The UK Court of Appeal has confirmed that the UK Financial Conduct Authority (FCA) has the power to impose single-firm schemes of redress where it considers this is desirable to satisfy one of its statutory operational objectives. The exercise of this power is subject only to the usual public law constraints. Overturning an earlier decision of the Upper Tribunal, the court held that the FCA can impose such a scheme even if the persons standing to receive redress have not suffered an "actionable loss".
The court also confirmed that when a FCA decision against an individual or firm is referred to the Upper Tribunal for re-hearing, the FCA has a greater flexibility to amend its case than many had previously understood.
FCA powers to impose redress schemes
The main dispute in this case concerned the preconditions that the FCA must satisfy in order to impose a requirement on a single firm to pay redress to consumers.
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Own-initiative requirement (OIREQ) power: The FCA has a power under s55L Financial Services and Markets Act (FSMA) to impose requirements on authorised firms in certain circumstances, including where the FCA considers this is desirable in order to advance one of its operational objectives, such as consumer protection. These requirements typically require firms to take, or stop taking, specific actions.
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Consumer redress power: Separately, the FCA has a standalone power to impose consumer redress schemes on firms (s404 FSMA), but only where the FCA is satisfied consumers could successfully bring a legal claim against the firms in question for the loss or damage suffered (alongside other conditions). Such schemes are used to address widespread failures across multiple firms.
Challenge to FCA’s exercise of redress power
The FCA issued a Decision Notice to BlueCrest Capital Management (UK) LLP (BCM) alleging that it had failed to manage fairly conflicts of interests that had arisen, primarily in relation to the allocation of traders as between an external investment fund (open to investors outside the BlueCrest group) and an internal fund (open only to BlueCrest partners and employees). In its Decision Notice the FCA imposed a financial penalty of GBP40.8m for alleged breaches of Principle 8. The FCA also issued a First Supervisory Notice (FSN) to BCM, notifying it of its decision to impose a requirement to pay redress, estimated at around GBP700m, pursuant to its OIREQ power under s55L FSMA. BCM referred both decisions to the tribunal.
BCM successfully applied to the Upper Tribunal to strike out the portion of the FCA’s case relating to the FSN, on the basis that the FCA did not have a freestanding power under s55L FSMA to impose a single-firm redress requirement where the conditions set out in s.404 FSMA were not met. The tribunal agreed with BCM that the FCA’s powers in s55L must be “read together [with,] and restricted by, the terms of s404F(7)”. This required the FCA to demonstrate loss, causation and breach of duty, and that the persons to be compensated had suffered actionable loss. The tribunal held that the FCA did not have a reasonable prospect of establishing actionable loss on its pleaded case. The FCA appealed this decision.
Clarification of powers
The Court of Appeal overturned the tribunal’s decision. It held that s55L is broad enough to encompass the imposition of a requirement on a single-firm to pay redress, and that the FCA’s power to do this derives solely from s55L. It is not limited by the conditions applicable to consumer redress schemes under s404F FSMA, and is only subject to the usual constraints imposed on the exercise of public law powers: ie, that the power is exercised rationally and for the purpose for which it was conferred.
The court specifically addressed the concern that this might allow the FCA to circumvent the safeguards applicable to sector-wide schemes of redress imposed pursuant to s404, by simply imposing requirements on multiple individual firms to pay redress. It was satisfied that the usual constraints imposed on the exercise of public law powers would prevent the FCA using its powers to circumvent statutory safeguards, as to do so would be to use them for an improper purpose.
The Court of Appeal drew a distinction between the s.404F power, which is purely a form of redress, and the s.55L power, which concerns the regulation of permission to continue to undertake regulated activities. The Court of Appeal was influenced by the lack of clear statutory conditions on the exercise of the FCA’s OIREQ powers and considered that it would be a “very surprising commercial consequence” if the FCA could not impose redress requirements under s.55L where only one of the requirements of s404F was not met; for example, where a firm profited from a breach of duty, but where no consumers suffered a legally actionable loss.
The power in question is not a new power, but it has not previously been exercised by the FCA to impose a scheme of redress on a single firm. The FCA has been vocal about its intention to use its powers and test their limits and the Court of Appeal’s blessing of its approach in this case is likely to encourage the FCA to test the use of its powers in other cases. The court confirmed that the scope of the FCA’s OIREQ power is very broad and can be used to require a firm to pay redress in circumstances where it would not otherwise be held legally liable towards consumers. The FCA has a broad discretion to impose redress schemes on firms based on its own determination of what is desirable, having regard to its consumer protection objective.
FCA can amend its case at tribunal stage
When authorised firms or individuals refer FCA decisions made against them to the Upper Tribunal, the tribunal can only consider “the matter” referred to it. There has been some past uncertainty as to what this includes, especially where the FCA seeks to include new allegations in its case that were not part of its original statutory notices (warning, decision or supervisory), or considered by the Regulatory Decisions Committee (RDC). In this case, the FCA sought permission from the tribunal to introduce allegations that the firm had breached Principle 7 and COBS rule 4.2.1, neither of which had previously been referred to in its statutory notices issued to BCM or before the RDC. The tribunal refused, on the basis that these alleged breaches were not part of “the matter” referred to it. The FCA appealed to the Court of Appeal.
The Court of Appeal confirmed that tribunal referrals are a “continuation of the regulatory process”. The “matter referred” can include anything that is “sufficiently related” to the FCA decision in question, in that it has a “real and significant connection” with its procedural or substantive content. The FCA need not have relied specifically upon something during the process leading to the tribunal reference for it to have the necessary connection.
The Court of Appeal considered that the FCA amending its statement of case against BCM would simply be a relabelling of conduct which was already alleged to be in breach of the FCA’s rules as part of the FCA’s case and that the additional alleged breaches could be addressed by BCM without any prejudice. The FCA could therefore include alleged breaches of Principle 7 and COBS 4.2.1 because these were sufficiently connected to the original allegations and fell within the scope of the “matter”, even though they had not been referred to in the statutory notices issued to BCM. It did not matter that the FCA had been aware of the matters giving rise to the newly alleged breaches at an early stage in its investigation.
Firms should therefore be aware that a reference to the tribunal could result in an expansion of the FCA’s case to include additional, or alternate, Principle or rule breaches.
What does this mean for firms?
This outcome is a big win for the FCA, which is likely to interpret it as a complete vindication of its original position. It will potentially embolden the FCA to continue to test the boundaries of its powers, especially its OIREQ power. Firms should be alert to a confident regulator making full use of its wide-ranging powers - we expect to see further ‘dusting off and repurposing’ of the regulatory toolkit.
The court considered that the absence of an alternate legal remedy for the proposed recipients of redress strengthened the FCA’s case for imposing redress requirements pursuant to its OIREQ power. The FCA may seek to use this power to require firms to “do the right thing” and provide redress even when the loss suffered is not financial; for example, distress, inconvenience or damage to reputation.
