In a recent decision, the UK Court of Appeal confirmed that the FCA can impose a redress requirement on an FCA-regulated firm without meeting the pre-conditions for a statutory market-wide redress scheme under the Financial Services and Markets Act 2000 (FSMA). Given the FCA’s emphasis on the importance of redress where it considers that breach of its rules has caused loss to consumers or counterparties, this is a significant decision for all regulated firms.
The Court of Appeal also considered that there are circumstances in which the FCA can put forward wider or amended allegations in front of the Upper Tribunal than appeared in an earlier decision notice.
The full decision in FCA v BlueCrest Capital Management (UK) LLP [2024] EWCA Civ 1125 is available here.
The Upper Tribunal’s decision restricted the FCA
In 2021, the FCA found that BlueCrest Capital Management (UK) LLP (BlueCrest), a hedge fund, failed to manage conflicts of interest in breach of Principle 8 of the FCA’s Principles for Businesses. The FCA alleged that BlueCrest, when acting as an investment manager, failed to properly manage a conflict of interests by acting in favour of an internal fund which benefitted senior partners and key staff employed by BlueCrest at the expense of external investors in an external fund. The FCA therefore imposed a financial penalty of £40,806,700 and required that BlueCrest provide redress to its investors under section 55L FSMA.
BlueCrest referred the FCA’s decision to impose a redress requirement to the Upper Tribunal. Under section 404 FSMA, the FCA can impose a market-wide redress scheme on firms where the conditions are met, including that firms are legally liable to pay redress. BlueCrest contended that the FCA’s power under section 55L FSMA to impose a redress requirement on a single firm should be construed in light of the conditions under section 404F(7) FSMA, for market-wide redress schemes. This would mean that the FCA could impose a redress scheme on an individual firm only if the 404F conditions are met.
The Upper Tribunal accepted this argument and found that the FCA had not satisfied the legal liability condition in imposing the redress requirement on BlueCrest.
Following referral to the Upper Tribunal, the FCA alleged an additional Principle breach that was not mentioned in the FCA’s decision notice against BlueCrest, which was a breach of Principle 7 of the FCA’s Principles for Businesses. The Upper Tribunal refused the FCA’s application to amend its statement of case to include this additional breach because the amendments were not within the “matter referred” to the Upper Tribunal.
The FCA appealed on both of these points.
The Court of Appeal decided in favour of the FCA
The single-firm redress requirement
The Court of Appeal found that the wording of section 55L FSMA provided the FCA with an own-initiative power to impose a redress scheme on a firm “provided it is a rational decision which the FCA considers to advance the objective of securing an appropriate degree of consumer protection” (para 58).
The Court rejected the Upper Tribunal’s interpretation that on a proper construction of the FSMA, the power to impose a single-firm redress requirement under section 55L FSMA includes the four conditions in section 404F(7) FSMA. The Court found that these restrictions should not be implied into section 55L when it was not set out expressly.
The Court also dismissed the Upper Tribunal’s concern that the FCA would be given an unreasonable breadth of power to require a firm to pay redress. The Court held that it made sense for the FCA to have wide powers to regulate complex market activity in order to ensure that the regulatory regime is effective – “the narrower and more prescriptive the terms in which its powers and rules are expressed, the less likely they are to provide an effective tool for regulating financial market activity” (para 83).
Although not restricted by section 404 FSMA, the FCA’s power to require single-firm redress is not an unfettered discretion given the remedies available to firms. The FCA is subject to rules of public law decision-making that require rational decisions, and to certain decisions (including on redress schemes) being challenged before the Upper Tribunal.
Jurisdiction of the Upper Tribunal
The Court of Appeal overturned the Upper Tribunal’s conclusion that its jurisdiction of a reference is limited to allegations that are of the same nature and based upon the same facts.
The Court held, based on statutory interpretation and policy reasons, that the scope of “the matter” referred to the Upper Tribunal should be wide enough to cover allegations and reasons not relied on prior to the reference. In particular, statutory notices issued by the FCA form part of “a continuous evolving process of adversarial engagement ”, in which the FCA can change its position during the process.
Comment
The Court of Appeal has again shown a reluctance to imply restrictions on wide express regulatory powers granted to the FCA by statute. The Court, however, emphasised that regulators are subject to the rules of public law to make decisions in a rational way and to use powers for the purpose intended. But, beyond that, the Courts are likely to give deference to regulatory discretion and expertise in decisions within their field, as shown in two recent court decisions involving the FCA and the LME covered in our blog posts here and here.
As emphasised in the FCA’s comments on the judgment, the FCA aims to secure redress for consumers quickly and with the use of a wide range of tools. The judgment is likely to embolden the FCA in its approach to redress exercises, which will be an area of focus when the FCA considers things have gone wrong in the light of the recent introduction of the Consumer Duty.
The confirmation that the FCA can shift its case against a firm in the Upper Tribunal is likely in practice going to act as a further disincentive for firms to fight regulatory decisions to the Upper Tribunal.
