In particular, the overseas companies were selling shares quoted on the Over-the-Counter Bulletin Board in the US (managed by Nasdaq) which were of a type generally regarded as high risk. The total value of shares purchased by investors from the overseas companies as a result of these communications was in excess of $20m (£9.9m). Subsequently, complaints were received from a number of investors about the overseas companies, many complaining of alleged ‘hard sell’ tactics including alleged persistent and abusive telephone calls.
The Financial Services Authority’s (FSA’s) investigation into Fox Hayes arose from its thematic work on the approval of financial promotions by unauthorised firms and its ongoing investigations into dubious sales tactics adopted by some overseas firms which target UK investors, often referred to as ‘boiler rooms’. The FSA maintains a list of unauthorised overseas firms known to target UK investors using questionable sales tactics, and a number of the companies for whom Fox Hayes were approving financial promotions appeared on this list.
Following its investigation, the FSA concluded that Fox Hayes had breached a number of FSA conduct of business rules and principles for business relating to financial promotions and proposed a fine of £150,000. In particular, the FSA concluded that Fox Hayes:
- had not taken reasonable steps to ensure that the financial promotions were clear, fair, and not misleading;
- had reason to doubt that the overseas companies would deal with customers in the UK in an honest and reliable way;
- had not arranged for the confirmation exercises (namely, to confirm that the financial promotions complied with the rules) to be carried out by an individual with appropriate expertise; and
- had not conducted its business with due skill, care and diligence contrary to the second of the FSA principles for business.
Fox Hayes referred the case to the Financial Services and Markets Tribunal (FSMT), which, while rejecting many of the FSA’s conclusions, decided that Fox Hayes did have reason to doubt that the overseas companies would deal with customers in the UK in an honest and reliable way from late 2003, given the cumulative weight of correspondence with the press, the warning of the Spanish regulator and the investor complaints. The FSMT found that it should have ceased to act until such time as the doubts had been removed.
Although the size of the fine is the subject of a further hearing (due to the disclosure shortly before the tribunal hearing that one of Fox Hayes’ partners received secret commissions from the overseas companies), the tribunal concluded on a preliminary basis that the proposed fine should be reduced to £70,000 by reference to the profit made by Fox Hayes from the work carried out.
Law firms that wish to conduct financial services can take advantage of the exemption available under the Financial Services and Markets Act 2000, which allows professionals such as solicitors to undertake certain types of regulated activities as incidental services additional to their normal professional services without requiring FSA authorisation. Alternatively, law firms may apply for FSA authorisation to conduct other types of financial services not permitted under the exemption.
A client who receives financial services from an authorised professional firm will have access to the Financial Ombudsman Service (FOS) (the statutory complaint handling scheme) and the Financial Services Compensation Scheme (FSCS) (the statutory fund of last resort for customers of FSA-authorised firms). However, clients of exempt professional firms have no access to the protections offered by the FOS or the FSCS, as those firms are not subject to direct FSA authorisation.
As authorised professional firms are directly authorised by the FSA, they can be subject to FSA enforcement action. The FSA has a wide selection of enforcement tools at its disposal including unlimited monetary fines, and also has the ability to issue public censures, cancel and prohibit authorisation and, in some circumstances, obtain restitution orders.
FSA enforcement investigations can be very costly and there is no prospect of recovering legal fees incurred from the FSA whether or not the investigation results in an enforcement action. Referring a proposed FSA fine or other enforcement action to the Tribunal is a similarly costly affair, and costs will only be awarded against the FSA where the FSA is found to have acted vexatiously, frivolously or unreasonably. This is a high hurdle to overcome. From a reputational standpoint, usual practice is for tribunal hearings to be held in public.
FSA enforcement cases permit mediation and settlement; the FSA operates a scheme to award discounts for early settlement of cases involving financial penalties. However, settlement does not mean that the matter will be kept confidential.
The FSA does not permit firms to insure against FSA fines. The purpose of this rule is to ensure that fines are paid by the person on who they are imposed and so have a punitive effect in practice. Depending on the circumstances of the investigation and perhaps whether a civil claim has been made, defence costs might well be covered by insurance, as under the current minimum terms a policy must cover the costs of defending a solicitor in “any investigation, inquiry or disciplinary proceedings... arising from any claim”.
It is possible for an authorised professional firm to be subject to regulatory investigations by both the FSA and the Solicitors Regulation Authority (SRA) arising from the same set of circumstances. This is particularly so given the clear overlap between some of the FSA’s high-level principles for business and the SRA’s core duties (as set out in rule one of the Solicitors’ Code of Conduct 2007).
Additionally, the FSA and the SRA co-ordinate their respective powers and will share information about authorised professional firms which is likely to be of material concern to the other. For example, this includes information about investigations and disciplinary or enforcement action, and any concerns regarding the fitness and propriety of individuals.
In short, having to deal with two regulatory regimes simultaneously is likely to present greater risks to law firms.
Andrew Blair and Ian Mason are partners and Laura Cooke an associate in the professional and financial disputes team at Barlow Lyde & Gilbert.