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Upper Tribunal expresses "wholesale disagreement" with FCA's assessment of level of financial penalty to be imposed on non-executive director

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In this decision report, we consider the decision of the Upper Tribunal (Tax and Chancery Chamber) in Angela Burns v FCA [2015] UKUT 0252 (TCC).

The tribunal significantly reduced the financial penalty that the FCA proposed to impose on Angela Burns in connection with a previous finding by the tribunal that she had failed to act with integrity in breach of Principle 1 of the FSA's Statements of Principle and Code of Practice for Approved Persons (APER) in her capacity as a non-executive director (CF2) of two mutual societies.

Background

In December 2014, the tribunal handed down a decision that partly upheld the FCA's findings in respect of Ms Burns in connection with her conduct as a non-executive director (CF2) of two mutual societies. The tribunal found that Ms Burns had failed to act with integrity in breach of APER Principle 1 on the basis that she had failed to make disclosures to and obtain consent from the two mutual societies in relation to approaches she made to a third party. For more information about the tribunal's findings in respect of Ms Burns, please click here.

Prior to the tribunal hearing, Ms Burns and the FCA had agreed to defer the issue as to what sanction should be imposed on her. As a result, when the tribunal handed down its decision in December 2014, it invited Ms Burns and the FCA to discuss whether, in light of its findings, they were able to agree upon an appropriate sanction.

Sanctions proposed by the FCA

In the light of the tribunal's findings in respect of Ms Burns, the FCA proposed to:

• impose a financial penalty of GBP 54,800 on Ms Burns (this was the same amount as the FSA had proposed to fine Ms Burns when it issued her with a decision notice prior to the tribunal considering her case); and

• impose a prohibition order on Ms Burns.

Ms Burns disagreed that these were appropriate sanctions to impose on her in light of the tribunal's findings. Rather Ms Burns argued that:

• no financial penalty should be imposed on her; and

• the FCA's proposed prohibition order should be limited to prohibiting her from performing the CF2 (non-executive director) function, and to the time served in the effective ban imposed on her since May 2011 (when the FSA's investigation into Ms Burns commenced).

The tribunal's role in assessing financial penalties

As the tribunal noted in Carrimjee v FCA [2015] UKUT 0079 (TCC) (see A&O report: Upper Tribunal overturns FCA decision that fund manager acted without integrity by recklessly assisting a client to commit market abuse), the tribunal is not bound to assess financial penalties by following the FCA's published penalties policy, but pays it due regard when carrying out its overriding objective of doing justice between the parties, taking into account all of the circumstances of the case.

In addition, the tribunal stated that, when considering what the appropriate penalty was for the FCA to impose on Ms Burns in this case, it must consider this point not only in the context of the positions adopted by the FCA and Ms Burns, but also having regard to the public interests promoted by the Financial Services and Markets Act 2000 (FSMA).

The tribunal's decision

Financial penalty

Notwithstanding the fact that the tribunal had only partly upheld the FCA's findings in respect of Ms Burns (only six of the FCA's ten allegations were upheld by the tribunal), the FCA did not alter the amount of the financial penalty that it proposed to impose on Ms Burns. It proposed to impose a financial penalty of GBP 154,800 on Ms Burns (the same amount as the FSA had set out in the decision notice it had issued to Ms Burns).

As the FCA had failed to take into account the fact that the tribunal had only partly upheld the FCA's findings, the tribunal held that the FCA "did not make a realistic reassessment" as to what financial penalty it would be appropriate to impose on Ms Burns. Overall, the tribunal found the FCA's submissions regarding the sanctions that should be imposed on Ms Burns "to be unsatisfactory and unpersuasive in a number of respects", including:

Extending the length of the breach. The FCA justified its proposed financial penalty for Ms Burns on the basis that her conduct had taken place over a period of two years, whereas the tribunal's findings concerned isolated incidents which occurred on four separate days over a period of 21 months.

Misinterpretation of the tribunal’s findings. The FCA incorrectly interpreted the tribunal's substantive decision regarding Ms Burns' conduct as having held that Ms Burns improperly misused her position as a non-executive director of two mutual societies to benefit herself. On the contrary, the tribunal upheld less serious findings in relation to Ms Burns' conduct that related to Ms Burns' failure to make disclosures to and obtain consent from the two mutual societies in relation to approaches she made to a third party.

Consideration of other factors. When calculating a financial penalty to be imposed on Ms Burns, the FCA relied on concerns expressed by the tribunal about the unsatisfactory nature of some of Ms Burns' evidence before it and the accuracy of information that Ms Burns had included on forms submitted to the FSA for approval as a CF2 (non-executive director). Although the tribunal acknowledged that it could take these factors into account in determining Ms Burns' fitness and propriety, the tribunal did not consider that they could be taken into account by the FCA when considering the appropriate financial penalty to be imposed on Ms Burns. This is because these factors did not form part of the alleged misconduct that was the subject of the FSA's decision notice and that was referred by Ms Burns to the tribunal.

Detriment to other parties. The FCA alleged that Ms Burns' conduct had caused detriment to other parties. The tribunal held that this allegation was unfounded.

In the light of these points, the tribunal found itself in "wholesale disagreement" with the FCA's assessment of the level of seriousness of the breaches committed by Ms Burns that had been upheld by the tribunal. Accordingly, the tribunal held that the FCA's proposed financial penalty of GBP 154,800 was "wholly excessive". The tribunal held that it would be appropriate for the FCA to impose a financial penalty of GBP 20,000 on Ms Burns. The tribunal commented that this figure also represented a discount in recognition of the prejudice Ms Burns suffered as a result of her facing substantial allegations made by the FCA that the tribunal concluded were unfounded.

Prohibition order

Ms Burns argued that, based on the tribunal's findings, any prohibition order imposed on her should be limited to prohibiting her from holding the CF2 (non-executive director) function and restricted to a particular period of time.

For the same reasons set out above, the tribunal found that the FCA's proposal to impose a complete prohibition order on Ms Burns in connection with this matter was based on "a more negative view of her conduct than that taken by" the tribunal. As a result, the tribunal agreed that it was appropriate in the circumstances given the limited nature of Ms Burns' breaches to limit the prohibition order imposed on her so as to only prevent her from performing the CF2 (non-executive director) function. The tribunal explained that it did not have the power to limit the time period of the prohibition order imposed on Ms Burns, but noted that it was open to Ms Burns to apply to the FCA at a later date to have her prohibition order varied or revoked pursuant to section 56(7) of FSMA. However, the tribunal commented that it may be difficult for Ms Burns to have her prohibition order lifted given that, despite the tribunal's findings, she continued to deny that she had breached the proper standards of conducted expected of a CF2 non-executive director.

In addition, the tribunal referred to the fact that Ms Burns has lodged an appeal relating to her case with the Court of Appeal. The tribunal did not disclose any details about the nature of Ms Burns' appeal, other than to say that it "cannot foresee how [Ms Burns'] situation [in relation to her prohibition order] may alter in the future, particularly after her appeal to the Court of Appeal is resolved."

Compensation and costs

Ms Burns also requested that the tribunal consider:

• awarding her compensation for the losses she had incurred through the "unfounded allegation of bribery" made against her, which had been maintained by the FSA and FCA for four years; and

• requiring the FCA to pay Ms Burns' legal costs "for the poor conduct of this case post 19 April 2011 and their unjust conduct at the tribunal hearing".

The tribunal stated that it was not within its jurisdiction to deal with Ms Burns' request for compensation from the FCA. In any event, the tribunal commented that it was "not apparent… how Ms Burns would have any claim against the [FCA] for damages" in connection with this case.

As for Ms Burns' request that the FCA be required to pay her legal costs, the tribunal invited Ms Burns to identify in writing the particular matters she relied in support of this request. The tribunal said that it would then give directions on this issue.

Comment

The decision in this case demonstrates that the tribunal will not shy away from expressing its disagreement with financial penalties that the FCA proposes to impose on subjects of enforcement investigations. The tribunal's criticism of the FCA's penalties calculation in this case also appears to have been aggravated by the FCA's failure to reconsider what financial penalty should be imposed on Ms Burns in light of the tribunal's findings, meaning it based its proposed financial penalty for Ms Burns on more serious findings than had actually been established by the tribunal.

We understand that Ms Burns' appeal in relation to this case is due to be heard by the Court of Appeal later in 2015.

Decision

Angela Burns v FCA [2015] UKUT 0252 (TCC) (dated 14 May 2015).

This article first appeared on www.practicallaw.com and is published with the permission of the publishers.