1. FCA proposals for protection of whistleblowers
The FCA, following a recent joint consultation with the PRA, has issued proposals confirming that UK banks, insurers, building societies, large credit unions and PRA-designated investment firms must offer protection to all whistleblowers from unfair treatment. This consultation comes in response to the Parliamentary Commission on Banking Standards' 2013 recommendation that banks and other financial institutions put in place mechanisms to allow their employees to raise concerns internally. The FCA and the PRA are responsible for ensuring the effectiveness of these mechanisms.
The proposals require firms to appoint a "whistleblowers' champion", who must be a non-executive director and a Senior Manager (see update 2 below) and will take responsibility for "ensuring and overseeing the integrity, independence and effectiveness of the firm's policies and procedures on whistleblowing". This individual will be required to prepare an annual report to the board, which could then be requested by the FCA or the PRA. Firms must specifically inform staff that they may raise concerns internally and offer the same protections to all whistleblowers. Additional proposals cover the inclusion of a statement in new employment contracts and settlement agreements clarifying the employee's ability to make a protected disclosure.
The FCA has requested comments on its consultation paper by Friday 22 May 2015. If implemented, the package of measures intends to formalise firms' existing whistleblowing procedures and produce a more consistent approach.
2. FCA update on who are Senior Managers
The FCA has confirmed its decision to limit the number of non-executive directors included in its Senior Managers Regime, in order to preserve the role non-executives play in providing independent criticism. In an update to its original consultation paper, published in July 2014, the FCA stated in February that only the chairman, the senior independent director and those chairing risk, audit, nominations and remuneration committees will be subject to the new regime.
This limited group of non-executives will be directly accountable and will have potential criminal liability under a newly introduced offence. In a public statement, Martin Wheatley, chief executive of the FCA, acknowledged the "vital role" of non-executive directors in challenging and overseeing the decisions of executives. The decision to focus the Senior Managers Regime on those non-executives with responsibility for a financial institution's security and safety aims to avoid the potential "unintended consequences" of which the FCA was warned by industry, namely the risk of discouraging individuals from assuming such board positions.
The FCA's latest consultation paper, published on 16 March 2015, summarises the responses received in relation to the Senior Managers Regime proposed in the FCA/PRA consultation paper issued in July 2014, setting out the FCA's policy intentions as a result. In the paper, the FCA confirmed that the majority of respondents were supportive of the aims of the regime but felt financial institutions would require a considerable amount of preparation time. With this in mind, a set of near-final rules, covering the certification regime and its application, is appended to the consultation paper, to be confirmed within the next few months.
3. Extent of jurisdiction of the Financial Ombudsman Service
In the recent case of R (Chancery (UK) LLP) v The Financial Ombudsman Service Ltd and another (2015), the Administrative Court rejected a judicial review relating to the jurisdiction of the Financial Ombudsman Service ("FOS") to consider a complaint.
Chancery (UK) LLP ("Chancery"), a firm of chartered accountants, gave advice to an individual (the "Complainant") in relation to the Complainant's entry into a film scheme (the "Scheme") and related tax advantages. When, in 2011, HMRC determined that the Complainant was unable to benefit from some of these tax advantages in respect of the money invested in the Scheme, the Complainant complained to Chancery. The Complainant's argument was that the Scheme was an unregulated Collective Investment Scheme ("CIS") under section 235 of the Financial Services and Markets Act 2000 ("FSMA") and that Chancery had not properly investigated the regulatory issues surrounding the Complainant's entrance into the Scheme.
Chancery rejected the Complainant's complaint, which the Complainant then referred to the FOS. Chancery alleged that the compulsory jurisdiction of the FOS did not apply to the complaint because the Scheme was not a CIS and the provision of tax advice (as opposed to investment advice) was not a regulated activity under FSMA. Chancery put forward a second argument that the nature of the dispute meant it was more suited to consideration in court and should therefore be dismissed by the FOS. This was on the basis that the compensation sought was greater than the statutory maximum the FOS can award (£150,000), there was a possibility that cross-examination or expert evidence would be required and the Complainant had the financial capability to take the matter to court. The FOS refused to exercise its discretion not to determine the complaint and consequently Chancery sought a judicial review to challenge the jurisdiction of the FOS.
Ouseley J dismissed Chancery's application for judicial review, finding in favour of the FOS for the following reasons:
(i) The Scheme was found to be a CIS for the purposes of section 235 FSMA. Where the participants have "day-to-day control over the management of the property" the scheme or arrangement will not constitute a CIS. Ouseley J found that this was not the case for the Scheme, and agreed with the FOS that day-to-day control rested with the film industry experts who were also partners.
(ii) Tax advice can also include investment advice and there is not necessarily a "sharp distinction" between the two. Even though the "dominant purpose" of the advice given by Chancery to the Complainant was tax avoidance, the advice still constituted investment advice.
(iii) The FOS had behaved reasonably in its decision to determine the complaint and the nature of the issues were not necessarily “pre-eminently more suitable” for a court.
The decision sheds light on how a CIS is defined for the purposes of section 235 FSMA. Ouseley J's comments confirm that the meaning of day-to-day control will differ depending on the documents involved and "the way things work[ed] in practice". They also suggest that the level for day-to-day control is to be set high and is not that of "supervisory oversight". The fact that an investor may have "a right to be consulted or give directions" will not be sufficient to establish day-to-day control over a scheme.
Alongside the reasons for his decision, Ouseley J considered Chancery's argument that it was not open to the FOS to determine the limits of its jurisdiction and that the factual and legal issues involved were more appropriate for a court to decide. Ouseley J concluded that the FOS should decide on jurisdiction at the outset, but where its decision is contested, the FOS should keep the question of jurisdiction open and if necessary the dispute may need to be determined in the courts.
Ouseley J also rejected Chancery's argument that the complaint should have been pursued in court instead of determined by the FOS. Ouseley J's decision suggests that such arguments (amount of compensation, type of evidence and financial capability), relating to whether the FOS or the courts are better able to deal with certain concerns, will not be enough to conclude that it was irrational for the FOS to believe that it could "resolve them justly, fairly and reasonably" within its jurisdiction.