Supreme Court victory for U.K. Financial Conduct Authority spells trouble for senior managers

You may remember that I have covered in previous blogs a particularly thorny issue for individuals caught up in the backwash of large-scale FCA enforcement proceedings involving their financial institution employers.  A very recent U.K. Supreme Court decision in the case of Financial Conduct Authority V Macris has clarified the law—but not in a way that will give comfort to senior managers.

Representing one’s innocence

Settlements with the regulator invariably include provision for the publication of a Final Notice

The controversy relates to the extent to which individuals are entitled to make representations as to their innocence in circumstances where their employers or (more likely perhaps) their former employers have reached a settlement with the FCA.

As I have suggested in the past, this is a battleground ripe for conflicts of interest between employer and employee. Settlements with the regulator invariably include provision for the publication of a Final Notice containing criticism of the conduct that gave rise to the enforcement proceedings in the first place. Where an individual is actually named, Section 393 of the Financial Services and Markets Act 2000 gives him or her the opportunity to make representations.

What happens where the individual is not named but is still arguably “identified” in the Final Notice? That was the issue before The Supreme Court.

The case

The Court of Appeal found that the test for identification should be similar to that applied in defamation cases

The case stemmed from the FCA’s Final Notice in the infamous London Whale case, in which the bank was fined £137million. The Notice made reference to the bank’s “CIO London management” but did not name any individuals.

Mr. Achilles Macris at the relevant time served as part of the management structure of the bank. He exercised a controlled function and had the job title of International Chief Investment Officer. He complained that, looked at in its proper context, the Notice did, in effect, “identify” him through use of the phrase “CIO London management” and that he had been denied an opportunity to make representations in his defence.

The FCA disagreed but had lost on this issue both in the Tribunal and in the Court of Appeal.

As explained in my earlier blog, the Court of Appeal found that the test for identification should be similar to that applied in defamation cases; in other words:

Are the words used … such as would reasonably in the circumstances lead persons acquainted with the claimant/ third party, or who operate in his area of the financial services industry, and therefore would have the requisite specialist knowledge of the relevant circumstances, to believe as at the date of the promulgation of the Notice that he is a person prejudicially affected by matters stated in the reasons contained in the notice?

On the facts, the Court of Appeal found for Mr. Macris.

The new test for identification

Delivering the leading majority judgment, Lord Sumption rejected the defamation test laid down by the Court of Appeal in favour of a narrower formulation which he set out as follows:

In my opinion, a person is identified in a notice under section 393 if he is identified by name or by a synonym for him, such as his office or job title. In the case of a synonym, it must be apparent from the notice itself that it could apply to only one person and that person must be identifiable from information which is either in the notice or publicly available elsewhere. However, resort to information publicly available elsewhere is permissible only where it enables one to interpret (as opposed to supplementing) the language of the notice.

Lord Sumption gave a number of reasons for this narrow approach including the “practicalities of performing the Authority’s investigatory and disciplinary functions.”

As he put it:

The internet is a fertile source of information and gossip for those who are willing to go to some trouble to discover… identity. The Authority will not necessarily know what if any further information about the business, the facts or the individuals involved may be available to knowledgeable outsiders or discoverable from publicly available sources. In those circumstances it must be able to ensure, by the way in which it frames its own notices, that a third party is not “identified” in the notice, even if he or she is identifiable from information elsewhere.

The problem for senior managers

That’s all very well from the regulator’s point of view. It also has the benefit of clarity—but will be of cold comfort to individuals and in particular to senior managers who are the focus of the new Senior Managers Regime.

Indeed, the implications for individuals of this strict approach were a cause of concern for a number of the Supreme Court Judges including Lord Wilson who issued a dissenting judgement favouring a broader test. His focus was on “the particular sort of damage which a wrong criticism of an individual in a notice given by the Authority is likely to cause to him.” As he put it:

It is the reaction to the criticism of those who operate in the same sector of the market which is likely to cause him most damage; for it may prejudice his ability to remain in his employment, or to find other employment in that sector, or otherwise to continue to earn his livelihood in the industry.

It strikes me that this is the crux of the problem for senior managers. After all, the interests of employers often keen to do a deal with the regulators and move on are not aligned with those of the individuals caught up in the investigation. As another of the judges, Lord Neuberger, put it in his judgement:

The interests of the addressee of a notice who is accused of failings, and those of a third party such as an employee of the addressee, who may be identifiable as responsible for, or implicated in, the alleged failings, are by no means necessarily aligned. Thus, it may well be that an employer would want to try and curtail any publicity about the alleged failings by quickly negotiating and paying a penalty, even if there may be grounds for challenging the allegation in whole or in part. But this may often not suit the employee, who might well feel that, in the absence of the Tribunal exonerating him, his reputation, and therefore his future employment prospects, could be severely harmed or even ruined.

Most senior managers will lead productive and well remunerated professional lives and will never be unfortunate enough to find themselves caught up a major regulatory investigation. I would be willing to bet that the common assumption among this majority is that, provided they have not behaved dishonestly or recklessly, their employers will look after them in the event of trouble. This case and in particular the passage quoted in Lord Neuberger’s judgment quoted above ought to give this majority pause for thought.

The lesson here is that senior managers in the (albeit unlikely) case of need should ensure they can always reliably call on (and pay for) independent legal advice.

About Francis Kean

Francis is an Executive Director in Willis Towers Watson's FINEX Global, where he specializes in insurance for Dir…
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