Law Report: Regulatory body's intervention notice was valid: Regina v Life Assurance Unit Trust Regulatory Organisation, Ex parte Ross. Court of Appeal (Lord Justice Glidewell, Lord Justice Stocker and Lord Justice McCowan), 11 June 1992

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The Life Assurance Unit Trust Regulatory Organisation, a self- regulating organisation which regulates the carrying on of investment business by serving intervention notices which control its members' businesses, does not have to give persons affected by such notices the opportunity to make representations before the service of the notice. However, a person served with a notice should be given the opportunity to apply to rescind the notice and to appeal against it.

The Court of Appeal dismissed an appeal by David Hugh Ross, the financial director of, and a shareholder in, Winchester Group plc, from the Divisional Court's dismissal (the Independent, 11 July 1992) of his application for judicial review of an intervention notice issued by Lautro prohibiting Norwich Union Life Insurance Society from accepting and soliciting investment businesss from Winchester.

Lautro is recognised by the Securities and Investments Board and regulates the carrying on of investment business under the Financial Services Act 1986. Norwich Union is a member of Lautro and authorised to carry on investment business. In March 1990, Winchester was appointed representative of Norwich Union and thereby permitted to carry on investment business.

In October 1990, Lautro conducted an investigation into Winchester's business and decided there was evidence to show that there had been serious breaches of the Lautro rules in respect of the business conducted on behalf of Norwich Union by Winchester.

The board of Lautro issued the intervention notice and served it on Norwich Union. Winchester was served with a copy. Winchester complained to Lautro that it had had no opportunity to make representations. Norwich Union decided not to appeal against the notice and terminated its agency agreement with Winchester.

Andrew Collins QC, and Cherie Booth (Manches & Co) for Winchester; Michael Beloff QC, and Richard Gordon (Slaughter & May) for Lautro.

LORD JUSTICE GLIDEWELL said that the main issue on the appeal was whether the intervention notice was invalid because the procedure adopted by Lautro was unfair to Winchester. Lautro was under a duty not merely at common law but by statute to be fair to its members. Mr Collins submitted that the duty of fairness was owed to persons or bodies who were not members of Lautro but who would be affected by its decisions.

The issue arose because of the self-regulatory structure created under the Act. The line of control was for Lautro to control the operations of Norwich Union and Norwich Union, in turn, to control Winchester. However, there was no doubt that decisions made by Lautro, particularly in relation to the issue of intervention notices, would frequently have a very considerable effect on the appointed representatives such as Winchester.

Very frequently a decision made which directly affected one person or body would also affect indirectly a number of other persons or bodies, and the law did not require the decision-making body to give an opportunity to every person who might be affected to make representations before the decision was reached.

On the other hand, when a decision-making body was called upon to reach a decision which arose out of the relationship between two persons or firms, only one of whom was directly under the control of the decision-making body, and it was apparent that the decision would be likely to affect the second person adversely, then as a general proposition the decision- making body did owe some duty of fairness to that second person, which in appropriate circumstances might well include a duty to allow him to make representations before reaching the decision.

Lautro was required under its rules to serve a copy of the intervention notice on Winchester. The rule defined the persons who should be served and to whom in appropriate circumstances Lautro owed a general duty to act fairly.

The decision whether or not to serve an intervention notice before hearing the persons to whom it was directed, or whom it would affect, must be one which Lautro must balance against what it regarded as the interests of investors. If a decision-making body exercised powers such as serving an intervention notice without giving anybody any opportunity to make representations, its procedures should provide that those who might have expected to make representations should be allowed to make immediate application to set aside the decision.

Lautro's rules had been amended to give persons such as Winchester the right of appeal. When the intervention notice was served in October 1990, the rules were defective.

Whilst the power to decide to serve an intervention notice without first hearing representations from persons affected was not in itself so unfair as to invalidate the notice, a lack of any means by which the person could immediately thereafter challenge the notice was a breach of the requirements of fairness which the law should imply.

Lautro should reconsider its practice of issuing a press notice at the time of service of the intervention notice. If it transpired that the intervention notice was not justified, and Lautro rescinded it, a press notice might already have caused substantial damage to the person affected.

Since the applicant's challenge was limited to Lautro's failure to allow the making of representations before the service of the intervention notice, and that did not of itself invalidate the notice, the appeal would be dismissed.