The Upper Tribunal upholds the FCA’s proposed enforcement action against financial adviser for “non-financial misconduct”

News in late 2020 that three regulated individuals found guilty of non-financial criminal offences were barred by the FCA was a reminder of the increasing importance that the FCA is placing on rooting out non-financial misconduct from the financial services industry. In this latest case, the Upper Tribunal has upheld the FCA’s decision to make a prohibition order against an individual following their conviction for a criminal offence not involving dishonesty, in circumstances where the behaviour concerned was unrelated to the individual’s regulated activity. We take a brief look at the case and the implications of it for firms and regulated individuals.

Mr Frensham was a financial advisor and the sole director of a financial advisory firm. In 2017, while he was approved by the FCA to perform various controlled functions under the Approved Persons Regime (the predecessor to SMCR), Mr Frensham was convicted of attempting to meet a child following sexual grooming. He was sentenced to 22 months’ imprisonment, suspended for 18 months, and was placed on the Sex Offenders Register until 2027.

At the time of the offence which led to his conviction, Mr Frensham was under investigation in relation to an earlier offence, and his bail conditions were still in place.

Mr Frensham did not inform the FCA of either of his arrests or his subsequent remand in custody.

The FCA’s Decision Notice, dated 1 October 2020, but only published on 29 March 2021, sets out the FCA’s proposal to withdraw Mr Frensham’s approval to perform certain senior management functions (SMF3 (Executive Director), SMF16 (Compliance Oversight) and SMF17 (Money Laundering Reporting Officer)) and to make an order prohibiting him from performing any function in relation to any regulated activity carried on by an authorised or exempt person, or exempt professional firm.

Mr Frensham referred the Decision Notice to the Upper Tribunal Tax and Chancery Chamber.

The basis for the FCA’s proposed enforcement action was that the FCA considered that the nature and circumstances of Mr Frensham’s offence meant he was not a fit and proper person and that he posed a risk to consumers and so to the confidence in the financial system. This is because they considered he lacked the necessary integrity and reputation which is a core aspect of the fit and proper assessment.

The FCA relied on a range of matters, including (1) the fact that Mr Frensham had committed a breach of his bail conditions; and (2) that he was not open and transparent with it because he did not inform it of: (i) his earlier arrest in March 2016 which led to bail conditions being imposed (ii) his arrest and remand in custody in respect of the offence which led to his conviction (iii) the fact that, whilst on remand, he was not for five weeks in a position to discharge his controlled functions or ensure compliance by the firm of which he was the sole approved person with its regulatory obligations; and (iv) the decision of the Chartered Insurance Institute (“CII”) to refuse to renew his Statement of Professional Standing and its decision to expel him from membership.

The decision

The Upper Tribunal’s overall conclusion was they were not satisfied that a decision to make a prohibition order against Mr Frensham based solely on the fact of his conviction could have been reasonably arrived at by the FCA. But they were satisfied that when the offence is considered in the light of (i) the circumstances in which it came to be committed and (ii) Mr Frensham’s failure to be open and cooperative with the FCA in a number of different respects following his initial arrest, the decision is one that was reasonably open to the FCA.

Although the Tribunal found some flaws in the FCA’s approach to the relevance of the conviction, in the Tribunal’s view those flaws did not justify them asking the FCA to reconsider its decision.

Comment

The Upper Tribunal’s judgment is likely to shape the FCA’s future approach to taking enforcement action against individuals in relation to non-financial misconduct, including non-financial misconduct that occurs in individuals’ private lives outside of the workplace and underlines the approach set out by Christopher Woolard, FCA Executive Director of Strategy in 2018: “non-financial misconduct is misconduct, plain and simple”.

The Upper Tribunal’s judgment is also useful for regulated firms in terms of the factors they should consider when assessing the potential regulatory impact of non-financial misconduct outside the workplace that comes to their attention.

This case also serves as an example of how it is often the case that it is not the fact that a criminal offence has been committed that is fatal to an individual’s case, but the way in which they deal with the consequences that follow. In this case, the Tribunal found that the way Mr Frensham dealt with those consequences demonstrated a lack of integrity which entitled the FCA to exercise the prohibition power in order to protect further its statutory objectives of consumer protection and protecting and enhancing the integrity of the UK financial system.

Whilst this case, and the others referred to above, are at the extreme end of the spectrum, the robust decisions taken by the FCA leave no doubt that regulated firms have a duty to report this sort of non-financial misconduct to the regulator.

There is also no doubt that the FCA also wants to know about less serious acts of non-financial misconduct too. To that end, firms should always bear in mind the obligation to be open and co-operative with the regulator and to notify the regulator promptly of anything relating to the firm of which the regulator would reasonably expect notice.

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