Legal profession – Partnerships – Conduct of business – Financial promotion

Financial Services Authority v Fox Hayes (a firm): CA (Civ Div) (Lords Justice Longmore, Wilson, Lawrence Collins): 17 February 2009

The appellant Financial Services Authority appealed against a decision of the Financial Services and Markets Tribunal relating to approval of financial promotions for overseas persons.

The respondent solicitors’ firm (F), as an authorised person under the Financial Services and Markets Act 2000, had approved a number of financial promotions for unauthorised overseas companies. The promotions took the form of letters approved by F and sent by the overseas companies to private investors in the UK, offering a free research report into a company in which the investor already held shares. Investors, by returning a form with their address and telephone number, agreed to be contacted about other investment opportunities, and the overseas company would then contact investors by telephone and persuade them to buy shares in Over the Counter Bulletin Board [regulated quotation service] companies. The FSA took the view that F had not taken reasonnable steps under the relevant conduct of business rules to ensure that the financial promotions were clear, fair and not misleading, and that F had had reason to doubt that the overseas companies would deal with UK customers in an honest and reliable way. The FSA imposed a penalty on F and F referred that decision to the tribunal. The tribunal reduced the penalty, holding that F had taken reasonable steps to ensure that the promotions were clear, fair and not misleading within the meaning of the rules, and F initially had no reason to doubt that the overseas persons would deal with UK customers in an honest and reliable way. The FSA submitted that the whole purpose of the promotion was that investors should be contacted by overseas companies who would try to sell OTC Bulletin Board shares, which were high-risk illiquid shares; that that purpose was not set out clearly or at all in the promotional literature; it followed that the promotion was neither clear nor fair and was misleading.

Held: (1) The relevant conduct of business rules emphasised the importance of the purpose of any promotion and that it was not to be disguised or misrepresented. The purpose of the promotion in the instant case was disguised, in the sense that it was not mentioned and was hidden behind the procurement of a report on a UK-listed company in which the investors already had shares. The sending of the report was not the purpose of the promotion which was, on the contrary, as the tribunal found, to obtain the consent of the investors to be contacted by the overseas companies which would try to sell them OTC Bulletin Board shares. The tribunal should have concluded that the purpose of the promotion was disguised, and that in itself tended to show that there had been a contravention of the rules. The tribunal decided that the initial letters sent by overseas companies were not inducements to engage in the purchase of OTC Bulletin Board shares, but only an invitation to send for a research report and to be contacted about other services. On the surface that might appear to be correct, but the answer to the question whether there was a financial promotion was that there was. The purpose of that promotion was disguised and, on the tribunal’s finding that F knew that the whole purpose was to gain access to investors to invite them to buy OTC Bulletin Board shares, it followed that F did not take reasonable steps to ensure that the promotion was clear, fair and not misleading. The tribunal had erred in law in that respect.

(2) If F knew what the purpose of the promotion was, but that purpose was disguised so that the promotion was not fair, clear and not misleading, it followed that F had reason to doubt that the overseas companies would deal with their UK customers in an honest and reliable way. F’s managing partner had received secret commissions from the overseas companies. The tribunal had erred in considering the knowledge of F separately from the knowledge of its managing partner. The relevant knowledge was that of all the partners, and on that basis there was every reason to doubt the overseas companies’ reliability and probably their honesty. That was the position from the beginning of the promotions.

(3) The tribunal was wrong to criticise the FSA for failing to give guidance as to the meaning of the rules or assistance to F when asked for it, but the tribunal’s criticism of the FSA’s conduct was not determinative of the question whether there was, in the tribunal’s view, a contravention of the rules.

(4) F’s conduct was serious and reckless and an appropriate penalty would be £750,000. That should be reduced to £500,000 to reflect the fact that the case was to some extent a test case. The secret commission of £454,770 should be added to the penalty. The case was remitted to the tribunal to determine which partners of F would be liable to pay the final penalty imposed and whether the penalty should be reduced by reason of the financial circumstances of the partners who would be liable to pay it.

Appeal allowed.

Timothy Dutton QC, Richard Coleman (instructed by in-house solicitor) for the appellant; Charles Hollander QC (instructed by in-house solicitor) for the respondent.