Eyes on integrity: a recent, regulatory insight

Jersey’s Royal Court has very recently published a judgment, Francis v Jersey Financial Services Commission 2017 JRC 203A, which goes some way to explain the meaning of integrity in the regulatory context.

The definition of integrity is important, because integrity is central to the Commission’s regulation of financial services businesses and their principal persons. For example, under the Financial Services (Jersey) Law 1998 the Commission may refuse to register a person, having regard to the integrity, competence, financial standing, structure and organization of the applicant.  Further, the Code of Practice requires that a registered person must conduct its business with integrity.

Judgment

Before the Royal Court, Mr Francis had appealed against (among other matters) the Commission’s decision to issue a direction prohibiting him from engaging in financial services business in Jersey and to issue a Public Statement to that effect.

The determinations by the Commission had been made in June 2014, following an investigation and decision-making process lasting some three years.  The appeal to the Royal Court was not heard until 2016 as a result of numerous interlocutory applications made by Mr Francis and as a result of delays caused by his ill health.  In a compendious judgment running to some 370 paragraphs, the Royal Court dismissed the principal appeal.

Mr Francis had complained that there was no basis for the Commission to have made certain findings of fact against him.  The Royal Court dismissed this complaint.

The background to these findings was Mr Francis’s various roles, including as CEO of the Horizon Group, a Jersey-based financial services business, in allowing a number of vulnerable individuals to invest large amounts of money into a company, Handmade Films (originally established by Beatle, George Harrison, and celebrated for having produced films such as the Life of Brian), which company was connected to Mr Francis and was in dire financial straits.

Mr Francis then complained that the findings of fact made against him (and upheld by the Court) did not justify the Commission’s conclusion that he had acted with a most serious lack of integrity and incompetence of the most serious kind.

Further, Mr Francis said that the finding of a lack of integrity amounted to a finding of dishonesty against him, and that there was insufficient evidence to prove that.  This led the Court to consider what is meant by a ‘lack of integrity’.

Integrity

The Court referred to the Commission’s view, supported by certain English cases, to the effect that there was a difference between dishonesty and a lack of integrity, and that a person may lack integrity even though not established as being dishonest.  (Oben had previously highlighted this point in a briefing note: https://www.oben.je/acting-with-integrity-what-does-it-mean/ .)

The Court noted that there were conflicting English decisions on this point, in the context of disciplinary proceedings involving the Solicitors’ Regulatory Authority.

However, ultimately the Court concluded that it would proceed on the basis that the Commission was correct and that dishonesty and lack of integrity are not the same.  It said that it found the following quotation, adopted by the Commission, to be particularly helpful:

“even though a person might not have been dishonest, if they lack either an ethical compass or their ethical compass to a material extent points them in the wrong direction, that person will lack integrity.”

Given that, and the fact that Mr Francis had previously taken no objection to the Commission considering the standard of integrity judged against this interpretation, the Court did not regard as unreasonable the Commission’s assessment of the severity of Mr Francis’s misconduct.

That said, the Court had some sympathy with Mr Francis’s submission that the ‘man in the street’ may well not appreciate that there is a difference, and would read a public statement containing a finding of a lack of integrity as amounting to a finding of dishonesty.  It strongly recommended that the Commission publish a guidance note explaining the difference, so that the subjects of regulatory action know where they stand, and those reading the Commission’s public statements fully appreciate their significance.

Appeal

The Royal Court’s judgment was delivered on 4 December 2017.  Mr Francis filed a notice of appeal to the Court of Appeal on 21 December 2017. On 18 May 2018 a judgment of the Court of Appeal was published, making it clear that Mr Francis had very recently abandoned his appeal, on the basis that he was “not well enough, physically or financially, to continue” with it. The Court of Appeal dealt in its judgment with the costs of the appeal and the form in which the Royal Court’s judgment would be published.  That Royal Court judgment was then published a week or so afterwards.

Commentary

It is remarkable that only now, seven years from the start of the initial investigation, is the public told about Mr Francis’s misconduct.  Admittedly, his apparent illness appears to have been a factor in the delays in bringing the matter before the Royal Court.  But what is more perplexing is that during the intervening period the various interlocutory hearings were anonymised, and even after the Royal Court had delivered its judgment, the content was not published until Mr Francis abandoned his appeal.  A defendant charged with a criminal offence would not ordinarily be afforded such treatment.

Turning to the definition of integrity, it is not immediately apparent how the passage relied upon by the Royal Court helps to narrow down the circumstances when an individual could properly be said to have acted with a lack of integrity but not dishonestly.

The Royal Court in Francis only considered this issue in a very cursory way, but referred to the definitions of dishonesty used in the context of civil liability for dishonest assistance.

In that context, in other cases the Royal Court has adopted the following definition of dishonesty from the English case of Barlow Clowes Intl Ltd v Eurotrust Intl Ltd [2006] 1 All ER 333 (see Nolan v Minerva Trust Company Ltd 2014 (2) JLR 117 and Cunningham v Cunningham 2009 JLR 227):

“In considering whether a defendant’s state of mind was dishonest an inquiry into the defendant’s view about standards of dishonesty was not required. A defendant’s knowledge of a transaction had to be such as to render his participation contrary to normally acceptable standards of honest conduct. There was no requirement that he should have had reflections about what those normally acceptable standards were. Consciousness of the dishonesty required consciousness of those elements of the transaction which made participation transgress ordinary standards of honest behaviour; it did not also require the defendant to have thought about what those standards were.”

The Royal Court in Nolan described this as “an objective test of dishonesty”, just as the Royal Court in Francis described the test of ‘lack of integrity’ as being “an objective test alone”, namely one where a person’s own standards of honesty/integrity (say, Robin Hood’s) do not absolve them of blame.  So far, so confusing.

It may be said that dishonesty in the context of regulatory/disciplinary or criminal proceedings should be assessed at a higher standard.  That was certainly true historically in criminal cases, but that suggestion seems to have been effectively quashed, in England at least, by the much publicised Supreme Court case of Ivey v Genting Casinos (UK) Ltd [2017] UKSC 67.

It may be recalled that Mr Ivey had sued a casino for failing to pay him his winnings.  Mr Ivey had used a technique known as edge-sorting to help him win £7.7 million.  The casino refused to pay out on the basis that the technique was cheating under English law. Mr Ivey contended that cheating involved dishonesty, which could not be proved.

The Supreme Court held that Mr Ivey had cheated, and that dishonesty was not a necessary feature of cheating.

However, it went further.  It also said that, in the context of criminal proceedings, the previously established test for dishonesty was wrong. (In R v Ghosh [1982] 3 WLR 110 the English Court of Appeal held that the test for dishonesty had two parts: (i) whether according to the ordinary standards of reasonable and honest people what was done was dishonest; and (ii) if it was dishonest by those standards, whether the defendant himself must have realised that what he was doing was by those standards dishonest.)

The Supreme Court in Ivey concluded that there should be one unified test for dishonesty in both criminal and civil cases, as set out in Barlow Clowes (see the passage quoted above).

Given that the Jersey cases on dishonesty rely heavily on the judgments of the English courts, it is difficult to escape the conclusion that Jersey will at some point adopt the same position. That is to say, a unified test for dishonesty, which is largely objective (the subjective element being limited to considering what the defendant actually knew and believed about the facts).

This makes it all the harder to see how a distinction can be clearly drawn between dishonesty and a lack of integrity.  The Supreme Court managed to draw a very fine distinction between cheating and dishonesty. And now the Commission in its anticipated guidance note will need to perform some semantic gymnastics to a similarly Olympian standard, if it is to explain adequately what it means by that word, and how lacking in integrity differs from dishonesty.

Should you like further detail regarding the matters raised in this briefing, please contact the author.