Upper Tribunal finds that individual lacked integrity due to recklessness

Background

Mr Batra was the director and controller of a firm named Mortgage 10 Ltd (M10). M10 was a mortgage and general insurance broker. Mr Batra was approved to perform the following FSA controlled functions for M10: CF1 (Director) and CF8 (Oversight). 

In 2007, Mr Batra acquired a number of flats in two properties using mortgage funding. Later that year, a dispute arose between Mr Batra and one of the firms that had provided him with mortgage funding in connection with this property purchase, Wave Lending Limited (Wave). Wave alleged that Mr Batra had misled it regarding how he intended to use the funds lent to him and that Mr Batra had breached the conditions of his mortgage with Wave. 

Wave launched proceedings against Mr Batra, seeking to have the funds it had lent him for the property purchase (plus interest) returned. As part of these proceedings, Wave secured a freezing injunction against Mr Batra's assets. Wave also refused to receive any further mortgage repayments from Mr Batra. In addition, Wave complained about Mr Batra to the FSA (as it then was) and alleged that Wave had been misled by Mr Batra into providing funding in the form of mortgages to fund his property purchase. 

The dispute between Mr Batra and Wave was eventually settled. Under the terms of the settlement agreement, Wave was required to write to the FSA and withdraw its complaint about Mr Batra, which Wave duly did. However, in the meantime, the FSA had received a similar complaint from another firm that had lent Mr Batra funds for his property purchase. As a result, the FSA had already commenced an enforcement investigation into Mr Batra and M10 which it declined to discontinue. 

The FSA's findings

Having conducted its investigation into Mr Batra and M10, the FSA concluded that Mr Batra had acted without integrity on the basis that he had:

• Deliberately made various representations in connection with his property purchase that he knew to be false. These representations included how Mr Batra intended to use the flats that he purchased, his income, the source of funds for his deposit on the flats and his relationship with another party involved in the transaction.
• Failed to deal with the FSA in an open and co-operative way. For example, the FSA alleged that Mr Batra misstated his income during an FSA interview, failed to ensure that M10 provided certain information to the FSA during the course of its investigation and failed to disclose to the FSA that Wave had launched proceedings against him and obtained a freezing injunction over his assets. 

In light of these findings, the FSA proposed to withdraw Mr Batra's approval to perform controlled functions for M10 and impose a prohibition order on him, preventing him from carrying out any function in relation to any regulated activity in the future. 

Mr Batra contested the FSA's findings. Although Mr Batra acknowledged that there were some errors in the information that had been provided to Wave and other mortgage providers, he denied having been dishonest or acting without integrity. Likewise, Mr Batra denied having failed to deal with the FCA in an open and co-operative way. As a result, Mr Batra referred the FSA's findings against him to the Upper Tribunal. 

Reference to the Upper Tribunal

By the time the case reached the Upper Tribunal, M10 had been dissolved. As a result, the Upper Tribunal only considered what action should be taken by the FCA (as it had become) against Mr Batra (and not M10).  

Integrity does not necessarily equate to dishonesty 

Given the nature of the FCA's allegations against Mr Batra, the Upper Tribunal confirmed at the outset the guidance to which it would have reference in order to determine whether Mr Batra had acted without integrity. The Upper Tribunal endorsed the approach set out in First Financial Advisers Limited v FSA [2012] UKUT B16 (TCC) which observed:  

"Even though a person might not have been dishonest, if they either lack an ethical compass, or their ethical compass to a material extent points them in the wrong direction, that person will lack integrity." 

In this case, the Upper Tribunal therefore started from the position that a lack of integrity does not necessarily equate to dishonesty: "'While a person who acts dishonestly is obviously also acting without integrity, a person may lack integrity without being dishonest".  

Recklessness may still amount to a lack of integrity 

The Upper Tribunal did not agree with the FCA's finding that Mr Batra had been deliberately dishonest in relation to the information that had been provided to Wave and other mortgage providers in connection with his property purchase. Rather, on the facts the Upper Tribunal concluded that Mr Batra had been reckless in this regard and that he had demonstrated disregard for the contents of mortgage application forms completed on his behalf. Even though the Upper Tribunal did not find that Mr Batra had acted dishonestly, the Upper Tribunal decided that his recklessness meant that he had still acted without integrity.  

The Upper Tribunal also found that Mr Batra had been reckless in terms of the incorrect figure for his income that he had provided to the FSA during its investigation, noting that: "Mr Batra … either knew that the figure was not accurate or was reckless as to whether it was accurate or not". The Upper Tribunal had regard to the fact that Mr Batra had provided this incorrect information while he was under investigation: "As he was under investigation by the [FSA], we would have expected Mr Batra to be especially careful to ensure that his answers to questions were accurate. Mr Batra was not careful".  

The extent to which reliance on professional advice may provide a defence to enforcement action 

The FCA argued that Mr Batra's failure to inform the FSA that Wave had initiated proceedings against him and obtained a freezing injunction over his assets demonstrated that Mr Batra had failed to deal with the FSA in an open manner. Mr Batra denied this allegation. In support of his position, Mr Batra referred to legal advice that he had received from two sets of solicitors when Wave brought proceedings against him, both of which advised him that he was not required to disclose this information to the FSA.  

The FSA argued that the legal advice that Mr Batra received should make no difference to its finding that Mr Batra failed to deal with the FSA in an open manner. Before the Upper Tribunal the FCA argued that "Mr Batra cannot hide behind legal advice" and "the obligation to deal openly with the Authority remains with Mr Batra and M10".  

The Upper Tribunal rejected this submission made by the FCA, stating:  

"We consider that there may be cases where it is clear that an approved person should disclose something to the Authority notwithstanding professional advice that he is not required to do so but we do not consider that this is such a case. Mr Batra did disclose the proceedings to his insurers. We accept Mr Batra's evidence that he sought advice from two firms of solicitors on whether he or M10 were required to disclose the [proceedings brought by Wave] to the Authority. He was advised that neither he nor M10 needed to disclose the proceedings to the Authority. In the circumstances, we consider that Mr Batra acted properly and did not fail to deal with the Authority in an open manner when he did not disclose the [proceedings brought by Wave]". 

Conclusion 

The Upper Tribunal found that the FCA had not established, on the balance of probabilities, that Mr Batra was deliberately dishonest. However, the Upper Tribunal concluded that Mr Batra displayed a lack of integrity in that he was reckless as to the truth of statements made to Wave and another party that provided mortgage funding for his property purchase. In light of this finding, the Upper Tribunal considered that imposing a prohibition order on Mr Batra would be appropriate in the circumstances.  

Unsuccessful application for permission to appeal to the Court of Appeal 

Mr Batra applied to the Court of Appeal for permission to appeal the Upper Tribunal's substantive decision. This application was refused on 31 March 2015. As a result, the FCA published a final notice in respect of Mr Batra on 7 August 2015.  

Comment 

The Upper Tribunal's decision in this case reconfirms that, even if an individual is found not to have behaved dishonestly, they may still be found to have acted without integrity and handed a prohibition order.  

What is perhaps more interesting in this case though is the reliance that the Upper Tribunal was willing to place on professional advice that Mr Batra received in relation to the disclosure of civil proceedings against him to the FSA. In enforcement cases brought by the FCA (especially those against significant influence function holders), subjects sometimes try to point to professional advice they received in relation to a particular matter in order to help demonstrate that they took reasonable steps to discharge their regulatory responsibilities. The FCA can react to this kind of evidence in different ways, with some investigators being willing to place more reliance on it than others. However, the Upper Tribunal's decision in this case is likely to prove helpful to those who seek to rely on professional advice given that the Upper Tribunal was willing to accept it as evidence that Mr Batra acted properly in the circumstances.  

However, the receipt of professional advice is unlikely to be an absolute defence for individuals who find themselves under investigation by the FCA. This is because the Upper Tribunal indicated that, to the extent that professional advice encouraged a course of action that was clearly wrong or non-compliant, it would be unlikely to place much, if any, reliance on such advice to help evidence that an individual acted properly. The advice would also need to be provided on a properly informed basis. 

Decision 

Batra v The Financial Conduct Authority [2014] UKUT 214 (TCC) (13 May 2014). 

This article first appeared on Practical Law and is published with the permission of the publishers. 

We have also published more commentary on this case on Allen & Overy's Investigations Insight blog.