Answer

Star Investment Management Ltd

• On the assumption that star Investment Management Ltd is an authorised person under the Financial Services and Markets Act 2000, how would you answer the following questions asked by her?

1. Issue: “How do I know the directors of this firm are not crooks?”

Rule

The conduct of senior persons who perform any role that could harm a financial institution are regulated by various laws and legislation in the UK. The main legislations relied upon in this regard are; the Financial Services (Banking Reform) Act 2013 and Financial Services and Markets Act 2000. According to Section 59 of the latter Act, senior management officials within an authorized financial firm must get approval before they act. According to Section 60 (2A) when senior management get approval, they have a statement of responsibilities that they must comply with and failure to comply will lead to personal liability for conduct (Financial Services and Markets Act 2000, Section 60[2A).

Directors are also required to act in compliance with the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) rules. If a director fails to act in compliance with the said rules, they will take personal responsibility for their conduct (Murphy & Senior, 2013). The PRA and CFA provide strict conduct rules that must be complied with by the directors. If they fail to comply with the conduct rules; or knowingly engage in a regulatory contravention; or the financial institution engages in a regulatory contravention when the director is holding their office; the director will be held to account for the contravention. Some of the individual conduct duties that have been imposed on directors by the PRA and FCA include; duty to act with integrity; duty to act with care, skill, and diligence; and duty to be cooperative with the PRA and FCA, as well as, other regulators. Other senior management conduct rules include;

Application/ Conclusion

The conduct of directors of Star Investment Management Ltd are duly controlled by adept legislations and rules. The directors must be approved and they must act within the prescribed conditions. Since Star Investment is an authorized person, you can be sure that the directors of the firm are not crooks.

1. Issue: “Are there any rules to stop the firm investing my money in inappropriate investments?”

Rule

There are several statutes that stop financial firms from investing money in inappropriate investments. Anti-Money Laundering statutes and regulations have, for instance, been passed in this regard. The main statute is the Proceeds of Crime Act (POCA) 2002. Through this Act, financial institutions are required to comply with their anti-money laundering (AML) obligations (Proceeds of Crime Act (POCA) 2002, Section 327). In line with the POCA, the “Money Laundering, Terrorist Financing, and Transfer of Funds (Information on the Payer) Regulations” were also published in 2017 (Proceeds of Crime Act (POCA), 2002). The regulations are used together with the POCA to determine the obligations that financial institutions have to comply with their AML rules.

Financial institutions are also regulated by the Financial Conduct Authority (FCA) whose objectives and duties include maintaining and ensuring the maintenance of the integrity and security of financial systems (Chiu, 2016). After the Financial Services Act came into force, the FCA was established in 2013. The FCA has investigative, regulatory, and prohibition powers in respect to all financial systems. The regulator also has particular focus on money-laundering matters. The FCA has provided a set of regulatory rules that must be complied with by a financial firm and failure to comply will lead to disciplinary action against the said financial institution.

The Prudential Regulatory Authority (PRA) also regulates the conduct of financial institutions. It, for instance, makes provision for rules on anti-money laundering, as well as, counter-terrorism financing. PRA rules provide that a firm’s senior managers placed in charge of matters relating to counter-terrorism financing and anti-money laundering must have sufficient seniority to effectively perform the aforesaid roles (Chiu, 2016). The rules further provide that members of a firm’s senior management must be of sufficiently good repute (). Firms are essentially required to take internal steps to ensure that inappropriate engagements are not undertaken.

Application/ Conclusion

Financial firms are regulated by several statutes and rules that specifically prohibit them from taking part in inappropriate investments.

• Issue: “What happens if the firm breaches an FCA rule?”

Rule

The FCA is not only authorized to regulate firms but it is also mandated to take enforcement measures when a firm acts in contravention of its rules. If a firm contravenes the rules they will be liable to disciplinary action. Some of the disciplinary actions that are typically taken by the FCA include;

• Withdrawal of the firm’s authorization;
• Prohibition of certain persons from undertaking regulated activities;
• Suspension of individuals or firms from undertaking regulated activities;
• Issuance of fines against individuals and firms that act in contravention of the rules or engage in market abuse;
• The making of a public announcement by the FCA regarding a disciplinary action;
• Application to courts for injunctions, winding-up orders, restitution orders, and other insolvency orders;
• Presentment of criminal prosecutions against firms and individuals for financial crimes, as well as, false claims to the FCA; and
• Issuance of alerts and warnings regarding unauthorized individuals and firms and the deactivation of associated websites through requests to web hosts.

Application/ Conclusion

If Star Investment Management Ltd breaches any FCA rule, they are liable to various types of disciplinary actions depending on the breach in question. Both the firm and the senior management within the firm could face the disciplinary action.

1. “What happens if any advice I receive is correct at the time that I purchase the product, but afterwards the product, market value falls?’

Rule

The PRA and FCA make provision for rules that must be complied in the course of engaging in authorized activities. Some of the individual conduct rules include the duty to act with integrity and with due care skill and diligence. If a professional offers advice in compliance with the FCA and PRA, as well as, other laws and regulations that accrue in this respect, they will not be held liable if the advice offered is correct at the time of purchase but afterwards the product market value falls.

Application/ Conclusion

If the advice you receive is correct at the time you purchase a product but afterwards the product market values falls, you will not be eligible to claim from the financial firm.

1. Issue: “In the event that the firm becomes insolvent, do I rank alongside other creditors when it comes to getting my money back?”

Rule

If a firm goes into liquidation, the order in which the creditors are to be paid is provided for by the Insolvency Act 1986. The Act makes provision for a hierarchy of payment of creditors and every group or class must receive full payment before the liquidator makes payment to the next group (The Insolvency Act, 1986). This essentially means that creditors rank alongside other creditors when it comes to getting their monies back. Priority is first and foremost given to the secured creditors who have a fixed charge (The Insolvency Act, 1986). According to Section 248 of the Insolvency Act of 1986, a ‘secured creditor’ is a creditor who holds security over their debt (the Insolvency Act 1986). The security is over the firm’s property (The Insolvency Act 1986). Types of security that can be held in England include; “mortgage, lien, and charge”, or other types of security (the Insolvency Act 1986, Section 248 (a)). Types of security that can, on the other hand, be held in Scotland include; any right of lien, “any floating charge, and any right of retention” (The Insolvency Act 1986, Section 248 (b)). Secured debts generally rank equally among themselves. Once all the secured creditors have been paid, the liquidator proceeds to pay the next class of creditors.

The second class of creditors that are given priority during liquidation are the preferential creditors. Section 175 of the Insolvency Act 1986 indicates that a preferential creditor is a person whose claim is given priority relative to other unsecured creditors (the Insolvency Act, 1986). It is further provided that ordinary preferential debts are given priority among themselves and the debts that accrue in this regard must be fully paid before the unsecured creditors can be paid (The Insolvency Act 1986). Once the ordinary preferential debts have been paid, the next group of persons that must be paid in this class are the secondary preferential debts. Types of preferential debts in this class include; the contributions that have been made to the occupational pension schemes and employee remuneration (The Insolvency Act 1986).

Once all the preferential creditors have been paid, the liquidator can then proceed to pay the unsecured creditors. The unsecured creditors essentially rank at the bottom of the list. An unsecured creditor is a person who lends money and does not secure their debt through the use of collateral.

Application

Based on the facts of the present case, it is highly likely that the woman is an unsecured creditor. Regardless of the class she belongs to, the provisions of the Insolvency Act 1986 make it clear that in the event of Insolvency, a creditor must rank alongside other creditors.

Conclusion

In the event that Star Investment Management Ltd becomes insolvent, you would rank alongside other creditors when it comes to getting your money back.

• On the assumption that star Investment Management Ltd is not an authorised person, how would you advise the woman who has since suffered loss as a result of advice offered by the firm

Rule

Section 19 of the Financial Services and Markets Act 2000 underscores a general prohibition which is to the effect that no person can carry on a regulated activity if they are not authorized to do so. Section 22 then defines what regulated activities are. Section 22 (1) provides that a regulated activity is an activity that is carried on through business and regards an investment of a specified kind. Section 26 makes provision for the enforceability of agreements that are made by the unauthorized persons (Financial Services and Markets Act, 2000). It provides that if a person contravenes the general prohibition by entering into an agreement with another while carrying on a regulated activity, the agreement will be deemed unenforceable against the other innocent party (Financial Services and Markets Act 2000). The innocent party will, therefore, be entitled to recover any property or monies that were transferred or paid by him as per the agreement (Financial Services and Markets Act 2000). They would also be entitled to compensation for any loss that may have been sustained as a result of parting with the monies or property (Financial Services and Markets Act 2000).

Application

In the present case, if Star  Investment Management Ltd was not an authorized person, the act of offering advice and taking your money as an investment would constitute illegally engaging in an authorized activity. The agreement that Star Investment has made with you is unenforceable and as such you are entitled to recover the money that you transferred to them under the agreement. You are also entitled to recover compensation for any loss that you may have sustained as a result of relying on their advice and parting with your money.

Conclusion

You are entitled to recover the money that you transferred to them under the agreement, as well as, compensation for any loss that you may have sustained as a result of relying on their advice and parting with your money.