Integrity is a concept usually associated with honesty. An approved person might therefore expect his integrity to remain intact provided he refrains from any dishonest conduct. Recent decisions, however, have indicated an increasing tendency on the part of the FSA to treat negligence as an integrity issue.
In particular, the recent settled final notice for James Ian Shanks, 18 December 2009, imposed a prohibition on a mortgage broker for failing to act with integrity. The case against Mr Shanks was that he failed to take steps to verify the information provided to him by mortgage applicants (who were employed by firms at which he was an approved person) thereby failing to prevent his firm from being used to perpetrate financial crime.
Mr Shanks admitted to an error of judgment. The final notices indicates that the FSA concluded that the error of judgment went beyond lack of competence because:
"you were aware of the regulatory requirements on you personally as an approved person and on the Firm. Despite knowing that you should have sought verification of income information provided by mortgage applicants and why verification should be sought, and although you had the ability to check the incomes as declared ... you nevertheless failed to do so. You therefore knowingly exposed the Firm to the risk of it being used to perpetrate financial crime. As such, the FSA concluded that you acted recklessly and your conduct fell below minimum standards in terms of integrity."
The "regulatory requirements" for verifying income information are not specified in the notice. Previous cases have relied on MCOB 4.7.8 which states
"A firm may generally rely on any information provided by the customer … unless, taking a common-sense view of this information, it has reason to doubt it."
However, the Shanks final notice does not suggest that Mr Shanks had any reason to doubt the information provided by the applicants (particularly since the income of one of the two applicants was genuine). The press release indicates that some checks were carried out (although these are referred to as "superficial ‘sense checks’ on mortgage applicants’ income and employment details").
In these circumstances, it may be that the concept of a reckless lack of integrity is being stretched a little too far. In the 2009 Milan Vukelic tribunal decision, the Tribunal found that Mr Vukelic lacked integrity "in that he must have turned a blind eye to the obvious". He was reckless rather than negligent because he had every reason to believe that the transaction in which he was involved was an improper one.
These principles seem to have been reasserted in the recent Stephen Robert Allen decision in which the Tribunal reduced a total prohibition to a management and controlled functions prohibition on the basis that the director of an insurance mediation firm lacked competence and capability, but was not dishonest or lacking in integrity. The Tribunal referred to Vukelic, stating:
"In [Vukelic] the Tribunal expressed the view that a lack of experience was a reason to be wary (in that case of substantial business carrying potential regulatory risks) (paragraph 75); that to turn a blind eye to the obvious, and to fail to follow up obviously suspicious signs is a lack of integrity (paragraphs 93 and 119); and that it is reckless knowingly to take an unreasonable risk (paragraph 94). .. We adopt all those principles."
The case turned on emails which Mr Allen received and whether he knew that the firm had used clients' money improperly. The Tribunal decided that the quality of the financial information in the emails was insufficient for it to conclude that Mr Allen was dishonest and he was not reckless because he did not "knowingly [take] an unreasonable risk". Separate consideration was given to whether he was reckless to ignore cumulative warning signs. The Tribunal decided that Mr Allen may have been misled by others and there was some evidence that he did follow up some suspicious signs. Therefore, the Tribunal concluded that he did not act without integrity.
However, the Shanks final notice seems to go beyond "turning a blind eye" and failing to heed warning signs to simply failing to check in circumstances where it would have been easy to do so and it is open to question whether such behaviour should be treated as a lack of integrity.
Of course different decision makers follow different processes and adopt different approaches and the wording of the settled cases cannot be relied on in the same way as that of the Tribunal decisions. However, the Enforcement Guide makes it clear that, when agreeing the terms of a settlement, the FSA will carefully consider the importance of sending clear, consistent messages through enforcement action and that settlement does not relieve the FSA of the obligation to ensure that the final decision is the right regulatory outcome. Decisions recorded in FSA final notices will be taken into account in any subsequent case and any decision to depart from the earlier approach will be made only after careful consideration. Accordingly, it is possible that a certain amount of "concept creep" may occur with successive decisions lowering the bar until the threshold for a lack of integrity is reduced to an unacceptable level.
Statement of Principle 1 requires approved persons to act with integrity in carrying out their controlled functions and the Code of Practice for Approved Persons gives examples of the types of behaviour that the FSA considers demonstrate a lack of integrity. What is striking about these is that each example begins with the word “deliberately” as in “deliberately misleading (or attempting to mislead) by act or omission a client …”. The recent decisions involving consideration of integrity indicate that, in some cases, “deliberately” may be read as “carelessly”.
The message to approved persons is clear: take care to protect your integrity.