Court of Appeal Overturns Upper Tribunal on FCA Issuing Notice of Discontinuance

11 09 2013

th-52The Financial Conduct Authority v Hobbs [2013] EWCA Civ 918 (29 July 2013)

In this case, the Court of Appeal (Sir Stanley Burnton, Rimer and Ryder LJJ) overturned the Upper Tribunal’s (UT) decision and held that if the Financial Conduct Authority (FCA or the Authority) publishes a statement intimating discontinuance on its website and subsequently removes that statement, the Authority is not in fact bound by such a statement because the statement does not follow the procedural requirements set out in the Financial Services and Markets Act 2000 (the Act). The FCA could therefore pursue its appeal even after retracting the statement announcing discontinuance on its website.

Sounds rather extreme. Yet the Court of Appeal so held and of course from what one can make of it their lordships were dead right.

I. Background

The FCA appealed against the UT’s decision that the Authority had bungled in properly making its case that the respondent trader David John Hobbs (H) was not a fit and proper person to perform functions in relation to a regulated activity within the meaning of the Act. H, who conducted proprietary trading for Mizuho, traded in coffee futures and associated derivatives on the London International Financial Futures and Options Exchange. The FCA maintained that H had provided false and misleading information under caution while being interviewed by the Authority in its offices. The FCA decided that H was guilty of market abuse within the meaning of section 118 of the Act and therefore subjected him to a prohibition order within the meaning of section 56 (prohibition orders) and section 57 (prohibition orders: procedure and right to refer to Tribunal) of the Act because the Authority reckoned that he was not a “fit and proper person”.

H was approved by the Authority as an investment advisor under controlled function CF21. Following Policy Statement 07/04 Reforming the Approved Persons Regime  and the Approved Persons Regime (Merging the Customer Functions) Instrument 2007, customer functions CF21 to CF27 were merged into a generic CF30 (but nothing turned on this in the instant case). A controlled function can be performed by someone who has been approved by the FCA under section 59 (approval for particular arrangements) of FSMA. Only individuals who are “fit and proper” are permitted by the FCA to hold controlled functions. The high-level standards section of the FCA’s Handbook sets out the fit and proper test for the minimum standards for becoming and remaining an approved person. The person in question must exhibit (i) honesty, integrity and reputation; see here (ii) competence and capability; see here and (iii) financial soundness; see here.

II. The Upper Tribunal

Aggrieved, H referred the decision to the UT which accepted the reference. The UT decided that H’s trading was conducted for legitimate reasons and it complied with accepted market practices. Moreover, the UT found that whilst H’s claims in respect of his dealings with another broker were incorrect, he was not involved in market abuse. For the UT, the FCA failed to properly make its case that H was not a fit and proper person.

In the mistaken belief that the UT’s decision would not be appealed, the Authority published the decision on its website and announced that the action against H would be discontinued. However, once the FCA realised that an appeal might be pursued, steps were taken to retract the website statement.

When the FCA applied for permission to appeal, the UT refused leave to appeal because the press release (website statement) exhibited that the FCA had decided to discontinue its action against H notwithstanding the fact that the appropriate notice of discontinuance had not been issued to H under section 389 of the Act.

Subsequently, the Court of Appeal (Lewison LJ) granted the Authority permission to appeal.

III. Issues on Appeal

The FCA did not seek to challenge that H was not partaking in market abuse and, at para 8, Sir Stanley Burnton delineated the issues as (1) whether the FCA had discontinued its proceedings (2) in the event proceedings had not been discontinued, whether the UT had considered whether H had been shown not to be a fit and proper person (3) if the answer to the preceding issue was in the negative, whether the UT had erred in law and (4) if the UT erred in law, what order should be made by the instant court?

IV. Court of Appeal’s Decision

Allowing the Authority’s appeal, the court held as follows.

  • Para 15: The communication of a decision to take no further action, or to discontinue, is an intrinsic part of the process. Parliament has specified to whom and how notice is to be given, in section 389 of the Act and, by delegated legislation, in the Financial Services and Markets Act 2000 (Service of Notices) Regulations 2001. A statement on the Authority’s website, not addressed in any way to the person to whom the decision notice is addressed, is not a sufficient notice of a decision to take no further action for the purposes of the Act so as to render it irrevocable.
  • Para 16: Moreover, H was confronted with the difficulty that, on the evidence before the court, there was no decision to take no further action made by anyone on behalf of the FCA with the requisite authority to do so.
  • Para 25: The FCA could be criticised for its failure to document and to enforce its internal procedures for making discontinuance decisions with the appropriate authority, but those failures did not amount to a decision to discontinue which could be said to be binding upon it.
  • Para 28: The UT did err in finding that the Authority was bound by a decision to discontinue, and also that on the basis of the evidence now before the court there was no such decision binding the Authority.
  • Para 29: Lying (which was a live issue in the UT proceedings), by definition deliberate and if intended to mislead, may well of itself demonstrate that a person is not a fit and proper person to carry out a regulated activity, and whether or not it did so in this case was a matter for the UT to address. Yet the UT provided no reasons whatsoever in connection to whether H had been shown not to be a fit and proper person to carry out trading by reason of his false assertions.
  • th-53Paras 31 – 39: The fact that by virtue of his conduct H had tried to mislead the FCA and that he therefore lacked honesty and integrity lay at the heart of the FCA’s case against H as set out in the Authority’s decision notice and its statement of case before the UT. The statutory language in section 57 of the Act – “a person against whom a decision to make a prohibition order is made may refer the matter to the Tribunal” – is such that it is important for the UT to consider all the facts and evidence put before it on a reference. The UT’s consideration of a reference is not ordinary civil litigation because there is a public interest in ensuring that those who were not fit and proper persons to perform functions in relation to a regulated activity were precluded from doing so. Moreover, provided that the applicant was given a fair opportunity to address the FCA’s case, a narrowing of the inquiry by the UT that excluded relevant material from its assessment of an applicant is to be avoided. In the instant case, it was not suggested that H did not have a fair opportunity to address the allegations that he had been guilty of persistent and repeated lying. Equally, if the UT incorrectly restricted its determination, it might be difficult for the Authority to rely on the excluded facts in future in assessing, for example, whether the applicant was a fit and proper person, or should be granted the authorisation he sought to engage in a regulated activity. For the foregoing reasons, it was incumbent on the UT to address whether, even if H was not guilty of market abuse, his lying, which it determined as a fact, demonstrated that he was not a fit and proper person. By not doing so, the UT had erred in law. The matter was remitted to the UT to consider whether a prohibition order was appropriate in the circumstances.



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