Rare defeat for the FCA at the Upper Tribunal

In a rare defeat for the FCA, the Upper Tribunal upheld the Applicant's reference in Financial Services (Euro) Limited v FCA, proving that it can be worth challenging the FCA if the facts are right.

If FCA-regulated firms or individuals disagree with the FCA's supervisory or enforcement decisions (for example, to vary or withdraw regulatory approval, issue a prohibition order or impose a financial penalty), that person can refer the matter to the Upper Tribunal. The Upper Tribunal is an independent judicial body that hears the matter from scratch and comes to its own view of the facts (and, in disciplinary cases, as to the appropriate action (if any) the FCA should take).

What were the proceedings about?

The subject matter of the Upper Tribunal's judgment was the FCA's decision to cancel FSE's regulatory permissions, on the basis that FSE had failed to pay fees and levies to the FCA and that FSE did not have professional indemnity insurance. The FCA considered, therefore, that FSE did not satisfy the necessary Threshold Conditions to be a regulated entity.

FSE did not dispute that it did not have PI insurance, nor that it had not paid the FCA's fees and levies. However, the FCA was investigating FSE and its director (the FCA had concerns that FSE's credit-broking business may be being innocently used to facilitate mortgage fraud). Because of that investigation, no insurance provider would provide PI cover to FSE. Without PI cover, FSE considered it should not trade, resulting in FSE not being able to afford to pay the FCA's fees and levies.

The Upper Tribunal's decision

The Upper Tribunal accepted FSE's assertion that, pending the outcome of the FCA's investigation, it was not able to obtain PI insurance. The Tribunal also agreed that, without trading, FSE could not afford to pay the FCA's fees and levies. In those circumstances, the Tribunal considered that the FCA's decision to cancel FSE's regulatory permissions was inappropriate. The Upper Tribunal found that the FCA had not sufficiently taken into account the reasons why FSE did not have PI cover, nor why FSE had not paid the FCA's fees and levies.

The Upper Tribunal therefore remitted the matter back to the FCA for further consideration in the light of its findings of fact.

Comment

This is a welcome example of the Upper Tribunal hearing the matter afresh without (as can sometimes be perceived) starting from the premise that the FCA must have been justified in the actions it had taken.

It is clear from the Upper Tribunal's judgment that the Tribunal found the FCA's treatment of FSE particularly poor. That was both in respect of the decision to cancel the firm's permission, but also in the way in which the FCA had obtained the FCA's Regulatory Decisions Committee's approval of that decision and had prepared for the Upper Tribunal hearing.

In particular, in the FCA's submissions to the RDC, the FCA had failed to inform the RDC of the true reason why FSE had not paid the FCA's fees and levies, suggesting instead that it was because the firm had made a complaint about the FCA's investigation. The FCA had also failed to inform the RDC fully about the reason why FSE did not have PI cover, suggesting that it was a failure without good reason and not because of the lack of progress with the FCA's investigation. The FCA had, finally, wrongly indicated that it had not asked FSE voluntarily to cancel its regulatory permissions, when the FCA had in fact done so (FSE had refused to comply, but had maintained its decision to cease trading, pending the outcome of the FCA's investigation).

By contrast, the Tribunal made it clear that FSE had acted responsibly and prudently in ceasing to carry on any regulated activities and delaying seeking PI cover pending further developments in the FCA's investigation.

It is fortunate that FSE considered its treatment so egregious that it referred the matter to the Upper Tribunal. We can only hope that other firms will be similarly bolstered in the potential usefulness of an Upper Tribunal reference in appropriate cases.

The Tribunal's decision should also make required reading for all enforcement teams at the FCA and all members of the Regulatory Decisions Committee. From the FCA enforcement teams' perspective, they should give the firms and individuals they regulate proper access to justice and the proper opportunity to understand (and respond to) the FCA's true concerns, before having draconian penalties imposed on them via short cuts. And from the RDC's perspective, they should be alive to the possibility that they are not being given the full picture by the enforcement teams who appear before them: indeed, the facts of this matter call into question the fairness of obtaining approval from the RDC to the issue of Warning Notices (which can be published) without hearing directly from the subject of the same at all.