Unreasonable FCA investigation: UK Court of Appeal confirms costs award

Background and Facts

In a decision handed down on 9 November 2023, the Tribunal made a rare order for costs against the FCA, including because of what the tribunal considered to be inadequate efforts on the part of the FCA to conduct an investigation reasonably (the Costs Decision). In the underlying proceedings, three individuals sought to challenge the FCA's decision to impose prohibition orders on them on the basis that they lacked integrity in relation to certain arrangements entered into between Julius Baer and individuals connected to the Yukos Group. In June 2023, the tribunal found that the FCA had not made out its case that the three individuals had acted recklessly and consequently with a lack of integrity and remitted the matter to the FCA for reconsideration. The FCA then decided to discontinue the proceedings and withdraw the decision notices issued against the individuals. The judgment was also highly critical of the FCA's investigation and conduct during the proceedings.

The FCA sought permission to appeal the Cost Decision on three grounds but was only granted permission on two of them. Ground One was that the Tribunal erred in the finding that the FCA acted unreasonably in failing to call material witnesses. Ground Two was that the Tribunal erred in finding that the Authority had acted unreasonably by (1) refusing to respond to a request from one of the individuals, Mr Seiler, for clarification in respect of the Authority’s position on what other individuals knew about the various FX transactions giving rise to the proceedings and the relationship between two individuals, Mr Merinson and Mr Feldman; and (2) refusing to answer certain other requests for details of its investigation. The ground for which permission was refused concerned a specific transaction referred to as the Third FX Transaction.  In granting permission to appeal on the two grounds, the Court of Appeal imposed a condition that the FCA should bear its own costs of the appeal in any event.

The Court of Appeal, by a majority of Fraser and Lewison LJJ, dismissed the appeal on both grounds. Elisabeth Laing LJ gave a dissenting judgment.

Decision

The majority of the Court of Appeal reached the following conclusions on the two specific grounds of appeal.

Ground 1: The Tribunal erred in the finding that the Authority acted unreasonably in failing to call material witnesses

The FCA’s first ground of appeal was that the tribunal erred in the finding that the Authority had acted unreasonably in failing to call material witnesses. In the underlying proceedings, the Tribual noted that the witnesses whom the FCA called to support its case at the Tribunal “only had a peripheral involvement” and failed to call other key witnesses as they were located abroad or considered to be “unreliable” by the FCA. The Tribunal made particularly clear how its ability to determine the facts was impaired by the deficiencies identified in the investigation.

The Court of Appeal noted that the Authority misunderstood the Tribunal’s finding in this regard.  The Court of Appeal disagreed with the view that the Cost Decision meant that “the Authority must call witnesses that it cannot proffer as witnesses of truth and whether it must invite the Tribunal to use potential powers to summon witnesses from abroad”. Instead, the Court of Appeal noted that the Tribunal had simply criticised the FCA for not bringing the issue of the witnesses to its attention and for not taking reasonable steps to obtain relevant evidence.

As such, the majority found that the Tribunal was entitled to conclude that the FCA had acted unreasonably in relation to the witnesses and that there was no error of law or false premise in its findings. Ground one of the FCA’s appeal was therefore dismissed. The Court of Appeal found that the Tribunal had properly taken into account the facts of the case, including the importance of the witnesses' evidence, the FCA's failure to seek directions from the Tribunal about calling them, the FCA's late and “feeble” attempts to obtain their assistance, and the FCA's lack of candour about its contacts with them. The Court of Appeal said that these findings were justified and fell within the range of findings properly open to the Tribunal. The Court of Appeal concluded that this ground of appeal could not be equated to a point of law, or be found to have been made on false premises as a result.

Ground 2: The Tribunal erred in finding that the Authority had acted unreasonably by (1) refusing to respond to Mr Seiler’s request for clarification; and (2) refusing to answer certain other requests for details of its investigation

On the second ground, the Court of Appeal held that the Tribunal was entitled to conclude that the FCA had acted unreasonably in refusing to respond to Mr Seiler's requests for clarification and information, agreeing that the FCA’s response was unhelpful and unsatisfactory. 

The Court of Appeal said that the requests were relevant to the issue of whether Mr Seiler had been reckless and lacked integrity, because they related to what other individuals knew about the transactions and the relationship between Mr Merinson and Mr Feldman. While the Court of Appeal recognised that in some cases, a party may ask numerous and seemingly irrelevant requests to burden the other party in providing information of peripheral matters, it found that some requests would provide great assistance to the case or defence being advanced by the requesting party, or to identify to the party asked to provide the information a particularly significant fact which may have been overlooked.

While the Court of Appeal accepted that there was no “one size fits all” approach to when the FCA should provide further information upon request in any given case, it found that the Cost Decision did not impose such a test on the FCA. Instead, the Tribunal found that, on the facts of this specific case, the Authority’s answers to Mr Seiler’s questions were unreasonable.  The Court of Appeal concluded that this finding was plainly within the range of reasonable decisions that the Tribunal was entitled to make. The Court of Appeal based this decision on the fact that the central issue of the substantive reference was one of integrity for failing to appreciate the risks of the transactions, yet the FCA did not progress a positive case on the other relevant individuals’ knowledge of the risks at the time. The Court of Appeal clearly considered that the FCA was wrong to assume that it did not need to engage with the requests because it did not advance a positive case on those individual’s knowledge, noting that the FCA’s own witnesses in the substantive hearing had accepted the relevance of looking at how other people acted at the time when considering whether an individual lacks integrity.

The Court of Appeal said that it must be remembered that the FCA is the regulator and able to conduct investigations, including interviewing other employees. In the Court of appeal’s view, the Judge was entitled to conclude that by taking the stance that it did, and “effectively stone-walling this avenue of enquiry by Mr Seiler”, the FCA had acted unreasonably. However, it did clarify that the finding was fact specific, and emphasised that the decision did not mean that in all future cases, if the Authority does not answer all requests for information or clarification, then it has acted unreasonably.

In her dissenting judgment, Elisabeth Laing LJ considered that the Tribunal had erred in principle and/or reached a perverse decision in finding that the FCA had acted unreasonably in relation to the witnesses and the requests for information because:

• The Tribunal misdirected itself as to the legal relevance of the evidence of the potential witnesses and the requests for information as they had no bearing on the objective question of whether the applicants lacked integrity;
• The Tribunal erred in principle in criticising the FCA for not calling witnesses whose evidence did not support its case, and for not taking steps short of calling them, such as seeking directions or letters of request;
• The Tribunal erred in principle in imposing a duty of candour on the FCA that went beyond the duty to explain its decision-making, and in expecting the FCA to co-operate with the Tribunal by calling witnesses whom the FCA did not regard as witnesses of truth or whose evidence was not necessary to prove its case;
• The Tribunal erred in principle in deciding that the FCA should be liable in costs for not responding more fully to Mr Seiler's requests, when Mr Seiler had not applied to the Tribunal for a direction or a strike-out under the Tribunal Procedure Rules.

Decision Insights

An appeal of a decision of the Tribunal can only be on a point of law

The Court of Appeal said that upon an appellate review in any type of case, the court would generally not interfere with the conclusion of the court or tribunal below on findings of fact. Specifically in relation to the Tribunal it said that, expressly and by statute, no challenge is permitted on appeal to any findings of fact and appeals are only permitted on points of law by reason of section 13(1) of the Tribunals, Courts and Enforcement Act 2007 (TCEA). In order to ascertain whether a point is one of law or fact, a pragmatic approach should be taken. The FCA contended that the Tribunal’s assessment of reasonableness was not one that was reasonably open to the ribunal. The FCA submitted that the Cost Decisions adopted a “novel and highly unorthodox approach in respect of important matters of practice and procedure in the Tribunal”. The Court of Appeal was not persuaded by these submissions and concluded that the decision of the Tribunal on unreasonableness could not be considered an error of law.

In making this determination, the Court of Appeal noted that when considering potential unreasonableness both as to the conduct of an investigation and/or the proceedings before the Tribunal, the Tribunal is best placed to come to a considered conclusion.

Elisabeth Laing LJ disagreed with the majority’s view that the Tribunal’s decision on cost was either unreviewable or virtually unreviewable by the Court of Appeal (as did Lewison LJ) on the basis that the Tribunal had expert knowledge which the Court of Appeal lacked. She argued that the Court of Appeal could intervene if the Tribunal had erred in principle or reached a perverse decision, and that the majority’s reliance on two specific precedents was misplaced. Elisabeth Laing LJ noted that the purpose of the right to appeal, even in its various specialist areas, does not preclude the Tribunal to set up its own idiosyncratic regime, but should still be subject to review.

The FCA should not be considered to be ordinary litigant in civil proceedings

The FCA sought to argue that the Tribunal had failed to understand the nature of the proceedings before it, arguing  that it should be treated as though it were a litigant in ordinary civil proceedings in the High Court and how it conducted itself should be considered against that standard when assessing unreasonableness. The FCA submitted that it was entirely a matter for the FCA to decide how to put its case, which witnesses to call, and how it could and should answer requests for information or clarification.  As such, it argued, the Cost Decision amounted to an error of law. The majority rejected this argument and referred with apparent approval to passages in Frensham v Financial Conduct Authority [2021] UKUT 0222 (TCC) in which the Tribunal referred to it sometimes being necessary for it to perform “a more inquisitorial role” and to its proceedings in relation to a non-disciplinary reference being very similar in character to judicial review proceedings, where a duty of candour on the part of the public authority is expected.  The Court of Appeal concluded that the FCA is “engaged in a common enterprise with the Tribunal in ensuring that the objects of the legislation are achieved and that public confidence is maintained in the integrity of financial markets, with those who are not fit and proper persons prohibited from engaging in regulated activity”. In support it noted that the Tribunal exercises a supervisory jurisdiction in non-disciplinary references, and cannot substitute its own decision for that of the FCA. Instead, the Tribunal can only remit the matter for the FCA to reconsider its view in light of the Tribunal’s findings.

The Court of Appeal is reluctant to interfere with the tribunal’s wide discretion

The decision of the Court of Appeal confirms that the Tribunal has a wide discretion to award costs in financial services cases, and that the FCA may be ordered to pay costs if it acts unreasonably in bringing, defending or conducting the proceedings. The judgment also makes clear that the Court of Appeal can be expected to be reluctant to interfere with the tribunal’s evaluative judgment on unreasonableness, unless there is a clear error of law or perverse decision. The Court of Appeal noted that the question of whether a party has acted unreasonably can only be determined after consideration of all the factual circumstances. As this is an evaluative factual assessment that can only be reached after a detailed analysis of the facts, the Court of Appeal should generally not interfere with that conclusion, although Lewison LJ cited with approval Lord Radcliffe’s comments in Edwards v Bairstow [1956] AC 14 that the facts found may be such that no person properly instructed as to the relevant law could have come to their determination, in which case the court must intervene on the assumption that there has been a misconception of the law.

The Costs Order would be unaffected regardless of the FCA’s appeal

The majority also noted that the FCA had been refused permission to appeal on a third ground, in relation to the Third FX Transaction, and said in obiter that this ground alone involved a finding of unreasonableness that was sufficient to trigger the Tribunal's jurisdiction to award costs. Therefore, even if the FCA had succeeded on one or both of the grounds of appeal for which it had been granted permission, the costs order would still have stood, as the FCA had not obtained permission to appeal the finding of unreasonableness in relation to the Third FX Transaction.  The Court of Appeal considered that interfering with a costs order where there was an unimpeachable finding of unreasonableness that entitled the Tribunal to make a costs order would amount to unwarranted appellate interference.  If followed in future cases, this approach would impose a high bar for parties seeking to challenge a costs award imposed on the basis of multiple findings of unreasonableness, as they would need to be able to successfully challenge each such finding and could not expect a reduction if they were only partially successful in doing so.

In her dissent, Elisabeth Laing LJ held that the finding of unreasonableness in relation to the Third FX Transaction was not a sufficient basis for upholding the costs order, as it was not clear that the Tribunal would have made the same order if it had not erred in relation to the other grounds, and as the Tribunal did not rely on that finding as a separate ground for its decision.

Conclusion

The Court of Appeal’s decision makes it clear that, while the threshold of unreasonableness is a high one to cross in order to obtain a costs order against the FCA, if that threshold is successfully crossed it will be very difficult for the FCA to challenge the costs order. 

From a broader perspective, the majority of the Court of Appeal clarified that the Tribunal had not found that the FCA was necessarily legally required to call specific witnesses from abroad to the Tribunal hearing, but rather criticised it for not adequately explaining the absence of those witnesses, who it had initially considered important but later deemed unreliable. This lack of explanation and effort amounted to a failure by the FCA to discharge its duty to present a complete and transparent case.

The majority also rejected the FCA's argument that it should not be subject to any special obligations in terms of its conduct beyond those of a regular party to civil litigation, including in relation to its decisions on which witnesses to call and how to respond to requests for information.  It seems clear that the FCA will be held to a higher standard.  The views expressed by both the Tribunal and the Court of Appeal in this case are likely to have significant implications for the FCA's future approach to cases, including how it decides the scope of the case that it wishes to present to the Tribunal, the amount of work that it needs to undertake to get a case hearing-ready and the evidence that it will have to adduce to present the case completely and transparently to the Tribunal.  We can be sure that defence teams will be looking for opportunities to challenge the approach that the FCA takes.

Financial Conduct Authority v Thomas Seiler & Anor [2024] EWCA Civ 852 (Published: 30 July 2024).

This article first appeared in the September 2024 financial services investigations and enforcement column published by Practical Law.