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CHAPTER 2

THE WEAPONS OF LAW

2.5.1U.K. Financial Services Act 1986 — Latent Power
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Statutory provisions to regulate the carrying on of investment business and to make related provision with respect to insurance business were enacted by the U.K. Legislature under the Financial Services Act 1986. The provisions of this powerful Act came into effect on the 29th April 1988.


Note!
We have already indicated (in Section 2.4.4) that the Financial Services Act 1986 was repealed on 1st December 2001, when the provisions of the Financial Services and Markets Act 2000 came into force, and that the many breaches of the Law exposed in this website-book largely relate to the activities of Financial Institutions and their Management Personnel prior to this date. Our study of U.K. Financial Services legislation is, therefore, largely focused on the 1986 Act. However, it must be stressed that, on the important matter of the regulatory provisions incorporated within the U.K. Financial Services Act 1986, the successor Financial Services and Markets Act 2000 further strengthened those provisions and, significantly, gave much greater statutory powers to the Financial Services Authority, particularly in respect of the institution of proceedings for an offence under Section 401 of the Act (this will be discussed further in the Sections that follow).


Within the provisions of the U.K. Financial Services Act 1986, ‘investment business’ includes the Managing of Investments and the Giving of Advice to persons in their capacity as investors. The Endowment Policy relating to an Endowment Mortgage constitutes both ‘investment business’ and ‘insurance business’ within the scope of the Act;
this is the case whether the authorised Institution/person dealing in such business does so either as principal or agent.

Note! The principal is the main party for whom another party acts as agent.


NOTE !


'investment business'

 

While the repayment of a loan does not, of itself, expressly constitute an ‘investment’ within the provisions of the Financial Services Act 1986, IF a person is being given advice in their capacity as an investor, and that person is burdened or is likely to be burdened with the repayment of a loan (any loan), and this fact is known to the advisor or the advisor (in performance of the assumed responsibility of the Giving of Advice) should make proper enquiry and have knowledge of this fact, THEN repayment of the loan constitutes an investment option for that person. The Giving of Advice should take full cognisance of the repayment of such a loan as an investment option. Therefore, in such circumstances, the Repayment of a Loan constitutes ‘investment business’ within the provisions of the Act.


Section 47 of the Act regulates that:

(1)

Any person who —

(i)

makes a statement, promise or forecast which he knows to be misleading, false or deceptive or dishonestly conceals any material facts; or

(ii)

recklessly makes (dishonestly or otherwise) a statement, promise or forecast which is misleading, false or deceptive,

is guilty of an offence if he makes the statement, promise or forecast or conceals the facts for the purpose of inducing, or is reckless as to whether it may induce, another person (whether or not the person to whom the statement, promise or forecast is made or from whom facts are concealed) to enter or offer to enter into, or to refrain from entering or offering to enter into, an investment agreement or to exercise, or refrain from exercising, any rights conferred by an investment.

(2)

Any person who does any act or engages in any course of conduct which creates a false or misleading impression as to the market in or price or value of any investments is guilty of an offence if he does so for the purpose of creating that impression and of thereby inducing another person to acquire, dispose of, subscribe for or underwrite those investments or to refrain from doing so or to exercise, or refrain from exercising, any rights conferred by those investments.

(3)

In proceedings brought against any person for an offence under subsection (2) above it shall be a defence for him to prove that he reasonably believed that his act or conduct would not create an impression that was false or misleading as to the matters mentioned in that subsection.

 

Section 47 of the Financial Services Act effectively created statutory offence for fraudulent misrepresentation in all its manifestations.

It is clear that the U.K. legislature, within the wording used in Section 47(2) above, were not just restating the provisions of Section 47(1), and that 'any course of conduct' which creates a false or misleading impression must be seen to include 'remaining silent where a duty to speak exists' . (See Section 2.3.2, Fraudulent Misrepresentation, and Section 2.3.4, The Duty to Disclose and Silence as a Misrepresentation. See also Section 2.3.6: Fraud and the Conman —— U.K. Law and Irish Law.)



The U.K. legislature did not shirk from imparting due gravity to such a crime, and gave the Act canine teeth.



Subsection 47(6) states:

A person guilty of an offence under this section (i.e. section 47) shall be liable —

(a)

on conviction on indictment, to imprisonment for a term not exceeding seven years or to a fine or to both;

(b)

on summary conviction, to imprisonment for a term not exceeding six months or to a fine not exceeding the statutory maximum or to both.


The U.K. Financial Services Act 1986 creates similar offences and liabilities, under Section 133, for fraudulent misrepresentation in the matter of ‘insurance business’ to those under Section 47 in the matter of ‘investment business’ (as related above).



Note!
The above fraudulent misrepresentation offences, and the penalties following from conviction of same, are again given full statutory effect within the successor U.K. Financial Services and Markets Act 2000 (under Section 397).





The U.K. legislature further reinforced the preventative purpose of the Financial Services Act 1986 by ensuring that senior personnel guilty of offences defined within its provisions cannot immunise themselves within the Financial Institution they represent.


Section 202(1) states:

Where an offence under this Act committed by a body corporate is proved to have been committed with the consent or connivance of, or to be attributable to any neglect on the part of —

(a)

any director, manager, secretary or other similar officer of the body corporate, or any person who was purporting to act in any such capacity ; or

(b)

a controller of the body corporate,

he, as well as the body corporate, shall be guilty of that offence and liable to be proceeded against and punished accordingly.


Note!
Again, Section 400 of the successor Financial Services and Markets Act 2000 gives effect to similar offence, and liability, on the part of an ‘officer’ of a body corporate.


Note!
This provision, whereby a ‘responsible officer’ of a Corporate Body becomes guilty of an offence and liable to prosecution and punishment, is generally applicable in the case of an offence committed under any of the Statutory Acts or Orders as previously related; its relevance in relation to the pervasive tendency of the ‘management personnel’ of Financial Institutions to collude with or to turn a blind eye to such wrongdoing SHOULD, if the Law was properly applied to them, have grave consequences.

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The offences and penalties for fraudulent misrepresentation, as provided for in Section 47 and Section 133 of the Financial Services Act 1986 (and in the successor Financial Services and Markets Act 2000), are, in effect, specifically modified applications of the Fraud provisions of the U.K. Theft Act 1968; the option of imposing a fine, however, is not available under the Theft Act.


The Fraud provisions of the U.K. Theft Act 1968 superseded the false pretences provisions of the Larceny Act 1916. With respect to the genesis and interpretation of the fraudulent misrepresentation provisions of the U.K. Financial Services Act 1986, the false pretences provisions of the Larceny Act 1916 (which was the Law applicable in both the U.K. and Ireland) following through to the Fraud provisions of the U.K. Theft Act 1968, and the many subsequent judgements relating to same, can be seen to have a significant bearing. (See Section 2.3.6: Fraud and the Conman —— U.K. Law and Irish Law.)

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That the U.K. legislature saw fit to unequivocally SPELL OUT these offences and penalties for fraudulent misrepresentation within the provisions of the Financial Services Act 1986 (and within the succeeding Financial Services and Markets Act 2000), and that it also saw fit to increase the imprisonment liability beyond the term applicable under the Fraud provisions of the U.K. Theft Act 1968 (seven years as opposed to five years), evidences its (i.e. the U.K. legislature’s) manifest conviction TO CONFRONT and PUNISH ‘WHITE COLLAR FRAUD’ perpetrated against another person by those within the Financial Services Industry, and TO PUNISH those responsible for such Fraud.


But, as we shall see in the Sections that follow, such conviction by the legislature has only been very selectively applied by the Regulatory Regime in matters specific to the consumer.




 


Because the Financial Services Act 1986 was formulated at a time when it was thought that the intrinsic integrity of the Management Personnel of Financial Institutions was unquestionable, the Act generally deferred to regulation by the Financial Institutions’ Self Regulating Organisations.


Section 48 of the Act relates to the Conduct of Business Rules for ‘investment business’. Importantly, Schedule 10 specifically (in subsection 4(2)) brings investment business associated with ‘insurance business’ within the scope of these Rules.


Section 48(1) of the Act states:

48. — (1) The Secretary of State may make rules regulating the conduct of investment business by authorised persons but those rules shall not apply to members of a recognised self-regulating organisation or persons certified by a recognised professional body in respect of investment business in the carrying on of which they are subject to the rules of the organisation or body.



Schedule 8 of the Act defines the Principles applicable to such ‘conduct of business rules’. These principles include the following:

On the matter of Standards

1.

The rules made under section 48 of this Act (here referred to as ‘conduct of business rules’) must promote high standards of integrity and fair dealing in the conduct of investment business.

2.

The conduct of business rules must make proper provision for requiring an authorised person to act with due skill, care and diligence in providing any service which he provides or holds himself out as willing to provide.

3.

The conduct of business rules must make proper provision for requiring an authorised person to subordinate his own interests to those of his clients and to act fairly between his clients.

4.

The conduct of business rules must make proper provision for requiring an authorised person to ensure that, in anything done by him for persons with whom he deals, due regard is had to their circumstances.


On the matter of Disclosure

5.

The conduct of business rules must make proper provision for the disclosure by an authorised person of interests in, and facts material to, transactions which are entered into by him in the course of carrying on investment business, including information as to any commissions or other inducements received or receivable from a third party in connection with any such transaction.

6.

The conduct of business rules must make proper provision for the disclosure by an authorised person of the capacity in which and the terms on which he enters into such transaction.

7.

The conduct of business rules must make proper provision for requiring an authorised person who in the course of carrying on investment business enters or offers to enter into a transaction in respect of an investment with any person, or gives any person advice about such a transaction, to give that person such information as to the nature of the investment and the financial implications of the transaction as will enable him to make an informed decision.



Note!
The Standards and Disclosure Principles, defined within Schedule 8 of the Financial Services Act 1986, are clearly a codification of precedents already set within U.K. Common Law.  

 

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