On 19th May 2015, the Court of Appeal in Macris v Financial Conduct Authority [2015] EWCA Civ 490 recast the legal test for the identification of third parties for the purposes of section 393 of the Financial Services and Markets Act 2002. Following the Financial Conduct Authority (FCA) coming under increasing pressure to rethink the way it phrases its Notices, the judgment signals a broader shift towards greater fairness for firms and individuals being implicated in financial crimes and for misdemeanours in the FCA’s Notices.
FCA Enforcement Notices
The FCA are empowered to issue Notices in criminal and civil cases which set out breaches of regulations such as the Payment Services Regulations 2009 or the Financial Services and Markets Act 2000 by companies. These Notices may identify third parties and, directly or indirectly, make adverse comments about the conduct of those third parties. The Notices can be prejudicial as they may include references which could damage the individual’s reputation, adversely affect how jurors perceive that individual in criminal proceedings, or may even lead to civil claims being made against them.
The Notices have been both a source of praise and criticism. On one hand, they inform clients/customers and the public of any misdemeanours committed by companies, they ensure the transparency of the FCA’s decision-making and maximise the deterrent effect of the FCA’s enforcement action. On the other hand, the Notices have been criticised for “naming and shaming” individuals, sometimes before the FCA have had sufficient time to fully investigate and establish the full facts.
The Facts of the Macris Case
In 2013, the trader Bruno Iksil, known as ‘the London Whale’ because of the giant positions he built up for JP Morgan Chase & Co, had executed a massive trading bet which had gone wrong. In connection with this, Iksil’s former boss and a junior trader were indicted in 2013 as U.S. prosecutors claimed the pair committed securities fraud by hiding the true extent of losses from bank management. Iskil himself was not the subject of any criminal charges. Senior Management at the bank had ignored any warning signs relating to ‘the Whale trades’ and accepted reports lacking the key data required to accurately assess their losses. The losses escalated beyond all expectations until the bank had to announce it totalled US $6.2 billion.
In connection with this conduct, the FCA had issued several Notices: a Warning Notice, a Decision Notice and a Final Notice to JP Morgan Chase Bank, N.A (JP Morgan Chase & Co’s parent company). The Notices addressed the management decisions that had led to the losses and, amongst other things, made reference to the firm’s Chief Investment Officers who principally operated in London and New York.
Achilles Macris was the London-based International Chief Investment Officer responsible for an international portfolio as well as managing the bank’s risks. Although he was not called by name in the Notices, he objected to the term “CIO London management” used in the Final Notice. This Final Notice fined JP Morgan £137,610,000 – a level of penalty that was critiqued for rubbing salt in the wounds of the firm’s stakeholders – for strategic and management failings connected to the losses of $6.2 billion. Crucially, Macris argued that this term was sufficient to identify him for the purposes of section 393 while the FCA contended it was not. However, both parties agreed that, if it was found to be so, Macris was entitled to the rights afforded to third parties under this section.
Section 393 provides that persons prejudicially identified as third parties in a Notice be given a copy and have the right to make representations to the FCA and to refer any adverse comment by the FCA against him to the Upper Tribunal. Section 394 provides that persons prejudicially identified as third parties in a Notice can request disclosure of material relied on by the FCA and any secondary material that may undermine the FCA’s comments. The case had gone through the Upper Tribunal, which had held that the wording had made reference to Macris and the FCA appealed to the Court of Appeal.
In a move that recast the legal test applicable to the identification of third parties for the purposes of section 393 of the Financial Services and Markets Act 2002, the Court of Appeal agreed with the Upper Tribunal. The wording in question was, in this context, clearly a reference to a particular individual and not a body of people. Further, the Court agreed that it was possible for those in the financial services industry to identify the respondent from this wording. On that basis, the respondent had indeed been prejudicially identified in the Notice without having been given the opportunity to make representations. Accordingly, the FCA’s appeal was dismissed.
The Implications of the Outcome
On 12th June 2015, the FCA announced that it was seeking permission from the Supreme Court to appeal the Court of Appeal’s ruling, however, it remains to be seen whether permission will be granted.
Should the ruling stand, it is likely to spell a lot of inconvenience for the FCA as it provides the opportunity for individuals in current proceedings who are in the same position as Macris to derail those proceedings to assert their third party rights and for other closed cases to be reopened. However, after witnessing the struggle Macris endured in asserting his rights, whether anyone will have the determination to follow him remains to be seen.
It will also have a significant impact on the way the FCA drafts its Notices. It will have to do so in a way that avoids giving rise to third party rights and ensure that individuals referred to in the Notice cannot be identified by other market participants. This may prove to be a difficult task as many functions at even the largest of organisations are discharged by one person and reference to his or her role will be enough to identify the individual to their peers.
The new ruling is a welcome development for businesses and individuals under FCA investigation. It will hopefully serve as a timely reminder to the FCA of the reputational damage which can be suffered by those referred to in an enforcement Notice, whether subjects or third parties.
Contact Lewis Nedas
At Lewis Nedas, we have a long and successful history of advising clients concerned with investigation by the FCA and other regulatory bodies. Our dedicated team of Financial Crime lawyers are very familiar with this area of the law, and regularly advise and represent clients in their dealings with regulatory agencies. If you require advice, please contact us on 020 7387 2032 or complete our online enquiry form.
