Advanced Equity and Trusts Law - alastairhudson.com

The general requirement which underpins the Conduct of Business code is that when the seller
communicates information to a customer, it must do so in a way which is “clear, fair and not
misleading”. 15
Suitability in the conduct of business
The test adopted throughout chapter 5 of the FSA’s Conduct of Business regulation is that the
seller must have taken “reasonable steps” in relation to its treatment of that client. An example
would be the manner in which its officers induce clients to enter into particular transactions
and any survey of the type of financial instrument which is sold to that particular client. 16 The
type of reasonable steps which will be suitable are not susceptible of general definition but
rather …
“… will vary greatly, depending on the needs and priorities of the private customer, the
type of investment or service being offered, and the nature of the relationship between
the firm and the private customer and, in particular, whether the firm is giving a
personal recommendation or acting as a discretionary investment manager.” 17
In so doing the firm is required to ensure that the financial instrument itself is the most
suitable of that type of product for the purpose, as well as that the means by which that
financial instrument is sold is also suitable in that context.
Limitation of liability
The principles relating to the trustees’ ability to exclude or limit their liability by contract were
considered in Topic 4. In relation to trustees who are regulated by the FSA there are
regulations as to the conduct of investment business which prevent the regulated (or,
authorised) person from relying on contractual provisions which are inappropriate for that
type of customer, as described under the conduct of business regulations.
Such contractual exclusion clauses are also subject to the Unfair Contract Terms Act 1977
(“UCTA”). One important example of such limitations are those of trustees in the business of
selling their services as investment managers seeking to rely on their standard documentation,
particularly when dealing with inexpert customers.
The control of misfeasance by financial regulation
Specific reading
Hudson, Equity & Trusts, section 9.8.4
There are particular forms of regulation which deal with various aspects of financial activity,
as follows:
Money laundering: The regulation of banks with a view to combating money laundering has
long been a feature of international financial regulation but has been given new impetus by
concerns about international terrorism. In England and Wales the Proceeds of Crime Act 2002
seeks to make provision for the treatment of the proceeds of criminal activity and the
Terrorism Act 2000 makes provision for the treatment of funds which it is suspected will be
applied for the purposes of terrorism. There are also the Money Laundering Regulations 1993
at the European Union level. The regulations require that authorised persons, including
regulated trustees, conduct due diligence as to their clients’ identity and the source of their
funds. Bound up with this is the need to report suspicious transactions, to train staff
15 COB, 2.1.3.
16 COB, 5.1.11, 5.1.13.
17 COB, 5.3.4.
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