UK Upper Tribunal decision on preliminary issue finds that a third party reference was not affected by the FCA issuing a final notice

Background

In May 2023, the FCA issued a decision notice to Banque Havilland S.A. (Banque Havilland) in which it proposed to fine Banque Havilland £10 million for failing to conduct its business with integrity. The FCA also proposed to take enforcement action against three former employees of Banque Havilland for failing to act with integrity. The FCA’s findings relate to the alleged preparation of advice recommendations involving manipulative trading strategies that, if undertaken in the UK, could amount to a criminal offence.

Banque Havilland and two of the three former employees referred their decision notices to the Tribunal. The third former employee (W) did not refer their decision notice to the Tribunal, and subsequently received a final notice from the FCA.  W’s final notice was not published on the FCA’s website.

A third party (R) referred W’s decision notice and the other three decision notices to the Tribunal, pursuant to the third party reference process set out in section 393 FSMA.  In June 2023, the Tribunal handed down judgment on a preliminary issue, raised by R, regarding the timing and issuance of the final notice to W in circumstances where R’s third party reference was pending.

Can the Tribunal consider a third party reference relating to a decision notice if a final notice has already been issued?

R contended that the FCA could not issue a final notice to W until R’s third party reference had been determined because the Tribunal’s decision on the various references (including the third party reference) could be inconsistent with W’s final notice. R also argued that, by issuing the final notice, the FCA had pre-determined the Tribunal’s assessment of R’s third party reference, circumventing the Tribunal’s statutory role. R asked the Tribunal to quash W’s final notice or, if it had no such power, to request the FCA to rescind it.

The FCA argued that it could issue a final notice where it had determined to take the action to which the decision notice relates and the subject of the decision notice had not referred it to the Tribunal. The FCA considered this to be the case regardless of whether a third party had referred the decision notice to the Tribunal. 

The Tribunal held that the fact that the FCA had issued a final notice to W did not impact the Tribunal’s jurisdiction to consider R’s reference of W’s decision notice, which could proceed in the usual way. This was, in part, because the FCA had said that, if W’s final notice were to be published, it would include a legend in the final notice to make it clear that a reference had been made to the Tribunal and would be considered judicially in relation to the third party. This would ensure it was clear to a reasonable reader that the Tribunal could reach a decision that was inconsistent with the FCA’s criticisms of the third party contained in W’s decision notice, if appropriate. Therefore, it could not be said that the issuance of the final notice had pre-determined the Tribunal’s assessment of R's third party reference.  As at the date of the preliminary issue hearing, the FCA still had not published W’s final notice.

Can the FCA issue a final notice before the determination of a third party reference of the related decision notice?

Having reached the above conclusion, the Tribunal considered it did not need to determine whether the FCA had acted lawfully by issuing the final notice to W before R’s third party reference had been determined. It also said that it has no statutory jurisdiction under FSMA to quash a final notice or issue an injunction to prevent the FCA from issuing a final notice. However, while not the issue before the Tribunal in this hearing, the parties asked the Tribunal to express a view on whether FSMA envisages the issue of a final notice before any third party reference made in respect of the relevant decision notice has been determined.

Section 390(1) of FSMA states: “If a regulator has given a person a decision notice and the matter was not referred to the Tribunal within the time required by the Tribunal Procedure Rules, the regulator must, on taking the action to which the decision notice relates, give the person concerned and any person to whom the decision notice was copied a final notice.”

The FCA argued that this provision of FSMA should be read as applying where no reference has been made to the Tribunal by the subject of the regulatory action. Where this is the case, the FCA must give that person a final notice. The FCA argued that the underlying purpose of this provision is to permit the issuance of a final notice to the subject of the regulatory action and determine the legal position between the regulator and the subject where the subject has decided not to take further action. 

The FCA said that its position was in the public interest because: it achieves finality for individuals subject to regulatory action, the FCA achieves regulatory efficiency, and the wider public receives the benefit of the regulatory action taking effect. It claimed that the latter point serves to protect customers and/or the integrity of the UK financial system. The FCA argued that the counter position would mean that the subject of the regulatory action would remain in limbo, pending the determination of the third party reference, which, for example, could concern a narrow issue of limited relevance to the decision notice. It claimed this would undermine the interests of the subject of the decision notice, the FCA and the wider public.

The position of the Applicants’ (R and the two former employees who referred their decision notices to the Tribunal) was that section 390(1) of FSMA distinguishes between a person receiving a decision notice and a person given a copy of the final notice because they have third party rights. The Applicants argued that if Parliament had intended the reference to a “referral” in section 390(1) of FSMA to be limited to a referral made by the subject of regulatory action, it would have said so. It followed that the obligation on the FCA to give the subject of regulatory action a final notice could only arise after a third party reference had been determined by the Tribunal.

The Applicants argued that, although a third party reference might delay (or even stop) the issuance of a final notice to the subject of an investigation, this was not a reason for the FCA to have acted as it had. Parliament had decided that third parties should be able to refer decision notices that identified them in a potentially prejudicial way to the Tribunal and, consistent with this, the issuance of a final notice should only be possible once the third party’s reference has been determined.

The Tribunal expressed the following views:

• While the Tribunal acknowledged that the wording of section 390(1) of FSMA is capable of having both meanings suggested by the parties, it concluded that FSMA does not envisage that a final notice will be issued to the subject of regulatory action until after any relevant third party reference has been determined by the Tribunal. It considered this to be the position whether or not the subject of the regulatory action has also referred the matter to the Tribunal. 
• If the Tribunal were to make findings relating to the criticisms of the third party that were contrary to those made in the decision notice, it would be for the FCA to decide what action to take in light of those findings. This could lead to the FCA amending the original findings and issuing a further decision notice. Should the third party no longer disagree with those findings and the subject of the regulatory action not wish to refer the decision notice, the matter would proceed to a final notice. However, if the FCA decided to continue to pursue regulatory action, it could issue a further decision notice that could be referred to the Tribunal by the subject of the regulatory action. This supports the construction that a final notice should not be issued until after the determination of any third party reference.

The Tribunal accepted that this position creates an unsatisfactory state of limbo for a subject of regulatory action who is willing to accept a final notice but cannot do so because a third party reference is pending. The Tribunal also noted that the public could be prejudiced as a result of the delay to the implementation of any remedial action set out in the decision notice. 

Status of third party references to the Tribunal

In its judgment, the Tribunal clarifies that references made to it by a third party pursuant to the process set out in FSMA carry the same status as a reference made by the subjects of FCA decision notices. The Tribunal considered R and the other applicants in this case to be in the same position. R is challenging the criticisms made of him in the decision notices, albeit the notices are not addressed to him. Similarly, the other applicants are challenging the findings and criticisms made of them in the decision notices addressed to each of them. 

Balancing legal certainty with the rights of third parties

While the Tribunal offered its view on whether FSMA envisages the issue of a final notice before the determination of a third party reference of a decision notice, it is clear that the Tribunal considered that the arguments put forward by both parties had their merits. In relation to the FCA’s arguments, the Tribunal acknowledged that there may be strong policy reasons to agree with such arguments. Namely, the legal certainty that this would provide for the subject of the regulatory action, the FCA and the wider public would not be inconvenienced by a third party reference that could concern a narrow point of limited relevance to the FCA’s findings against the subject of the regulatory action. 

However, the Tribunal also noted that this might lead to the FCA making every effort to avoid giving third party rights, which could “skew the balance against the legitimate interests of a potential third party”.

Does the FCA need more clarity?

The Tribunal acknowledged that the FCA’s case made strong points as to what the law ought to be as a matter of policy. Whether or not the Tribunal agrees with these arguments, the Tribunal confirmed that it is bound to interpret the law as it actually is. It is not within the Tribunal’s power to set a precedent based on policy considerations. 

The Tribunal also noted that cases referred to it pursuant to the third party reference process set out in FSMA usually give rise to “difficulties of interpretation” and suggested that the FCA may, therefore, want to consider whether it would be appropriate to lobby Parliament for the law in this area to be clarified. Alternatively, if the FCA remains of the opinion that its own interpretation of s.390(1) FSMA is the correct one, it could test it in the Administrative Court.

This article first appeared on Practical Law (www.practicallaw.com) and is reproduced with the permission of the publishers.