Financial Services Authority – Regulation – Overseas investment – Respondent firm authorised to approve communications from overseas companies to potential UK investors – Senior partner receiving secret commissions – Financial Services and Markets Tribunal finding promotions clear, fair and not misleading – Tribunal deciding respondent had no reason to doubt honesty and reliability of overseas companies – Whether tribunal erring in law – Appeal allowed
The respondent solicitor was an authorised person for the purposes of the Financial Services and Markets Act 2000 and held itself out as being prepared to approve communications made between overseas companies (unauthorised persons) and potential buyers of shares in the UK. The respondent had approved several financial promotions for unauthorised overseas companies in the form of letters sent to private investors in the UK, offering a free report into a company in which those investors already held shares. Investors were invited to return a form with their address and telephone number by which they agreed to be contacted with regard to other investment opportunities. Upon receipt of those forms, the overseas companies would telephone the investors, in an attempt to sell them shares in OTC Bulletin Board companies.
In 2006, the appellant Financial Services Authority (FSA) served a decision notice on the respondent, imposing a penalty of £150,000 for breach of the conduct of business rules on the basis that it had not taken reasonable steps in accordance with the rules to ensure that the financial promotions were clear, fair and not misleading. The appellant also considered that the respondent had had reason to doubt that the overseas companies would deal with UK customers in an honest and reliable way.
The respondent referred the notice to the Financial Services and Markets Tribunal. At this point, the respondent’s senior partner revealed that, unknown to the other partners, he had received substantial secret commissions from the overseas companies, in addition to the respondent’s ordinary fee. The tribunal found, inter alia, that the fact that the senior partner had retained the commissions did not affect the way in which the respondent had advised the companies and that his own knowledge had not given the respondent reason to doubt that the overseas companies would treat UK investors in an honest and reliable way. Accordingly, the tribunal reduced the penalty. It also criticised the appellant for failing to provide guidance as to the meaning of the rules or to assist the respondent when requested.
The appellant appealed. It contended that the purpose of the promotion was that the overseas companies would contact investors in an attempt to sell the OTC Bulletin Board shares, which were high-risk illiquid shares. Since the promotional literature did not set out that purpose clearly or at all, the promotion was neither clear nor fair and was misleading.
Held: The appeal was allowed.
The respondent had breached the rules because it did not take reasonable steps to ensure that the promotions were clear, fair and not misleading.
Although the rules did not prevent overseas companies from gaining access to UK investors, their communications had to be approved by authorised persons. Those persons were obliged to take reasonable steps to ensure that the communications were clear, fair and not misleading, which meant that the purpose of the communication should not be disguised. On any view, in the instant case, the purpose had been disguised, bearing in mind the tribunal’s finding that the respondent had been aware that the purpose of the communication was to gain access to investors to invite them to buy OTC Bulletin Board shares. The fact that the rules did not prohibit overseas companies from accessing UK investors was nothing to the point if the promotion was not fair or if it disguised its true purpose. It followed that the tribunal had erred in law in that respect.
Moreover, if an overseas company was promoting a scheme without fairly setting out its purpose, there was every reason to doubt that it would deal with UK customers reliably or honestly. To the extent that the tribunal appeared to accept that the respondent’s knowledge might be separate from that of the senior partner, that was an error of law. Once the composite knowledge of all the respondent’s partners was accepted as the relevant criterion, there was every reason to doubt the reliability and honesty of the overseas companies.
Per curiam: Although the purpose of the relevant rule was to protect investors at the point of sale, such protection was not necessarily to be found only at the point of sale. Non-real-time promotions deserved protection precisely because they might lead to sales agreed on the telephone. It was all the more important that such promotions had to be clear, fair and not misleading and that there must, at the point of promotion, be no reason to doubt the honesty and reliability of the relevant overseas companies.
Per curiam: Regulators might often find themselves in a difficult position when they were expressly asked for advice or guidance. A regulator could not be legitimately criticised for not providing advice or guidance. The authorised person had a duty to comply with any relevant rule, it was not the regulator’s duty to advise whether certain conduct complied with or contravened a rule. If advice or guidance was given and it subsequently transpired to be incorrect, it could affect the penalty for any transgression. Any advice or guidance could be relied upon only if the full facts were before the regulator when that advice was given. In the instant case, the appellant had not been aware of all the facts; thus, that any advice or guidance given expressly or implicitly to the respondent would have been valueless.
Timothy Dutton QC and Richard Coleman (instructed by the Financial Services Authority) appeared for the appellant; Charles Hollander QC (instructed by Fox Hayes LLP, of Leeds) appeared for the respondent.
Eileen O’Grady, barrister