The Upper Tribunal (Tribunal) has dismissed the appeal of Jon Frensham against a decision of the Financial Conduct Authority (FCA) banning him from the industry. This is the first time that the Tribunal has had to consider a case where the FCA has sought a prohibition order against an individual based on a conviction for a criminal offence not involving dishonesty. The decision also provides important guidance for firms undertaking their own assessment of fitness and propriety under the SMCR regime.
Relevant Facts
Frensham was an independent financial advisor and approved person since 2001. The Tribunal accepted that in undertaking that role he had an unblemished regulatory record. However, on 10 March 2017, he was convicted by a jury for attempting to meet a 15 year old child following acts of sexual grooming, including the sending of explicit communications. That offence occurred at a time when he was subject to bail conditions in relation to a prior incident in 2016 (which was not prosecuted). The bail conditions included not to have unsupervised contact with any person under 18 years without parental consent. Following his conviction, Frensham was sentenced to 22 months' imprisonment suspended for 18 months with a 60 day rehabilitation requirement. He was made the subject of an indefinite Sexual Harm Protection Order and added to the sex offenders register.
Following the conviction, the Chartered Insurance Institute (CII) of which Frensham was a member did not renew his statement of professional standing (SPS) and expelled him from membership. That was significant because the FCA's Training and Competence Sourcebook requires individuals providing personal recommendations to retail clients to hold a valid SPS.
Notwithstanding his lack of SPS, following his conviction Frensham continued to practice (without incident) until the Tribunal hearing.
The Regulatory Proceedings
On the day of Frensham's sentencing hearing, a member of staff in FCA supervision contacted FCA Enforcement informing them of the fact of his conviction and providing a link to press coverage. This was followed on 1 April 2017 by Frensham writing to FCA supervision explaining the outcome of his trial and the fact that he was now out of prison. Frensham expressed his desire to continue his career as a financial adviser.
However, he did not receive a reply to that letter and he did not hear from the FCA until January 2019, when the FCA wrote to him to inform him that the FCA would recommend to the Regulatory Decisions Committee (RDC) to make a prohibition order. Nevertheless, it was not until 5 May 2020 that a warning notice was issued to Frensham. On 1 October 2020, following a disputed hearing before the RDC, the FCA issued a decision notice withdrawing Frensham's approval to perform a controlled function on the basis that Frensham lacked integrity and was therefore not fit and proper.
Frensham appealed to the Tribunal. Before the Tribunal, the FCA contended that the nature and circumstance of Frensham's offending showed that he lacked integrity. The offending involved abuse of a position of trust and a deliberate and criminal disregard for appropriate standards of behaviour. The FCA contended that there was a risk of erosion of public confidence if Frensham was allowed to continue in the industry.
In addition, the FCA contended that Frensham had not been open and transparent with it because he did not inform the FCA of (i) his earlier arrest in March 2016 when the bail conditions were imposed, (ii) his arrest and remand in custody in respect of the offence for which he was convicted, (iii) that whilst on remand he was not in a position to discharge his controlled functions at his firm and (iv) the non-renewal of his SPS and expulsion from the CII.
Frensham submitted that the FCA had wrongly applied the fitness and propriety test. The factors upon which he relied included that (i) his conviction did not relate to his regulated activity (ii) the conviction was not for an offence of dishonesty and (iii) there were no connections between the criminal offence and Frensham's regulated activity, including that his work would not bring him into contact with minors.
The Tribunal's Decision
The Tribunal upheld the decision of the FCA, although not without some criticism of the FCA's approach to the investigation, the proceedings before the Tribunal and the FCA's reasoning for its decision.
The FCA had originally approached Frensham's case as a "Threshold Conditions" case. These are routine cases where it is not normally the case that facts needed to be established, beyond, for instance, a criminal conviction having taken place or a firm failing to comply with its obligations to pay fees or file returns. The Tribunal considered this was not such a case and that it was also inappropriate for the FCA to rely (as it did) on the manager of the Threshold Conditions team as the sole witness from FCA Enforcement.
The Tribunal also considered that in respect of one significant issue the FCA "has not shown the degree of candour which the Tribunal should reasonably expect and which the Authority would expect from the firms and individuals which it regulates, which, ironically, the Authority maintains was not provided by Mr Frensham in this case". The issue in question was whether the FCA could have taken action sooner against Frensham. In her statement, the FCA witness claimed that the delay could be most appropriately attributed to the FCA's assessment of Frensham's conduct. However, in oral evidence it was conceded that a large part of the delay in bringing regulatory proceedings was that discussions were taking place internally, at a senior level, as to how to proceed with cases of this kind.
The Tribunal considered that it was unsatisfactory that the FCA did not put forward appropriate witnesses who could provide evidence as to these deliberations and those witnesses who did attend were not properly prepared.
In respect of the FCA's decision itself, the Tribunal found that the basis upon which the FCA sought to link Frensham's lack of personal integrity to his professional role on the basis of the nature of the offence alone to be "speculative and unconvincing". The Tribunal considered that the FCA had offered no evidence to support the FCA's contention that the nature of Frensham's offending meant that there was a risk that he would abuse his position of trust in dealing with his customer noting that Frensham had been allowed by the FCA to continue in business for 4 years, without incident. The Tribunal also considered that it would have also have been helpful had the FCA adduced expert criminological or psychological evidence which could support the view that acting in the manner which Frensham did, ran a significant risk that he would likewise seek to exploit vulnerable clients (such as the elderly).
The Tribunal considered that the FCA was on sounder ground in asserting that public confidence in the industry would be significantly harmed if such a person was allowed to continue to work in the industry. However, again, the Tribunal was troubled by the fact that the FCA had allowed Frensham to work for 4 years without incident and where most (but not all) of Frensham's clients were content to continue with him as their advisor.
In the circumstances, the Tribunal stated that if they had been asked to decide the case on the basis of the conviction alone, it is likely that it would have found in favour of Frensham.
The Tribunal was more persuaded by evidence relating to Frensham's breach of his original bail conditions (by contacting the minor when he did). The Tribunal agreed with the FCA that deliberately breaching bail conditions was evidence that Frensham may also seek to disregard his regulatory obligations and that Frensham took a deliberate decision to disregard the law in order to satisfy his own interests.
The Tribunal also took the view that Frensham's decision not to inform the FCA of his arrests and other matters was also evidence that Frensham decided to put his own interests and those of his Firm before the need to comply with the clear obligations to be open and transparent with the FCA. The Tribunal considered that it was unimportant that the FCA found out about the matters from other sources or that the FCA had not been diligent in following up with Frensham when it became aware of those matter.
The Tribunal concluded that although it had found some flaws in the FCA's approach to the relevance of the conviction, in its view those flaws did not justify asking the FCA to reconsider its decision.
Comment
This is an important case involving non-financial misconduct and is relevant not only to how the FCA approaches these types of case in the future, but also how authorised firms should deal with similar issues when considering fitness and propriety of their staff:
- Except in cases of dishonesty, in most instances it will generally be insufficient for a firm to rely on a conviction alone to make a finding of lack of fitness.
- As well as the factors set out in the FCA handbook chapter on assessment of fitness (FIT), firms should consider whether the facts of the offending impact on the FCA's statutory objectives. In the case of Frensham, the Tribunal considered the impact of Frensham's offending on the FCA's statutory objectives of securing an appropriate degree of protection for consumers and its statutory objective of protecting and enhancing the integrity of the UK financial system.
- The Tribunal relied upon the cross examination of Frensham in finding that he had not shown genuine remorse in relation to the commission of the offence. It follows that firms should generally interview a staff member as part of the investigation process.
- The Tribunal's stated experience is that it is often the case that it is not the fact that a criminal offence has been committed that is fatal to an applicant's case but the manner in which he deals with the consequences that follow. Firms should consider how open the staff member has been with them in accepting their offending and promptly providing proper disclosure to the firm or FCA, as appropriate.
The FCA will welcome the guidance provided by the Tribunal in this case and the fact that its decision has been upheld. However, it will be concerned that it has again come under criticism from the Tribunal for how it conducted its case - so soon after receiving criticism for how it complied with its disclosure obligations in Forsyth v The PRA and The FCA. The FCA faced particular criticism for allowing Frensham to continue to practice without an SPS pending the Tribunal hearing. In the future, we can expect the FCA to expedite the removal of those it considers are not fit and proper, including the use of supervisory powers where available.