Taking on the financial regulator
9 August 1998
John Virgo and Philip Ryley explain the options open to solicitors who are banned from offering financial advice. John Virgo is a barrister at Guildhall Chambers and Philip Ryley is a solicitor at Ringrose Wharton in Bristol.
With the advent of the Financial Services Authority (FSA), financial advisers are facing a new dawn of regulatory control. The FSA will certainly take a no less exacting view of criteria for membership than the current regulator, the Personal Investment Authority (PIA).
So it is apt to consider the options open to financial advisers who, in applying for membership of the PIA (which will eventually be absorbed into the FSA), fail to make the grade first time round.
The onus is on the applicant to satisfy the PIA that it is "fit and proper" to be regulated by it. The relevant criteria for meeting this requirement are set out in the PIA rule book under the three main headings of Honesty and Reputation, Solvency and Financial Standing, and Competence and Organisation.
In practice the most difficult criteria to satisfy are the competence and organisation of the business. The applicant will need to demonstrate that their firm is organised and motivated to comply with the conduct of business rules. This includes showing that the entire compliance function is adequately resourced. In particular, the presence of an experienced compliance officer will be essential. A good track record with any previous regulator and indemnity insurer will go some way to demonstrating the existence of a good compliance culture.
Following the submission of an application, the PIA will generally carry out a pre-admissions visit to assess first hand the way in which the business is operated. Where this leads to refusal of the application by the membership committee, a number of options are open.
First the applicant may appeal to the membership and disciplinary tribunal, which treats the appeal as a fresh application. The critical point here is that the tribunal must consider the issue of whether the applicant is "fit and proper" as at the date of the appeal. Since the appeal may be heard anything up to a year after the initial consideration of the application by the committee, the applicant has a valuable window of opportunity to reform procedures and practices which may have caused the rejection of the original application.
The position is analogous to the need for licence holders under the Gaming Act 1968 to show they are fit and proper persons. Where such a licence is cancelled the holder can appeal. Again, the question of whether the applicant is fit and proper has to be considered as at the date of the appeal.
In ex parte International Sporting Club (London) the gaming licences of a number of clubs were cancelled because of repeated breaches of the provisions of the Gaming Act. By the date of the appeal the companies concerned had been substantially restructured, to remove the personnel responsible for the previous compliance failures.
The Court of Appeal emphasised that "the question must be determined in the light of the circumstances existing at the time of the appeal. Past conduct will of course be relevant... [but]... there are other considerations... particularly where the licence holder is a limited company... for instance, whether the shareholding and management of the company remains the same at the date of the material hearing as when the past misconduct occurred."
Of course, changes must have the hallmark of genuine reformation. Evidence from an independent expert compliance consultant about the way in which the business is operated at the time of the appeal will be helpful.
If the appeal to the tribunal fails, there is one further avenue of appeal - to the Appeal Commissioner.
However, the grounds permitted for the appeal are limited. The appellant will have to show that the tribunal "misdirected" itself, or that the decision made was based on an error of law, a misrepresentation of the PIA's rules, or that it was "unreasonable".
Although the commissioner has the discretion to admit fresh evidence, the introduction of such material will, in practice, depend upon satisfying the Ladd v Marshall criteria applied by traditional appellate courts for the reception of new evidence.
So, although this avenue of appeal will be difficult to pursue, it will have the advantage of keeping alive authorisation where this is derived from an existing regulatory body while the appeal is undertaken.
It is, of course, open to an applicant to submit a further application for membership while pursuing the appeal process.
The advantage of running an appeal in tandem with a fresh application, is that authorisation is kept alive until the appeal decision is announced. This gives the prospective applicant more time to ensure its competence and organisation issues are properly addressed.
It may be that while the appeal itself is unsuccessful, the would-be applicant has nonetheless instituted sufficient effective changes in business operation that the PIA will now regard the firm as satisfying the "fit and proper" criteria.
Once in place, the procedural safeguards designed to secure investor protection will need to be regularly reviewed. Regulatory monitoring visits will soon reveal deficiencies in a firm's approach. In essence a rigorous approach to compliance is now inescapable.