Covering topics of: CDD, Data Protection, Voice Recording, Short Selling and other fund matters Applicable to: each financial industry sector, investment businesses, funds and fund services businesses These unprecedented circumstances …
Acting With Integrity – What Does It Mean?
Acting with integrity is one of two important benchmarks (the other being competence) against which regulated entities, Principal and Key Persons are assessed in determining their “fit and proper” status.
The Oxford English dictionary provides the following definition of integrity: “the quality of being honest and having strong moral principles.”
Understanding what constitutes acting with integrity would therefore appear straightforward: Integrity equates to honesty. However, if one analyses public statements issued by the JFSC it is clear that the regulator does not equate acting with integrity with acting honestly. The following are examples of conduct regarded by the Jersey Financial Services Commission (“JFSC”) as lacking integrity:
- Failing to ensure conflicts of interest which are known to exist, are properly identified, documented and managed;
- Wilfully neglecting responsibilities;
- Failing to take any action and failing to contact the Commission when confronted with serious issues, which included inaccurate valuations, poor administration and the management of conflicts of interest;
- Knowing that valuations were issued to customers in circumstances where questions were being raised about the reliability of the valuations, and in the knowledge there was not the information available to support the amounts recorded in the valuations;
- Signing and/or authorising the execution of financial statements and a letter of representation which included material misstatements; and
- Despite a complete lack of understanding of an investment structure, proceeding to authorise investments of circa £2.5m into the structure and thereby placing customer assets at inappropriate and avoidable risk.
To date, there has been no judicial commentary or finding by the Royal Court as to what constitutes a lack of integrity. This is unlike the position in the UK. In the case of Batra v FCA UKUT 0214 (TCC), the Upper Tribunal endorsed the leading case of Hoodless and Blackwell v FSA (3 October 2003) as providing “useful Guidance”. In Hoodless, the Tribunal said:
“Integrity connotes a moral soundness, rectitude and steady adherence to an ethical code. A person lacks integrity if unable to appreciate the distinction between what is honest and dishonest by ordinary standards. (This presupposes of course, circumstances where ordinary standards are clear. Where there are genuinely grey areas, a finding of a lack of integrity would not be appropriate.)”
In Batra, the Tribunal provided a useful summary of previous cases appearing before it and commented:
“In the subsequent cases of Vukelic v FSA  and Atlantic Law LLP and Greystoke v FSA , the Tribunal has cautioned against attempting to formulate a comprehensive definition of integrity. As the tribunal in Vukelic observed, integrity remains a concept elusive to define in a vacuum but still readily recognisable by those with specialist knowledge and/or experience in a particular market.”
The Tribunal continued:
“A lack of integrity does not necessarily equate to dishonesty. While a person who acts dishonestly is obviously also acting without integrity, a person may lack integrity without being dishonest. One example of a lack of integrity not involving dishonesty is recklessness as to the truth of statements made to others who will or may rely on them or wilful disregard of information contradicting the truth of such statements.” Such behaviour was found to be evidence of a lack of integrity by the Tribunal in Vukelic. [Emphasis added.]
“It may be that Mr Vukelic was not dishonest on this transaction in the sense of deliberately participating in a scheme to deceive and we are prepared to accept that he was not. But he turned a blind eye to what was obvious and failed to follow up obviously suspicious signs. We do not believe that an educated professional in a senior position could have been oblivious to the signs that the transaction depended on concealment for its success. It is possible, but unlikely, that Mr Vukelic simply failed to spot what should have been obvious to a person in his position. But if that had been so it would have resulted from an inexcusable failure to ask obvious questions.”
In Arch Financial Products LLP & Others v FCA  UKUT 0013 (TCC) the Tribunal stated:
“It is clear that acting recklessly is one example of acting without integrity. The passage from Vukelic indicates that a person acts recklessly when he turns a blind eye to what was obvious to a person in his position.
In our view such a formulation results no more than an application of the authoritative formulation of the concept of recklessness by Lord Bingham of Cornhill [in R v G  AC 1034] where he stated that a person acts recklessly when he acts with respect to (i) a circumstance when he is aware of a risk that exists or will exist and (ii) a result when he is aware of a risk that it will occur; and it is in the circumstances known to him, unreasonable to take the risk.”
The Tribunal concluded:
“In a regulatory context the concept of lacking integrity embraces only behaviour of a serious nature which demonstrates the lack of an ethical compass, and where as stated in Hoodless v Blackwell there are genuinely grey areas there is no place for a finding of a lack of integrity. A finding of a lack of integrity cannot be made in a situation where there has been a conscious decision to take an acceptable risk.”
Given each case is assessed on its own particular facts, it is perhaps understandable why regulators are likely to refrain from seeking to provide a comprehensive definition of integrity. However, those with knowledge in a specific sector should be well placed to identify conduct lacking integrity. Further, it is clear that the JFSC does not have to establish dishonest conduct in order to arrive at a finding that an individual lacks integrity.
The JFSC’s findings and the Tribunal’s decisions should serve as a stark reminder that there is no place in any financial services sector for turning a blind eye; acting recklessly; failing to manage conflicts of interest which are known to exist; and, perhaps the most direct message of all, failing to take any action and failing to contact the JFSC when on notice of significant issues.
 As defined in the Financial Services (Jersey) Law 1998, as amended
 Judicial Commentary is, however, anticipated when W -v- Jersey Financial Services Commission is considered by the Royal Court. See: https://www.jerseylaw.je/judgments/unreported/Pages/JRC231A.aspx
 Financial Services Authority, UK
 Financial Conduct Authority, UK