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Concurrent regulatory and civil proceedings- Judicial review decision a reprieve for firms and senior managers?

  • United Kingdom
  • Financial services disputes and investigations
  • Litigation and dispute management

04-03-2021

When things go wrong for firms operating in the financial services sector it is not unusual for the business and those running it to face proceedings on multiple fronts including civil claims and disciplinary action by regulators. In a recent successful judicial review of a decision of the Financial Conduct Authority's Regulatory Decisions Committee (“RDC”), the Administrative Court provides some useful guidance on when disciplinary proceedings will be stayed pending the outcome of civil proceedings.

Background

On 4 June 2020, the FCA issued a Warning Notice under the Financial Services and Markets Act 2000 against an individual (“T”) who became the First Claimant in the judicial review proceedings. This followed the FCA’s receipt of information provided by the Danish Customs and Tax Administration (“SKAT”) in August 2015.

The Warning Notice related to the First Claimant’s involvement whilst Chief Executive of the Second Claimant in a dividend arbitrage equity trading strategy carried out by the Second Claimant. It is alleged that this strategy had as its purpose that false claims would be made to SKAT for rebates of a tax payable under the Danish Withholding Tax Act.

The FCA considered that the First Claimant’s conduct was dishonest and lacked integrity and therefore amounted to a breach of Principle 1 of the FCA's Statements of Principle for Approved Persons. Principle 1 requires an Approved Person to act with integrity when carrying out functions relating to regulated activities. This includes a requirement to act honestly.

The Second Claimant is a defendant in proceedings before the Commercial Court brought by SKAT alleging that the trading strategy employed breached the requirements of Danish law and the terms of the Denmark-US Double Taxation Treaty. While proceedings have not been brought against the First Claimant, part of SKAT’s claim against the Second Claimant is that the "knowledge, acts and intentions" of the First Claimant should be attributed to the Second Claimant. Therefore the First Claimant's conduct will be directly in issue in the Commercial Court proceedings. A trial in the Commercial Court of a number of preliminary issues, including the legality of the trading strategy, is scheduled to take place in October 2021, with a number of those issues also being central to any conclusion reached in the RDC disciplinary proceedings as to whether or not the First Claimant acted in accordance with the requirements of Principle 1.

Given this overlap between the two sets of proceedings, the First Claimant sought from the RDC a stay of the disciplinary proceedings pending the outcome of the Commercial Court proceedings. The RDC refused the application and the First Claimant sought to challenge that decision by way of judicial review.

Preliminary points regarding the Judicial Review

The Administrative Court confirmed that the outcome of the application for judicial review in this type of case does not depend on any Wednesbury-based (reasonableness) review of the decision. The Court set out the following factors which it needed to consider in determining whether a stay of the disciplinary proceedings should be granted:

1) The jurisdiction must be exercised sparingly and with great care;

2) The party seeking a stay must show that if a stay is refused there is a real risk of serious prejudice which may lead to injustice;

3) The court has to balance the risk of prejudice against the countervailing considerations such as the strong public interest in seeing that the disciplinary process is not impeded;

4) While the court will give great weight to the view of the disciplinary body as to the factors militating against the stay and the weight to be given to them, the court is the ultimate arbiter for what is fair; and

5) Each case turns on its own facts. Accordingly, only limited assistance can be derived from other cases.

The other general observation that the Court made concerned whether judicial review hearings should be in private given regulatory proceedings (at least to the point they had reached here of a warning notice) were private. The Court considered that once a party has stepped outside those private proceedings by making an application for judicial review, the open justice principle applies and proper weight is to be given to it. In this case, the matters in issue in the FCA proceedings were already in the public domain in the Commercial Court proceedings and confidentiality could be adequately protected by orders for anonymity and preventing publication of the complaints contained in the Warning Notice.

The Decision

The Administrative Court concluded that the disciplinary proceedings should be stayed pending the Commercial Court’s judgment on the trial of preliminary issues. This was on the basis that, absent a stay, there was a risk of serious prejudice to the First Claimant which outweighed other public interest considerations. The basis of the Administrative Court’s decision was as follows:

1) There was a significant overlap of issues in the disciplinary proceedings and the Commercial Court proceedings. Any conclusion that the First Claimant acted in breach of Principle 1 is likely to depend on whether the trading strategy met the requirements of Danish tax law and the Denmark-US Double Taxation Treaty. The Administrative Court considered that the conclusions reached by the Commercial Court on the questions of tax law would be of particular assistance to the RDC.

2) Absent a stay of the disciplinary proceedings (at least until determination of the preliminary issues hearing) there was a real risk of serious prejudice to the First Claimant. The Administrative Court considered that any conclusion that the First Claimant's actions breached Principle 1 should take account of the findings of the Commercial Court on the issues for determination at the preliminary issues hearing, many of which were outside the expertise of the RDC.

3) In balancing the risk of serious injustice against the strong public interest in seeing that regulatory proceedings are not impeded, the Administrative Court took account of the importance of prompt enforcement action by regulators such as the FCA and the seriousness of the complaint – dishonesty. However, the court pointed out that the misconduct alleged against the First Claimant was historic, having taken place between 2013 and 2015 and the First Claimant did not currently pose a risk to the integrity of the UK financial services industry because he is resident abroad and not operating in this industry.

The Court concluded “In this case, where issues that are critical to the regulatory charges are both outside the general experience of RDC panel members and due for early consideration by a specialist court, regulatory conclusions based on those findings will carry particular weight and will for that reason particularly serve the public interest in regulation that is robust, fair and maintains the integrity of the financial system”.

Analysis

This case is a welcome development for firms and their senior managers in seeking to deal with multiple proceedings arising from the same alleged misconduct. It is also a reminder from the court as to the importance of decision makers considering, in the context of overlapping proceedings, which forum is best placed to determine overlapping issues.

The decision illustrates the difficulty that regulators may face in arguing that delay in progressing regulatory proceedings is contrary to the public interest in circumstances where their own investigations have been ongoing for some time.

The Administrative Court refused the FCA permission to appeal. The FCA has said that it will now seek permission from the Court of Appeal and therefore further guidance may follow on this topic.

Case reference:

R (on the application of T & I) (Claimants) v Financial Conduct Authority (Defendant) [2021] EWHC 396 (Admin)

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