Law Report: Investment industry rule lawful: Regina v LAUTRO, ex parte Kendall. Queen's Bench Division (Mr Justice Latham), 26 November 1993

A rule which prevented a person acting as a representative of a company selling life insurance if he was already indebted to another insurance company, by whom he was previously employed and to whom he had been unable to repay advances on commissions, was not unreasonable or unlawful.

Mr Justice Latham refused an application by Edward R Kendall to quash rule 3.5A(5) of Lautro, the self-regulating organisation for the life insurance and unit trust industry.

Lautro was recognised under section 10 of the Financial Services Act 1986, and its members were 'authorised persons' entitled to carry on investment business, on the basis that Lautro had in place rules which met the requirements of Schedule 2 to the 1986 Act, and afforded investors certain minimum safeguards.

Mr Kendall had trained with Royal Life Assurance, a Lautro member, and was employed to do investment business on their behalf. He was paid by commission and, under a scheme they operated, obtained an advance on commission which was to be repaid by deductions from subsequent earnings. He left Royal Life while still owing pounds 2,150, and later obtained work with Sun Alliance. But they stopped employing him when they learned of his outstanding debt to Royal Life, which he was unable or unwilling to reduce or discharge.

Rule 3.5A(5), which related to the employment by Lautro members of representatives, provided: 'A member shall not appoint any person as a company representative unless the member is satisfied on reasonable grounds that the person is not indebted to any other member or an associate of any other member, to any other authorised person, to an exempted person, to Lautro or any other recognised self- regulating organisation or a recognised professional body, to the Securities and Investment Board or to the Investors Compensation Scheme Ltd.' Rule 3.5A(7) excepted debts of less than pounds 1,000.

Mr Kendall was told by Lautro that there could be no dispensation or relaxation of the rule. He argued that rule 3.5A(5) was anomalous and unjust, and the decision to make it was unreasonable or failed to take into account relevant considerations such as its effect on employees.

Andrew Collins QC, and Ian Glen (Palmer Hart & Co, Bristol) for Mr Kendall; Nigel Pleming QC (Slaughter & May) for Lautro.

MR JUSTICE LATHAM said that indebtedness on the part of an employee in an investment business might well reflect on his competence, and could encourage him to sell policies with a view to maximising commission, without having regard to the interests of the investor. A rule reasonably designed to avoid or mitigate this mischief could not be challenged as ultra vires.

But the apparently illogical consequence of rule 3.5A(5) was that a person who owed in excess of pounds 1,000 within the industry was precluded from employment, whereas a person who was substantially in personal debt, which might impose greater pressures on him, or had taken out a crippling loan to reduce his indebtedness within the industry below pounds 1,000, would not be so precluded.

The rule was said to have been adopted against growing concern at the extent to which some representatives moved from member to member with accruing burdens of indebtedness. There was no doubt, from the evidence, consultation had been widespread within the industry. Any rule had the potential for anomaly or injustice and could not be ipso facto unreasonable.

If the rule could be justified objectively, and there was sufficient evidence that it could be, then the fact that it benefited members of Lautro could only assist the applicant if he could show that it was imposed for improper motives, that it was for the benefit of Lautro members and not for the protection of investors. But the evidence did not justify such a conclusion.

Moreover, there was clear evidence, including the pounds 1,000 limit, that its effect on employees had been taken into consideration. In his Lordship's judgment, rule 3.5A(5) was not unlawful.