Shail Patel of 4 New Square considers the decision of the Upper Tribunal in UK Innovative TI Limited v Financial Conduct Authority [2018] UT 0136 (TCC), confirming that third parties have no statutory rights in relation to supervisory notices issued by the FCA. However, with evident dissatisfaction at the potential prejudice this could cause, Judge Herrington suggested the answer might not always be as clear cut.

The Issue

When the FCA publishes a notice setting out its case against a regulated firm, it is often necessary for it to refer to the deeds and intentions (and indeed misdeeds and bad intentions) of third parties; be they other firms, directors, managers, employees, or contractors.

The position in relation to warning and decision notices is relatively well known; see my previous article on the statutory position under s.393 of FSMA, and the two leading cases of Macris and Grout here.

In UK Innovative TI Limited v FCA the question of third party rights arose where the FCA had issued a supervisory notice. As will be seen, the statutory position is different, but the Tribunal suggested that the common law might come to a third party's rescue.

The Facts

On 07.07.17 the FCA published the first supervisory notice ('FSN') under s.55L of FSMA varying the permissions of a regulated firm ('Stargate') in relation to certain investment management activities. The FSN named an unregulated company ('UKITI') and its director ('Mr S'), and expressed concerns that they might be carrying out regulated activities relating to Stargate's business, in breach of the general prohibition.

The FSN was picked up and publicised on an industry news website on 13.07.17, and the FCA's stance on the potential breach of the general prohibition became well known.

While the precise reason is not clear, the FCA had in fact re-published the FSN with references to UKITI and Mr S redacted, on 10.07.17. However, by then it was too late and the damage was done.

Stargate referred the FSN to the Tribunal and made representations to the FCA.

UKITI and Mr S also purported to refer the FSN to the Tribunal. The Tribunal permitted them to file representations. Ultimately, however Stargate settled, and the FCA applied to strike out the UKITI/Mr S reference. Those third parties maintained their case that their business had been "defamed and destroyed" by the FCA's decision to identify them in the original FSN.

The Decision

The FCA's case was simple; s.393 of FSMA confers an express right to be heard on a third party where the FCA publishes a warning or decision notice which is prejudicial to that third party. There is no such statutory right in relation to supervisory notices. To the contrary, s.55Y only requires a supervisory notice to be notified to the subject of the variation of permissions.

The Judge agreed and struck out the references.

He concluded that the absence of third party rights for supervisory notices was a deliberate decision by parliament. A supervisory notice is issued where the FCA is concerned about the manner in which a firm's business is being conducted; it is a supervisory tool, not a disciplinary one, with the paramount purpose of protecting consumers. Importantly, notices can be issued with immediate effect, and without prior notice to the firm itself, let alone third parties. Even the subject of the notice must in that situation wait until after it is issued, to make representations or refer it to the Tribunal.

The Judge made reference to the common law right to "Maxwellisation" established in Re Pergamon Press Ltd [1971] Ch 388, observing that the FCA would in practice seek representations from third parties before (e.g.) producing a report on a bank failure. Here however the statutory context in which the FSN was issued evidently ousted those rights.

Thoughts and Observations

The decision confirms that the balance between regulatory objectives and the rights of individuals is struck differently where the role of the regulator is supervisory as opposed to disciplinary. This is not particularly surprising, and as the Judge found, it is enshrined in FSMA itself.

Nevertheless the following points are of interest:

  1. It is a mystery why the FCA published the FSN in an un-redacted form before it was reissued. The change of stance however does suggest a sensitivity on the part of the regulator to the possible adverse effects of a first supervisory notice on a third party who has had no opportunity to respond and is not the subject of the regulatory action. The initial publication of the un-redacted version may be a decision we will not see repeated.
  2. Ironically, the second supervisory notice ("SSN") did take account of representations made by UKITI and Mr S, because he had referred the FSN to the Tribunal. The Tribunal was willing to hear representations from the third parties, and so the FCA followed suit to avoid a disparity between the parallel processes. The SSN did not mention UKITI or Mr S, and the suggestion of a breach of the general prohibition was much watered down.
  3. The Judge observed that the position on third party rights "may be different in relation to...the issue of a second supervisory notice, bearing in mind the possible application of the common law rights not to be criticised without being given the chance to make representations [i.e. Maxwellisation]". That is, perhaps, the most interesting facet of the case. The suggestion is that common law third party rights might arise in the second supervisory notice stage, notwithstanding a statutory context (s.55Y) which appears to oust such a right. The rationale is presumably that the subject of the notice will have the opportunity to make such representations, and the requirements of urgency and secrecy will have disappeared; so why not? As noted in point 2; the third parties obtained such rights de facto in this case. The principle identified by the Tribunal here will create unwelcome uncertainty for the FCA, and potential opportunities for third parties, in this context and elsewhere in the financial regulatory sphere.
  4. Consistently with that principle the Judge remarked that the Tribunal would in an appropriate case permit third parties to make representations where there is a reference from the notice subject. In such a case the FCA may well grant the third party a right to make representations as a consequence. However, the absence of a reference to the Tribunal, and presumably any representations by the subject to the Authority, would appear to be fatal to the third party's right to be heard. Those rights, insofar as they exist, are parasitic, and not free standing.

The issue of third party rights has arisen frequently of late as a consequence of increased regulatory activity in the financial and professional spheres. Clearly this is an area where the law will remain in flux.