In a recent series of decisions, the Upper Tribunal (UT) has thrown a spotlight on the Financial Conduct Authority’s (FCA) enforcement strategy. These verdicts have far-reaching implications, potentially reshaping how the FCA approaches enforcement actions in the future. In this update we look at these cases and their potential consequences.
The Role of the Regulatory Decisions Committee (RDC)
Typically, when a supervised entity disputes an enforcement action by the FCA, the case is referred to the Regulatory Decisions Committee (RDC) for review. Once the RDC concludes its review, the FCA’s decision-making process is considered complete. However, the decisions of the RDC can be challenged before the UT.
In a country governed by the rule of law, it’s natural for powerful agencies like the FCA to be held accountable by the courts. Thus, some decisions will inevitably be challenged or overturned. What’s noteworthy in these recent cases is that the UT’s judgments contained pointed criticism of the FCA’s decision-making processes and interpretation of the law.
The Markou Case
The Markou case involved an individual approved to carry out critical functions in a mortgage and insurance intermediary named FSE. Mr. Markou was the sole director of the company. Between 2011 and 2015, the FCA had raised serious concerns with FSE relating to the prevention of financial crime.
Following an investigation, the FCA found Markou liable for various grounds, including failure to oversee FSE’s mortgage business adequately and reckless neglect of financial crime controls. The FCA believed that Markou had breached Principle 1 (acting with integrity) and failed the “fit and proper test.” Penalties, restrictions, and a provisional ban were imposed.
However, the UT’s detailed judgment disagreed with the RDC’s decision. It did not find Markou to be reckless, lacking integrity, or dishonest. Therefore, it disagreed that he had breached Principle 1 or was not fit and proper. The UT’s decision, in essence, cleared Markou of these allegations.
This verdict is significant because it could set a higher bar for the FCA in cases alleging recklessness or a lack of integrity. If upheld, this could make it more challenging for the FCA to establish such claims in future enforcement actions.
Julius Baer Employees
The 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 itself, imposing a fine of £18 million related to certain foreign exchange transactions and associated finders’ fees.
The FCA relied heavily on the knowledge and actions of the three individuals in its case against the bank. However, the FCA accused all three of lacking integrity, albeit on different grounds. One was found to have acted naively, another as a “weak manager,” and the third had placed reliance on subordinates. Prohibition orders banning them from regulated business were issued.
These individuals challenged the FCA’s decision before the UT, which found that the FCA had not demonstrated recklessness or a lack of integrity. The UT’s decision has set a clearer standard for establishing recklessness: the individual must have genuinely appreciated the risk and then decided, reasonably, to ignore it.
This decision will likely make it more challenging for the FCA to allege recklessness in future cases. The UT’s judgment was also critical of the FCA’s actions, including the time taken to issue a Decision Notice and its reliance on internal investigation reports rather than conducting independent investigations.
The BlueCrest Case
In the BlueCrest case, the FCA fined BlueCrest Capital Management £40.8 million for alleged breaches related to managing a conflict of interest. The FCA also imposed a requirement on BlueCrest to provide redress to non-US clients who had suffered losses due to its failings.
BlueCrest contested the decision and the redress requirement directly before the UT, bypassing the RDC. The UT’s judgment was highly critical of the FCA’s Decision Notice, describing it as unclear and muddled. The UT had difficulty discerning the essence of the FCA’s reasoning.
Ultimately, the UT found that the FCA’s redress case had no reasonable prospect of success in establishing actionable loss. As a result, the FCA’s redress application was struck out, allowing BlueCrest to avoid paying potential sums exceeding £560.9 million.
The UT also scrutinised the FCA’s attempt to amend its statement of case, finding that some proposed amendments were not related to the allegations in the FCA’s Warning Notice or Decision Notice. This decision could impact future UT cases where the FCA seeks to change its position from that presented at earlier stages.
Implications and future directions
These recent cases signal a potential shift in the FCA’s enforcement landscape. Proving recklessness or lack of integrity may become more demanding, making sanctions against individuals harder to pursue. Additionally, the role of the RDC in the enforcement process may be reevaluated, as the recent decisions call its effectiveness into question.
While these cases do not signify a seismic shift in FCA enforcement, they certainly invite a closer look at the regulator’s strategies. The FCA may need to refine its evidence collection, legal analysis, and overall approach to enforcement actions. As new executive directors take charge, the agency will likely assess how these cases impact its enforcement direction.
In this evolving regulatory environment, businesses need to stay vigilant. Ensuring compliance with FCA regulations and understanding the shifting enforcement landscape is crucial. Neopay can assist businesses in navigating these challenges, providing expert guidance and support in maintaining compliance and managing regulatory risks effectively.
Contact us today to learn how our tailored solutions can help your business navigate the evolving regulatory landscape.