Hunter into Prey: City Watchdog Exposes its Achilles’ Heel – Part 1

6 07 2015

Achilles “When the pendulum swung back it did so in dramatic fashion,” claims the iconic Howard Davies in his admirable sketch of the 2008 global meltdown entitled Can Financial Markets Be Controlled? “Bankers have vanished from the Honours lists in London. They are barely respectable in New York,” continues the first ever chairman of the abolished Financial Services Authority (FSA, 2001-2013). Yet in May 2015 the tide turned against the FSA’s successor. In The Financial Conduct Authority (FCA) v Achilles Macris [2015] EWCA Civ 490, the legal pendulum swung back in favour of the banks because an unhesitant Court of Appeal safeguarded the reputation of the global financial elite by unanimously dismissing the FCA’s appeal against the decision of the Upper Tribunal: reported as [2014] UKUT B7 (TCC). At first blush, the decision looks like a small step. But properly understood it significantly derails clichés about the bugbear of evil bankers. It equally exposes the FCA’s Achilles’ heel. The issue before Longmore, Patten and Gloster LJJ was whether the FCA’s notices identified Mr Achilles Macris for the purposes of section 393 of the Financial Services and Markets Act 2000 (FSMA) in which case the watchdog ought to have given him third party rights. The third party procedure secures the fair treatment of the reputation of third parties so that they are not presumed guilty in the enforcement process.

Oddly, despite the recent 800th anniversary of the fight for freedom incorporated in Magna Carta, present day executive procedures are not being properly followed. These two posts argue that the tough talking FCA’s Achilles’ heel is becoming increasingly exposed not only because of the important issues in the landmark case of Macris but also because of its unpardonable misconduct in relation to the Telegraph article headlined Savers locked into ‘rip-off’ pensions. Mishaps such as these seem to be turning the hunter into easy prey and questions loom large over its prowess to hold mischief to account. Similarly, these two posts also examine the new Senior Managers and Certification Regimes and question the conventional wisdom in relation to whether a heftier rulebook will bring us closer to a better formula for conduct. Light is also shed on the Supreme Court’s existing jurisprudence involving the FSA/FCA because Macris is in the process of being appealed to the Supreme Court – it is the first time the FCA or its predecessor the FSA have been an appellant in the apex court. These proceedings are keenly watched by traders who contend that they have not been given a right of reply despite being identified in FCA notices: the future trajectory of their cases is steered by Macris. Equally, the overall performance of the FCA – which must ensure that the markets function well – and its use of its media policy is an important public matter.

As regards identification, on 18 September 2013 the FCA gave a Warning Notice, a Decision Notice, and a Final Notice to JPMorgan Chase Bank, N.A. (the firm). All the notices were in identical terms and on 19 September 2013 the Final Notice (the notice) was published. It informed the firm about the imposition of a financial penalty, or conduct costs, of £137.61 million which was settled under the FCA’s executive settlement procedures.

The Court of Appeal held that Macris, a Greek citizen, was identified and should have been given the right to make representations on certain matters set out in the final notice. From that angle, the instant proceedings are of particular interest to traders who contend that they have not been given a right of reply despite being identified in FCA notices. Viewed in the larger context of recent regulatory reform, the curtailment of third party rights exposes much wider dilemmas. Deep-rooted distrust of the enforcement system connected to the efficacy and ethics of the enforcers leaves larger questions unanswered. Ethical regulation must be a two way street and like the miscreant bankers they seek to bring to justice, elite enforcers too must be held to account. Sensibly speaking, increasing the regulators’ powers is pointless if the enforcers themselves fail to accept responsibility for their actions.

The firm was penalised as a result of losses incurred in the synthetic credit portfolio (the portfolio) it managed for its owner JP Morgan Chase & Co (the group), a corporate entity branded – by Michael Lewis’ controversial bestseller Flashboys – as mostly “passive-aggressive” but occasionally “simply aggressive”. The portfolio’s trading related to credit instruments, especially credit default swap indices. The firm is a wholly owned subsidiary of the group. By the end of 2012 the notorious losses, dubbed the “London Whale” trades by the media, stood at $6.2 billion (whereas in 2009, at the height of its profitability, the portfolio generated more than $1 billion in revenue). However, Bruno Iksil, the notorious trader who caused the losses (translating to £51 billion in shareholder value), has been let of the hook by the FCA after a costly three year investigation which amounted to little more than a waste of public money. Apparently, the Regulatory Decisions Committee (RDC) – composed of practitioners and non-practitioners representing the public interest and not part of the investigation team – did not think that the FCA had a good enough case and it decided not to take any further action. As an administrative decision-maker, the RDC does not engage in a judicial process. Although representations are made before the RDC, full evidential analysis and the examination and cross-examination of witnesses does not take place and “the concepts of burden and standard of proof are not strictly relevant.” See Stuart Bazley, Market Abuse Enforcement: Practice and Procedure (2013:113). Now that the probe into Iksil’s conduct has been dropped, Macris is the only remaining executive under FCA investigation for the portfolio’s losses.

We live in interesting times. Not long ago in 2009, the Times argued that “[t]he threat of fines from the FSA are seen as a footling expense.” Yet in 2014 the UK penalties alone added up to almost £1.5 billion and the upward trend in global conduct costs produces a striking analysis. For example, in the UK arena, from 2013 to 2014 the quantum of the FCA’s average penalty has almost trebled. The starker five-year picture shows more than a tenfold increase in the magnitude of the average fine imposed by the FCA. Although in the public domain, these fines are not disclosed by the banks and are shown on their balance sheets as legal costs. The Conduct Costs Project Research Foundation’s International Results Table (2010-2014), which provides us useful insight into the scale of the controversial subject of misconduct by banks, puts the conundrum of the fines into context. The league table, which aids the public’s understanding of the scale of the problem, is an important tool for measuring the costs of wrongdoing. It ranks the group second whereas Bank of America Corporation (BAC) tops the list. Involving 16 global banks, the latest scorecard essentially shows a total of £205.56 billion in conduct costs of which £28.65 billion were imposed on the group and £64.05 billion on BAC: respectively America’s first and second largest banks.

Indeed, as the final report of the Fair and Effective Markets Review (FEMR), the keystone of global financial reform co-authored by Minouche Shafik (Bank of England) Martin Wheatley (FCA) and Charles Roxburgh (HM Treasury) published to coincide with the 2015 Mansion House dinner, insightfully explains:

The Conduct Cost Project publishes details of fines levied by a range of authorities from around the world, split by institution, and a number of private sector firms are also looking to develop conduct ratings using data on fines and measures of their severity.

Other key personalities related to the portfolio’s activities included CIO Senior Management in New York, or Ina Drew, the Global Chief Investment Officer, to whom Macris reported directly. “Aged 54, with a 30-year career behind her, she was one of the most powerful women on Wall Street, with a reputation as a survivor and one who knew the markets inside out,” is how Alex Brummer of the Daily Mail describes Drew in his book Bad Banks. She hired Macris, who rose quickly up the ranks, in 2006 during her drive to acquire staff possessing quantitative skills needed to manage riskier and complex credit derivates. Prior to his move, Macris worked as a proprietary trader at the UK investment bank Dresdner Kleinwort Wasserstein.

Drew reported to Jamie Dimon, Chairman and CEO of the group who called the record losses “a complete tempest in a teapot” and relied on the size of the portfolio to absorb the loss. But Dimon also conceded that the portfolio’s strategy was “flawed, complex, poorly reviewed, poorly executed and poorly monitored”. Macris was also jointly responsible for the Foreign Exchange Capital Hedging portfolio. Two other London based senior CIO managers reported directly to both CIO Senior Management in New York and to Macris and with the exception of Dimon (who was mentioned by name in the notice) none of these individuals was named in the notice. Macris recruited Javier Martin-Artajo, his Spanish subordinate at Dresdner Kleinwort Wasserstein, as head of credit and equity trading. He was both responsible for the portfolio and was regional head of the Europe, Middle East and Africa region, and also held the title of global head of credit and equity. Martin-Artajo was the boss of Bruno Iksil, the man who notoriously came to be known as the “London Whale”, who was the portfolio’s head trader from 2007 to 2012. Iksil, a Frenchman who is allergic to wearing ties and annually earned up to £100 million for his employers, has been described as a “lone wolf” who refused to back down on his bets; someone who personifies the “too big to fail” model of the corporation and the “casino style” culture, or underdeveloped “risk culture”, embedded in the trading activity of City banks. Unfortunately for his employers his actions came to light too late and tarnished their pristine image as a bank which unlike its rivals had survived the onslaught of the crisis relatively unscathed.

Whilst Iksil has been cooperating with the Americans and does not face charges because of a non-prosecution agreement, Martin-Artajo and another junior trader called Julien Grout (also a Frenchman, who resigned in late 2012) were both indicted by US authorities on five charges including securities fraud and conspiracy. Martin-Artajo lives in Spain. He was accused of hiding the real extent of the losses to bolster his chances for promotion and bonuses. To serve himself he allegedly also delayed a possible plan to move the portfolio to JPMorgan’s investment bank. However, a Spanish judge rejected the US request for his extradition because Martin-Artajo is a Spanish citizen and the events occurred outside the US. Grout lives in France, which does not extradite its citizens. The Americans admit that the drive to extradite them has proved fruitless.

In 2011, insofar as executive compensation was concerned, Drew was paid $14 million, Macris $14.5 million, Martin-Artajo 10.9 million, Iksil $6.8 million and Grout $1 million. Prosecutors in New York claim that Martin-Artajo and Grout manipulated and inflated the value of position markings in the portfolio and concealed their losses. Martin-Artajo and Grout deny wrongdoing. However, as noted above, in 2013, their employer admitted wrongdoing and agreed to pay more than $1 billion to American and British regulators. Notwithstanding the $6.2 billion “London Whale” losses in 2012, in January 2013, the group (i.e. JP Morgan Chase & Co) reported fourth-quarter 2012 net income of $5.7 billion, or $1.39 per share, on revenue of $24.4 billion. It was the bank’s third consecutive year of record net income and 15 percent return on tangible common equity. The full-year picture for 2012 showed a record net income of $21.3 billion, or record $5.20 per share, on revenue of $99.9 billion.

As a result of the $6.2 billion scandal, the group clawed back some $100 million from executives in share options and bonuses. Drew lost $21.5 million. Dimon’s annual pay was cut to $11.5 million and is cited as a testament to his strong leadership. However, the setback to Dimon’s pay package was only temporary and he was back on top of the executive pay league table and reportedly took home $26.7 million in 2014. (In the British context, the FRA and the FCA have recently unveiled plans – see joint Policy Statement – to introduce a ten-year wait for senior bankers, and a seven-year clawback for other bankers, to receive their bonuses.)

Macris: Case Context

The importance of the instant case goes well beyond the London Whale rogue trader losses. This game-changing decision profoundly impacts the manner in which the FCA goes about its business in taking enforcement action. Macris had the FCA’s approval under section 61 of FSMA to hold the Controlled Function CF 29 (significant management) at the firm from November 2007 to July 2012. Based in London, as International Chief Investment Officer (CIO), Macris played a part in the management structure of the portfolio. He was not named in the notice – which mentioned “CIO London management” – and on 14 October 2013 had referred the matter to the tribunal under section 393(11). In the Upper Tribunal and in the Court of Appeal, the FCA did not deny his assertion that the term “CIO London management” had been deliberately used to refer to him specifically.

Macris contended that the notice clearly identified him and that he should have been given third party rights within the meaning of section 393 of FSMA. The provision protects a person who is prejudicially identified in an enforcement notice (which must be copied to him) by providing him with an opportunity to answer any criticisms. The FCA is obliged to give the third party access to the material used to make the decision concerned and to any ancillary material which might compromise it. These safeguards aim to ensure that those, like Macris, who are prejudicially identified in the FCA’s enforcement notices are provided a chance to respond to criticisms directed at them before the regulator’s conclusions are published. In that regard, the Court of Appeal’s judgment discloses sloppiness on the FCA’s part. The first interview it conducted with Macris in January 2013 was useless because the recording was faulty so he submitted to a further interview in March 2013. Although he was not questioned in a detailed manner, the FCA said by way of correspondence that:

in the future we may interview Mr Macris again, at which time he will have an opportunity to answer any further questions that may be put to him in relation to our concerns in this area.

However, no further interview took place. Initially Macris was not charged with contravening Principle 4 of the FCA’s Statements of Principle for Approved Persons – dealing with regulators in an open and cooperative way and disclosing appropriately any information of which the regulator would reasonably expect notice. However, in July 2013, the watchdog added a new ground of investigation, i.e. a potential breach of Statement of Principle 4, and served a Notice of Change of Scope of Investigation. In August 2013, the FCA confirmed in writing that it “had not made any findings as to whether Mr Macris has breached Statement of Principle 4”. The following month, two days before the notices were promulgated, Macris took the initiative himself by providing the FCA with a written explanation of the matters that it had previously identified as prompting the expansion of its investigation into his conduct. Dealing with things haphazardly, the FCA confirmed that it had received Macris’ written explanation but failed to engage with the materials he had provided.

Albeit unsuccessfully, before the Court of Appeal the FCA argued that – for the purposes of section 393 – Macris would only have been “identified” if he could have been identified from the matters exclusively contained in the notice. Indeed, hitherto, a person needed to have been identified per se from the language of the notice to benefit from the rights conferred by FSMA. In Macris, turning the tide in favour of those working in the financial services industry, the Court of Appeal held that a simple objective test applies to identification in regulatory action and that the FCA must desist from prejudicing third party rights under FSMA.

So alphabetical anonymity – in the form of monikers such as “Manager B”, “Submitter C”, “Trader X”, “Employee Y” and so forth – does not suffice in safeguarding third party rights because industry specialists and the public are able to ascertain the identity of the person in question from evidence outside the notice. Insofar as Gloster LJ could see, such individuals must be provided an opportunity to respond to the criticisms of them detailed in enforcement notices. The case is a turning point in that regard as it quashes the FCA’s conventional wisdom as regards conducting its enforcement activities.

For Macris, who remains under investigation, his identification in the notice was clearly and obviously prejudicial to him and because he had had no opportunity to contest it, he referred the matter to the tribunal. As noted above, the FCA had fined the firm £137,610,000 ($220 million) for serious failings related to its Chief Investment Office. The firm’s conduct demonstrated full spectrum failings at all levels of its operations, i.e. “from portfolio level right up to senior management.” It breached a number of the fundamental obligations firms have under the regulatory system, namely Principles 2, 3, 5 and 11 of the FCA’s Principles for Businesses relating to wholesale conduct, market protection, treating customers fairly and failing to be open and cooperative with regulators.

Applying the decision of the House of Lords in Knupffer v London Express Newspaper Ltd [1944] AC 116, the Court of Appeal unanimously held that a “simple objective test” needed to be applied when determining whether, under section 393, “matters” in a notice issued by the FCA against the firm had “identified” a person who was not directly named.

As reported in the media, when the FCA’s appeal was heard in December 2014, Gloster LJ was entirely unconvinced that using alphabetical monikers helped in anonymising third parties. Despite some sympathy for the regulator, her Ladyship found the FCA’s arguments to be quite badly misconceived and remarked that:

I’m sure it’s extremely inconvenient for the FCA but don’t you think, when you are making allegations of fraudulent concealment, it’s fair to allow them to make representations and you don’t get around it by saying they are simply ‘Trader A’?

In sum, at para 45, the court found no reason why the approach to determining the question whether a “matter” “identifies” a person for the purposes of section 393 of FSMA should be any different to the approach to the question whether an allegedly defamatory statement, which refers to an individual person, whether, for example, by his office, or by the first and last letter of his name, or by means of a description of his status or otherwise (for example, by a pseudonym) identifies a claimant in defamation proceedings.

Rationale for Decision

Flagging up the vintage decisions in Watts v FSA [2005] UKFSM FSM020 and Laury v FSA [2002] UKFSM FSM046, which were otherwise of “little assistance”, the Court of Appeal elucidated that the statutory language clearly required the relevant matters to identify/specify a person, rather than facts from which it could be inferred that a particular person was being criticised. (The “first stage” of the test.) It was common ground that to be “identified” it was not necessary for a person to be referred to in the notice expressly by name because an individual could technically be identified by reference to his title, office or job description. The firm received a 30 percent (or “stage 1”) discount on the fine under the FCA’s executive settlement procedures. Moreover, the regulator accepted that even if it had been required to serve a copy of the notices on Macris, that would not have prevented the firm from being entitled to have taken advantage of the discount option, although it might have delayed the decision from becoming final at such an early stage.

The court said that identification within the meaning of section 393 “is in one sense a unitary question”. However, dismissing the appeal, at para 40, Gloster LJ agreed with the approach taken in proceedings below that logically speaking the first stage of the identification process involves asking whether the relevant statements in a notice which was said to identify a third party were to be construed in the context of the notice alone, and without recourse to external material.

Gloster LJ explained that the critical issue between the parties in the present case was the extent to which it was legitimate to have regard to external material to identify the person referred to in the notice. The court found a useful parallel in the authorities relating to identification of individuals in defamation proceedings. At para 43 et seq of the judgment, her Ladyship drew on Chapter 7 of Gatley on Libel and Slander, 12th Edition (London: Sweet & Maxwell, 2013) and she went on to hold that:

45. … The wording of section 393, whether construed on its own, or in the context of FSMA, does not require the word “identifies” to have any special or limited meaning. As I have already said, it is clear that it has to be the “matter” or “matters” referred to in the relevant notice which “identifies” the third party. But, as in the defamation cases, that does not mean that the third party has to be mentioned by name. As long as the relevant description in the “matters” (whether by reference to an office, a job description, or simply “Mr X”) can properly be construed as a reference to an individual person, i.e. a “he” or a “she” (or, if a corporate entity, an “it”), then it seems to me that the correct test for identification is the simple objective one applied in the defamation cases adapted for the purposes of this case …

In other words, where the first stage is satisfied, the following simple objective test for identification applies under FSMA:

Are the words used in the “matters” such as would reasonably in the circumstances lead persons acquainted with the claimant/third party, or who operate in his area of the financial services industry, and therefore would have the requisite specialist knowledge of the relevant circumstances, to believe as at the date of the promulgation of the notice that he is a person prejudicially affected by matters stated in the reasons contained in the notice?

On the other hand, at para 46, the court accepted the FCA’s submission that the comparative analysis was subject to the proviso that in the context of defamation, there might be by implication a defamatory reference to a claimant, simply as a result of what was generally said in a statement, notwithstanding that there was no separate reference to the specific person in the alleged defamatory statement. Accordingly, the mere fact that a statement criticising a corporate recipient of a notice might be read by persons in the relevant financial market as criticising by implication the chairman or chief executive officer of that company does not suffice in the context of section 393 to amount to identification. This is so because as regards meeting the requirements laid down in section 393, there must be a specific reference to “a person” in “the matter” to which the reasons related and there must be some sort of “key or pointer” to a separate person. Where the pointer or peg is found, the following simple objective test contemplated by Viscount Simon LC in Knupffer applied:

Where the plaintiff is not named, the test which decides whether the words used refer to him is the question whether the words are such as would reasonably lead persons acquainted with the plaintiff to believe that he was the person referred to.

Gloster LJ was of the view that ex post facto unlimited reference to external material to identify the third party was impermissible and her Ladyship found at para 50 that the Upper Tribunal had incorrectly articulated the relevant tests. This was so because Judge Herrington – who held that it was “simply a matter of whether there is information in the public domain that incontrovertibly links the description in the Final Notice to Mr Macris” – had conceptualised the tests too broadly. He, therefore, “failed to limit the relevant information to that which objectively would be known by persons acquainted with the third party, or persons operating in the relevant area of the financial services market.” As her Ladyship explained at para 51, the “workable” objective test formulated by the court, clearly limited:

… external material to what, objectively, persons acquainted with the third party, or persons operating in the relevant area of the financial services industry, might reasonably have known as at the date of the promulgation of the relevant notice.

The court concurred with Macris’ position that by the time the FCA served notice it would have been well aware of the information publicly available to the relevant sector of the market. It rejected the argument that only if Macris could have been identified from the “matters” exclusively contained in the notice, would he have been “identified” for the purposes of section 393. Gloster LJ found the FCA’s construction to be inconsistent with the statutory language and with the natural/ordinary meaning of the word “identifies”.

So there was no requirement for a claimant to be identifiable from matters exclusively contained in the notice because such an approach failed to take into consideration the knowledge, necessarily contributing to their ability to identify the third party, which people might have in addition to the information contained in the notice. Essentially, the flawed approach espoused by the FCA required the court to conduct the artificial task of asking the wholly hypothetical question whether, putting on one side the knowledge available to the market, the third party could be identified by what was stated in the notice alone. Given that it was not in dispute that the purpose of the third party procedure was to secure the fair treatment of the reputation of third parties in regulatory action, it was unrealistic to disregard what was already common knowledge in the market over and above the information stated in the notice.

Irrespective of the judge’s application of the incorrect test, he had rightly held that the matters in the notice identified Macris because the reference to “CIO London management” was clearly a reference to “a particular individual” and “not a body of people.” Equally, the judge was entitled to conclude that persons acquainted with Macris or those operating in his area of the financial services industry would reasonably have been able to identify him from statements made in the notice. (Notably, Macris had been named expressly in a US Senate Report)

Patten LJ agreed with Gloster LJ. Moreover, Longmore LJ gave a short judgment of his own and explained that identification in a decision notice is more a question of fact than law. However, Longmore LJ nevertheless concurred with the test proposed by Gloster LJ and at para 66 his Lordship too dismissed the appeal.


Macris is not just a one-off case. Quite literally following suit, Deutsche Bank’s former super star trader Christian Bittar is also taking action against the FCA for improperly identifying him in April’s historic LIBOR manipulation settlement – which left Deutsche Bank nursing fines totalling $2.5 billion – with American and British regulators. Bittar, who has been privately warned by the FCA that it wants to fine him £10 million for benchmark rigging, alleges that he was not provided the opportunity to make representations before the watchdog’s findings were published. As reported in the press, the LIBOR scandal simply refused to leave Deutsche Bank alone and important developments in Germany where BaFin had dragged the controversial figure of Anshu Jain into the rate-rigging scandal further by suggesting that the co-chief executive had lied (“knowingly made inaccurate statements”) to the Deutsche Bundesbank about exactly when he became aware of the LIBOR manipulation. Jain, who called the BaFin report as “another pound of flesh”, is accused of making changes to the trading floor which created and/or intensified conflicts of interests between traders and submitters. Jain, who stood down as CEO on 30 June 2015, retorted that the allegations are “baseless” and Deutsche claims that he had misunderstood the scope of the Deutsche Bundesbank’s questions. BaFin’s investigation had an individual focus and appeared to be a procedural first step that culminated in criminal charges but ultimately Jain was cleared of wrongdoing by Bafin’s president Felix Hudfeld who concluded that the allegation that Jain knowingly lied to the regulator was “unsubstantiated”. On the other hand, Deutsche Bank is still facing further investigation from the New York Department of Financial Services about rigging the ISDAfix benchmark, used to price financial products, for annual swap rates for swap transactions. (Only recently, in May 2015, Barclays paid the US Commodities and Futures Trading Commission $115 million for misreporting ISDAfix.)

Interestingly, as May 2015’s foreign exchange (forex or FX) rigging penalties of $5.6 billion demonstrate, the LIBOR scandal was just the tip of the iceberg insofar as benchmark manipulation is concerned. Out of the $5.6 billion, the group’s (i.e. JP Morgan’s) share of misconduct came to a whopping £574 million ($912 million). The rigging of the $5.3 trillion-a-day forex markets, which dwarfs the total $500-$800 trillion value of financial contracts underpinned by LIBOR, was achieved by rogue traders who congregated in chat rooms under aliases such as “The Cartel” and the “Coiled Cobra”. In relation to the forex investigations, Rohan Ramchandani (previously European head of spot trading at Citigroup) and Richard Usher (formerly the chief currency dealer in London for JP Morgan) are also pursuing challenges because of being identified by the FCA in the $4.3 billion global settlement in November 2014 as regards forex manipulation involving a half a dozen banks.

Ramchandani, who was allegedly part and parcel of the Cartel, is presently under investigation by the Serious Fraud Office (SFO) is will be questioned by officials over the coming three months. Apart from Ramchandani, other alleged members of the Cartel include Usher, Matt Gardiner and Chris Ashton (a temporary member). The details of these venal networks have emerged out of May 2015’s forex rigging penalties. Apparently, the SFO has intervened in the civil proceedings related to the third party rights raised by these individuals. Ironically, the individuals involved would probably prefer being investigated by the SFO because it may deter extradition to the US where penalties for white-collar crime are much harsher: the paradox is aptly demonstrated by the recent spoofing case of Navinder Sarao – who faces 380 years’ imprisonment if extradited to the US – for causing the “flash crash” and the FEMR has also increased the penalties for criminal market abuse from seven to ten years’ imprisonment. On the whole, such measures are meant to send a clear signal to the financial services industry that those who transgress the law will face full retribution and will not go unpunished.

However, the fact that the average jail sentence for terrorists is a mere two years imprisonment (see Philip Davies MP’s concerns at Column 1637), lengthening bankers’ criminal liability and keeping them behind bars longer than jihadis is totally out of kilter with common-sense and reasonableness. A mass exodus would be an economic calamity. The ironies are inescapable. For example, some fear that strident legislative changes and a tighter regulatory corset may be so suffocating as to prompt cutting-edge firms and individuals to flee from the UK. Yet Elizabeth Corley, who heads the new Fixed Income Markets Standards Board created by the FEMR, has claimed that bankers see misconduct as no worse than driving over the speed limit and endorses intensifying criminal sanctions against white collar crime. The architect of the new regulatory design, George Osborne, is conscious that he cannot afford to alienate the City altogether. To pacify the financial elite, he can be seen rowing back from legislating his way out of trouble and has been heard stressing the case for a more laissez-faire approach that competitiveness cannot be sacrificed in the name of high standards of conduct.

Interestingly, all this comes of the heels of the first LIBOR trial. The alleged “ringmaster” of manipulation, Tom Hayes, who pleaded not guilty in December 2013 to eight charges of fraud, insists that he was operating in a “grey area” where there were “no rules” and that UBS distributed “an instruction manual on fixing LIBOR.” Hayes initially agreed to plead guilty but then changed his mind. He claims he acted with “complete transparency” and that LIBOR rigging was an open secret. According to him, all his managers (even the CEO) were well aware of his methods. Hayes, who was known as “Rainman”, said in his testimony that he made confessions of wrongdoing to the SFO to prevent being extradited to the US where he is also facing charges which carry a much greater sentence. “Petrified” of extradition, Hayes explained to the jury that “the only consideration was getting charged and avoiding extradition … I didn’t think about innocence or guilt.” Hayes, whose remarkable email correspondence to a broker specified “just give the cash desk a Mars bar and they’ll set you whatever they want,” has been diagnosed with mild Asperger’s Syndrome (autism) and Judge Jeremy Cooke has told the jury that people with the condition only see the world in black and white because they are unable to see shades of grey. Judge Cooke said that Hayes’ prowess in understanding “mathematical patterns is a characteristic of Asperger’s”. Equally, things are made all the more scandalous because of the fact that UBS rogue trader Kweku Adoboli – who was convicted of two counts of fraud and sentenced to seven years’ imprisonment – has just been released from prison after spending just a bit more than three years behind bars for losing $2.5 billion in unauthorised trading. The FCA understandably wishes to ban Adoboli, who reckoned he had a “magic touch”, from being a regulated person in financial services.

Moreover, the May 2015 fines and an investigation from the European Commission are likely to trigger a litany of damaging civil claims against the banks in the UK and on the Continent similar to those already witnessed in America. Indeed, the banks have earmarked money for this purpose and Citigroup has revealed that it had agreed payments of $394 million to settle private cases in the US. (RBS has a similar arranged a similar mechanism but did not disclose the details.) Subject to the law on quantification of damages, the civil claims may surpass the fines imposed by regulators.

Because reputational damage tends to accompany regulatory action, bank misconduct must not been seen as a green light for regulators to overreach themselves and cause prejudice to third parties. Equally, the FCA must not lose sight of mitigating its own risks when entering into settlements with the banks. It is fair to say that, in light of Macris, to save legal costs and embarrassment the FCA should make every effort to change the culture of identifying third parties in its notices because the pivotal Parliamentary Commission on Banking Standards (PCBS) expressly stated in its Changing Banking for Good Report (at para 985) that the FCA should replicate the Bank of England’s stated intention for the PRA to operate at a lower cost than its equivalent part of the FSA.

Magna Carta, in which the moral of the story may well lie, remained one of my points of departure. Clause 20 of that historic challenge to the absolute power of the King was unequivocal:

For a trivial offence, a free man shall be fined only in proportion to the degree of his offence, and for a serious offence correspondingly, but not so heavily as to deprive him of his livelihood. In the same way, a merchant shall be spared his merchandise, and a villein the implements of his husbandry, if they fall upon the mercy of a royal court. None of these fines shall be imposed except by the assessment on oath of reputable men of the neighbourhood.

Speaking on Magna Carta’s 800th anniversary, the present Master of the Rolls, Sir John Dyson, said that King John and the Barons would have been “bemused” by our take on their bargain – which bizarrely became a global symbol for the rule of law, democracy, justice and human rights. “But that is exactly what has happened,” argued Lord Dyson and his Lordship concluded that the Great Charter contained the seed of democracy and civil liberty for which it remains internationally celebrated. Even a “Magna Carta sceptic” like Lord Sumption JSC, who critically opines that Sir Edward Coke cleverly transformed the “technical catalogue of feudal regulations” into a constitutional cornerstone, agrees that the historic document sowed the seeds of democracy by default because “it is one of those documents which is important not so much because of what it says as because of what people wrongly think it says.”

Lord Denning elevated Magna Carta to “the greatest constitutional document of all time”. Be that as it may, on a reasonable view, Lord Sumption’s analysis is more accurate and is to be preferred to Lord Denning’s labelling of Magna Carta as “the greatest constitutional document of all time”.

Shining a light on the divergent views above, Lord Neuberger PSC’s presidential analysis is that “Magna Carta can claim to be the Bible of our constitution, even if its Biblical role is as much based on myth as it is on reality” because “far from being a disgrace to the nation, it represents the United Kingdom’s greatest contribution to the world – the rule of law and democratic government.” From the viewpoint of the working person, some things have changed a lot over eight centuries but others have not. For example, like the Barons (Macris, Bittar and others of their ilk) and King John (or the gangly figure of Martin Wheatley in our context), today’s “banking barons” like Macris are also following in their predecessors’ footsteps by challenging executive decision-making on the grounds of proportionality, reputation and fairness.

Jokes aside, Macris stands out because it demonstrates that the FCA needs to reflect on the convenient, discounted, fast tracked, “record” settlements it has been achieving with the banks and other corporate entities. As this case shows so well, these quick fixes by the regulator are producing quite protracted litigation. We can, therefore, say with some confidence that the hunter is turning into prey. Certainly, the framework for deciding the scope of investigations needs a critical rethink to evaluate whether or not it is feasible to continue to regulate on agreed facts and evidence without directly examining senior persons whose behaviour may subsequently be scrutinised and put in the media spotlight. Ultimately, coercive power alone will not suffice to bring order to the markets and the FCA will need to improve its analytical and investigative procedure to fortify its own position in the enforcement process. Such introspection is likely to strike the right balance between the public interest in regulation and the rights of those who work in the world of finance.

Robust financial regulation must be underpinned by fairness. Therefore, in addition to making sure markets function well, the FCA must also preserve the reputation of the City of London as a place of world business where the rights of senior management in financial services are protected under the law.

The overall situation is rather slippery for the FCA because other traders such as Bittar, Ramchandani and Usher contend that the FCA infringed their statutory rights and failed to conduct a full and proper investigation before making its decisions. Eager to preserve their reputation, such people are unhappy that they were prejudicially identified in regulatory notices that explicitly criticised their conduct but did not afford them an opportunity to respond in their defence. As observed above, these proceedings are of particular interest to traders who contend that they have not been given a right of reply despite being identified in FCA notices. Indeed, the future trajectory of their cases will be guided by the result in Macris.

uksc Dual defeats in Macris must have been hugely unsettling for the FCA. Licking its wounds, the whimpering watchdog – which insists that it “did not consider that he [Macris] was identified in the notice” – is seeking permission to appeal to the Supreme Court. Since opening its doors for business in October 2009, the court has decided a handful of cases involving the FSA/FCA. Some decisions involving the FSA are discussed below. (Recently in Asset Land Investment Plc and another (Appellants) v The FCA (Respondent) Case No: UKSC 2014/0150, on appeal from [2014] EWCA Civ 435, Lord Mance, Lord Wilson and Lord Toulson JJSC granted permission to appeal in December 2014.)

The decision in Plevin v Paragon Personal Finance Ltd [2014] UKSC 61 has important ramifications for the FCA because of its connection to a Payment Protection Insurance (PPI) agreement. The Supreme Court’s judgment turned on the point that the conduct of insurance intermediaries was governed by a statutory scheme contained in the Insurance Conduct of Business (ICOB) Rules 2005 made by the FSA under powers conferred by the FSMA. ICOB created duties owed directly by the provider of the service to the insured. (However, the FCA was not a party to those proceedings.) Lord Sumption JSC, who gave the court’s unanimous decision, dismissed the first defendant lender Paragon Personal Finance’s appeal from the order of the Court of Appeal 2013 EWCA Civ 1658 where Moses, Beatson, Briggs LJJ had allowed, on other grounds, an appeal by the claimant borrower, Susan Plevin. His Lordship held that an agreement for PPI was unfair within the meaning of section 140A of the Consumer Credit Act 1974 (the 1974 Act), as inserted, when the debtor had not been told, before concluding the agreement, that over 70% of the one-off £5,780 premium would be used to pay commission to various parties. Essentially, a failure to disclose the large commission payment on a single premium PPI policy rendered the relationship between a lender and the borrower unfair. The FCA is considering the implications of the judgment and is engaging with relevant stakeholders to evaluate whether additional rules and/or guidance are required to deal with complaints involving PPI.

The court accepted that the provisions of the 1974 Act were triggered by the non-disclosure of the amount of commission payable to the lender and an intermediary (despite ICOB not requiring this). The court thus held that the earlier authority of Harrison & Anor v Black Horse Ltd [2011] EWCA Civ 1128 was wrong to treat the absence or presence of a regulatory duty under ICOB as conclusive on the question of whether particular conduct made a relationship unfair within the parameters of the 1974 Act. It was held that although the regulatory rules establish a minimum standard of conduct applicable in a wide range of circumstances, the provisions of the 1974 Act lay down a wider test of fairness which potentially focuses on a much wider range of factors such as the characteristics of the borrower, their sophistication or vulnerability, the state of their knowledge, the extent of market choice and the creditor’s awareness of these factors. In Plevin’s case, Lord Sumption clearly regarded the size of the commission as a weighty reason for concluding that the non-disclosure made the transaction unfair.

In R (T & Anor) v Secretary of State for the Home Department & Anor [2014] UKSC 35 both the FCA and the PRA intervened. Lord Reed JSC held that the disclosure by the state to an employer of information about a person’s criminal record fell within the scope of the guarantee of respect for a private life in article 8 of the European Convention on Human Rights (ECHR) and so had to meet the requirements of being in accordance with the law and necessary in a democratic society. The Supreme Court held that the provisions in Part V of the Police Act 1997 for the automatic release of a person’s convictions, cautions and warnings – irrespective of their relevance or the length of time that had elapsed – when that person was required, by reason of articles 3 or 4 of the Rehabilitation of Offenders Act 1974 (Exceptions) Order 1975, to obtain and disclose an enhanced criminal record certificate for the purpose of obtaining employment or some other position which involved working with children or other vulnerable groups of persons, did not meet the requirement of legality for the purposes of article 8 ECHR and was therefore incompatible with the person’s right to respect for their private life. Moreover, the provisions contravened article 8 in that they were not “necessary in a democratic society”, as required by article 8(2).

Other, more historic, Supreme Court case law can be recalled as follows. In R v Rollins [2010] UKSC 39, the appellant conceded that the respondent FSA had power to prosecute the insider dealing offences under section 402 of FSMA but nevertheless argued that the FSA’s powers to prosecute criminal offences were limited to the offences referred to in sections 401 and 402 of FSMA. He challenged the FSA’s power to prosecute the money laundering offences because this had not been provided for by section 402. In vain, he argued that FSMA set out a complete code within which the FSA had to operate and that its only powers to prosecute were those referred to in sections 401 and 402. Both the Crown Court and the Court of Appeal rejected these points and the appellant appealed to the Supreme Court. Unanimously dismissing the appeal, the Supreme Court held that the FSA did have the power to prosecute the money laundering offences. Sir John Dyson JSC (as he then was) gave judgment and held that FSMA cannot have set out a complete code within which the FSA to operate because the FSA had powers under other statutes which were not derived from FSMA.

Two other decisions were handed down in February 2013. In Digital Satellite Warranty Cover Ltd & Anor v FSA [2013] UKSC 7, Lord Sumption JSC gave the court’s unanimous judgment and dismissed the appeal and upheld the decisions below – reported as [2011] EWCA Civ 1413 and [2011] EWHC 122 (Ch) – that the FSA was right to apply for orders to wind up the appellants in the public interest under section 367(1)(c) of FSMA, on the ground that each of them “is carrying on or has carried on a regulated activity in contravention of the general prohibition.” Moreover, in FSA v Sinaloa Gold plc & Ors [2013] UKSC 11, delivering the court’s unanimous judgment, Lord Mance JSC held that (i) there is no general rule that the FSA, an authority acting pursuant to a public law duty, should be required to give a cross-undertaking in respect of losses incurred by third parties, and (ii) there are no particular circumstances which mean that the FSA should be required to give such a cross-undertaking on the facts of this case. So, going by these numbers, it would be shortsighted to conclude that the FCA’s chances of success on appeal are entirely foreclosed.

It is nonetheless important to note that in Digital Satellite Warranty Cover and Sinaloa Gold, which turned on totally different issues in comparison to Macris, the FSA was the respondent and not the appellant. In none of the cases discussed above was the FSA/FCA the appellant and it will be interesting, in the days ahead, to observe how the FCA will fare in its first appeal to the Supreme Court. (At the time of writing, a search for “Macris” produces zero results on the court’s website.)

On the other hand, if the apex court’s learned justices preserve the existing state of play, greater vigilance as regards maintaining anonymity of individuals will haunt the regulator. In reality, the only alternative is to adhere to the rules and give third party rights to those irregularly identified. Inevitably, this option impedes speedy settlements – often involving coordination with international regulators – and the FCA and regulated firms will have to work together in order to overcome the dilemma exposed by Macris if the Supreme Court upholds Court of Appeal’s judgment. Certainly, individuals’ rights to make representations, which will need to be considered prior to notices being published, and the duty on the FCA to provide evidence to those identified will delay speedy settlements. On the other hand, if the FCA does not take steps to modify its behaviour, more individuals prejudiced by published notices will follow suit. And the floodgates will, no doubt, quite literally be forced open.



6 responses

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