The extent to which individuals working within the financial services industry can be subject to regulatory censure as a result of conduct within their PRIVATE lives is a rapidly developing area. On 17 September 2021, the FCA published the latest in a line of cases on this topic. It makes for interesting reading.
In September 2016, Mr Frensham, an independent financial advisor (“IFA”) and sole trader, travelled to meet someone whom he thought to be a 15-year old girl and with whom he had been corresponding on-line. Despite Mr Fensham’s denial, both the FCA and the Upper Tribunal were satisfied that this was with the intention of engaging in sexual activity. Either way, Mr Frensham was caught in a ‘sting’ operation. He was arrested, subsequently convicted and sentenced to 22 months imprisonment in March 2017 (suspended for 18 months). He was also made the subject of an indefinite Sexual Harm Protection Order (“SHPO”) and added to the sex offenders register until 2027. At the time of the offence, Mr Frensham was in breach of bail conditions.
As a result, the FCA revoked Mr Frensham’s authorisation to act as SMF3 (Executive Director), SMF16 (Compliance Oversight) and SMF17 (Money Laundering Reporting Officer) by way of a decision notice dated 1 October 2020. The FCA considered that Mr Frensham was not fit and proper to perform any of these senior management functions because he lacked “the necessary integrity and reputation” as required by FSMA Sections 56 and 63 and FIT (the chapter of the FCA’s Handbook dedicated to ‘fit and proper’ requirements). In its view, Mr Frensham’s offending involved attempted exploitation of a minor, abuse of a position of trust and a deliberate and criminal disregard for appropriate standards of behaviour. It concluded that he posed “a risk to consumers and to confidence in the financial system”.
The reference to the Upper Tribunal
Mr Frensham asked that the matter be referred to the Upper Tribunal. He contended that the FCA had wrongly applied the fitness and propriety test to the facts. He argued that the FCA did not have sufficient regard to the fact that:
- His conviction did not relate to his role as an IFA,
- The conviction was not for an offence of dishonesty,
- The criminal offence was not committed at his place of work, and
- His work was not likely to bring him into contact with a minor or put him at risk of breaching the conditions of his SHPO.
The matter was heard in the Upper Tribunal Tax and Chancery Chamber on 14 and 15 June 2021. It is worth noting that proceedings start afresh in the Upper Tribunal, with the result that the Upper Tribunal may consider additional matters as long as they fall within the scope of the subject matter of the reference. In other words, a reference to the Upper Tribunal is, technically, NOT an appeal of the original decision – it is more of a re-hearing.
The Upper Tribunal’s finding
The Upper Tribunal unanimously dismissed Mr Frensham’s appeal. It held that the FCA was “fully entitled to take into account non-financial misconduct which occurs outside the work setting”. Nevertheless, it was NOT satisfied that a prohibition order was justifiable solely on the basis of Mr Frensham’s conviction. It was only when the offence was considered in the light of the breach by Mr Frensham of his bail conditions coupled with his failure to be open and cooperative with the FCA, that the decision become one reasonably open to the FCA.
This interesting conclusion forces us to look behind the fact of the prohibition order – to the rationale behind the decision, as well as to the factors which the Upper Tribunal considered along the way. Ultimately, these elements are far more instructive than the decision itself. The decision also included useful observations on the concepts of “integrity” and “honesty” – which are discussed in more detail in Annex 1.
The factors which the Upper Tribunal considered
In reaching its decision, the Upper Tribunal concluded that it was entitled to take into account the circumstances of Mr Frensham’s arrest and imprisonment and his communications with the FCA. More specifically, it considered:
- The relevance of Mr Frensham’s conviction to the performance of his functions as an IFA.
- Whether the question of the relevance of Mr Frensham’s conviction was affected by the fact that in committing the offence he acted in breach of his bail conditions.
- The extent to which the FCA was entitled to place weight on Mr Frensham’s openness with the regulator, specifically:
- The fact that Mr Frensham did not inform the FCA of the fact that he had been arrested on two occasions (or that he had been remanded in custody);
- The fact that Mr Frensham continued to carry on his business for five weeks whilst on remand (and before a locum was appointed) without reporting the matter to the FCA; and
- The failure of Mr Frensham to inform the FCA of the decision of the Chartered Insurance Institute (“CII”) to refuse to renew Mr Frensham’s Statement of Professional Standing and its decision to expel him from membership.
- The extent to which the FCA had given appropriate weight to the length of time since the offence had occurred and the evidence of Mr Frensham’s rehabilitation.
- Whether a prohibition order was, in all the circumstances, disproportionate taking into account Mr Frensham’s right to a private life under Article 8 of the European Convention on Human Rights (“ECHR”).
Each of these aspects is considered in more detail below.
The relevance of the conviction to Mr Frensham’s role as an IFA
One of the FCA’s statutory objectives is to ‘protect and enhance the integrity of the UK financial system’ (See Section 1D of FSMA 2000). This is known as the “Integrity Objective” and was one of the grounds upon which the FCA sought to justify the prohibition order on Mr Frensham.
Put simply, the FCA argued that Mr Frensham lacked integrity. It contended that in order to maintain public confidence in the financial services industry, the FCA and the public are entitled to expect that approved persons are individuals with integrity and good reputation. Even though Mr Frensham’s offence was not committed at work and did not involve financial dishonesty, it involved him deviating from legal and ethical standards and seeking to exploit those more vulnerable than himself. This, the FCA considered, was fundamentally incompatible with acting as an IFA. In the view of the FCA, if individuals who had committed such offences were allowed to continue working in the financial services industry, public confidence would be eroded.
The Upper Tribunal agreed that Mr Frensham’s offence would have severely damaged his PERSONAL reputation. It held further that the FCA was “clearly entitled” to take that into account when considering its obligations with respect to the Integrity Objective. However, the real question was whether the offence affected the reputation of Mr Frensham as an IFA – specifically whether public confidence in the financial services industry would be harmed if a person convicted of a serious sexual offence over four years ago and where there had been no complaints about the manner in which he had conducted his business since was able to continue to work in the industry. Put simply, would Mr Frensham’s PERSONAL conduct pose a risk to consumers and to confidence in the financial system? Only if the answer to this question was “yes” could his offence impact on the FCA’s Integrity Objective.
The Upper Tribunal concluded that the FCA had failed to make the link between Mr Frensham’s offence and the Integrity Objective. In other words, the fact of Mr Frensham’s offence was NOT related to his role as an IFA in a direct way. Assertions “based only on the awfulness of the offence itself” and Mr Frensham’s failure to act with PERSONAL integrity were (a) not sufficient to create a link between the offence and Mr Frensham’s PROFESSIONAL integrity and (b) not proof that a particular set of events gave rise to any matter falling within a regulator’s remit.
Evidence was needed, and the only evidence that existed suggested that there had been no cause for concern that Mr Frensham had acted without integrity in relation to any dealings with his clients. Moreover, his crime did not involve an act of dishonesty and did not take place in a work environment. It was true that a minority of Mr Frensham’s clients had left him after they became aware of the offence, but a significant majority had stayed with him, some of whom would have been aware of the conviction.
On that basis, it was not possible to conclude that Mr Frensham’s reputation as an IFA amongst his client base has been completely undermined.
The fact that Mr Frensham was in breach of his bail conditions at the time of the offence
The Upper Tribunal held that for several days before the commission of the offence Mr Frensham had consciously disregarded the conditions of his bail in attempting to groom a child. This was a “serious aggravating factor”. More specifically, the Upper Tribunal thought it relevant to the Integrity Objective because, in effect, Mr Frensham took a deliberate decision to disregard the law in order to satisfy his own interests.
Mr Frensham’s failure to disclose information to the FCA
The Upper Tribunal recognised the FCA’s entitlement to rely on the openness and cooperation of smaller firms and the need for them to voluntarily bring the FCA’s attention any matters relating to their ability to comply with regulatory requirements. The FCA considered that Mr Frensham had not been open and transparent. Indeed, even Mr Frensham accepted that:
- His arrest and remand in custody was relevant to the question of his fitness and propriety.
- He knew that once he was in custody his firm had nobody to fulfil any regulatory role (because he was the sole approved person) and he could not continue to provide advice to clients or run the business himself from prison.
- He had an obligation to information the FCA about these developments.
The Upper Tribunal found that Mr Frensham was driven by a desire to get his business back on an even keel before he made any contact with the FCA because he feared that it might be closed down immediately if he told the truth.
On this basis, the Upper Tribunal concluded that Mr Frensham chose not to inform the FCA until he was able to give them a positive account as to the way the business was being run. This was further evidence that, in his dealings with the FCA, Mr Frensham had put his own interests and those of his firm before the need to comply with the clear obligation to be open and transparent with the FCA. The same could be said of Mr Frensham’s failure to notify the CII of his difficulties (and in failing to notify the FCA of the CII’s decision to expel him from membership). Put simply, he took it upon himself to decide what it was appropriate for the FCA and the CII to know and did not give either the opportunity of assessing whether the matters concerned impacted upon his fitness and propriety. In the eyes of the Upper Tribunal, a person of integrity would not have sought to keep such matters back but would recognise that it is much better to be up front with difficulties.
The length of time since the offence and Mr Frensham’s rehabilitation
The Upper Tribunal found that Mr Frensham continued to deal with his clients in what appeared to be a compliant fashion and there was no evidence that there was a risk of him reoffending.
Nonetheless, it did NOT consider that, on balance, much weight could be placed on the steps that Mr Frensham had taken to rehabilitate himself after the offence. More specifically, Mr Frensham had not shown genuine remorse. He had not accepted that he had committed a criminal offence and continued to try to justify his failure to be open with the FCA using explanations which the Upper Tribunal found to be neither convincing nor appropriate. Put simply, the Upper Tribunal continued to have concerns that Mr Frensham would, if necessary, put his own interests above those of the FCA. On this basis it concluded that Mr Frensham continued to demonstrate a lack of integrity.
Mr Frensham’s right to a private life
The Upper Tribunal concluded that the prohibition order was NOT disproportionate taking into account Mr Frensham’s right to a private life under Article 8 of the ECHR. Had the FCA relied on the nature of the offence alone then the impact on Mr Frensham’s right to a private life and the issue of proportionality would have been relevant. However, given the wider context involving Mr Frensham’s non-disclosure of information and breach of bail conditions, this was not the case.
Learning the lessons
Mr Frensham wasn’t banned from acting as an IFA because he had attempted to groom a 15-year old girl. At this point, his lack of PERSONAL integrity had not crossed over into his professional life. Rather, he was banned because he knowingly breached his bail conditions and because he deliberately withheld information from the regulator. Effectively, he put his own interests above those of the regulator and, by extension, of consumers – demonstrating a lack of PROFESSIONAL integrity in the process. In doing so, his behaviour bled into a professional context. As the Upper Tribunal neatly summarised: “it is often the case that it is not the fact that a criminal offence has been committed that is fatal to an applicant’s case but the manner in which he deals with the consequences that follow”.
Beyond this, there are a number of principles of more general application which are highlighted by Mr Frensham’s case. These represent the real take-aways and can be summarised as being:
- “Integrity” means adherence to ethical standards of the profession concerned (in this case acting as an IFA).
- In matters regarding their professional standing there is an expectation that professionals may be held to a higher standard than those that would apply to individuals outside of the profession.
- Nevertheless, a regulatory obligation to act with integrity does not require professional people to be “paragons of virtue”.
- The need for public trust in the provision of professional services means that some scrutiny of a person’s private affairs is permitted.
- Requirements that professional persons act with integrity or be of sufficient repute may reach into private life only when conduct that is part of a person’s private life realistically touches on their practice of the profession concerned. The conduct must be qualitatively relevant because it “engages” the standard of behaviour set out in the regulatory code concerned. It is not simply a question of assessing whether the behaviour concerned demonstrates a lack of integrity at large.
- In considering the question of whether conduct in a person’s private life touches on the practice of their profession, it is necessary to consider whether public confidence in the profession would be harmed if the public, assumed to have knowledge of the facts, found that a person who behaved in a manner under scrutiny was able to continue to practice his profession.
‘Honesty’ versus ‘integrity’
There was no pleading of dishonesty in Mr Frensham’s case. Rather, his conviction demonstrated a lack of integrity.
So, what’s the difference?
A person who is dishonest will always lack integrity and reputation. However, the same does not apply in reverse. It is possible for a person who lacks integrity to remain honest. An example of a lack of integrity not involving dishonesty would include recklessness as to the truth of statements made to others who will (or may) rely on them, or a wilful disregard of information contradicting the truth of such statements.
It is worth looking at both concepts in a bit more detail.
“Integrity” relates to a person’s “ethical compass”, specifically whether it ‘points in the right or the wrong direction’. It can be regarded as the requirement ‘not to take unfair advantage of others’. It is a broader, more nebulous, concept than honesty.
In professional codes of conduct, the term “integrity” is used to express the higher standards which society expects from professional persons and which the professions expect from their own members. Integrity connotes adherence to the ethical standards of one’s own profession. That involves more than mere honesty. Nonetheless, having “integrity” does not require professional people to be “paragons of virtue”. Furthermore, in every instance, professional integrity is linked to the manner in which that particular profession professes to serve the public.
An example of professional integrity would be the higher expectation on a solicitor or a barrister not to mislead (accidently or otherwise) a judge in court when compared to an ordinary member of the public. Similarly, the public can expect higher standards of conduct from IFAs because of the trust placed in individuals in that position.
A clear distinction exists between personal integrity and professional integrity. Failing to act with integrity in personal life in a manner which is not relevant to how one is required to conduct oneself in professional life should not, in itself, result in regulatory censure. However, that does not mean that the two concepts must be treated as being entirely separate. A regulator will have to consider whether in all the circumstances the failings of personal integrity also amount to failings of professional integrity.
“Honesty” is a basic moral quality which is expected of all members of society. Honesty involves being truthful about important matters and respecting the property rights of others. Telling lies about things that matter or committing fraud or stealing are generally regarded as dishonest conduct.
A person who is dishonest is guilty of more serious misconduct than a person who acts without integrity.