Regulatory compliance, trust and confidence in the financial services sector

In a case that attracted national media coverage and emphasises the crucial importance of regulatory compliance and the highest standards of professional conduct in the financial services sector, the High Court dismissed a breach of contract claim brought by an investment manager.
 

What happened?

• The Claimant, Mr Palmeri, was an associate and self-employed investment manager at the Defendant, Charles Stanley, for over 20 years.  He was very successful.  He employed his own team and considered them to be a self-contained business. In return for a proportion of their client revenue, the firm provided the team with office space, back-office services and the regulatory approvals they needed. The firm then decided to change its operating model and take a larger slice of their revenue, requiring him to sign up to new terms or leave. 
• The Claimant was called into an unscheduled meeting at which he was presented with two envelopes to choose from; one containing the new terms and, the other, a letter terminating his engagement with immediate effect.  He reacted very strongly to the ultimatum, alleging that he had been ambushed and proceeded to shout, swear and disparage the competence of the firm’s management, also questioning their integrity using very strong and personally abusive language. 
• The Claimant asked to speak with his team before expressing his decision, which he was allowed to do.  He then returned to the meeting stating that he would reluctantly accept the new terms.  However, he was told that his earlier behaviour was so inappropriate and unacceptable that his relationship with the firm was irretrievably broken.  The offer of the new terms was therefore withdrawn and his engagement terminated with immediate effect.
• After the Claimant left, the firm discovered a number of breaches by him of their internal compliance policies which, it argued, of themselves amounted to misconduct that would have justified summary termination of his engagement, even if his behaviour in the above meeting did not. 

Outcome

The claim failed. The Court held that the Claimant’s conduct (breach of the firm’s bullying and harassment policy and of its regulatory compliance manual) amounted to serious misconduct justifying summary termination. He was in breach of trust and confidence, which the Court held “is essential to the continuation of any contractual relationship, and cannot survive sustained, angry and open disaffection… In particular, disaffection of this sort is not compatible with a contract in which mutual trust and confidence is essential to the operation of [FCA] regulatory obligations.” 

The Claimant acknowledged that his behaviour in the meeting was unacceptable but sought to contextualise it by saying that similar behaviour and vocabulary are commonplace in city finance and that his own passionate and volatile personality was well known and unfairly exploited by the firm.  However, the Court concluded that “even if Charles Stanley had not had a sound basis for summary termination of contract going into that meeting, Mr Palmeri thereby provided one”. 

Breaches of compliance rules

On investigation of the Claimant’s emails after he left, the firm discovered that he had engaged in loan activities with clients (involving five or six figure sums) which he had not disclosed to Charles Stanley.  Mr Palmeri sought to explain these as personal matters between friends which had nothing to do with Charles Stanley and did not fall within their compliance policies. 

In summary:

• Conflicts of interest:  The compliance manual required all associates to disclose to Charles Stanley details of any potential conflicts of interest.  The Court agreed with Charles Stanley that there had been a substantial breach of internal reporting obligations. Regardless of whether the loans were with “friends who happen to be clients” or “clients who happen to be friends”, it is their status as clients which has legal consequences and which must come first. 
• Complaints handling:  One loan involved the Claimant giving an unhappy client and friend a personal, interest free loan of £10,000 as a way of dealing with an issue (the client had instructed him to sell some shares from his portfolio, which he failed to do).  Rather than report this in accordance with the firm’s complaints handling procedure, again his position was that this was an entirely personal matter and that the client had never intended to have it formally reviewed.  However, the Court held that the client’s unhappiness had triggered reporting obligations under the firm’s policy. 
• Credit broking:  In a matter involving a family, more than one member of which was a client of the firm, the Claimant proposed an ingenious solution involving one member of the family giving a loan to another, guaranteed by another member of the family on the security of their portfolio.  All the parties were delighted.  However, on investigation the firm found that the loan was a “regulated credit agreement” and that the activity of proposing it amounted to “credit broking” which is a regulated activity which the firm was not authorised to undertake.  This was therefore in breach of the compliance manual which prohibited associates from undertaking such activity. 

Ultimately, the Court found that Mr Palmeri had engaged in a “sustained and significant pattern of unreported potential conflicts of interest, a serious breach of complaint handling procedure, and evidence of unauthorised credit broking” which, individually and collectively entitled Charles Stanley to terminate his engagement with immediate effect.

Comment

The facts of this case occurred when the approved persons regime was still in force, before the extension of the Senior Managers and Certification Regime (SMCR) across the financial services sector.  With regulatory reference obligations now in play across the sector, and the making of fit and proper assessments outsourced to employers, the importance of observing the highest standards of professional conduct is greater than ever.

Further Information

If you would like any further information or advice about the issues explored in this blog, please contact Andreas White, Özlem Mehmet or another member of our Employment team.

About the Authors

Andreas is a partner in our employment team.  He has substantial litigation experience, with a particular focus on complex and high value employment and partnership disputes. Andreas has a particular interest in international and cross border employment law. He is a former president of the labour law commission of AIJA.

Özlem is a Professional Support Lawyer in our Employment Team. Before joining Kingsley Napley, Özlem was a Tutor and Team Leader at BPP University’s Law School, teaching on the Legal Practice Course.  She taught the Employment Law, Business Law & Practice, Corporate Finance and Equity Finance modules of the course, as well as the skills modules of Interviewing & Advising and Professional Conduct & Regulation.