Parties' position on identification in notices
Upper Tribunal and Court of Appeal
Supreme Court decision
The Supreme Court has overturned(1) the decisions of the Upper Tribunal and the Court of Appeal in respect of what it means to be 'identified' in a Financial Conduct Authority (FCA) enforcement notice. It held by a four-to-one majority that a person is 'identified' if he or she is referred to in such a notice by name or by a synonym. This confirms a narrower interpretation as to whether a person is identified for the purposes of Section 393(1) of the Financial Services and Markets Act 2000, which determines when the FCA must provide a copy of enforcement notices to third parties and when such third parties are entitled to make representations to the FCA.
Under Section 393(1) of the Financial Services and Markets Act, when the FCA issues a warning notice which identifies a person other than the person to whom the notice is addressed (ie, a third party) and the FCA considers that such notice is prejudicial to that third party, the FCA must provide a copy of the notice to that individual. The third party can then make representations to the FCA on the content, including the reasons, set out in the enforcement notice. Section 393(4) provides equivalent provisions in relation to decision notices.
In 2012 Achilles Macris (the respondent) was the chief investment officer based in London for JP Morgan Chase Bank NA. In his role as chief investment officer, the respondent headed a unit within the bank called the Chief Investment Office (CIO) International. CIO International's role was to manage the bank's excess deposits, including a portfolio of traded credit instruments called the 'synthetic credit portfolio'. The respondent's own functions in this capacity were 'controlled functions' within the meaning of Section 59 of the Financial Services and Markets Act, which meant that he had to be approved by the FCA as a suitable person to carry on those functions.
In July 2012 the bank announced that the synthetic credit portfolio had lost $5.8 billion in the first half of the year. The loss rose to $6.2 billion by the end of the year. The FCA conducted an investigation into the loss and concluded that:
- the loss had been caused by a high-risk trading strategy and weak management of that trading;
- there had been inadequate responses to important information which should have alerted the bank to the problems;
- the bank had withheld significant information from the FCA while the losses were being incurred; and
- together these failings were found to have undermined trust and confidence in the UK financial markets.
A regulatory settlement was agreed, whereby the bank paid a penalty of £137.6 million. The FCA served the warning notice, decision notice and final notice in relation to this investigation on the bank on September 18 2013. The decision notice and final notice were duly published the next day.
The respondent was not provided a copy of the notices served on the bank or given an opportunity to make representations. As an 'approved person', he was subject to a personal investigation by the FCA. In February 2016 he reached his own regulatory settlement, whereby he paid a penalty of £762,900. A final notice in relation to him was published on February 9 2016, in which he was found to have been a party to the withholding of information from the FCA and on one occasion to have misled it.
Parties' position on identification in notices
The FCA accepted that if the respondent had been identified in the warning and decision notices that were served on the bank, there were statements in those notices which would have been prejudicial to him. However, the FCA's case was that he was not identified in those notices.
The parties agreed that the respondent was not identified by name or job title. However, there were references in the notices to conduct by 'CIO London International' and similar expressions. Although the respondent was not the only manager within the CIO International unit, his case was that those who were active in the relevant markets would have known that such descriptions referred to him. In support of this position, the respondent relied on the following:
- A witness statement from an ex-manager in CIO International in London – he explained that it was clear to him that 'CIO London International' referred to the respondent. This was because of knowledge which he had acquired while he worked in that unit; in particular, he knew that the respondent was the head of that unit and was not in the habit of delegating his responsibilities to others.
- A witness statement from a senior sales representative dealing in credit instruments for another bank in London – he also concluded that the references related to the respondent, because he knew about his position and working methods from his dealings with the CIO International unit.
- The fact that approximately five months before service of the notices on the bank, a US Senate committee had published a report on the losses in the bank's synthetic credit portfolio and that that report identified the respondent by name – the report was publicly available online and the respondent claimed that when that report was read alongside the FCA notices, it was possible to deduce who was being referred to by 'CIO London management'.
Upper Tribunal and Court of Appeal
The Upper Tribunal dealt with the question of whether the respondent was entitled to be treated as a third party for the purposes of Section 393 of the Financial Services and Markets Act as a preliminary issue. It held that he was identified and therefore entitled to be treated as a third party.
The Court of Appeal upheld the Upper Tribunal's decision. It agreed that the test involved two stages. In relation to the first stage, the Court of Appeal was satisfied that the language in the notice operated to single out a particular person, rather than referring to a collective body. In particular, it pointed to the description of the hierarchy and roles of the areas of the bank which were involved – it described clear reporting lines and identified CIO London as managing certain areas, which indicated that such references related to particular persons rather than collective bodies who would be described instead as being responsible for the management, rather than actually performing acts of management. It also pointed to particular language in the notices which described certain acts as being performed by CIO London (eg, "CIO London management sent an e-mail").
The Court of Appeal held that the second stage of the test was to determine whether those references could be regarded as referring to a particular person (ie, to the respondent). It held that a key question in determining this question was the extent to which external material or background facts were relevant for the purpose of determining whether an individual was identified.
In relation to the second limb, the Court of Appeal held that the evidence adduced by the respondent and publicly available material such as the US Senate committee report had meant that it was possible to conclude:
"on an objective basis, that persons acquainted with [the respondent], or who operated in his area of the financial services industry, would reasonably have been able to identify [the respondent] from the statements made in the notice."
The FCA appealed to the Supreme Court, specifically regarding the issue of how to determine whether an enforcement notice identifies a third party and the extraneous material which should be taken into account in determining that question.
The Supreme Court allowed the FCA's appeal by a majority of four to one. In relation to the second limb of the test, it held that a person is identified in an enforcement notice only if he or she is identified by name or a synonym (eg, his or her office or job title). In the case of a synonym, it must be apparent from the notice itself that it could apply only to one person, and that the person must be identifiable from information which is either contained within the notice or publicly available elsewhere. However, recourse to extraneous information is permissible only where it enables one to interpret (as opposed to supplement) the language in the notice. The court included the example where a notice refers to the 'chief executive of X Company' and notes that such a reference could be elucidated by discovering that individual's identity on the company's website.
By comparison, it noted that it would not be permissible to resort to additional facts about the person so described so that if those facts were read alongside the notice, it would become apparent that they referred to the same person. While the meaning of 'identifies' is not elaborated in the Financial Services and Markets Act, Lord Sumption noted that such language makes clear that the individual must be identified within the reasons set out in the enforcement notice itself and not merely be identifiable by reference to extraneous sources.
The Supreme Court noted that knowledgeable outsiders may be able to identify an individual by reference to their knowledge of the organisation or discover the identity by reference to publicly available documents. Sumption noted that in such circumstances, the FCA must be able to ensure, by the way that it frames the enforcement notices, that a third party is not identified in the notice, even if he or she is identifiable from information elsewhere.
The decision will be a welcome relief for the FCA. Had the earlier decisions been upheld, there would have been potentially wide-reaching implications in terms of whether these and other enforcement notices had been properly produced to all identified third parties, and whether such individuals had been given the appropriate opportunities to make representations. It also would have caused the FCA to revisit the way in which it drafts enforcement notices and the descriptions which it can include of the individuals involved. In light of this decision, the FCA may feel galvanised to take a more robust approach in terms of describing individuals in a way which means that, while they cannot be identified by reference to the notice alone, they would in fact be identifiable by knowledgeable individuals or by reference to extraneous materials.
For further information on this topic please contact Charlotte Ducker or Andy McGregor at RPC by telephone (+44 20 3060 6000) or email ([email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk.