Forging the link between non-financial misconduct and fitness and propriety

In one of the most closely followed enforcement outcomes of the year, a Final Notice has recently been issued by the Financial Conduct Authority (the “FCA”) in the Frensham case, following Mr Frensham’s unsuccessful appeal to The Upper Tribunal (Tax and Chancery) (the “Tribunal”). The Tribunal unanimously decided that the FCA was entitled to impose a prohibition order against Mr Frensham following his conviction for a criminal offence not involving dishonesty and unrelated to his regulated activity. Significantly, however, the prohibition was upheld on the basis that Mr Frensham had committed the crime for which he was convicted while on bail for an earlier incident and had failed to be open and co-operative with the FCA on several matters, including his first arrest. But the Tribunal said that had it been required to make its decision on the basis of the crime for which Mr Frensham was convicted alone, it would likely have asked the FCA to reconsider its decision. This case is of particular interest to employers and executives in financial services because of comments made by the Tribunal explaining the need for the FCA to link Mr Frensham’s criminal conviction to the FCA’s statutory objectives and his ability to carry out his professional role.

The decision notice

In October 2020, the FCA published a decision notice (the “Notice”) pursuant to which the FCA decided to withdraw Mr Frensham’s current approval under the Financial Services and Markets Act 2000 and make an order prohibiting Mr Frensham, a financial advisor, from performing any function carried on by an authorised person in relation to any regulated activity. The basis for the Notice was the FCA’s view that Mr Frensham was not a “fit and proper” person (the test used by the FCA as a benchmark to assess a person’s suitability to perform a controlled or senior management function) due to his conviction for attempting to meet a child under the age of 16, following acts of sexual grooming. These events occurred whilst Mr Frensham was an approved person. Mr Frensham was sentenced to 22 months’ imprisonment, suspended for 18 months, made the subject of an indefinite Sexual Harm Protection Order and was added to the sex offenders register until 2027.

The FCA took the view that the nature and circumstances of Mr Frensham’s offending demonstrated that he lacked integrity, contending that: (i) his attempted exploitation of a child demonstrated an abuse of trust and a disregard for appropriate standards of behaviour; (ii) there was a risk of erosion of public confidence if individuals who committed such misconduct are permitted to continue working in the financial services industry; and (iii) he had not been open and transparent with the FCA following his arrest.

Mr Frensham’s referral

Mr Frensham then referred the prohibition to the Tribunal as he argued that the FCA had wrongly applied the fitness and propriety test to the facts, contending that the FCA: (i) allowed irrelevant considerations to affect its judgment; and (ii) did not have sufficient regard to relevant factors, including, that there was no connection between the criminal offence and his regulated activity (the criminal offence not being committed at work and his work being not likely to bring him into contact with a minor).

Before considering the Tribunal’s decision, it is worth recapping on the current position regarding the FCA’s “fit and proper” test.

Fitness and propriety

Under the Senior Managers and Certification Regime, regulated firms are required each year to certify employees as being “fit and proper” to perform specific roles. The FCA retains a role in giving approval for senior managers (carrying out the most senior functions in firms) to carry out their role, but in large part it is for firms to assess whether its employee is “fit and proper”.

It is now well established that non-financial misconduct will be relevant to the assessment of fitness and propriety, including misconduct that may have taken place outside the workplace. For a discussion of recent cases supporting this position, see our previous blog here. As discussed in that blog, one of the main assessment criteria regarding fitness and propriety is “honesty, integrity and reputation”. Many of the previous non-financial misconduct prohibitions have involved an element of dishonesty and the case law demonstrates that a person who is dishonest will always lack integrity.

The Frensham case is the first case of this kind to be considered by the Tribunal not involving dishonesty and where the behaviour concerned was unrelated to the regulated activity. Despite there being no dishonesty, the Tribunal was clear that the serious nature of the offence committed by Mr Frensham would, regardless of profession or business, be recognised widely as having demonstrated that he acted without integrity. Interestingly however, the Tribunal explained that, in their view, the previous case law and the FCA’s “FIT” guidance, indicates “it is not simply a question of assessing whether the behaviour concerned demonstrates a lack of integrity at large, but whether the behaviour engages the specific standards laid down by the relevant regulator.” In particular, the Tribunal cited the 2018 case of Wingate v SRA in arriving at this position, where the term “integrity”, in a professional context, was defined as “useful shorthand to expresses 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…Obviously, neither courts nor professional tribunals must set unrealistically high standards…The duty of integrity does not require professional people to be paragons of virtue. In every instance, professional integrity is linked to the manner in which that particular profession professes to serve the public”.

The “FIT” guidance states also that a conviction for a criminal offence does not automatically mean the person will be found not to be “fit and proper” and the relevance of the offence to the person’s role is a factor that must be taken into account. Judges in previous cases have also noted that a distinction must be drawn between personal integrity and professional integrity. Whilst the two concepts are not necessarily entirely separate, the regulator concerned must consider whether, in the circumstances, the failings of personal integrity also amount to failings of professional integrity. In relation to the FCA’s regulatory framework, the Tribunal stated that the starting point must be its statutory objectives and that when considering the relevance of behaviour that takes place in a person’s private life, the key issue is whether the behaviour concerned realistically engages the question as to whether the individual poses a risk to consumers and to confidence in the financial system.

The Tribunal’s decision

As stated above, the Tribunal’s judgement was in favour of the FCA. However, this decision was not reached for all the same reasons as those put forward by the FCA. While the FCA sought to establish a link between the offence and the “consumer protection” objective, based on Mr Frensham’s serious failure to act with personal integrity, the Tribunal found that the evidence provided was “speculative and unconvincing”. The evidence did not raise any cause for concern that, in the four years since his conviction, Mr Frensham had acted without integrity in his dealings with clients. The Tribunal noted that it would have been helpful if the FCA’s assertions had been backed up with criminological or psychological evidence supporting the view that Mr Frensham’s failure to act with integrity in his personal life runs a significant risk that he would likewise seek to exploit vulnerable clients (such as the elderly) who rely on him putting their interests before his own when providing advice.

The Tribunal gave more support to a different approach taken by the FCA in which they sought to establish a link between the offence and the “integrity” objective, on the basis that there could be a significant risk that confidence of consumers would be impaired if it were known that a person guilty of such an offence is allowed to continue working as a financial adviser. However, the Tribunal again found that the FCA’s case would have benefitted from a more independent, analytical justification of the link between the offence and public confidence. The evidence in fact showed that a significant majority of Mr Frensham’s clients stayed with him (some of whom will have known of his conviction) demonstrating that his reputation as a financial adviser had not been completely undermined. Consequently, the Tribunal concluded that Mr Frensham’s criminal conviction alone would have been insufficient to warrant a finding that the was not “fit and proper”.

Overall, the Tribunal noted that there were other factors on which the FCA placed considerable weight, namely Mr Frensham’s conduct after he was arrested and charged, that led the Tribunal to agree with the FCA that Mr Frensham was not a “fit and proper” person. Such conduct included, for example: (i) Mr Frensham’s failure to notify the FCA that he had been arrested and remanded in custody; (ii) his failure to notify the FCA that a professional body had declined to renew his statement of professional standing; and (iii) and his lack of remorse regarding his actions.

The Frensham case also saw the FCA come in for some strong criticism from the Tribunal for its handling of the case - including that the reason for the delay in bringing the case against Mr Frensham being due to FCA policy deliberations was not disclosed until cross-examination of FCA witnesses in the Tribunal - which followed on from criticism it received earlier in the year in the Forsyth case. You can read our previous blog on this topic here.

Discussion

Whilst in some respects the Tribunal’s decision is helpful in providing guidance concerning the wider circumstances that can be taken into consideration to the question of fitness and propriety, it does, in other respects, muddy the water and leave firms (the ones making the fitness and propriety assessments in the majority of cases) in quite a difficult position.

Notwithstanding the “FIT” guidance, looking at the Final Notices that went before Frensham, firms could be forgiven for thinking that serious crime equals prohibition. The Frensham case makes it clear that this is not necessarily the case, and that it is necessary to adduce sufficient evidence to forge a link between the crime and both the individual’s ability to carry out their role and the relevant regulator’s statutory objectives. This is particularly important where the crime does not involve dishonesty and occurs outside the workplace. In that respect, the Frensham decision is somewhat at odds with previous statements from the FCA that “non-financial misconduct is misconduct, plain and simple.” That may be the case, but it cannot be assumed, and work must be done to establish the link between the non-financial misconduct, an individual’s professional role and the FCA’s statutory objectives.

It is likely that the FCA will be looking to bring further cases in the near future. It will be interesting to see whether any of these cases are taken to the Tribunal to establish some precedent for the types of crimes/misconduct that are likely to lead to a finding of a lack of fitness and propriety in order to give firms more concrete guidance for making “fit and proper” determinations when faced with criminal conduct and individuals greater certainty of the sort of criminal convictions which are likely to result in prohibition. For now, the Frensham decision raises more questions than answers for firms faced with the difficult task of assessing fitness and propriety, and considering questions of integrity, in cases of non-financial misconduct. What is clear is that it is not quite as “plain and simple” as the FCA had previously suggested.

If you require further information about anything covered in this blog, please contact Eleanor Rowswell, Gerard Heyes, Natasha Nichols, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, December 2021