised firm of solicitors, approved promotional documents used by unauthorised overseas companies. The documents offered United Kingdom investors free research into companies in which they already held shares. Their purpose was to obtain consent for telephone approaches promoting high-risk, illiquid OTC Bulletin Board shares.

The Financial Services Authority imposed a £150,000 penalty. On a reference, the Financial Services and Markets Tribunal held that the promotions were clear, fair and not misleading, and that there was no reason to doubt the overseas companies’ honesty and reliability until mid-November 2003. Its further determination reduced the penalty to £146,000.

The Authority appealed on points of law under section 137(1) of the Financial Services and Markets Act 2000. The central issues were whether the Tribunal had applied the Conduct of Business Rules correctly and what penalty should follow.

1. Appeal allowed. The court held that Fox Hayes had breached COB rule 3.8.4R.1. The relevant question was not confined to the immediate wording or surface effect of the documents. The firm had to consider the promotion’s actual purpose. The Tribunal had found that the whole purpose of the free-research offer was to secure consent for approaches intended to sell OTC Bulletin Board shares. That purpose was concealed rather than plainly stated.

2. COB rule 3.8.5E reinforced that conclusion. The promotional purpose was disguised behind an offer of research about an existing United Kingdom shareholding. The vague reference to opportunities to invest in unquoted companies did not fairly disclose the intended sale of high-risk, illiquid shares. Fox Hayes therefore failed to take reasonable steps to ensure that the promotions were clear, fair and not misleading.

3. Fox Hayes also breached COB rule 3.12.6R(2) from the outset. A promoter which disguises the purpose of its approach gives reason to doubt whether it will deal honestly and reliably with customers. Protection under the rule was not confined to the later telephone sale: non-real-time promotions required protection because they could lead to such sales.

4. The Tribunal had additionally erred by separating Mr Manning’s knowledge from that of the firm. Regulatory compliance had to be assessed by reference to the partnership’s combined knowledge. Mr Manning’s concealed 4% commission, paid because he arranged the firm’s work, gave further reason to doubt the overseas companies’ honesty and reliability.

5. An authorised person bears the duty to comply with the rules. A regulator is not obliged to provide advice or guidance on whether proposed conduct complies. Guidance may affect penalty only where it was given on full facts. The Authority did not know the promotions’ true purpose, the firm’s knowledge of it, or Mr Manning’s commission.

6. For penalty purposes, the misconduct was serious and at least reckless. A starting penalty of £750,000 was reduced to £500,000 because the case had aspects of a test case. Mr Manning’s £454,770 commissions were profits accrued without additional overhead and were to be added in full. The resulting £954,770 figure was remitted to the Tribunal to determine the liable partners and any reduction for their financial resources.

Lawrence Collins LJ added that professional persons whose approval lends respectability to financial documents must recognise the comfort that their name gives potential investors and be alert where it facilitates solicitation.

• Court of Appeal (Civil Division): Allowed the Financial Services Authority’s appeal, declared breaches of COB rules 3.8.4R.1 and 3.12.6R(2), and remitted the final penalty issues to the Tribunal. [2009] EWCA Civ 76
• Financial Services and Markets Tribunal: In proceedings numbered FIN/2006/0015, its determination of 24 September 2007 rejected the alleged breach of the clear, fair and not misleading requirement and found that reasons to doubt honesty and reliability arose only in mid-November 2003. Its further determination of 29 February 2008 reduced the penalty from £150,000 to £146,000.