Vukelic v Financial Services Authority, Court of Appeal - United Kingdom Financial Services and Markets Tribunals, March 13, 2009, [2009] UKFSM FSM067

Resolution Date:March 13, 2009
Issuing Organization:United Kingdom Financial Services and Markets Tribunals
Actores:Vukelic v Financial Services Authority

PROHIBITION ORDER Fitness and propriety Involvement of Applicant in financial reinsurance Legitimacy of transactions Integrity and recklessness Reference dismissed FINANCIAL SERVICES AND MARKETS TRIBUNAL MILAN VUKELIC Applicant - and - FINANCIAL SERVICES AUTHORITY The Authority Tribunal: HIS HONOUR JUDGE MACKIE CBE, QC MS SANDI O NIELL MR IAN ABRAMS Sitting in public in London on 1-9 December 2008 & 13 March 2009 Mr Charles Flint QC and Mr Andrew Green, instructed by Norton Rose, for the Applicant and Mr James Bagge of Norton Rose, appeared for the Applicant on 13 March Mr Guy Philipps QC and Mr Dan Enraght-Moony, for the Authority © CROWN COPYRIGHT 2009 2 DECISION

1. The Applicant, Mr Vukelic, challenges a decision by which the Financial5 Services Authority ( the Authority ) prohibited him from, in effect, working in regulated financial services activity following his involvement in three sets of transactions involving financial reinsurance. At the heart of the case are the nature, effect and probity of those transactions and Mr Vukelic s responsibility for them. Mr Vukelic says that these were legitimate financial reinsurance10 contracts. The Authority says that no real reinsurance risk was involved and that the transactions were entered into and used to disguise losses and/or misrepresent financial accounts.

2. The Authority issued a Decision Notice dated 14th December 2007 ( the Decision Notice ) signed by the Chairman of its Regulatory Decisions15 Committee ( RDC ). The Decision Notice informed the Applicant that the Authority had decided pursuant to Section 56 of the Financial Services and Markets Act 2000 ( the Act ): to make an order prohibiting Milan Vukelic ( Mr Vukelic ) from performing any function in relation to any regulated activity carried on by any authorised or exempt person or exempt professional20 firm . On the 9th January 2008 the Applicant referred the matter to this Tribunal. Role of the Tribunal

3. The party against whom the Authority makes a prohibition order has a right25 under Section 57(5) of the Act to refer the matter to the Tribunal which under Section 133 (4) must determine what, (if any), is the appropriate action of the Authority to take in relation to the matter referred to it . We are not hearing an appeal against the Decision of the Authority but reviewing from the start the facts and matters which led to it. This case has therefore been a complete30 rehearing of the issues which gave rise to the decision. The statutory and other regulatory provisions in more detail

4. The Authority s regulatory objectives are set out in Section 2(2) of the Act. These include: (a) market confidence;35 (b) the protection of consumers; (c) the reduction of financial crime.

5. Section 56(1) of the Act provides that the Authority may make a prohibition order if it appears to the Authority that the individual is not a fit and proper person to perform functions in relation to a regulated activity carried on by an40 authorised person. 3

6. The Authority has issued specific guidance on the use of its power under Section 56. Guidance as relevant in this case is set out in the Enforcement Manual component of the FSA Handbook ( ENF ) and other relevant guidance is set out in the Fit and Proper test for Approved Persons ( FIT ). Enforcement Policy5

7. The FSA s policy in relation to prohibition orders is set out in Chapter 8 of the Enforcement Manual. ENF 8.1.2 explains that the purpose of prohibition orders is to help the Authority to further its regulatory objectives.

8. ENF 8.4.2 concerns the scope of the Authority s power to make prohibition orders: they may be unlimited, or they may be limited to specific functions in10 relation to specific regulated activities. The scope of the order will depend upon, inter alia, the reasons why the individual is not fit and proper, and the severity of risk which he poses to consumers or the market generally.

9. ENF 8.4.3 states that the Authority recognises that its decision to make a prohibition order will have a substantial impact on the individuals concerned15 and that the Authority will also consider all relevant circumstances in making such a decision.

10. ENF 8.8.1 states that the Authority will consider exercising its power to make prohibition orders against individuals who are neither approved persons or employed by authorised persons where such individuals have shown20 themselves to be unfit to carry out functions in relation to regulated activities.

11. ENF 8.8.2 states that the Authority will consider the individual s fitness or propriety where, for example, he appears likely to pose a serious risk to consumers or confidence in the financial system in the future.

12. ENF 8.8.2A states that, where it is considering whether to exercise its powers25 to make a prohibition order against such an individual, the Authority will not have the option of considering the adequacy of other enforcement action. The guidance provides that the Authority will consider the severity of the risk posed by the individual and may prohibit him where it considers that this is necessary to achieve the Authority s regulatory objectives.30

13. ENF 8.8.3 provides that when determining the fitness and propriety of an individual who is neither an approved person nor employed by an authorised person, the Authority will consider the criteria set out in ENF 8.5.2G(1), ENF

8.5.2G(3) and ENF 8.5.2G(5).

14. ENF 8.5.2G provides that when the Authority decides whether to exercise its35 power to make a prohibition order the factors it will consider include, but are not limited to: (1) whether the individual is fit and proper to perform functions in relation to regulated activities and the criteria for assessing the fitness and propriety of approved persons which include those contained in FIT40

2.1 (honestly, integrity and reputation). Honesty, integrity and reputation includes an individual s openness and honesty in dealing with consumers, market participants and regulators and ability and 4 willingness to comply with requirements placed on him by or under the Act as well as with other legal and professional obligations and ethical standards. (3) the relevance, materiality and length of time since the occurrence of any matters indicating unfitness;5 (5) the severity of the risk which the individual poses to consumers and to confidence in the financial systems; (6) the previous disciplinary record and general compliance history of the individual including whether the FSA (or any previous regulator) has previously imposed a disciplinary sanction on the individual.10

15. The matters referred to in FIT 2.1.3G when assessing a person s honesty, integrity and reputation include, but are not limited to the following on which the Authority relies particularly: (5) whether the person contravened any of the requirements and standards of the regulatory system or the equivalent standards or requirements of15 other regulatory authorities (including a previous regulator), clearing houses and exchanges, professional bodies, or government bodies or agencies; (13) whether, in the past, the person has been candid and truthful in all his dealings with any regulatory body and whether the person20 demonstrates a readiness and willingness to comply with the requirements and standards of the regulatory system and with other legal, regulatory and professional requirements and standards. Questions of Law and Procedure Dishonesty or nothing25

16. The Authority s case is that Mr Vukelic acted dishonestly over each of the three transactions. Mr Vukelic s lawyers have contended that this is therefore a case of dishonesty or nothing. We put it to Mr Philipps QC for the Authority and Mr Flint QC for Mr Vukelic that, despite their respective positions, the Tribunal was free to make its own determination of whether or not Mr Vukelic30 was and is fit and proper taking account of the matters referred to in FIT

2.1.3.G. They accepted that and agreed that we were entitled to reach our own conclusions on grounds not necessarily involving dishonesty, provided of course that these were within the scope of the matters raised in the case and were fairly put to Mr Vukelic. Thus, for example, the Tribunal has power to35 conclude (as the Authority s Regulatory Decisions Committee ( RDC ) did in this case) that Mr Vukelic was not dishonest but lacked integrity. Proof of dishonesty or lack of integrity

17. It is for the Authority to prove its case to a civil standard. This standard is a flexible one and the more serious the allegation, or the more serious the40 consequences if it is proved, the stronger must be the evidence before the Tribunal will find it proved on the balance of probabilities. 5

18. Mr Flint QC submits that when considering dishonesty the test to be applied is that set out by the High Court in Bryant v-The Law Society [2007] EWHC 3043 (Admin) following the Court of Appeal in Bultitude -v- The Law Society [2004] EWCA CIV 1853. The Tribunal needs to consider firstly whether the applicant acted dishonestly by the ordinary standards of reasonable and honest5 people and secondly whether the applicant was aware that by those standards he was acting dishonestly.

19. Mr Flint also relies on the fact that the Tribunal in Hoodless & Blackwell v FSA (3 October 2003) adopted the same approach as Bryant to the issue of dishonesty (at Paragraphs 18 and 19) and went on to deal with the question of10 integrity.

20. Before turning to integrity we refer to the fact that the Authority contended that the approach used in Hoodless & Blackwell to the question of dishonesty was misconceived and should be reconsidered. Mr Philipps QC submitted that in a case before the Tribunal honesty and integrity are used together describing15 different facets of fit and proper and that it was a mistake to approach the issue in the way a court would when considering dishonesty as an essential ingredient of an offence. As we see it the...

To continue reading