Fraud offences - Fraud by failing to disclose information

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Overview

Fraud by failing to disclose, specified in Section 3 of the Fraud Act 2006, is a vital topic for the SQE1 FLK2 exam. This offense addresses omissions when there is a legal obligation to reveal information. Its understanding is essential for aspiring solicitors, touching on fiduciary duty, contractual obligations, and statutory norms. This article delves into the main components, including legal duty, dishonesty, and intent, while providing practical examples and distinguishing it from similar offenses.

Legal Duty Component

This offense rests on the duty to disclose specific details, which can come from various sources:

Statutory Obligations

Certain laws mandate disclosure in specific sectors like finance, healthcare, and consumer protection:

  • Financial institutions must disclose key information under the Financial Services and Markets Act 2000.
  • Company directors are required to reveal conflicts of interest per the Companies Act 2006 (Section 177).
  • The Consumer Rights Act 2015 demands that consumers receive specific information before a contract is formed.

Contractual Obligations

Contracts may explicitly or implicitly require disclosure:

  • Express terms in commercial agreements often necessitate transparency about financial terms, performance, and risks.
  • Implied terms, such as in insurance contracts under the duty of utmost good faith (uberrimae fidei), demand comprehensive disclosure of material facts.

Fiduciary Duties

Such duties occur in relationships where one party trusts another to act in their best interest:

  • Trustee-beneficiary connections
  • Director-company associations
  • Solicitor-client interactions

The case of Bristol and West Building Society v Mothew [1998] Ch 1 defines fiduciary duty with an emphasis on loyalty and avoiding conflicts of interest.

Key Legal Precedent

Keech v Sandford (1726) illustrates fiduciary duties, ruling that a trustee cannot benefit from a conflict of interest, even with no loss to the beneficiary, showcasing the strict transparency required.

Dishonesty Aspect

Dishonesty is essential for fraud based on omission. Ivey v Genting Casinos [2017] UKSC 67 sets the objective test for dishonesty:

  1. Knowledge of Facts: Determine what the defendant understood.
  2. Objective View: Decide if the action was dishonest by the standards of ordinary, decent people.

This replaced the older Ghosh test, which included the defendant's awareness of dishonesty.

Applying the Ivey Test

For failing to disclose information:

  1. Identify the defendant’s knowledge about their duty to disclose.
  2. Analyze what information was withheld.
  3. Judge if ordinary people would deem the omission dishonest.

For example, if a director conceals a personal financial interest in a contract under consideration, knowing it's required to disclose under the Companies Act 2006, it would likely be seen as dishonest.

Intent to Gain or Cause Loss

To convict, the defendant must:

  1. Intend to gain for themselves or another, or
  2. Aim to cause loss or risk of loss to another.

Analyzing Gain and Loss

  • Defined Broadly: Section 5 of the Fraud Act 2006 includes monetary or property gain or loss, whether temporary or permanent.
  • Risk Requirement: Exposing someone to loss risk suffices; actual loss isn't necessary.

Often, defendants gain from omissions while causing others to lose. For instance, if an executive hides a conflict of interest for personal gain, it can result in financial harm to a company.

Case Study: R v Konrad [2018] EWCA Crim 865

In this case, not disclosing a county court judgment to secure a mortgage met the criteria for intending to gain.

Differentiating from Other Fraud Offenses

Understanding how this differs from other types is essential:

Fraud by False Representation (Section 2)

  • Difference: Involves misrepresentation rather than omission.

Fraud by Abuse of Position (Section 4)

  • Difference: Centers on exploiting a position of trust rather than neglecting to disclose.

Fraud by failing to disclose focuses on not providing required information, contrary to making false claims or exploiting positions.

Practical Examples

Example 1: Solicitor's Conflict of Interest

A solicitor failing to disclose their financial interest in a selling company while advising a client.

  • Duty: Fiduciary responsibility to disclose conflicts.
  • Dishonesty: Concealment considered dishonest.
  • Intent: Possible financial gain.
  • Loss: Client's uninformed decision resulting in potential loss.

Example 2: Investment Advisor's Omission

An advisor not revealing their stake in a competing product when advising clients.

  • Duty: Client's best interest demands unbiased information.
  • Dishonesty: Omission impacts client's decision.
  • Intent: Financial gain from commissions or future opportunities.
  • Loss: Client could choose a less suitable product.

Conclusion

Understanding fraud by omitting disclosure involves understanding legal duty, dishonesty, and intent. Key points for the SQE1 FLK2 exam are:

  1. An offense arises from omission when disclosing is legally required.
  2. Various sources can establish these legal duties.