The case of Financial Services (Europe) Limited v FCA proves that it might be worth challenging the FCA and its supervisory powers, if your facts are right. The Upper Tribunal is an independent judicial body that hears the matter from scratch and develops its own view of them (and, in disciplinary cases, as to the appropriate action (if any) the FCA should take).
Therefore, if FCA-regulated firms or individuals disagree with the FCA’s supervisory or enforcement decisions (for example, to vary or withdraw regulatory approval, issue a prohibition order or impose a financial penalty), they can refer the matter to the Upper Tribunal.
THE PROCEEDINGS BEFORE THE UPPER TRIBUNAL
The FCA’s decision to cancel Financial Services (Europe) Limited (“FSE”)’s regulatory permissions, on the basis that FSE had failed to pay fees and levies to the FCA and that FSE did not have professional indemnity (“PI”) insurance, considering that FSE did not satisfy the necessary threshold conditions to be a regulated entity, had been at the centre of the challenge brought before the Upper Tribunal.
FSE did not dispute that it did not have PI insurance, nor that it had not paid the FCA’s fees and levies.
However, the FCA was investigating FSE and its director (the FCA had concerns that FSE’s credit-broking business may be being innocently used to facilitate mortgage fraud). Because of that investigation, no insurance provider would provide PI insurance to FSE. Without PI insurance, FSE considered it should not trade, resulting in FSE not being able to afford to pay the FCA’s fees and levies.
THE COURT CASE
The Upper Tribunal accepted FSE’s assertion that, pending the outcome of the FCA’s investigation, it was not able to obtain PI insurance. The Upper Tribunal also agreed that, without trading, FSE could not afford to pay the FCA’s fees and levies. In those circumstances, the Upper Tribunal considered that the FCA’s decision to cancel FSE’s regulatory permissions was inappropriate. The Upper Tribunal found that the FCA had not sufficiently taken into account the reasons why FSE did not have PI insurance, nor why FSE had not paid the FCA’s fees and levies.
The Upper Tribunal therefore remitted the matter back to the FCA for further consideration in the light of its findings of fact.
This is a welcome example of the Upper Tribunal hearing the matter afresh without (as can sometimes be perceived) starting from the premise that the FCA must have been justified in the actions taken.
It is clear from the Upper Tribunal’s judgment that the FCA’s treatment of FSE was found to be too harsh. Both in respect of the decision to cancel the firm’s permission, but also in the way in which the FCA had obtained the FCA’s Regulatory Decisions Committee’s (“RDC”) approval of that decision and had prepared for the Upper Tribunal hearing.
In particular, the Upper Tribunal considered that in the FCA’s submissions to the RDC, the FCA:
- had failed to inform the RDC of the true reason why FSE had not paid the FCA’s fees and levies, suggesting instead that it was because the firm had made a complaint about the FCA’s investigation;
- had also failed to inform the RDC fully about the reason why FSE did not have PI insurance, suggesting that it was a failure without good reason and not because of the lack of progress with the FCA’s investigation;
- had wrongly indicated that it had not asked FSE to voluntarily cancel its regulatory permissions, when the FCA had in fact done so (FSE had refused to comply, but had maintained its decision to cease trading, pending the outcome of the FCA’s investigation).
By contrast, the Upper Tribunal made it clear that FSE had acted responsibly and prudently in ceasing to carry on any regulated activities and delaying seeking PI insurance pending further developments in the FCA’s investigation.
The fact that FSE considered its poor treatment by the FCA worth referring to the Upper Tribunal, is encouraging for other firms, which can consider the Upper Tribunal in appropriate cases.
The Upper Tribunal’s decision should also make much needed reading for all enforcement teams at the FCA and all members of the RDC.
More importantly, it highlights the fact that enforcement teams should give the firms and individuals they regulate proper access to justice and the proper opportunity to understand (and respond to) the FCA’s true concerns, before having draconian penalties imposed on them via short cuts.
Moreover, members of the RDC should be aware of the possibility that the enforcement teams who appear before them might not be giving the full picture of the case under examination: indeed, this case calls into question the fairness of obtaining approval from the RDC for Warning Notices (which can be published), without the RDC hearing directly from the subject of the notices.
POINTS TO TAKE AWAY
If firms subject to FCA actions are not treated in compliance with the appropriate criteria, this case is an example of how they can successfully object to poor regulatory supervision from the FCA.
For more information, and any guidance or advice on your regulatory authorisation and approval process, Cleveland & Co External in-house counselTM, your specialist outsourced legal team, are here to help.