The Upper Tribunal dismissed an application for disclosure of materials relating to the FCA's internal decision-making processes around initiating and pursuing action against approved individuals.

Mr and Mrs Chiesa were founding partners of FCA-authorised Westwood Independent Financial Planners (Westwood). In May 2011 the FCA took enforcement action against Westwood for mis-selling geared traded endowment policies and fined it£100,000. As a result of numerous customer complaints liabilities Westwood became insolvent and entered sequestration. The Chiesas were partners of Westwood with unlimited liability and a trustee was appointed to establish the value of their assets and liabilities so that an assessment could be made that would allow payments to creditors (one of whom was the FCA). The assessment process required the Chiesas to make full disclosure. During this process they remained approved persons. The FCA instigated an investigation and in October 2016 issued Decision Notices banning them and finding that they made inadequate, incomplete and misleading disclosures to the trustee about their financial situation to avoid the trustee inquiring into, and potentially recovering, assets for the benefit of their creditors. In addition, a £50,000 penalty was imposed on Mrs Chiesa for making misleading statements during a compelled interview.

In November 2016 the Chiesas referred the FCA's decision to the Upper Tribunal. In March 2017 they applied for disclosure of FCA internal decision-making materials under rule 5(3)(d) of the Tribunal Procedure (Upper Tribunal) Rules 2008. The Chiesas' argument was essentially that the FCA proceedings against them were instituted and pursued in bad faith; they were a means to enable the FCA to impose a financial penalty as a way of recovering the fine they imposed on Westwood and disclosure was necessary for the Tribunal to deal fairly and justly with the case.

In his 13 July 2017 judgment Judge Sinfield refused the application on the following grounds:

(1) Relevance: the disclosure sought was not relevant to the issues before the Upper Tribunal. The Tribunal's remit was the Chiesas' fitness and propriety and the appropriate action to be taken. Adopting the approach of Judge Berner in Ford & Ors v FCA [2016] UKUT 41 (TCC), it was held that the Tribunal does not have jurisdiction to deal with complaints about the FCA's conduct of investigations which should be dealt with through the FCA complaints processes. The cases the Chiesas relied upon in arguing that there were real concerns of an abuse of power by the FCA that led to unfairness, or brought the Tribunal proceedings into disrepute, were very different in that in those cases the alleged abuse affected the facts forming the basis of the claim or was such that no proceedings could have taken place without it.

(2) Lack of evidence of bad faith/improper motive: even if he had been persuaded that the FCA's conduct was relevant, in any event the Judge was not satisfied there was evidence of bad faith or improper motive on the part of the FCA (on the balance of probabilities). Absent such evidence, there could be no duty on the Tribunal to order disclosure wherever bad faith or improper motive was alleged. Judge Sinfield considered some of the Chiesas' supporting evidence as "based on suspicion and supposition". In particular, he disagreed that the FCA approach to Mrs Chiesa's interview was designed to trick her into giving misleading answers and commented that it seemed "perfectly fair and proper".

Following this decision, the Chiesas agreed to settle the case in September 2017 with final notices published on 12 October 2017 (as to which see above).

Over recent years it has become more common for subjects of FCA enforcement action to contend bad faith/impropriety by the regulator and to seek disclosure of internal documents. This decision follows that of Judge Berner in the Ford case and Judge Herrington in Hussein v FCA [2016] UKUT 0549 (TCC) in refusing to order such disclosure. Essentially, since the Tribunal is a de novo hearing concerned with the subject's behaviour it is clear that it will be extremely difficult to show that the regulator's conduct is of sufficient relevance to justify ordering disclosure. Whilst this judgment does not completely rule out the possibility, it is very clear that the situations where the regulator's conduct may be relevant are very limited and likely to be extremely rare (e.g. where it affects the facts forming the basis of the FCA's case). Although similar applications may continue to be made for tactical reasons, we would generally expect to see fewer of them in future.

Upper Tribunal upholds FCA fine and ban

Charles Anthony Llewellen Palmer v. Financial Conduct Authority [2016] FS/2015/017

In September 2015, the FCA issued a decision notice to Mr Palmer imposing a fine of £86,691 and a full prohibition order against him. The prohibition order prevented him from holding a position in an authorised firm where he could exert significant influence on the carrying out of a regulated activity. Mr Palmer referred this to the Upper Tribunal. On 8 August 2017, the Upper Tribunal upheld the FCA's decision.

Mr Palmer was the majority shareholder and CEO of Standard Financial Group Limited. He was also a director and de facto CEO of Financial Limited and Investments Limited (the Firms). The Firms' business was the operation of a network of adviser firms. This network comprised 397 appointed representatives (ARs). Each of the ARs had its own customer base and the ARs acted as financial advisers. Under an agreement between each of the ARs and the Firms, the Firms accepted responsibility for the conduct of the ARs.

The FCA found that Mr Palmer failed to exercise due care, skill and diligence in his controlled function in managing the business of the adviser firms that he was responsible for. It considered that there was a critical lack of systems and controls in place for the activities of the approved individuals within the Firms, such that the Firms could not effectively monitor (and therefore control and mitigate) the risk of unsuitable advice to underlying customers.

Mr Palmer referred the FCA's decision to the Upper Tribunal based on three main grounds:

  • the adviser firms having been disciplined by the FCA in relation to the failings, he was not personally culpable for them;
  • in any case, these failings were the responsibility of the compliance systems and controls manager; and
  • the FCA had "cherry-picked" examples of incidents so as to seek to paint a picture of an inappropriate culture.

The Upper Tribunal paid particular attention to Mr Palmer's role within and across the Firms and observed that his role, in reality, was quite different from that which he had described in his evidence. He denied have a controlling function and suggested that the Firms' board collectively controlled the group. In fact, Mr Palmer founded the group and devised and took ownership of the very business model on which the Firms operated. Mr Palmer had also accepted that he was aware of the enhanced risks of the model, associated in particular with the flexibility and the freedom afforded to each AR.

The Upper Tribunal held that, while the Board had overall responsibility for the Firms' systems and controls, it agreed with the FCA that Mr Palmer was responsible for ensuring that such systems and controls were effective and as robust as the business model required. As a result, the FCA's penalty and its severity were justified. In its conclusions, the Upper Tribunal noted that it did not find Mr Palmer to have the necessary competence to carry out the regulatory role and, perhaps more damagingly, that he did not see the value in the controls and compliance required by the regulations.

This is not the first time that Mr Palmer has been the subject of regulatory enforcement. He was issued with a final notice by the FSA in 2010 as an alternative to the FCA imposing a penalty on Financial Limited. The FCA did not consider that Mr Palmer responded adequately to the 2010 decision notice. His general history of compliance and the fact that the FCA had previously taken action were aggravating circumstances that weighed against him in the FCA's calculation of his penalty.

It is open to Mr Palmer to take his case to the Court of Appeal.

Findings of Complaints Commissioner – Failure by FCA to disclose documents during an investigation

Complaints Commissioner Response, 15 September 2017

The Complaints Commissioner has published his findings in relation to a complaint brought against the FCA with respect to shortcomings in the way it handled an investigation and the subsequent complaints process. The (then) FSA's Enforcement and Financial Crime Division (the Enforcement Team) started an investigation into the complainant on 29 November 2012. This investigation ultimately led to the Regulatory Decisions Committee (RDC) issuing a Warning Notice in 2014. This was done in reliance upon documents which had been requested by the US Commodity Futures Trading Commission (CFTC) and which had been provided by a bank to the FSA over several months starting from 2 November 2010.

Prior to the issue of the Warning Notice, the Enforcement Team had not raised with the RDC that the receipt of those documents potentially undermined the case against the complainant due to limitation. The limitation issue came to light later, resulting in the FCA dropping its case. This was notified to the complainant on 25 July 2014, with an explanation and apology following on 3 October 2014.

The Complaints Commissioner looked into: (i) the limitation matter, given the complainant's allegations that the Enforcement team had deliberately withheld/failed to disclose relevant material; and (ii) the FCA's subsequent delays in dealing with the complaint. The complainant requested a full independent and detailed explanation of what went wrong, an apology, and damages for distress/inconvenience.

In relation to the limitation issue, the Complaints Commissioner:

  • found that there was evidence that the FSA had been aware of the potential significance of the limitation issue as early as the first half of 2011;
  • concluded that the problem had not been a lack of awareness, but that a decision had been made early on to treat some of the documentation as having no impact on the limitation period, despite others in the Enforcement Team holding a different view;
  • found no evidence that the FCA had deliberately withheld information from the RDC, but was critical of the fact that no one had alerted the RDC to the differing arguments on the limitation issue;
  • agreed with the final decision of the FCA that the failure to alert the RDC to the limitation issue had been a serious mistake, rather than evidence of bad faith; and
  • was critical of what he perceived to be the FCA's "closed minded attitude" and a "lack of rigour in important proceedings".

The Complaints Commissioner then considered the FCA's delay in handling the complaint. He considered that the delay between the initial FCA letter on 25 July 2014 and the explanation and apology on 3 October 2014 was unsatisfactory, and that the apology did not go far enough. His letter also notes that he had to intervene on several occasions when the FCA postponed its investigation, stating that in his view the FCA's view on investigating the complaint while related proceedings were ongoing had been unnecessarily cautious.

In light of his findings, the Complaints Commissioner stated that the FCA's failings in the case had been considerable. However, he did not believe the complainant's request for damages was justified.