Background
All UK authorised financial services firms are required to comply with the FCA’s Principles for Businesses. Principle 8 requires a firm to manage conflicts of interest fairly, both between itself and its customers and between a customer and another client. The FCA can take a wide range of enforcement action against firms it considers to have breached the Principles, including imposing a financial penalty.
Before imposing a penalty on a firm, the FCA must issue a Decision Notice. On receiving a Decisions Notice, a firm can challenge the FCA’s decision by referring it to the Regulatory Decisions Committee and / or the Tribunal.
The FCA has a power to impose requirements on authorised firms if the FCA considers this is desirable in order to advance an operational objective of the FCA (section 55L FSMA). This is known as the FCA’s “own initiative requirements power” (OIREQ power). These requirements are typically used to require firms to take or stop taking specific actions.
The FCA also has a power to impose consumer redress schemes on firms if certain conditions are satisfied (section 404 FSMA). These are typically used to address widespread failures across multiple firms but can also be imposed on a single-firm basis (section 404F(7) FSMA). A s404 consumer redress scheme can only be imposed if certain conditions, listed in the relevant sections of FSMA, are met, including that “it appears to [the FCA] that, as a result [of a firm’s failure], consumers have suffered (or may suffer) loss or damage in respect of which, if they brought legal proceedings, a remedy or relief would be available in the proceedings”.
Facts
The FCA issued a Decision Notice to BlueCrest Capital Management (UK) LLP (BCMUK) alleging that it had failed to manage fairly conflicts of interests that had arisen in relation to the allocation of portfolio managers 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 proposed a financial penalty of GBP48.8m for alleged breaches of Principle 8. The FCA also issued a First Supervisory Notice (FSN) to BCMUK, notifying it of its decision to impose a requirement to pay redress pursuant to s55L FSMA. BCMUK referred both of these decisions to the Tribunal.
BCMUK applied to strike out the portion of the FCA’s case relating to the FSN, on the basis that the FCA does not have a freestanding power under s55L FSMA to impose a single-firm redress requirement. BCMUK’s case was that the FCA’s power to impose such a requirement comes from reading s55L and s404F(7) FSMA, together. It argued that it would be unfair and irrational if the FCA could use its OIREQ powers to impose a consumer redress scheme on a single firm without satisfying the more onerous pre-conditions that the FCA would be required to meet if imposing such a scheme on a firm pursuant to its s404 FSMA powers.
The FCA disagreed, claiming that it did not need to satisfy the requirements of s404F(7) FSMA to impose a single-firm consumer redress scheme as s55L is a freestanding power with the conditions for using it being clearly stated in s55L FSMA itself. The FCA said that it would be wrong to imply further restrictions on the exercise of the s55L power and that the only pre-condition it needed to satisfy was that requiring the firm to pay redress was desirable to advance one of the FCA’s operational objectives. In this case, the FCA said that requiring the firm to pay redress was desirable to advance its consumer protection objective.
Decision
The Tribunal ultimately agreed with BCMUK, confirming that on the proper construction of FSMA, the FCA’s source of power to impose a redress requirement on a single-firm is by virtue of s55L “read together [with,] and restricted by, the terms of s404F(7)”.
Consequently, the FCA is required to satisfy the same statutory conditions as would be required for the imposition of a s404 consumer redress scheme: loss, causation, breach of duty (or failure to comply) and actionability. The Tribunal considered that there was a reasonable prospect of the FCA being able to establish the first three elements, but not “actionability”. This is because, as a result of other case management decisions, the reference was only proceeding in relation to BCMUK’s alleged breach of Principle 8. Breaches of the FCA’s Principles for Businesses are not actionable (s138D(3) FSMA) and so the FCA did not have a reasonable prospect of demonstrating actionable loss to which the consumer redress scheme could apply. The Tribunal held that this part of the FCA’s case had no reasonable prospect of success and therefore the strike out application succeeded.
The FCA sought to amend its case to include new allegations relating to other Principles and specific rules in the FCA Conduct of Business Sourcebook (COBS), which had not been raised during the FCA’s investigation and were not referred to in the Decision Notice. These were contested by BCMUK. The Tribunal did not permit the amendments because they fell outside the scope of the “matter referred” to the Tribunal. It found that allegations relating to different regulatory provisions to the ones under investigation or referred to in the Decision Notice could not be considered to be “of the same nature”.
In considering the matters before it, the Tribunal acknowledged that when construing statutory provisions there is a presumption of parliament intending to act reasonably. It also acknowledged that if the FCA’s interpretation of FSMA was correct then it would allow the FCA to impose penalties on firms without having to demonstrate a breach of any regulatory requirements. This is markedly different from the other routes to redress provided for in FSMA. The Tribunal said it seemed unlikely that this is how parliament had intended s55L to take effect.
Comment
A new Principle 12 came into force on 31 July 2023 as part of the Consumer Duty and, like the existing Principles, is not be actionable. Neither are the cross-cutting rules and outcomes that have also been introduced as part of the Consumer Duty. The Tribunal’s judgment in this case reinforces the fact that the new Principle and rules that make up this new duty will not open new avenues to FCA-imposed redress for consumers, at least not for now.
Case: BlueCrest Capital Management (UK) LLP v The Financial Conduct Authority [2023] UKUT 140 (TCC)
This article first appeared in the August 2023 edition of Practical Law Magazine and is reproduced with the permission of the publishers.
