Acting in breaches of Financial Service Regulations

Where a company enters into insolvency proceedings, one of the first steps for the Official Receiver (for compulsory liquidations) or the appointed Liquidator/Administrator (for voluntary liquidations/Administrations) is to provide a report to the Secretary of State on the Directors’ conduct pre-insolvency.

This duty continues as an ongoing duty as the company’s affairs are further investigated and administered in the insolvency proceedings.

Where a Director’s conduct is investigated, it will be the risk they present to the public interest (of such conduct being repeated) that may lead to further investigations into such matters and eventually the commencement of a Disqualification Claim against each of the Directors subject to these investigations.

Where a Director holds a professional qualification or otherwise has considerable experience (such that they should have known better) then these enquiries will also consider the reason for such behaviour.

Professionally skilled Directors

Where a Director is professionally regulated, although not determinative it is generally the case that such Directors’ conduct should meet a higher standard in a similar way to their legal fiduciary duties as set out at Section 174 of the Companies Act 2006:

Duty to exercise reasonable care, skill and diligence

(1) A director of a company must exercise reasonable care, skill and diligence.

(2) This means the care, skill and diligence that would be exercised by a reasonably diligent person with—

(a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company, and

(b) the general knowledge, skill and experience that the director has.

Accordingly, where a professionally regulated individual is a Director of an insolvent company, particular attention will be paid to a subjective assessment of his/her skills and experience – for example where they are a solicitor, an accountant or a financial service professional.

This is particularly important for financial services, where there is a huge public interest risk associated to miss-selling of financial products and managing customer investments which often involve very large sums of money.

Regulation of Financial Services

Financial services are offered to almost every individual in the UK on a daily basis – whether it is credit services, investment or even insurance products.  All of them are financial products and the companies/individuals who sell them operate in financial services.

Currently, the most important piece of legislation governing the provision of financial services is the Financial Services and Markets Act 2000 (“FSMA”) which has been amended a number of times to reflect the changing trends and products arising in the financial services industry.

Previously, such financial services were regulated under FSMA by the Financial Services Authority until 2013, following which it became the Financial Conduct Authority (which also merged with other government departments including the Office of Fair Trading) (“FCA”).

Nowadays, to operate in any area of financial services (including selling financial products), a company and/or its directors need to be regulated by the FCA unless they fall with a category excepted from these rules.

Misconduct in the provision of Financial Services

Where FCA authorised companies and/or individuals (dependant on the financial service provided) act in breach of their professional regulation, then the issues of misconduct can go far deeper.

Equally, where a company and its directors act in the provision of financial services but are not regulated, then there are grave concerns that persons with unchecked backgrounds and potential dubious experience in the provision of financial services are publicly selling investments or loans to the public, without any qualification or experience to protect the customer and ensure they are being recommended the best possible product (rather than, as often occurs, a financial product that is simultaneously lining the pockets of those selling them)./

For example, to operate a Collective Investment Scheme for the management of land being sold, the company or individual selling the scheme must be regulated.  Similarly, any lending to individuals for personal needs (which has a lot of businesses operating in it) must be sold by a regulated individual/entity including, for non-business transactions, the appropriate consumer creditor authorisation.

Defending the Disqualification Claim

Misconduct in the provision of financial services can be very wide and the range of misconduct is limitless, often involving offshore companies (although the ability to operate offshore is becoming more limited as a result of changes to how information is exchanged between different countries’ tax authorities).

However, it is almost always the case that the Insolvency Service (when investigating such arrangements) do not completely understand them and it is of great importance that the Director subject to such a proposed (or issued) Disqualification Claim is able to communicate this through his/her solicitors.

At Francis Wilks & Jones we have considerable experience of Director Disqualification matters and a large component of our experience includes assisting Directors who have been involved in financial services, either in exchanges with the Insolvency Service pre-issue or following the issue of a Disqualification Claim against you.

Please call any member of our Director Disqualification team for a consultation now on 020 7841 0390. Alternatively please email us with your enquiry and we will call you back at a time convenient for you.