In a decision dated August 31, 2021, the Upper Tribunal (Tax and Chancery Chamber) (the Upper Tribunal) dismissed a reference made by a financial adviser who had been prohibited by the Financial Conduct Authority (FCA) following non-financial misconduct. The FCA had found that Jon Frensham was not a fit and proper person in a decision notice dated 1 October 2020 (the decision notice), as a result of his criminal conviction for a serious indictable offence.

The FCA contended before the Upper Tribunal that the nature and circumstances of Frensham’s offending showed that he lacked integrity and that there was a risk of eroding public confidence if individuals who committed such misconduct and abused their position of trust were permitted to continue working in the financial services industry. In addition, the regulator considered that Frensham had not been open and transparent in relation to a number of matters arising from his arrest and conviction.

While the Upper Tribunal was not satisfied that the decision to make a prohibition order against Frensham could have been reasonably arrived at based solely on his criminal conviction, when the conviction was considered against: (i) the circumstances in which it came to be committed; and (ii) Frensham’s failure to be open and cooperative with the FCA, the Upper Tribunal considered that the decision to make a prohibition order was reasonably open to the regulator. It therefore dismissed Frensham’s referral.

Factual background

Frensham was an independent financial advisor and the sole approved person of a financial advisory firm, of which he was also the majority shareholder. On March 10, 2017, Frensham was convicted of an offence related to child grooming, and was subsequently sentenced to 22 months’ imprisonment, suspended for 18 months, and placed on the Sex Offenders Register until 2027.

At the time of the offence, which led to his conviction in 2017, Frensham was under investigation as the result of an earlier arrest in March 2016 and was therefore in breach of pre-existing bail conditions (of which the FCA had been unaware).

Frensham referred the decision notice to the Upper Tribunal on the basis that the FCA had “wrongly applied the fitness and properness test to the facts” and had “allowed irrelevant considerations to affect its judgment”.

Upper Tribunal’s decision

The Upper Tribunal confirmed that the FCA is “fully entitled to take into account non-financial misconduct which occurs outside of the work setting”. It found, however, that the attempts by the FCA to link Frensham’s conviction to the consumer protection and integrity objectives were based on “bare assertions” without supporting evidence and could not be made out as a matter of fact.

In relation to the consumer protection objective, the FCA’s assertions regarding Frensham’s willingness to disregard ethical and legal standards which may have posed a risk to consumers were based only on the nature of the conviction itself. The Upper Tribunal considered that the link to Frensham’s professional role on the basis of his conviction was not supported by evidence and was purely speculative.

While the Upper Tribunal considered that the FCA was on “sounder ground” in seeking to link the integrity objective with Frensham’s offence, it was again held that this link had not clearly been made out on the facts. The Upper Tribunal summarised the FCA’s arguments as being, in effect, that the public are entitled to expect the utmost integrity and reputation from approved persons and the offence in this case was so awful that it must lead to prohibition due to public confidence in the industry being harmed.

The Upper Tribunal referred, however, to the High Court’s recent judgment in Ryan Beckwith v SRA [2020] EWHC 3231, where it was said that “popular outcry is not proof that a particular set of events gives rise to any matter falling within a regulator’s remit”. The judgment also found that the FCA’s own guidance failed to make it clear that particular offences are considered by the regulator to be so serious that, without more, individuals would be automatically prohibited from working in the industry.

Importantly, the ruling makes it clear that had the Upper Tribunal been asked to decide this case on the basis of Frensham’s conviction alone, then it was likely that the FCA would have been asked to reconsider its decision notwithstanding the nature of the offence.

Ultimately, however, Frensham’s referral was dismissed on the basis of certain additional factors, including: (i) the breach of bail conditions by Frensham which showed he took a deliberate decision to disregard the law to satisfy his own interest; and (ii) his failure to be open and transparent with the FCA, including his failure to report his first arrest, the imposition of bail conditions and his second arrest and remand in custody.

Commentary

Looking at the outcome (prohibition), Frensham could be seen as just the latest in a line of recent cases demonstrating the FCA’s commitment to taking action in relation to non-financial misconduct, which the FCA has made clear is “misconduct, plain and simple”.

As with the three prohibitions from November 2020, this case involves sexual misconduct of a kind which is rightly the subject of serious criminal conviction. The Upper Tribunal, however, grapples with the more difficult question of when such conduct is relevant to a person’s professional career and whether it is right to axiomatically lead to prohibition.

While confirming that the FCA is entitled to consider non-financial misconduct outside the workplace, the Upper Tribunal’s reasoned decision in this case reminds the regulator that it then needs to go on to consider whether, and how, the conduct affects its regulatory objectives. That question is not always plain and simple to answer. In this case, the FCA had not clearly linked the facts of the case to either the consumer protection or the integrity objective. It is not enough simply to assert the fact of the criminal conviction for a serious offence (even one as reprehensible as here).

The Upper Tribunal decision also sheds light on the reason for the delay in the FCA taking action (in this case, and presumably the other recent prohibitions for non-financial misconduct), taking several years after the convictions and the FCA becoming aware of the circumstances. It was revealed under cross-examination that this was in large part due to senior discussions taking place within the FCA as to how to proceed with cases of this kind.

Having taken the time to reach the view that non-financial misconduct cases are to be pursued, it is regrettable that the approach taken to investigating them and building a case appears to have lacked rigour and, in this case, lacked the candour that the Upper Tribunal should reasonably expect.

This case provides some welcome guidance on the questions to be addressed in considering non-financial misconduct in financial services cases, although each case will turn on its facts and it remains to be seen how conduct falling short of criminal conviction for sexual offences will be treated.

For example, how would findings of discrimination, harassment and bullying be treated by the FCA? The authors welcome the regulators considering, in their recent diversity and inclusion discussion paper, the production of guidance on non-financial misconduct.

This case also serves as a reminder (should one be required), that the way in which a conduct matter is handled and reported to the regulator, and the mitigation shown afterwards, can have a critical bearing on the outcome of proceedings.

This article was first published by Thomson Reuters Accelus Regulatory Intelligence

Christine Young
Christine Young
Partner, Employment, London
+44 20 7466 2845
Hwyel Jenkins
Hwyel Jenkins
Partner, Finance Services Regulatory, London
+44 20 7466 2510
Karen Anderson
Karen Anderson
Partner, Finance Services Regulatory, London
+44 20 7466 2404
Benedicte Perowne
Benedicte Perowne
Senior Associate, Finance Services Regulatory, London
+44 20 7466 2026
David Palmer
David Palmer
Senior Associate, Employment, London
+44 20 7466 3846