In R(C) v FSA, a banker who was investigated by the FSA for regulatory breaches has successfully sought judicial review of the decision by the FSA's Regulatory Decisions Committee to issue a decision notice against him. The FSA failed to explain why it had rejected his representations, and so left him with no basis on which to decide whether to ask for his case to be referred to the Upper Tribunal for a re-hearing. Judicial review is unlikely to be a common recourse for those under FSA investigation, but this case sends a signal to the FSA and the incoming FCA that they need to explain the reasoning behind enforcement decisions.
The Financial Services and Markets Act 2000 ("FSMA") gives the Financial Services Authority ("FSA") statutory powers to investigate and take enforcement action in respect of breaches of its Statements of Principle, which describe the duties and obligations of approved persons who perform controlled functions in the financial services industry. The decision whether to impose a sanction and as to the wording of any warning notice or final notice is taken by an independent committee of the Board of the FSA known as the Regulatory Decisions Committee ("RDC"). The RDC considers material prepared by the FSA's Enforcement Division and hears representations from the firm or person who is the subject of the investigation. Under FSMA, the RDC must, among other things, give written reasons for the action it proposes to take. Where the FSA (through the RDC) decides to issue a decision notice, the person or firm against whom the action is taken has a right to refer the matter to the Upper Tribunal, which re-hears the whole case and has discretion to lay new charges or increase any penalty imposed by the FSA.
The FSA Investigation
The Claimant in this case ("C") is an individual who performed a management function at a bank, whose conduct during 2008 became the subject of an investigation and enforcement action by the FSA. In order to preserve C's anonymity pending the resolution of the action against him, the Court's judgment has been redacted, and only limited details of C's role have been made public. It is apparent that C was authorised by the FSA to perform a significant influence function at the bank where he worked, and as such had a duty to comply with the FSA's Statement of Principle 6 to "…exercise due skill, care and diligence in managing the business of the firm for which he is responsible…". The FSA's Enforcement Division formed the view that C had breached this duty in respect of information he knew or should have known, and on which he failed to act, during a two-week period in 2008. It recommended a fine of £150,000. The RDC issued a warning notice to C in May 2010. C submitted over 100 pages in written response, and he and his solicitors made further oral representations to the RDC in a hearing in September 2010. The RDC issued a decision notice (the "Decision Notice") in October 2010 which was in substantially the same terms as the warning notice, save that the fine was reduced to £100,000 and a summary of C's representations was included. Importantly, the RDC did not state its reasons for rejecting C's representations.
C brought a claim in the High Court for a judicial review of the RDC's decision to issue the Decision Notice on the grounds that the RDC had failed to give proper or adequate reasons for its decision in breach of its statutory duty to do so, and the Decision Notice was therefore flawed and should be quashed. The FSA contended that judicial review of the RDC's decision was inappropriate, because an alternative remedy was available, in that C had a statutory right to refer the matter to the Upper Tribunal for a re-hearing. It also argued that adequate reasons had in any case been given.
The Court's Decision
The Court quashed the Decision Notice and referred the matter back to the RDC to be re-considered. The Court rejected the FSA's argument that the possibility of referral to the Upper Tribunal barred access to judicial review of the RDC's decisions. The Upper Tribunal did not offer an alternative remedy to a failure by the RDC to give reasons for its decision, since there was no mechanism by which the Upper Tribunal could compel the RDC to state its reasons. The Court found that no adequate reasons had been given in the Decision Notice since there had been no attempt to explain why C's representations had been rejected. The Decision Notice did not tell C why he had lost, or why the substantial points which he had raised had been rejected. Accordingly, C was left with no way to decide whether or not to refer his case to the Upper Tribunal. If C did refer his case to the Upper Tribunal, there was a risk that further charges might be introduced or a higher penalty imposed. It was therefore prejudicial to C to have to make that choice without knowing the RDC's reasoning.
This case has not opened a wide new avenue of appeal to the RDC's decisions by judicial review. Mr Justice Silber expressly made the point that referral to the Upper Tribunal is the proper course where the correctness or rationality of the actual decision is challenged. This case illustrates that it is possible to bring a judicial review of the decisions of the RDC in relatively narrow circumstances where the recipient of a decision notice (i) does not know "why the matter was decided as it was and what conclusions were reached on the principal important controversial issues”; and (ii) has been "substantially prejudiced" by the failure to provide reasons.
In his judgment, Mr Justice Silber held that "the FSA can without difficulty avoid cases like the present one in the future simply by giving full and proper reasons". The wider implications of this case are likely to be for the RDC itself, which will no doubt be careful to ensure that it gives full reasons for its decisions going forward. Although it was indicated at the FSA Enforcement Conference in July 2012 that the FSA intends to appeal this decision, the role of the RDC following the forthcoming restructuring of the financial services regulatory regime is far from clear. Under the Financial Services Bill, the new Financial Conduct Authority and the Prudential Regulation Authority will be required to operate a decision-making procedure similar to that carried out by the RDC. However, the Financial Services Bill provides that the decision could be made by two or more persons who include a person not directly involved in the enforcement investigation. It will be interesting to see how this proposed change will affect the composition of the RDC (or any successor body) under the new regulatory regime.