At what cost? Upper Tribunal awards costs to applicants in significant financial services case
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The UK Upper Tribunal (the Tribunal) has made a rare order for costs against the Financial Conduct Authority (the Authority), including because of what the Tribunal considered to be inadequate efforts on the part of the Authority to conduct the investigation reasonably. We consider the circumstances in which such applications can be made, together with some other points for individuals and firms to consider if they find themselves in a similar position.
Background and Facts
In the underlying proceedings, three individuals sought to challenge the FCA’s decision to impose a prohibition order on the basis that they lacked integrity. In June 2023, the Tribunal handed down a detailed judgment that held that the Authority had not made out its case that the individuals lacked integrity, and ultimately remitted the cases back to the Authority for reconsideration. The judgment was also highly critical of the Authority’s investigation and conduct during the proceedings. In a further hearing on 23 October 2023, two of the three individuals, Mr Seiler and Ms Whitestone, made an application for costs against the Authority. The Tribunal ultimately ordered the Authority to pay some of the costs claimed by the Applicants, on basis that some of the Authority’s conduct relevant to the proceedings had been unreasonable.
The Upper Tribunal’s power to award costs
Generally, the starting point in civil litigation, outside of the Tribunal system, is relatively straightforward – the successful party is entitled to recover their reasonable costs of bringing or defending a claim (as the case may be). However, awards of cost are rare in the Upper Tribunal, and the circumstances where orders for cost can be made are far more limited. Rule 10 of the Tribunal Procedure (Upper Tribunal) Rules 2008, stipulates that costs can only be ordered in financial services cases where the Tribunal considers a party or it’s representative, has acted unreasonably in bringing, defending, or conducting proceedings, or where the initial decision in respect of the reference was made unreasonably (Rules 10(3)(d) and (e)).
Mr Seiler and Ms Whitestone’s cost application
The individuals’ applications relied on a number of grounds, including the following.
- It was unreasonable for the Authority to issue the Decision Notice at all because it was unreasonable, in light of multiple failings of the Authority, both in its investigation of the individuals and analysis of the evidence, to conclude at the time of the Decision Notice, that the individuals recklessly disregarded risks of which they were actually aware and therefore lacked integrity. On that basis, the Applicants argued that it was unreasonable for the Authority to impose a prohibition order under s56 Financial Services and Markets Act 2000 (FSMA). It was further unreasonable for the Authority to defend its position on this before the Tribunal.
- It was unreasonable for the Authority to impose a prohibition order on the individuals on the basis that they posed a serious risk to the confidence in the UK financial system in light of the matters found by the Tribunal as to the delays in the investigation and the late disclosure of documents.
- The Applicants contended that the Authority’s Decision Notices were unreasonable insofar as they were based on allegations concerning a specific transaction (known as the “Third FX Transaction”) which had not been made in the Applicants’ Warning Notices contrary to s387 FSMA, and in relation to which the Authority’s case changed repeatedly.
Reasonableness of the initial decision in respect of which the Applicant’s reference was made
On whether the Authority, specifically the Regulatory Decisions Committee (RDC), had acted reasonably in issuing the Decision Notices to the individuals, the Tribunal found that the Authority’s decision was within the range of reasonable decisions open to the RDC. The Tribunal noted that its judgment on the substantive references demonstrated that it was wrong for the RDC to have reached the conclusion that it did, but that it was not unreasonable.
In reaching this decision, the Tribunal took into account a number of procedural weaknesses in the way the Authority had conducted its investigations that the Tribunal had also highlighted in its judgment on the substantive references (including late disclosure of evidence, inadequate collection of evidence and undue delay), the Applicants’ conduct and the nature and seriousness of the allegations against the Applicants.
The Tribunal’s position was different with regard to the Authority’s conduct in relation to allegations concerning the Third FX Transaction, which the Tribunal held was unreasonable. The Authority had not properly investigated the relevant transactions prior to issuing the Warning Notices against the Applicants. One consequence of this failure was that the allegations relating to the Third FX Transaction were not made out in the Warning Notices or Decision Notices issued to the Applicants, notwithstanding the Authority’s Enforcement division had indicated that the Warning Notices should be amended, and were first raised in the Authority’s case before the Tribunal. As a result of the weaknesses in the Authority’s investigation, it found that it has been advancing a case against the Applicants based on the wrong transaction. The Tribunal held that at this point, the only reasonable course of action for the Authority to take was to discontinue proceedings in relation to the Third FX Transaction.
Reasonableness of the Authority in bringing, defending or conducting the proceedings
It was submitted by the Applicants that the Authority was unreasonable to repeat the allegations in its Decision Notice in its defence despite the multiple failings with the investigation having been highlighted prior and that it further failed to undertake a rigorous review of the position when pleading its case. The Tribunal found that regarding the reasonableness of whether the individuals were aware of the relevant risks, it is clear that the Authority did have an arguable case on that point. The fact that the Tribunal rejected the Authority’s case does not make the fact that the Authority defended the reference unreasonable in and of itself.
As to whether the Authority’s conduct in the course of the proceedings was unreasonable, the Tribunal highlighted that the Authority had (i) failed to call material witnesses; (ii) refused to answer requests for clarification; (iii) unreasonably declined to respond to requests for details of its investigation; and (iv) continued to rely on the Third FX Transaction. The Tribunal noted that whilst it had jurisdiction to order costs in relation to the Third FX Transaction, as it was found to be clearly unreasonable of the Authority to persist with the allegation in the Tribunal proceedings, despite the unreasonable conduct, the Tribunal did not have jurisdiction to order costs in relation to the other findings.
Tribunal’s decision on costs
Despite its repeated criticisms of the Authority’s conduct during the investigation stage and during the proceedings before the Tribunal, the Tribunal found that it only had jurisdiction to make a costs order in respect of the Authority’s case relating to Third FX Transaction and some limited aspects of the Authority’s conduct during the proceedings, on the basis that both were unreasonable.
The Applicants were unable to establish that the Authority’s unreasonable conduct had caused them to incur any cost in the Tribunal proceedings. However, the Tribunal noted that causation was only one of the matters that it must consider when making a cost order. The Tribunal held that it would have been easier for it to determine the relevant issues had the Authority had not conducted itself unreasonably and, on this basis, the Authority was ordered to pay each of the individuals 5% of the costs incurred by each of them in relation to the Tribunal proceedings.
The Authority’s obligation to obtain witness evidence
The Applicants claimed that the Authority acted unreasonably in not having called various witnesses; a weakness also considered by the Tribunal in reaching its decision.
The Tribunal observed that proceedings before the RDC are different to judicial proceedings, in this regard. Witness evidence plays no part in RDC proceedings and the nature of those proceedings necessitates the RDC drawing inferences from documentary evidence.
In contrast, the Tribunal frequently considers witness evidence. In this case, the Tribunal considered its task was made more difficult by the absence of potentially key witnesses; where the Tribunal’s assessment of oral evidence played a significant part in its overall assessment.
- One witnesses was not called by the Authority because there were serious concerns about the witness’s credibility. The Tribunal considered that the correct course of action in these circumstances would be for the Authority to seek directions from the Tribunal on whether the witness should be called and, if so, how that should be managed.
- Other witnesses were not called because they were located outside the jurisdiction. The Authority had made attempts, at a late stage, to seek their assistance via the relevant overseas regulator but the Tribunal held Authority’s action had been delayed and pursued with insufficient vigour.
The Tribunal reminded the parties of its powers under s25 of the Tribunals, Courts and Enforcement Act 2007 to issue Letters of Request to compel the attendance and examination of witnesses. Whilst this power is rarely exercised by the Tribunal, especially in the financial services sector, it’s reference within this judgment may indicate a willingness to exercise this power more often in the future. The failure to consult the Tribunal where the Authority did not believe the witness should be called, or to take steps in managing witnesses overseas was found to be unreasonable in the circumstances.
Fair treatment of individuals who successfully challenge decisions made against them
In its judgment on the substantive references in this case, the Tribunal directed that it would be irrational of the Authority to make a prohibition order against the Applicants on the basis that they lacked integrity and noted a number of factors the Authority should take into account if it were to consider making a prohibition order against the Applicants on the basis they lacked competence and capability.
Shortly after this Tribunal decision was published, the Authority discontinued its proceedings against the Applicants and accordingly did not seek to make a further decision prohibiting any of the Applicants on grounds of lack of competence or capability. The Authority has since anonymised the individuals’ Decision Notices published on its website, and anonymised references to the individuals in the Julius Baer Final Notice, the individual’s former employer at the relevant time, but has not made any formal statement regarding this development.
Clear, fair and not misleading press statements
It is common practice for the Authority to report the outcome of cases it is party to before the Tribunal. The Tribunal was highly critical of the press statement issued by the Authority shortly after judgment was handed down in the substantive references in this case. The Tribunal considered the statement was “highly misleading” and unfair because:
- it said that the Authority had “already had a successful outcome in this case”, by which the Authority was referring to a settled decision between the Authority and the Applicants' former employer, which conflicted with the findings of the Tribunal;
- emphasised criticisms the Tribunal had made of the Applicants’ conduct but downplayed criticisms that had also been made of the Authority’s conduct;
- did not include links to the Tribunal’s judgments in favour of the Applicants, as it had done in previous press statements of this nature; and
- did not mention that the Authority had decided to discontinue its proceedings against the Applicants.
The statement was removed a month after detailed discussions with the Applicants in which it was agreed the statement would be removed. The Tribunal was critical of the Authority’s delay in taking this action.
Reform of the costs regime
Interestingly, the postscript to the Tribunal's judgment suggested that there may be some policy arguments for the modification of the Upper Tribunal cost regime in so far as it relates to more complex financial services decisions, to permit parties to recover their costs more easily. The Tribunal noted that had it not been for the restrictive cost regime, the Applicants in this instance would have been entitled to their whole costs in relation to the matter. Reference was made to the cost shifting regime in place for complex tax cases heard in the First-tier Tribunal. Under that regime, appellants can opt-out of the cost-shifting regime but it provides an appellant the opportunity of being awarded their costs if they believe they have a strong case.
Whilst the postscript to the Tribunal’s costs judgment noted that the Authority had been “largely successful” in relation to the costs applications, it warned that the Authority should not take great comfort from its conduct in connection with the proceedings. Following criticism in a number of judgments recently, we might start to see an adjustment in the way the Authority conducts investigations, the types of cases it refers to enforcement and the types of cases it is prepared to defend before the Tribunal. The Authority may also be more cautious about the extent to which it relies on internal investigations conducted by firms where it is also investigating the conduct of officers or employees of the firm, without undertaking their own investigative work into issues or to verify the findings of such internal investigations.
The Authority has yet to issue a full statement in relation to its discontinuance of proceedings against the individuals concerned or the costs judgment itself.
Thomas Seiler and Louise Whitestone v Financial Conduct Authority  UKUT 00270 (TCC) (9 November 2023) (published 14 November 2023)
This article was first published on Practical Law and is reproduced with the permission of the publishers.
Update: An application to appeal the November 2023 decision of the Upper Tribunal has been made.