Waite v The Financial Services Authority, Court of Appeal - United Kingdom Financial Services and Markets Tribunals, July 28, 2005, [2005] UKFSM FSM020

Resolution Date:July 28, 2005
Issuing Organization:United Kingdom Financial Services and Markets Tribunals
Actores:Waite v The Financial Services Authority

Regulated Activity - Chairman of Credit Union Prohibition Notice Fit and proper person Chairman failing to disclose interest in transaction entered into by Credit Union and preferring own interest to that of Credit Union Credit Union suffering loss - Statements of Principle 1 and 2- Reference dismissed Prohibition Order should issue FINANCIAL SERVICES AND MARKETS TRIBUNAL DR ALBERT ALPHONSO CARLYLE WAITE Applicant - and - FINANCIAL SERVICES AUTHORITY Respondents Tribunal: TERENCE MOWSCHENSON QC PETER BURDON CHRISTOPHER CHAPMAN Sitting in public in London on 25 and 26 July 2005 The Applicant, until he withdrew, in person Nicholas Vineall, Counsel, for the Respondents © CROWN COPYRIGHT 2005 2 DECISION The Reference

  1. Following a Decision Notice dated 27th October 2004 by the Financial Services5 Authority ("the FSA") pursuant to section 56 of the Financial Services and Markets Act 2000 ("FSMA") to the effect that the FSA proposed to make an order prohibiting the Applicant ("Dr Waite") from performing any function in relation to any regulated activity carried on by a credit union, on the grounds that Dr Waite was not a fit and proper person to carry on such activities, Dr Waite referred the10 matter to this Tribunal by a reference notice dated 21st November 2004.

  2. At all material times until 11th July 2004 Dr Waite was the Chairman of the Board of the London Adventist Credit Union ("LACU"). The circumstances giving rise to this reference arose out of activities carried out by Dr Waite in15 relation to LACU between about March 2001 and 11th July 2004. In their decision notice the FSA summarised the conduct which caused them concern as being:

    2.1. Dr Waite's conduct in facilitating an investment of LACU funds by the LACU Board for the purchase and development of a property at 15720 Chingford Road, Walthamstow, London ("the Property") which contravened requirements of the previous regulatory regime;

    2.2. the failure to protect LACU's investment by ensuring that there was adequate security for its investment and to disclose to the LACU Board the true level of risk associated with the investment;25

    2.3. the failure to disclose to the full LACU Board or the LACU membership the full extent of Dr Waite's personal interest in the Property development and the fact he had agreed with the developer that he would receive the sum of £55,000 as a result of an investment agreement with the developer;

    2.4. the fact that he had a conflict of interest between his role as Chairman of30 LACU and his personal financial interest in the development; 3

    2.5. that Dr Waite put his personal interest in receiving a sum of more than £55,000 from the development before the interests of LACU in recovering its monies;

    2.6. Dr Waite's failure to ensure that LACU met its capital requirements as prescribed by the Credit Union Sourcebook ("CRED") resulting in LACU5 voluntarily varying its own position in November 2003 in order to preserve its financial position.

  3. In coming to its conclusion that Dr Waite was not a fit and proper person to perform any functions in relation to any regulated activities carried on by a credit union the FSA had regard to its guidance published in the FSA Handbook, and in10 particular Chapter 8 of the Enforcement Manual , the criteria in Chapter 2 of the Fit and Proper Test, and the Statements of Principle and Code of Practice for Approved Persons ("APER"). These matters include

    3.1. honesty and integrity; these include an individual's openness and honesty, willingness to comply with requirements placed on him by the regulatory15 regime to which he is subject, as well as ethical standards; this is reflected in Statement of Principle 1 in that an approved person must act with integrity in carrying out his controlled function. In APER at 4.1.13 failing to disclose a conflict of interest is given as an example of conduct not complying with Statement of Principle 1.20

    3.2. competence and capability; these include an assessment of the individual's skill in carrying out the controlled function; this is reflected in Statement of Principle 2 that an approved person must act with due skill, care and diligence in carrying out his controlled function. In APER at 4.2.3 and 4.2.10, failing to disclose information to firm (in this case LACU) where disclosure was25 required and failure to disclose a conflict of interest are given as examples of conduct not complying with Statement of Principle 2.

  4. Dr Waite attended the commencement of the hearing on 25th July 2005 to make an application for an adjournment. That application was refused for reasons given in30 4 a separate judgment. Upon the refusal of his application Dr Waite withdrew from the hearing.

  5. The evidence before the Tribunal included a large number of contemporaneous documents and a number of witness statements. The FSA produced 6 witness5 statements and Dr Waite had produced 10, including his own. Prior to the hearing Dr Waite had indicated that he wished to cross examine all but one of the FSA's witnesses. In the event, his failure to do so resulted in the witness statements not being challenged by him. It did not, of course, follow that the Tribunal was bound to accept the evidence in the witness statements. The FSA had indicated that it10 wished to cross examine Dr Waite and Mr Ecroy Moore. Dr Waite and his witness were not available to be cross examined. The FSA did not submit that the Dr Waite's and Mr Moore's witness statements should not be admitted in evidence as a result of failure to attend for cross examination. Instead the FSA submitted that the failure to attend for cross examination should go to the weight to be attached15 to the witness statements. That was the position adopted by the Tribunal in relation to the witness statements. In fact there was only one significant issue in which the witness statements differed in respect of the relevant facts and that related to the question whether Dr Waite had disclosed his financial interest in the development of the Property to the Board on 25th March 2001, and if so, the extent20 of the disclosure. The Regulatory Background

  6. So far as the Tribunal is aware, this is the first reference to the Tribunal involving activities relating to a Credit Union. Credit Unions are mutually owned financial25 co-operatives established under the Credit Unions Act 1979 ("CUA 1979") and the Industrial and Provident Societies Act 1965. They are unique, in that their membership is restricted to individuals who share a particular common bond. The common bond may be one of a number of qualifications, the four most frequently used are: residence in a particular locality; being a member of, or having an30 association with, an organization; working for a common employer or in a particular locality; or following a particular occupation. The rationale behind the 5 "common bond" requirement is to ensure that members of a credit union have a degree of shared identity. In the case of LACU the "common bond" was originally that members were Seventh-day Adventists in the North London Area (at which time it was called the North London Adventist Credit Union); subsequently the "common bond" was changed to Seventh-day Adventists in the London Area and5 LACU's membership was extended to cover the whole of London at which time its name was changed to its current name.

  7. Generally speaking, most members of Credit Unions are individuals on low incomes who have no access, or limited access, to credit available from larger10 financial institutions. Most Credit Unions' staff, including senior management, are part time unpaid volunteers drawn from the members.

  8. Until 2nd July 2002 Credit Unions were supervised by the Registrar of Friendly Societies ("RFS"). Since then they have been regulated by the FSA under the15 Financial Services and Markets Act 2000 ("FSMA"). The FSA has provided rules and guidance applicable to Credit Unions which are set out in the Credit Union Sourcebook ("CRED"). The transition from regulation by the RFS to regulation by FSA was assisted by a "grandfathering" process. Under this process, all credit unions which were registered and operating under the regulation of the RFS as at20 July 2002 were not required to undertake the process for authorisation. They were automatically deemed to be authorised by the FSA under the Part IV provisions of the FSMA to conduct the regulated activity of accepting deposits.

  9. The "grandfathering" process also operated for individuals undertaking Controlled25 Functions in the credit union. They were automatically deemed to be Approved Persons for the purposes of FSMA, albeit subject to the same requirements and standards of persons who have to apply for authorization through the FSA's application process.

  10. By section 1(3) of the CUA 1979 Act the objects of a Credit Union are, and can only be: 6 (a) the promotion of thrift among the members of the society by the accumulation of their savings; (b) the creation of sources of credit for the benefit of the members at a fair and reasonable rate of interest; (c) the use and control of members' savings for their mutual5 benefit; and (d) the training and education of the members in the wise use of money and in the management of their financial affairs.

  11. There are limitations on the uses to which Credit Union funds may be put. The Credit Unions (Authorised Investments Order) 1993 ("the Authorised Investments10 Order") made under section 13(1) of the CUA 1979, applied at the time of the £100,000 transfer from LACU funds. Under the Authorised Investments Order Credit Unions could invest only in a very narrow range of authorised investments, basically limited to government securities, building society shares, or bank deposits.15

  12. By section 12(1) of the CUA 1979: A credit union may hold, purchase or take on a lease in its own name any land for the purpose of conducting its business thereon but, subject to subsection (3) below, for no other...

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