The FCA is under the spotlight after three appeals to the Upper Tribunal (UT)

The following article highlights three enforcement cases undertaken by the Financial Conduct Authority (FCA), which under challenge were overturned.

KEY HIGHLIGHTS

In three recent cases, the Upper Tribunal (UT) has overturned FCA decisions (two involving the Regulatory Decisions Committee [RDC]), with the UT’s judgments’ containing some stinging criticism of the FCA’s decision-making, case handling and interpretation of the law. There is one specific case around Financial Crime, with the other instances covering further areas under the FCA's purview.

• MARKOU - https://assets.publishing.service.gov.uk/media/644b9a3dfaf4aa000ce1305d/Markou_v_FCA_final.pdf
• JULIUS BAER EMPLOYEES-https://assets.publishing.service.gov.uk/media/648836cab32b9e0012a96653/Seiler__Whitestone_and_Raitzen_v_The_FCA_Decision_for_release_to_Parties.pdf
• BLUECREST - https://assets.publishing.service.gov.uk/media/649306adb32b9e0012a96c27/BCMUK_v_FCA_preliminary_issues_decision_for_release__002_.pdf

With regulations that can be complex and subject to interpretation, it is easy to see how decisions can become subjective. This will become even more acute as we move into a more principle-based approach.

It's so important that the FCA is seen as credible and has the right skills and capabilities to execute its remit. These findings from the UT will undoubtedly be assessed and considered for future enforcement action.

ARTICLE READ HERE https://www.ftadviser.com/fca/2023/09/11/three-recent-cases-raise-questions-over-fca-enforcement-strategy/?page=1 or extracted below, albeit altered in certain sections

A recent sequence of adverse decisions by the Upper Tribunal could have significant implications for future Financial Conduct Authority cases.

Where a supervised company or individual decides to contest an enforcement action taken by the FCA, the case will typically come before the Regulatory Decisions Committee, following which the FCA’s decision-making on a case is complete.

Decisions of the RDC can then be referred to the UT (Tax and Chancery Chamber), and in some circumstances, affected persons may choose to exercise their right to bypass the RDC and to take the case directly to the UT.

In a country governed by the rule of law, even powerful agencies such as the FCA are accountable to the courts. Therefore, it is expected that some decisions will be quashed or reversed.

The RDC may need help finding a meaningful role in enforcement cases if it comes to be seen as little more than a rubber stamp for case teams' opinions.

However, in three recent cases, the UT has overturned FCA decisions (two involving the RDC), with the UT’s judgments’ containing some stinging criticism of the FCA’s decision-making, case handling and interpretation of the law.

• MARKOU - https://assets.publishing.service.gov.uk/media/644b9a3dfaf4aa000ce1305d/Markou_v_FCA_final.pdf
• JULIUS BAER EMPLOYEES - https://assets.publishing.service.gov.uk/media/648836cab32b9e0012a96653/Seiler__Whitestone_and_Raitzen_v_The_FCA_Decision_for_release_to_Parties.pdf
• BLUECREST - https://assets.publishing.service.gov.uk/media/649306adb32b9e0012a96c27/BCMUK_v_FCA_preliminary_issues_decision_for_release__002_.pdf

These decisions are likely to be of significant concern to the FCA’s enforcement division and, considering its substantially reduced remit following recent changes, the RDC itself.

MARKOU

The case of Markou involves a decision against the eponymous individual who was approved to carry out SMF1 (Director) and SMF3 (Chief Executive) functions at a small mortgage and insurance intermediary named FSE.

• Mr Markou was the sole director of the company.

Between 2011 and 2015, the FCA raised serious concerns with FSE about preventing financial crime.

Following an investigation, in a decision notice of January 29, 2021, issued by the RDC, the FCA found against Markou on several grounds, including that between 2015 and 2017

1. He did not have appropriate oversight of FSE’s mortgage business and had recklessly failed to establish, maintain, and enforce effective financial crime systems and controls; and
2. That in July-October 2017, he recklessly failed to take sufficient steps to prevent FSE from transacting mortgage business at a time when FSE did not have professional indemnity insurance in place.
3. https://www.fca.org.uk/publication/decision-notices/markos-theodosi-markou-2021.pdf

According to the FCA, Markou failed to comply with Statement of Principle 1 (acting with integrity) through the RDC and failed the "fit and proper test".

It imposed a penalty of £25,000, withdrew his permissions and made a provisional order banning him from performing any controlled functions. Markou referred this Decision Notice to the UT.

In a detailed judgment, the UT

• Disagreed with the RDC’s decision. https://assets.publishing.service.gov.uk/media/644b9a3dfaf4aa000ce1305d/Markou_v_FCA_final.pdf
• It did not find Markou reckless, lacking integrity or dishonesty, and therefore did not agree that he had breached Principle 1 or needed to be fit and proper

Although it found him to have failed to ensure that regulated activities had ceased after a time when required insurance was no longer in place, in its view this had not been done recklessly or with a lack of integrity.

The UT declined the FCA’s invitation for it to make any alternative findings as to whether Markou had breached any other Principles.

In the absence of any finding that Markou had failed to comply with any Statement of Principle as alleged, the UT determined that the appropriate action for the FCA was not to impose any financial penalty or prohibition on Markou.

Unusually, and perhaps indicating the level of concern inside the regulator regarding the implications of this decision setting a precedent, the FCA made a strong public statement that it believed UT’s decision to be “incorrect and irrational” and would seek permission to appeal.

• https://www.fca.org.uk/news/statements/upper-tribunal-decision-markou

JULIUS BAER EMPLOYEES

A second set of decisions relates to the FCA’s case against three senior individuals previously employed by Julius Baer, a Swiss-headquartered private bank.

In February 2022, the FCA concluded a case against the bank with a fine of £18mn for certain foreign exchange transactions and associated finders’ fees.

• https://www.fca.org.uk/news/press-releases/fca-fines-julius-baer-international-limited-ps18m-and-publishes-decision-notices-three-individuals

The bank entered a settlement with the FCA at an early stage. In the public Final Notice against the bank, the FCA placed significant reliance on the knowledge and actions of the three individuals, each of whom received Decision Notices in relation to such decisions.

The FCA, through the RDC, found that all three individuals lacked integrity, although on different bases:

• One individual was found to have acted naively.
• Another had made a mistake due to being a “weak manager”; and
• The third had placed reliance on subordinates.

The X3 above were issued with prohibition orders (banning them from participating in regulated business).

The three individuals referred the FCA’s decision to the UT, which was not satisfied that the FCA had demonstrated recklessness or lack of integrity and ordered the FCA to reconsider its decision.

In this regard, the UT made several helpful remarks that should go some way to clarifying the appropriate test to be used for establishing recklessness.

Rejecting the FCA’s argument that a finding of recklessness could be made where a reasonable person would have appreciated the risk presented, the UT held that it is, in fact, necessary to show that the individual did actually appreciate the risk and then to assess whether it was reasonable in the circumstances for that individual to ignore it.

This practical implication will likely significantly raise the FCA's bar in alleging recklessness.

The UT’s judgment is also particularly critical of the FCA’s actions in relying heavily on the evidence of another individual without calling the individual as a witness; the UT also makes several significant broader criticisms of the way in which the FCA handled the case.

These include the time taken for the FCA to issue a Decision Notice, its handling of disclosure and its failure to ensure that potentially undermining evidence was placed before the UT.

The UT was also critical of the extent of the FCA’s reliance on the firm’s internal investigation reports in forming its case against the individuals, rather than making findings based on its rigorous investigative work.

Soon after the Markou decision, this case will likely significantly impact the FCA’s future cases against individuals.

Such cases have historically been difficult for the FCA, and the impact of this decision is that they will become even more challenging.

Where the FCA alleges recklessness or a lack of integrity, it must scrutinise its evidence more thoroughly than ever. It must assess more carefully whether prohibition orders are legally appropriate and defensible.

The case also highlights the risk for firms in reaching an early settlement with the FCA in circumstances where no action is ultimately taken against the individuals.

ADDITIONAL READING

1. https://financialregulation.linklaters.com/post/102igvp/fca-suffers-defeat-in-julius-baer-case-with-important-individual-accountability
2. https://www.allenovery.com/en-gb/global/blogs/investigations-insight/uk-upper-tribunal-overrules-fca-finding-that-bank-employees-lacked-integrity
3. https://www.cliffordchance.com/insights/resources/blogs/regulatory-investigations-financial-crime-insights/2023/06/the-upper-tribunal-criticises-the-FCA-approach-to-enforcement-in-seiler-whitestone-raitzin.html

BLUECREST

In this case, the FCA fined BlueCrest Capital Management £40.8mn because of an alleged breach of Principle 8 relating to a failure to manage a conflict of interest fairly.

• https://www.fca.org.uk/news/press-releases/fca-publishes-decision-notice-hedge-fund-conflicts-interest-failings

As part of its case, the FCA also decided to impose a requirement on BlueCrest to undertake redress for its non-US clients who had suffered loss as a result of its failings.

BlueCrest referred the decision and the redress requirement directly to the UT, electing to dispense with the RDC entirely.

• https://www.fca.org.uk/publication/decision-notices/bluecrest-capital-management-uk-llp.pdf

The UT’s written judgment was at times scathing,

1. Labelling the FCA’s Decision Notice as “not an impressive document” and
2. Stating that it “demonstrates a considerable amount of muddled thinking on the part of the Authority and a lack of clarity as to the reasons it gives for its conclusion that there has been a breach of Principle 8”.
3. This caused the UT to struggle to identify the essence of the FCA’s reasoning for itself.

Holding that the FCA’s single firm redress case had no reasonable prospect of success in establishing any actionable loss, the UT ultimately decided that the FCA’s redress application should be struck out, allowing BlueCrest to avoid paying back potential sums of more than US$700mn (£560.9mn).

During the UT proceedings, the FCA also made an application to amend its statement of case.

BlueCrest opposed many of the FCA’s proposed amendments. On this point, the UT found that some of the amendments were not of the same nature as allegations contained or referred to in the FCA’s Warning Notice or Decision Notice, and therefore that it did not have jurisdiction to allow those amendments.

This will likely significantly affect future UT cases, particularly where the FCA seeks to change its position from that advanced at the Warning/Decision Notice stage.

ANALYSIS

While there will always be peaks and troughs where contested enforcement is concerned, particularly where "grey areas" of the law are engaged, the three decisions we have highlighted relate to some core aspects of the FCA’s enforcement strategy.

They also raise questions as to the role of the RDC in the process. Persons under investigation may be tempted to save costs and time by skipping the RDC stage altogether and proceeding directly to the Tribunal.

Since the drastic reduction of the role of the RDC in non-enforcement cases two years ago, it may now need help finding a meaningful role in enforcement cases if it comes to be seen as little more than a rubber stamp for case teams' opinions.

The Markou and Julius Baer decisions are likely to make prohibitions against individuals more difficult than ever for the regulator to pursue or maintain, particularly where it is alleging recklessness or a lack of integrity.

The Tribunal has made it clear that sanctions against individuals require clear and compelling evidence. Given the lack of recent outcomes against individuals, this is likely to be something other than welcome news at the regulator.

It will be particularly revealing to watch closely the progress of the FCA’s appeal in Markou (if this indeed materialises) and to examine any future cases in which these issues arise.

The BlueCrest case, which was against a corporate entity, highlights several technical points but also indicates some concerning failures in the way the FCA prepared its case, including its legal analysis, its handling of the disclosure exercise and the time taken from opening the possibility to issuing of a Decision Notice.

The UT did not hold back in its very public criticism of these failures. This could be one reason that BlueCrest took a strategic decision to avoid the private RDC stage and move straight to a public case before the UT.

The FCA may now, understandably, want to take some time to step back and analyse these three decisions and what they mean for the agency’s future approach to enforcement, particularly as its newly appointed executive directors will be keen to put their stamp on the directorate and its current and future cases.

SOURCED

• https://www.ftadviser.com/fca/2023/09/11/three-recent-cases-raise-questions-over-fca-enforcement-strategy/?page=5