29 Mar 2017

FCA v Macris – Supreme Court gives judgment on "third party rights"

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On Wednesday 22 March the Supreme Court handed down its much-anticipated judgment in Financial Conduct Authority v Macris [2017] UKSC 19.

In a split decision (3-2 on the law, and 4-1 on the facts), the Supreme Court reversed the judgment of the Court of Appeal, and found that Mr Macris was not "identified" in the Final Notice given to JP Morgan in September 2013, so as to engage "third party rights" under s.393 of the Financial Services and Markets Act 2000.

The Macris case raised questions of the utmost importance about the conduct and resolution of FCA investigations and the rights of individual "third parties" – typically the employees of financial services institutions which are seeking to resolve FCA investigations. 

Background

In September 2013 the FCA fined JP Morgan £137,610,000 in relation to the London Whale "rogue trading" losses, and issued a Final Notice which criticised the conduct of “CIO London Management”.

Macris complained to the Upper Tribunal that the FCA had prejudicially identified him in its Notice, by using the cipher “CIO London Management”, without affording him third party rights under s.393 of the Financial Services and Markets Act 2000 ("the Act") and thereby the right to contest the criticisms levelled at him.

The Upper Tribunal held that the FCA had indeed identified Mr Macris, prejudicially, as he could be identified as an individual singled out in the Notice, and his identity could be confirmed by reference to external sources. As such, the Tribunal found that third party rights were engaged.

In May 2015 the Court of Appeal (unanimously) rejected the FCA's appeal against the decision of the Upper Tribunal. Lady Justice Gloster circumscribed the class of external material which is relevant to the question of identification to that which “objectively, a person acquainted with the third party, or persons operating in the relevant area of the financial services industry, might reasonably have known at the date of the promulgation of the relevant notice”.

The judgment of the Supreme Court

The majority of the Court found that a greater degree of particularity than "CIO London Management" would have been needed in the FCA's Notice to identify Mr Macris:

  • "A person is identified in a notice under s.393 if he is identified by name or by a synonym for him, such as his office or job title" (Lord Sumption); and
  • "An individual is identified…if his position or office is mentioned [and] he is the sole holder of that office" (Lord Neuberger).

As to the "relevant audience", to which an individual must be identified, the majority of the Supreme Court roundly rejected the "persons acquainted" test applied by the Court of Appeal, and held that a person must be prejudicially identified in a Notice to the "public at large" for third party rights to be engaged:

"The relevant audience for this purpose is the public at large. The fact that some specific sector of the public at large may, like Mr Macris' witnesses, have special additional information enabling them to identify a third party is not relevant" (Lord Sumption).

In order to "identify" a person in a Notice, the public at large can have regard to "external sources", in the manner envisaged by the Upper Tribunal (and, to a lesser extent, the Court of Appeal). However, a person is only identified for the purposes of s.393 if his identify can be ascertained by "straightforward and simple" means:

  • "It involves assessing the identifiability of an individual by reference to what members of the public generally know or could discover… Any research or investigation should be straightforward and simple, as would be the case in relation to identifying the chairs of the board of a UK registered company… any investigation process should not require detective work; and so jigsaw identification…would not do" (Lord Neuberger). 

Practical implications

Had judgment been given for Mr Macris, the implications for FCA – and for financial institutions seeking quick resolutions of investigations – may have been severe. A broader test for "identification" may have prolonged investigations, and all but removed the possibility of prompt resolution by settlement, for example as occurred in the FX investigations.

However, the Supreme Court's judgment is likely to have – as Lord Wilson put it, in his dissenting judgment – "significant implications for individuals wrongly criticised in warning and decision notices given by the Authority to others".

Under the law as expounded by the Supreme Court, it appears that the FCA remains at liberty to negotiate the culpability of individual "third parties" with financial services institutions, and publish findings about individual culpability, without affording those individuals any opportunity to make representations or explain their conduct.

Even if the entire financial services community knows, or could find out, who "Trader A" is, in a Notice agreed between his employer ("X Bank") and the FCA, the Authority need not pay any regard to the position of "Trader A", or afford him any opportunity to comment, before publishing its Notice regarding "X Bank", and irreversibly damaging his reputation and future career prospects.

Of greater concern still, "Trader A" will have to live with the heavy burden of having to explain  – for example, in the context of a claim for unfair dismissal in the Employment Tribunal, or to a foreign prosecutor, considering criminal charges – that the criticisms of his conduct, contained in the FCA Notice to "X Bank", are not the result of a meaningful investigation, or due process; but rather nothing more than the negotiated terms of an agreement, between an institution and its regulator, with a common interest in a fast resolution by settlement.

In an era when "individual accountability" is an expressed imperative for the UK's financial services regulators, individuals working in financial services firms – whether at management level, like Mr Macris, or on the trading floor, like the traders criticised in the FX Notices – may have cause to agree with Lord Wilson's judgment: "The Court's decision today does not strike a fair balance".

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