Financial Services Authority – Powers – FSA finding applicant general insurance broker in breach of FSA rules

Jeffery v Financial Conduct Authority: Upper Tribunal (Tax and Chancery Chamber): 27 June 2013

The applicant acted as an insurance broker for general insurance contracts, including household and motor insurance and commercial insurance for businesses. As of January 2005, he required and received approval from the respondent Financial Services Authority (the FSA) to undertake those activities through his company JFC Ltd (the firm). In 2008, he was prosecuted for alleged fraud but was subsequently acquitted of all charges.

In February 2009, the FSA commenced its own investigation into the applicant and his firm. In October 2009, the FSA removed the applicant's permission to conduct regulated activities and, in January 2010, it issued a final notice cancelling his permission. On 28 May 2010, the FSA served a warning notice on the applicant.

In July, the FSA sent the applicant a decision notice which stated that it had decided: (i) to impose a penalty on the appellant of £150,000 for breaches of statements of principles 1 and 4 of the FSA's Statements of Principle and Code of Conduct for Approved Persons in the period between January 2005 and October 2009; and (ii) to make a prohibition order pursuant to section 56 of the Financial Services and Markets Act 2000 to prevent him from carrying our any function in relation to a regulated activity carried on by any authorised person, exempt person or exempt professional firm. In its decision letter, the FSA stated that its decision had been made on five grounds including, among other things: that the applicant had recklessly failed to effect insurance for clients or had failed to inform clients of the identity of their insurers (ground 2); and had forged documentation and correspondence in the names of clients potentially to mislead insurance companies (ground 3). The applicant denied all the allegations made by the FSA and further raised a limitation defence to certain of the grounds for the imposition of a penalty under section 66 of the act. The applicant referred the decision notice to the Upper Tribunal (Tax and Chancery Chamber) (the tribunal).

In relation to the limitation point, pursuant to section 66(4) of the act, the FSA could only take action under section 66(1) of the act within two years from the first day on which the FSA had known of the misconduct. Knowledge for that purpose included having information from which the misconduct could reasonably be inferred (section 66(5). Against that background, it fell to be determined whether the FSA had known of any of the relevant misconduct or had information from which the misconduct could reasonably be inferred, before 29 May 2008, which was two years earlier than the issue of the warning notice to the applicant on 28 May 2010.

The reference would be dismissed.

(1) For time to start running for the purposes of section 66(4) of the act, it was not necessary that the FSA had the full picture that would justify the issue at that stage of a warning notice. Although the FSA might only take action under section 66(1) if it appeared to it that the relevant person was guilty of misconduct, the limitation period started to run from an earlier time, when the FSA knew or had information from which the misconduct could reasonably be inferred. The FSA should, however, have sufficient knowledge of the particular misconduct, or such knowledge should be capable of being reasonably inferred, to justify an investigation. Mere suspicion was not enough, nor was any general impression that misconduct might have taken place. A mere allegation or assertion unsupported by evidence would be unlikely to be regarded as sufficient to amount to knowledge of misconduct or as information from which it would be reasonable for the FSA to have inferred misconduct, although it might be expected to give rise to further enquiry. Knowledge of an allegation of misconduct was not the same as knowledge of the misconduct.

Where the FSA became aware of more than one act of misconduct of which a particular person appeared to be guilty, the time limit operated separately in respect of each. The FSA might not take action in respect of misconduct of which it had known or which could reasonably be inferred more than two (subsequently three) years before the issue of a warning notice (see [337], [339] of the judgment). Prior to 29 May 2008, the FSA had not known of any of the misconduct to which the instant reference related, nor prior to that time had the FSA had information from which such misconduct could reasonably have been inferred. It followed that there was-no limitation impediment to any of the actions taken by the FSA under section 66 of the act (see 413 of the judgment).

(2) The principal purpose of a financial penalty was to promote high standards of regulatory conduct by deterring persons who had committed breaches from committing further breaches, and helping to deter other persons from committing similar breaches, as well as demonstrating generally the benefits of compliant business (see [420] of the judgment).

Save only in respect of two matters, the alleged failure by the applicant and his firm to effect household insurance for certain of their clients for the period 1 October 2007 to 30 September 2008 and the 2007/08 insurance cover for another client, the FSA had made out its case against the applicant. As the applicant had demonstrated a serious case of lack of integrity, the making of false statements and failure to deal with the FSA in an open and co-operative manner, there was no doubt that a substantial financial penalty should be imposed.

In all the circumstances, the penalty of £150,000 imposed by the FSA on the applicant had been appropriate. Furthermore, in the light of the applicant's lack of integrity in the performance of his controlled function, there was no doubt that he was not a fit and proper person to perform functions in relation to a regulated activity carried on by an authorised person. Accordingly, the only appropriate order was to prohibit the applicant from performing any function in relation to any regulated activity carried on by any authorised person, exempt person or exempt professional firm (see [418], [419], [422], [425], [426] of the judgment).

Pending submission by the applicant of evidence as to his means, the question of the level of the financial penalty would be adjourned. Directions would be given to the FSA with respect to the financial penalty when that had finally been determined by the tribunal. As regards prohibition, the FSA would be directed to make a prohibition order pursuant to section 56 of the act (see [423], [428], [429] of the judgment).

The applicant appeared in person. Sarah Clarke (instructed by the Financial Services Authority) for the FSA.