Fox Hayes v Financial Services Authority, Court of Appeal - United Kingdom Financial Services and Markets Tribunals, October 05, 2007, [2007] UKFSM FSM047

Resolution Date:October 05, 2007
Issuing Organization:United Kingdom Financial Services and Markets Tribunals
Actores:Fox Hayes v Financial Services Authority
 
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FINANCIAL PROMOTIONS ­ approval of non-real time financial promotions for unauthorized overseas persons ­ whether Applicant was able to show that it had taken reasonable steps to ensure that promotions clear, fair and not misleading ­ yes ­ whether Applicant had no reason to doubt that the overseas persons would deal with customers in the UK in an honest and reliable way ­ yes until mid-November 2003 but no thereafter ­ whether Applicant arranged for confirmation (that the promotions complied with the rules) to be carried out by an individual with appropriate expertise ­ yes ­ whether Applicant conducted its business with due skill, care and diligence ­ yes - whether penalty of £150,000 excessive ­ further submissions invited - FSMA 2000 Ss 21, 138 and 206 ­ Conduct of Business Rules 3.6.1; 3.8.4;3.12.6; Principles for Businesses, Principle 2 THE FINANCIAL SERVICES AND MARKETS TRIBUNAL FOX HAYES Applicant - and - THE FINANCIAL SERVICES AUTHORITY Respondent Tribunal : DR A N BRICE (Chairman) MRS C E FARQUHARSON MISS S C O'NEILL Sitting in London on 5 to 14 June 2007 Charles Hollander QC, instructed by the Applicant, for the Applicant Richard Coleman, Counsel, instructed by the Financial Services Authority, for the Authority ©CROWN COPYRIGHT 2007 CONTENTS Paragraph The reference 1 The legislation 5 The 2000 Act 5 The Conduct of Business Rules 9 The Principles for Businesses 13 The issues 14 The evidence 15 The facts 18 The Applicant 19 2000 ­ The Entrepreneurs Club 22 The OTC Bulletin Board 24 2002 ­ Mr Manning meets Mr Reade 25 Early January 2003 ­ Mr Rycott visits the Applicant 26 Mr Jones researches the rules 31 Late January 2003 ­ Condor Research SL 35 Stage 1 ­ the enquiries into Condor 37 Stage 2 ­ the approval of the initial letter 40 Stage 3 ­ the approval of the research report 46 Stage 4 ­ the operation of the escrow account 49 The other promotions and the other overseas companies 56 The enquiries into the other overseas companies 57 A summary of all the promotions 61 Later developments 64 May 2003 ­ The Authority's seminar 65 May 2003 ­ The Authority's press releases 66 July 2003 - The Authority visit the Applicant 72 2003-2004 ­ Correspondence from the press 78 December 2003 ­ The warning of the Spanish regulator 84 April 2003 ­ 2004 ­ The complaints from investors 85 March 2004 ­ The meetings between the Applicant and Mr Reade 88 June 2004 ­ The Applicant ceases to act 92 2003-2004 ­ The developments within the Authority 94 April 2004 - The Authority's investigation into the Applicant 100 September 2006 ­ The Decision notice 102 2007 - The events shortly before the hearing 103 Mr Manning's evidence to the Tribunal 107 Our findings about the commissions 109 The oral evidence of the investors 113 Reasons for decision 116 Issue (1) ­ Clear, fair and not misleading 119 Issue (2) ­ Honest and reliable 128 The enquiries about the overseas companies 132 What the Applicant knew at the outset 135 The press releases 137 The Authority's visit 141 The other developments 142 The time of the reason to doubt 144 Conclusion about issue (2) 148 Issue (3) ­ Appropriate expertise 149 Issue (4) ­ Due skill, care and diligence 152 The adequacy of the enquiries 154 Advice about the legality of the telephone calls 158 The Financial Promotions Order 159 The Regulated Activities Order 165 Conclusion about issue (4) 169 Issue (5) ­ Was the penalty excessive? 170 Decision 176 Directions 177 DECISION The reference1. Between February 2003 and June 2004 Fox Hayes (the Applicant) approved a number of financial promotions for unauthorized overseas companies. The financial promotions took the form of letters approved by the Applicant and sent by the overseas companies to private investors in the United Kingdom. Each letter offered a free research report into a company in which the investor already held shares. The Applicant also approved the research reports which were later sent by the overseas companies to the investors who requested them.2. The Financial Services Authority (the Authority) was of the view that the Applicant had not taken reasonable steps to ensure that the financial promotions were clear, fair and not misleading and was also of the view that the Applicant had reason to doubt that the overseas companies would deal with customers in the United Kingdom in an honest and reliable way. The Authority therefore decided to impose a penalty on the Applicant of £150,000 and gave a decision notice to that effect on 29 September 2006. The Applicant referred that decision notice to the Tribunal. 3 In its statement of case the Authority also argued that the Applicant had not arranged for the confirmation exercises (that the financial promotions complied with the rules) to be carried out by an individual with appropriate expertise and that the Applicant had not conducted its business with due skill, care and diligence. The Applicant accepted that, following the decision of the Tribunal in Philippe Jabre v The Financial Services Authority (Decision 035), the Tribunal had jurisdiction to consider these matters even though they had not been mentioned in the decision notice.4. The Applicant disputed all the arguments of the Authority and was also of the view that the amount of the penalty was excessive. The legislation The 2000 Act5. The legislation dealing with financial promotions, the Authority's rule-making power and the imposition of penalties is found in sections 21, 138 and 206 of the Financial Services and Markets Act 2000 (the 2000 Act).6. Section 21 provides that a person must not, in the course of business, communicate an invitation or inducement to engage in investment activity unless he is an authorised person or unless the content of the communication is approved by an authorised person. An investment activity includes selling securities and giving investment advice. Where a communication originates outside the United Kingdom, the section only applies if the communication is capable of having an effect in the United Kingdom. At the relevant time the Applicant was an authorised person.7. Section 138(1) gives the Authority power to make such rules applying to authorised persons as appear to be necessary or expedient for the purpose of protecting the interests of consumers. Under this provision the Authority has made the Conduct of Business Rules and the Principles for Businesses.8. The penalty was imposed under the provisions of section 206 the relevant part of which provides: "(1) If the Authority considers that an authorized person has contravened a requirement imposed on him by or under this Act ... it may impose on him a penalty, in respect of the contravention, of such amount as it considers appropriate." The Conduct of Business Rules9. Chapter 3 of the Conduct of Business Rules applies to every firm which communicates or approves financial promotions. This reference concerns non-real time financial promotions. At the relevant time, real-time financial promotions were defined in rule 3.5.5R1 as "promotions which are communicated in the course of a personal visit, telephone conversation or other interactive dialogue". Non-real time financial promotions were defined in rule 3.5.5R2 as "financial promotions which are not real time" and the examples given included promotions made by letter.10. Rule 3.6 concerns confirmation of compliance and at the relevant time rules3.6.1R1 and 3.6.1R2 provided: "3.6.1R1. Before a firm communicates or approves a non-real time financial promotion, it must confirm that the financial promotion complies with the rules in this chapter.2. A firm must arrange for the confirmation exercise in (1) to be carried out by an individual or individuals with appropriate expertise."11. Rule 3.8 concerns the form and content of financial promotions and rules 3.8.2R to 3.8.20R apply to firms which communicate or approve non-real time financial promotions. At the relevant time rule 3.8.4R1 provided: "3.8.4R.1 A firm must be able to show that it has taken reasonable steps to ensure that a non real-time financial promotion is clear, fair and not misleading."12. Rule 3.12 concerns the communication and approval of financial promotions for an overseas person or unauthorized person. At the relevant time rule 3.12.6R applied to specific non-real time financial promotions for overseas persons and the relevant part provided: "3.12.6R A firm must not communicate or approve a specific non-real time financial promotion which relates to an investment or service of an overseas person, unless ... (2) the firm has no reason to doubt that the overseas person will deal with customers in the United Kingdom in an honest and reliable way." The Principles for Businesses13. Principle 2 of the Principles for Businesses provides; "2. A firm must conduct its business with due skill, care and diligence." The issues14. Thus what we had to decide was: (1) whether the Applicant had taken reasonable steps to ensure that the promotions were clear, fair and not misleading within the meaning of COB rule3.8.4R1; (2) whether the Applicant had no reason to doubt that the overseas persons would deal with customers in the United Kingdom in an honest and reliable way within the meaning of COB rule 3.12.6R(2); (3) whether the Applicant had arranged for the confirmation exercises (that the promotions complied with the rules) to be carried out by an individual with appropriate expertise within the meaning of COB rule 3.6.1R2; (4) whether the Applicant had conducted its business with due skill, care and diligence within the meaning of Principle 2; and . (5) whether the amount of the penalty was excessive. The evidence15. Eleven bundles of documents were produced by the parties.16. Oral evidence was given on behalf of the Applicant by two partners in the Applicant, namely Mr Robert Manning and Mr Malcolm Jones. We found Mr Jones to be a credible and reliable witness and accept his evidence. We also formed the view that Mr Jones is a competent...

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