What rights do third parties have when named in FCA enforcement notices?
Jonathan Brogden, DAC Beachcroft, Partner, London, 30 June 2015
Jonathan Brogden, a partner at the international law firm of DAC Beachcroft in the City of London, reviews an important case in which the Court of Appeal has told the UK's conduct regulator that if it inadvertently identifies an individual in a decision notice or final notice, that individual has certain rights.
On 19 May 2015, the Court of Appeal handed down its judgment in the case of the FCA v Macris  EWCA Civ 490. The FCA had appealed against a decision handed down by the Upper Tribunal that found that Mr Macris had been identified in certain notices given by the FCA on 18 September 2013 to JP Morgan Chase Bank NA ("JPM") relating to what were referred to in the press as the "London Whale Trades" ("the notices").
The usual channels of enforcement
Where the FCA considers that there has been misconduct by an individual or a firm, it follows a procedure of issuing a series of notices to the individual/firm to which the individual/firm has the opportunity to respond to and, if it so wishes, defend itself in whole or in part against the allegations raised.
The first stage is for the FCA to issue a warning notice setting out the action the FCA is minded to take and the reasons for it. After receiving representations, it then issues a Decision Notice with a Final Notice following in the event that the Decision Notice is not challenged or any challenge fails. These notices may prejudicially identify third parties who are not the subject of the regulatory enforcement action.
Rights for third parties
Section 393 Financial Services & Markets Act 2000 operates to give those third parties the right to receive copies of the notices and to make their own representations to the FCA. It essentially provides that if any of the reasons contained in a notice relate to a matter that identifies a person other than the person to whom the notice is given, and in the opinion of the FCA is prejudicial to that person, a copy of the notice must be given to that person.
In the present case, the FCA did not give Mr Macris a copy of the notice and the question was whether Mr Macris had been identified in them. The Upper Tribunal decided that Mr Macris had been identified and ought to have been afforded the rights under section 393 FSMA.
How does identification take place?
The Court of Appeal agreed with the Upper Tribunal that Mr Macris had been identified in the notices. The Court of Appeal analysed the language of s393. It found that, "as long as the relevant description of the 'matters' (whether by reference to an office, a job description, or simply Mr X) can properly be construed as a reference to an individual person, i.e. a 'he' or a 'she' (or, of a corporate entity, an 'it'), then it seems to me that the correct test for identification is…"Are the words used in the 'matters' such as would reasonably in the circumstances lead persons acquainted with the claimant/third party, or who operate in his area of the financial services industry, and therefore would have the requisite specialist knowledge of the relevant circumstances, to believe as at the date of the promulgation of the notice that he is a person prejudicially affected by matters stated in the reasons contained in the notice?"" Put succinctly, at times when the third party is not named, the question is whether the words used are such as would reasonably lead persons acquainted with him to believe that he was the person referred to.
However, the Court of Appeal did not agree with the Upper Tribunal about the extent to which "after the fact" evidence could be used to draw the necessary conclusion. The Court of Appeal decided that evidence was properly to be limited to what a person acquainted with the third party might reasonably have known as at the date of promulgation of the notice. On that basis, it was not merely limited to what was in the notice, but to what was known about the matter by "persons acquainted" at the time the notice was published.
The upshot of the Court of Appeal's finding is that Mr Macris is and remains entitled to challenge the FCA's findings relating to him in the notices in the Upper Tribunal.
A useful clarification
The Court of Appeal's decision is important because it clarifies how section 393 FSMA is properly to be construed. Where, for instance, a third party's evidence has not been obtained during an investigation carried out by the FCA, but the FCA draws conclusions about their involvement in matters from other sources, s393 operates as a safe guard, where that third party is identifiable, to allow that third party the opportunity to state his or her case. The FCA may not change its view of the matter, but it may decide to change the way it characterises or describes the involvement of the third party or it may decide to omit reference to them altogether.
The FCA will, of course, always know to whom it is referring when it drafts the notices and it is only right that it errs on the side of caution in considering the extent to which the words it uses identify that third party and if it does, it gives that third party proper opportunity to make representations.
In cases where the FCA gets it wrong, it is also right that the third party should have the opportunity to state their case, which may result in a decision being issued which clarifies or rectifies the situation. Essentially, this case has shown that they must be given a chance to undo the damage caused to them by the publication of the notice.
* Jonathan Brogden can be reached on +44 (0)20 7894 6290 or at firstname.lastname@example.org