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Third Party Rights and the SMR and SIMR: the regulators' Achilles' heel?

26 October 2016

The FCA has recently gone to the Supreme Court in an attempt to overturn a significant ruling in relation to third party rights. This could have profound effects on the enforcement of SMR and SIMR.

Achilles Macris was the former International Chief Investment Officer at JP Morgan in the division which was behind JP Morgan's expansion into credit trading. This unit created a portfolio which by the end of 2012 had losses standing at $6.2 billion (losses which were dubbed the "London Whale" trades by the media). 

JP Morgan settled regulatory action on both sides of the Atlantic relating to this debacle with the FCA fining JP Morgan £137.6m for systems and controls failings.

However what should have been a swift and successful outcome for the FCA has been somewhat undermined by the fact that the Upper Tribunal upheld a claim by Macris that he had been "singled out" for criticism in the FCA's final notice against JP Morgan. The tribunal reached this decision despite the fact that Mr Macris was not mentioned by name in the final notice. The Upper Tribunal concluded that as he was identifiable on the notice, and he was prejudiced by the notice, he should have been given third party rights as required under section 393 of the Financial Services and Markets Act 2000. Critically third party rights under section 393 entitle an individual, who is identified in a prejudicial way in an enforcement notice, to make representations against the notice. 

The FCA appealed against this decision to the Court of Appeal. On 19 May 2015 the Court of Appeal also found against the FCA, concluding that whilst the judge in the Upper Tribunal had not adopted the corrected test for resolving the issue of identification for the purposes of section 393, "nonetheless he had clearly reached the right conclusion on the evidence before him". 

Notwithstanding its earlier defeats the FCA has taken the unique step (for the FCA at least) of appealing to the Supreme Court. 

Presumably having lost on this point before both the Tribunal and the Court of Appeal, the FCA does not feel supremely confident that it will win.  Instead the fact that the FCA have taken the exceptional step of making its debut in the Supreme Court as an appellant, indicates the seriousness with which it is treating the implications of the Tribunal and Court of Appeal judgments. 

In part the FCA is no doubt motivated by a desire to win this case in the hope that it will stop all of the other current instances where individuals are asserting that they should have been afforded third party rights in relation to settled notices (such as Bittar v FCA [2015] UKUT 0602 (TCC) and Grout v FCA [2016] UKUT 302 (TCC)). However at stake is a far wider problem for both the FCA and PRA. The speedy resolution of many cases against firms through the settlement process, allows the regulators to bring and dispose of more cases than would otherwise happen if these cases were contentious; thereby requiring the regulators to take the cases before their internal decision making committees and then the Upper Tribunal. Where individuals (who are far more inclined to fight) are involved in cases these often take far longer to resolve and a far more resource intensive; hence the desire to avoid giving individuals third party rights on matters which could otherwise be disposed of quite swiftly.

There is an argument to say that had the FCA been more careful in its use of language then it might not have drafted a notice which the Tribunal and Court of Appeal both believe engaged Mr Macris' third party rights.  However in the light of the introduction of the SMR and SIMR it is not sufficient to say that the FCA and PRA should just be more circumspect ion the future when drafting settled notices so that they avoid identifying and criticising individuals.  

At the heart of the SMR and SIMR is the allocation of responsibilities to particular individuals. As such when the FCA or PRA seeks to bring a case against a firm for a failure in a particular part of its business it would need to either draft the notice in such a way that it did not criticise management's oversight of that area (thereby rendering the notice both weak and bland) or they would need to afford the relevant senior managers third party rights.  It may be that this will lead the regulators to more regularly bring cases against individuals rather than to just give them third party rights on a firm's notice. However whether or not that happens, the difficulty faced by the regulators is that if there are more cases being contested by individuals (whether they are the subject of disciplinary proceedings or they are merely asserting third party rights) the knock on effect of this is likely to be that the regulators will face difficulties resolving more cases because of the resource that will need to be spent on dealing with the contested matters.  If this is what the FCA perceives then it is no wonder that it is fighting this case to the bitter end.