UK Upper Tribunal overrules FCA finding that Julius Baer employees lacked integrity
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The UK Upper Tribunal (Tribunal) has overruled Financial Conduct Authority (FCA) decisions that three former employees of Julius Baer International Limited (JBI) lacked integrity and should be prohibited. The Tribunal’s judgment confirms the appropriate legal test for recklessness and considers the factors to be taken into account when assessing the reasonableness and competence of an individual’s conduct.
Once again, the Tribunal has taken the opportunity to address concerns it has identified in relation to the adequacy of the FCA’s investigation and enforcement processes.
In November 2022, the FCA fined JBI over GBP18 million for failing to conduct its business with integrity, systems and controls failings and for failing to be open and cooperative with the FCA. The FCA also proposed taking enforcement action against three of JBI’s former employees on the basis they lacked integrity. All three referred the FCA decisions against them to the Tribunal. The FCA’s findings all relate to JBI’s involvement in a finder’s arrangement with a third party, which facilitated bribery and corruption.
In order to reach a finding that JBI lacked integrity, the FCA attributed the knowledge of two of the former employees to JBI, a junior relationship manager and a manager to whom she reported who was also a board member.
In June 2023, the Tribunal handed down a detailed judgment covering all three references and remitted the cases to the FCA for reconsideration. It held that the FCA had not made out its case that the individuals lacked integrity and directed that it would be irrational for the FCA to prohibit the individuals on this basis. However, given that it found that the three individuals had demonstrated a lack of competence and capability to varying degrees, the Tribunal did not find that the imposition of a prohibition order by the FCA would be disproportionate or irrational.
Clarification of the legal test for recklessness
There is no specific definition of what constitutes acting with integrity. However, it is accepted that acting recklessly is one example of a lack of integrity. The FCA’s case against all three of the JBI individuals was that they lacked integrity on the basis that they had acted recklessly.
A person acts recklessly with respect to a result if they are aware of a risk that it will occur and it is unreasonable to take that risk having regard to the circumstances as that person knows them to be (Tinney v Financial Conduct Authority  UKUT 0345).
In these cases, the FCA also pleaded an alternative case that recklessness could be established if a reasonable person in the individual’s position would have been aware of the risk in question, regardless of the individual’s actual knowledge of the risk concerned. The Tribunal rejected this, saying that such a finding would amount to negligence at worst and could not amount to a finding of recklessness (and therefore a lack of integrity). However, while deciding that the correct test is whether the individual was aware of the risk in question, the Tribunal recognised that it could conclude from objective factors that the risk would have been obvious to the individual and so infer that they were aware of the risk.
On the facts, the Tribunal was not satisfied that the FCA had demonstrated that the JBI individuals acted recklessly. With regard to the most junior of the three, a junior relationship manager, the Tribunal found that she was not aware of the risks and, therefore, could not be considered to have acted recklessly. When considering her conduct more generally (and the cumulative effect of her conduct in relation to a series of incidents) the Tribunal took into account: her lack of experience, the unsupportive culture in which she worked, the fact that she had followed JBI’s policies and procedures, had escalated particular issues to subject matter experts at JBI and had acted on their advice, and the fact that more experienced individuals with whom she worked had also not identified the relevant risks.
Likewise, the Tribunal held, on the facts, that neither of the senior managers had been aware of the relevant risks at the time. Accordingly, they could not be considered to have acted recklessly. The Tribunal appears to have accepted that these individuals missed risks which should have been obvious to a person of their experience, had they given certain matters more detailed consideration or asked for more information, but it considered this indicated a lack of due, skill, care and diligence rather than recklessness.
The Tribunal appears to have accepted that, in assessing whether a person’s reaction to a particular event demonstrates a lack of integrity, it is relevant to consider how other people reacted at the time.
Assessing lack of integrity
In summarising the law relevant to a lack of integrity finding, the Tribunal highlighted the following types of behaviour, in addition to acting recklessly, which are likely to demonstrate a lack of integrity on the part of an individual.
- A person who lacks an ethical compass, or whose ethical compass to a material extent points them in the wrong direction, will lack integrity, even though they might not have been dishonest.
- Turning a blind eye to the obvious and failing to follow up obviously suspicious signs suggests a lack of integrity.
The test to be applied is essentially objective, but anyone required to make such an assessment should have regard to the individual’s state of mind and the facts that they knew at the relevant time.
Whistleblowing reports and confirmation bias
The conduct of the individuals in this case came to be under investigation as a result of an email sent by the junior relationship manger’s line-manager (C) to JBI’s Money Laundering Reporting Officer. C described the email as a suspicious transaction report. This triggered an internal investigation by JBI, supported by external advisers, which ultimately led to the matter being reported to the FCA.
The Tribunal was critical of the way in which the FCA had based its case theory on C’s email and his version of the relevant events. When challenged at the hearing on why C had not been called as a witness, the FCA accepted that he was not a reliable witness. There was ample evidence that he had been “reckless as to the truth of what he said in FCA interviews” and the FCA considered he could not be relied upon to tell the truth under oath before the Tribunal.
The Tribunal criticised the FCA’s failure to call C as a witness, saying that the public interest is served by the FCA calling all relevant evidence before the Tribunal, even if it might be exculpatory, and that the FCA’s concerns about C not being a reliable witness could have been dealt with by an application to treat him as a hostile witness.
The Tribunal was also critical of the FCA’s failure to take a step-back and reconsider its case theory during the course of its investigation and the wider enforcement proceedings. The Tribunal considered that the FCA became anchored in its initial impression of what had happened, informed by C’s email (notwithstanding later doubts about his veracity), so that subsequent disclosures during the investigation process gave rise to a mind-set of confirmation bias.
The risks highlighted by the Tribunal are equally relevant to the conduct of internal investigations, during which it is important to periodically take a step-back and challenge the evidential weight being attributed to conflicting accounts of events as well as any underlying case theory. Failure to do so is likely to increase the risk of confirmation bias, reducing the objectivity of the investigation process and the reliability of the outcome.
Sharing internal investigation reports where the FCA investigates firm and individuals
The Tribunal criticised the FCA for relying heavily on internal investigations conducted by third parties appointed by JBI rather than conducting its own rigorous investigation into the conduct of the individuals. The Tribunal highlighted the potential for conflicts of interest to arise where the FCA conducts contested proceedings against individuals on the basis of its acceptance of a version of events put forward by the individuals’ employer, which is usually keen to settle the separate proceedings against the firm.
Whilst firms may be keen to volunteer material gathered during and the results of internal investigations, in an attempt to secure co-operation credit, the FCA might be less willing to rely on these in the wake of the Tribunal’s criticism in this case. To the extent that the FCA is required to re-conduct the investigation, the timesaving utility of reports and underlying materials disclosed by firms is likely to be reduced which may, in turn, reduce the value of any co-operation credit.
The Upper Tribunal remains concerned about FCA enforcement conduct
The Tribunal made a number of other criticisms of the FCA’s investigation and expressed views on how the FCA should approach its next steps in the cases. These included:
- A second direction that the FCA review its disclosure processes: For the second time, the Tribunal exercised its powers under section 133A(5) of the Financial Services and Markets Act to direct the FCA to review its disclosure process (following its earlier decision in Forsyth v FCA and PRA  UKUT 0162(TCC)). The Tribunal expressed exasperation that basic errors continue to occur and observed a continuing problem with the competence of individuals at the FCA conducting the disclosure process and the adequacy of their supervision.
- Delay: The Tribunal said that it was unacceptable that there was a delay of five years from the date of one of the individuals being first notified of the investigation to the FCA issuing its decision notice against her. It said that it is for the FCA to consider whether it is appropriate to continue with an investigation which it does not have resources to complete within a reasonable period of time.
- Appropriate use of prohibition orders. When remitting the cases to the FCA for reconsideration, the Tribunal directed that the FCA should not use prohibition orders as a proxy for a disciplinary sanction (eg a fine) in circumstances where a disciplinary sanction cannot be imposed because the individual was not an approved person at the relevant time or the relevant limitation period has expired. Prohibition orders are a protective rather than punitive measure.
- Publication. In a postscript to its judgment, the Tribunal expressed a view that it would “clearly be unfair” to the JBI individuals if the notice against JBI, which refers to the individuals lacking integrity, continued to be published in full on the FCA’s website. The Tribunal suggested a summary of the outcome could be published instead.
The FCA’s final notice against JBI now sits in an “awkward” position, with a regulatory finding that the firm lacked integrity, based on the attribution of the state of mind of individuals now held not to have lacked integrity. Before settling with the FCA, JBI had unsuccessfully challenged (before the Regulatory Decisions Committee) the FCA’s attribution of the junior relationship manager’s knowledge to the firm. The Tribunal observed that the allegations against the individuals in this case could easily have been divorced from the allegations against the firm so that they could be investigated thoroughly. We will see whether the Tribunal’s criticism makes the FCA less inclined to bring integrity cases against firms in factually complex cases like this, and instead reserve integrity issues for investigations into individuals.
In any event, the Tribunal’s judgment provides helpful guidance on where the line lies between negligence and recklessness, and the way in which considerations like an individual’s level of seniority, scope of role and relative inexperience should be taken into account. The Tribunal’s approach to these issues, and to the analysis of the evidence in this case more broadly, will be instructive for firms in relation to their own assessments of individuals’ conduct under the FCA and PRA conduct rules.
This article first appeared on Practical Law (www.practicallaw.com) and is reproduced with the permission of the publishers.