Is credible deterrence really working? And other questions arising from a mixed week for the FCA
Even though the FCA was able to trumpet that it had imposed its highest ever fine and that it had been successful in two decisions handed down by the Upper Tribunal, things have not gone entirely the regulator's way in the past week or so.
The FCA lost in the Court of Appeal whilst in the two tribunal decisions it was criticised. Indeed even the Barclay's fine may not be entirely good news for the FCA.
On 20 May 2015 the FCA announced that it had imposed a record fine of £284m upon Barclays Bank Plc for its involvement in rigging the foreign exchange (FOREX) market. The FCA settled the case with Barclays alongside US agencies which imposed very substantial penalties of their own; Barclays will pay $710m to the US Department of Justice, $485m to the NYDFS, $400m to the Commodities Futures Trading Commission and $342m to the Federal Reserve. In the US the fines imposed upon Barclays were part of a wider settlement with other financial institutions, whilst the FCA had already imposed very substantial penalties upon 5 banks for FOREX related failings in November 2014.
One of the most striking aspects of the allegations against Barclays was that the period of its misconduct overlapped with and continued on after it had been investigated and then fined for very similar misconduct relating to the LIBOR and Gold benchmarks. The FCA stated in the Final Notice that one of the aggravating factors that increased the penalty imposed upon Barclays was the fact that it had failed to adequately respond to the lessons that it should have learned from the fines that were imposed upon it for LIBOR and Gold fixing misconduct. Additionally, the size of the penalty was also substantially increased by the fact that Barclays had delayed settlement from last Autumn and it had therefore only qualified for a 20% discount rather than the usual 30% discount. Clearly many factors contributed to the size of this fine, nonetheless these aspects of the Barclays case explain in part why Barclays ended up with the largest fine of all the firms involved in FOREX misconduct. Whilst these and/or other aggravating factors may well be present in a future enforcement case which results in a higher penalty, it is likely that for some time at least Barclays will retain this dubious record.
However the problem for the FCA is not where will the next record fine come from, but rather what do these huge fines say about the effectiveness of credible deterrence? The FCA, and the FSA before it, have argued that hefty penalties imposed under the banner of credible deterrence will drive a change in behaviours across financial services, even though the regulator brings enforcement cases in only a small number of incidents of misconduct. Indeed it was reported last week that Martin Wheatley, the head of the FCA, had said that heavy fines were making a difference and that they had driven change in the financial services sector. Nonetheless the fact remains that many of Barclays' failures in relation to FOREX came after a time when it should have been aware of the risks from such business, whilst the individuals who engaged in the actual rigging of the FOREX market will have been well aware of the cases being brought against those involved in the LIBOR scandal. In this case at least nobody appears to have been deterred from anything.
The Upper Tribunal
On 21 May 2015, the Upper Tribunal (Tax and Chancery Chamber) published decisions in two cases in which the FCA was ultimately successful. However the FCA's satisfaction at having been victorious will have been tempered by the criticism it received in both cases.
In Bayliss and Co (Financial Services) Ltd and Clive John Rosier v FCA  UKUT 0265 (TCC) (FS/2013/0004 and 0005) the FCA was criticised in relation to its handling of the case, including the submission of late evidence and its handling of a press statement, which was sent to selected media outlets along with the decision notices issued to Bayliss and Mr Rosier. The Upper Tribunal complained that the FCA's press statement contained a number of inaccuracies, including a headline and quote that did not accurately reflect the findings in the decision notices, failed to emphasise the provisional nature of those notices and did not comply with the protocol previously set out by the tribunal. This setback for the FCA was unfortunate because the Upper Tribunal had agreed with the FCA's Decision Notices issued to Bayliss and Rosier. The Upper Tribunal had upheld the FCA's findings that Mr Rosier had failed to act with due skill, care and diligence in breach of Statements of Principle 2 and 7 and that as a consequence he should be fined £10,000 and prohibited from performing a significant influence functions at an authorised firm (meaning that Bayliss would fail to meet the threshold conditions because it would not have sufficient human resources). The FCA has responded to the criticism that have been levelled against it saying that it has already taken forward some of the tribunal's recommendations and will take forward the rest in due course. Nonetheless the question remains how such a serious error could have arisen in relation to the use of what is a relatively controversial power?
In contrast to the Upper Tribunal's broad endorsement of the FCA's findings against Bayliss and Mr Rosier, in the decision in Angela Burns v FCA  UKUT 0252 (TCC) (FS/2012/0024) the Upper Tribunal completely repudiated the approach taken by the FCA. In this matter the Upper Tribunal was to make a determination as to the appropriate action for the FCA to take following its first decision in the case of Angela Burns v FCA. In December 2014, the tribunal had upheld or partly upheld four of the ten allegations the FCA had raised in its May 2013 decision notice (in that notice the FCA had decided to prohibit Ms Burns from performing any function in relation to any regulated activity and impose a fine of £154,800). The FCA maintained the appropriateness of the prohibition order and fine set out in its decision notice. The Upper Tribunal criticised the FCA for its unsatisfactory submissions on some points and for failing to reassess its position in the light of the fact that six out of its ten allegations had failed, and out of the four that succeeded, three were upheld only to a limited extent. The Tribunal ultimately decided that it was appropriate for the FCA to prohibit Ms Burns from carrying out a CF2 function in relation to any regulated activity and to impose a fine of £20,000. Thus far the FCA has not published a press release concerning this decision and so it is not clear whether it accepts the criticisms and if it does then will it approach future cases differently.
The Court of Appeal
Whilst there were some positives for the FCA to draw from the Upper Tribunal decisions, the Court of Appeal's judgment in the case of FCA v Macris  EWCA Civ 490, which was handed down on 19 May 2015, has no crumbs of comfort for the regulator. In this matter the Court concluded that the FCA should have given Achilles Macris third party rights in relation to the statutory enforcement notices given to J P Morgan Chase Bank N.A. The Court of Appeal found that the FCA had prejudicially identified Mr Macris when issuing a Final Notice to J P Morgan Chase in respect of failures arising from the so-called "London Whale" trades. It therefore found that the FCA should have treated Mr Macris as a third party for the purposes of section 393 of FSMA, and that he should have been accorded certain rights before issue of the Final Notice, and that he was and is entitled to refer the Final Notice to the Upper Tribunal for a hearing as to whether the criticisms of him are appropriate. This decision will prove to be a major inconvenience for the FCA in a matter that it had hoped to have resolved. However more interesting, and potentially more troubling for the regulator, is the potential for other closed enforcement cases to be re-opened or for current proceedings to be de-railed by individuals asserting their third party rights – though at present it is hard to gauge how much appetite others will have for embarking on the struggle that Mr Macris has faced in asserting his rights.
The FCA has also announced on 26 May 2015 that it has issued decision notices to three individuals in relation to alleged mis-selling at Keydata Investment Services. This case represents more positive news for the FCA than the Macris case, because it may suggest that this matter is inching towards a resolution. However this also serves as a reminder of one case where the FCA, and the FSA before it, have suffered some serious setbacks. In a judicial review in 2011 the FSA was prevented from relying upon certain material which was protected by legal professional privilege. Whilst the FSA was allowed to continue with the action against the individuals the length of time since that challenge serves to demonstrate how determined these individuals have been in seeking to thwart the regulator.
All considered this has not been a good week for the regulator with questions posed about the effectiveness of enforcement strategy as well as the rigour of internal processes at the FCA.