On 17 November 2015 Outer Temple Chambers (“OTC”) and the Financial Services Lawyers Association (“FSLA”) hosted a panel discussion on the topic of “Global Investigations and Judicial Oversight”, attended by over 175 lawyers and financial services professionals.

The panel was chaired by Richard Lissack QC of OTC, with speakers Mark Steward, the new Executive Director of Enforcement and Market Oversight at the Financial Conduct Authority (“FCA”); Stephanie Pagni, the Global Head of Litigation at Barclays Bank; Dorian Drew, a Partner at Clifford Chance; Judge Timothy Herrington of the Upper Tribunal (Tax and Chancery Chamber); and Richard Hitchcock QC of OTC.

Four key themes emerged during the evening:

  • the role of the FCA as a seeker of the truth, versus its practice of reaching settlements;
  • the position of third parties affected by regulatory findings in investigations;
  • the implications of regulatory investigations for follow-on commercial litigation; and
  • the need for greater collaboration between different regulators and with regulated firms.

Seeking the truth versus settlement

Mark Steward suggested that the FCA’s first priority in exercising its enforcement powers was to seek the truth and to expose whatever misconduct or wrongdoing had occurred, so that the problem could not arise again. He said this was not for the sake of “heads on sticks”, but rather to understand what went wrong, to uproot misconduct quickly and efficiently, and to ensure that the right remedy was imposed.

Judge Herrington noted that in the UK large firms tended to settle their disputes with the regulator at an early stage. Citing his experience as a former chair of the Regulatory Decisions Committee, he observed that regulated firms occasionally appeared before the RDC, but that he had not seen a case before the Upper Tribunal. He queried whether the enforcement process was really about seeking the truth, considering that most cases settled. He also asked to what extent settlements actually got to the bottom of the issues which had triggered the investigation.

Richard Hitchcock QC echoed Judge Herrington’s sentiment. He said one had to recognise (without this being a criticism of the regulatory process) that settlements were not the product of a truth-finding process. They were a bargain between the regulator and a firm, each of which had particular strategic objectives. He thought a regulator that set out to be a truth-finder set itself an unnecessarily high hurdle.

Mark Steward responded that regulators had to be interested in finding out the truth, because that was one of the purposes for which they were created. He noted that the FCA could not itself bring cases before the courts (unlike regulators in some other jurisdictions). He thought this was one of the reasons why so many cases resulted in settlement.

The position of third parties

Judge Herrington commented on the Upper Tribunal’s experience with cases brought by individuals seeking to exercise third party rights under s393 of FSMA.

Judge Herrington said it was difficult to interpret what identification meant in the context of s393. In the first case of this kind, Macris, the Upper Tribunal formulated a two-stage test of identification. On appeal, the Court of Appeal held that the two-stage approach was correct, but adopted a narrower second stage. Recently, the Supreme Court gave permission for a further appeal in Macris, so the principle might be re-formulated once more. Judge Herrington noted that he applied the Court of Appeal’s guidance in Bittar, a subsequent case.

Judge Herrington highlighted that, so far, identification had been argued only as a preliminary issue. A substantive hearing of a third-party reference was yet to take place, so it remained to be decided exactly what the remedies should be if it were found that a third party had not been given his rights.

A member of the audience observed that if the FCA was seeking the truth then the rights of third parties could be seen as an opportunity to shine a judicial spotlight on what might otherwise be viewed as a cosy stitch-up.

Mark Steward replied that, in his view, it was doubtful whether third party cases could carry the burden of shining a spotlight for finding the truth, as he did not think that third party rights would necessarily subject the entirety of an FCA final notice to scrutiny.

Follow-on commercial litigation

Dorian Drew said firms subject to regulatory investigations had a natural concern about follow-on litigation. He observed that firms understood this exposure and wanted to minimise it by not providing written reports and written notes of interviews to regulators during the course of an investigation. Now that group actions were becoming more common in the UK, the FCA should be ready to accommodate oral reporting by firms. He thought it was legitimate for firms to have one eye on potential follow-on claims and therefore to try to find ways of giving information to regulators in a form that did not cause privilege over that material to be lost.

Richard Hitchcock QC noted that a number of follow-on commercial claims had already been brought in the UK which would never have come into being but for regulatory investigations and published decision notices. He observed that, in jurisdictions such as the UK and the US where the settlement of regulatory investigations took the form of a plea bargain, that was an opportunity for firms to manage the information which would reach the public domain. The firms had a calculation to make as to how much they were willing to pay in order to retain the information as private. But was this a safe strategy?

He said one potential leakage was due to third-party claims of the type mentioned by Judge Herrington. There was a risk that such claims could have the effect of tearing up a settlement by releasing into the public domain information which had been intended to be kept private. The second type of risk was illustrated by the Property Alliance Group litigation, where the court ordered disclosure of the bank’s correspondence with the FCA leading up to a settlement because the bank had pleaded to the FCA’s final notice in its defence.

Richard Hitchcock QC also considered the interaction between the disclosure exercise firms would have gone through in response to a regulatory investigation and the disclosure requirements of the CPR. He posed the question of whether the civil courts would order a new disclosure process to be undertaken at great expense or instead order the disclosure in the regulatory process to be relied on even if, in some respects, that went beyond what the CPR would require. A judicial decision on this question was pending and would be significant for follow-on claims.

Collaboration between regulators and with regulated firms

Stephanie Pagni first highlighted the importance of collaboration amongst regulators. She acknowledged that there was already extensive information-sharing between regulators, but said more was needed to collaborate on enforcement outcomes. This would benefit regulators by enabling them to pool resources rather than duplicate efforts. It could also ensure that outcomes against regulated firms which operate globally do not exceed what is proportionate. She suggested building on IOSCO’s earlier work and envisaged, in particular, that in a multi-jurisdictional multi-agency enforcement, a lead regulator should be designated in order to agree a common scope for the investigation, to identify the legal issues and to ensure a targeted approach, while protecting the interests of all of the regulators concerned. Otherwise, there was a growing risk that the aggregate impact of individual enforcement decisions would be disproportionate, and that jurisdictional conflicts and multiple jeopardy would undermine rather than support credible and effective deterrence.

Stephanie Pagni also thought that regulators should more often use non-enforcement tools, such as market surveillance and early-stage issue detection. For example, she favoured measures to encourage information sharing by regulated firms, particularly regarding violations which were not deliberate or dishonest, but which indicated wider systemic problems. She drew a comparison with the airline industry, where the regulator incentivises regulated entities to notify it of issues by not automatically referring technical breaches to enforcement. Reported problems are widely disseminated amongst other industry participants to allow preventive or remedial steps to be taken at an early stage.

Dorian Drew said that, in his experience of multi-jurisdictional investigations, regulators did talk to each other, but not enough. Regulators were interested in what other regulators were doing, but relied heavily on firms and their advisors to provide updates. At the same time, regulators did not necessarily want other regulators to know what they were doing. He said this resulted in a difficult process whereby the firm under investigation had to ask one regulator to permit the disclosure of information to another regulator.

Conclusion

Since the OTC/FSLA seminar, the debate about collaboration has continued to run with Mark Steward’s discussion of the risk of double jeopardy for individuals and firms on 22 January 2016 at another event. He said “some kind of [international] treaty needs to be explored so we don’t have the phenomenon of piling on”, referring to the aggregate impact of multiple enforcement agencies seeking substantial fines in cross-border investigations, a concern already voiced at the OTC/FLSA seminar by Stephanie Pagni.

Also in January, Judge Herrington delivered judgment in Ashton, the latest third-party case under s393 of FSMA. The full text of that decision is available here.