Upper Tribunal hands down damning report on FCA

In a rare decision by the Upper Tribunal (UT) last month, the superior court of record handed down its 209 page decision in Seiler and others v FCA , soundly rejecting the FCA’s handling of the conduct investigation. The judgement is remarkable in its stark criticism of the regulator.

Background

In February 2022, the FCA fined Julius Baer (JB) £18m for a series of FX transactions on behalf of the Yukos Group. JB shared a portion of its fees with an individual connected with Yukos; the FCA believed that this and similar arrangements ran the clear risk of facilitating financial crime and that JB had inadequate controls to mitigate such risks. In addition to fining JB, the FCA made prohibition orders for three JB employees which it believed had acted recklessly and without integrity. The FC based its case on an assertion that the individuals lacked integrity because they acted recklessly, relying on Tinney vs Financial Conduct Authority [2018] UKUT 3045– a person acts recklessly if they take an unreasonable risk that they know is likely to occur. “Integrity” is not defined, however acting recklessly is generally considered to be an evidence of its lack. The UT considered whether these employees had in fact acted without integrity.

The Decision

The UT did not accept the FCA finding as to the individuals’ lack of integrity or reckless behaviour. The UT believed that each had insufficient information and were ultimately reliant on JB’s compliance department. The UT ordered the FCA to rescind its prohibition decisions; the door was left open for the FCA to revive the prohibition orders on the grounds of lack of competence and capability, though the UT’s damning general and specific criticism makes such an outcome unlikely.

Specific Criticism

1. The FCA mishandled the cases by failing to contact key witnesses and by relying on JB’s own narrative rather than independently investigating. The FCA placed undue reliance on the evidence of one individual despite later doubts as to his veracity. The FCA case was largely based on the evidence of C; however, he was not called as witness because the regulator judged him to be “reckless as to the truth of what he said in FCA interviews“.
2. Disclosure- the UT found the FCA had failed to disclose an extremely relevant document and they found “basic errors” in the FCA’s disclosure process which they characterised as “exasperating”, concluding with a formal recommendation that the FCA should conduct a review of this area.
3. Delay- the UT was extremely critical of the “glacial pace” of the investigation. In the case of Ms. Whitestone, the investigation took five years, a period which the UT considered to be entirely unacceptable.
4. Staff turnover- the UT believed that the factors above were exacerbated by high staff turnover at the regulator, noting that there was not a single person who saw these cases through from start to finish.

General Criticism

1. Delay- the UT was scathing in this regard. In addition to the specific criticisms of delay, the UT suggested that the FCA “give serious consideration as to whether it is appropriate to continue with an investigation which it does not have the resources to complete within a reasonable period of time and where it has decided that its priorities for its limited resource lie elsewhere.” This is effectively a recommendation that the regulator should triage cases according to achievability within a reasonable cost and time-frame. Absent any unanticipated FCA funding increase, it doesn’t augur well for more complex cases.
2. Prohibition orders- the UT clarified that recklessness cannot be simply inferred from a supposition that the individual should know that a given risk was reckless, instead they should prove that they did know. This will make it more difficult for the FCA to allege lack of integrity on this count. Other reasons for a prohibition order such as lack of competence and/or capability will be a higher evidential bar to cross.
3. Disclosure- the UT was particularly concerned about the FCA’s disclosure processes and general readiness for trial-“there are only so many times that the Authority can apologise for its failings…” It expected the FCA, as a public body, to be held to a higher standard i.e. evidence adverse to their case must be disclosed.

Conclusion

The UT findings represent more than a slap on the wrist for the FCA, they are deeply critical of almost every aspect of the Regulator’s handling of these three cases. The FCA is now in an awkward position. Alongside the PRA, it has indicated a willingness to increase the discount for early settlement and co-operation form 30% to 50%. However, such discounts are inevitably the result of a firm agreeing to the findings of a short and typically internal investigation. The UT has concluded that the FCA should not swallow “hook, line and sinker” a firm’s own version of events. It should also carefully consider taking on cases which may prove to be overly long and/or resource intensive. The UT conclusions are now a matter of record, they may well form the basis of compelling future appeals against FCA action. The FCA has recently appointed two well-regarded figures, Steve Smart and Therese Chambers as co-leads of Enforcement and Market Oversight, apparently heralding a new and intense focus in this area. It seems clear that both they and the Authority as a whole have some internal challenges to face before external enforcement effects will be experienced by market participants.

Why is this relevant to the typical Corterum subscriber? Readers should not regard the above as any sort of invitation to downplay the likelihood or efficacy of FCA SM&CR enforcement. Instead, the cases emphasise that the FCA is firstly far from infallible and secondly, the impact of the investigation itself can be tantamount to a severe punishment, regardless of the final outcome.

 The only way to avoid the possibility of formal investigation is to comply fully and be able to evidence full compliance.