Last summer, the Upper Tribunal's decision in BlueCrest Capital Management (UK) LLP v. The Financial Conduct Authority sent minor shockwaves around the City with its ruling that limited the FCA's power to impose single firm redress schemes. That decision has now been overturned by the Court of Appeal with normal order resumed and confirmation that the FCA has broad powers to impose investor redress schemes.

This ruling marks a return to the previously understood position for regulatory enforcement in the financial sector, whereby firms can be required to compensate investors without satisfying burdensome preconditions. This, coupled with comments from Therese Chambers, Joint Director of Enforcement, last year encouraging firms to "do the right thing" when faced with enforcement action, emphasises that redress is front and centre to the FCA's enforcement strategy.

Background

In December 2021, the FCA imposed a £40.8 million financial penalty on BlueCrest Capital Management (UK) LLP (BCMUK) and ordered it to provide an estimated US$700 million in redress to its investors under section 55L of the Financial Services and Markets Act 2000 (FSMA). This was in connection with the mismanagement of conflicts of interest in breach of Principle 8, which requires firms to manage conflicts of interest fairly, both between itself and its customers, and between a customer and another client. BCMUK referred the FCA's notice to the Upper Tribunal, which initially ruled in its favour on two key issues. However, the FCA appealed to the Court of Appeal, which has now overturned the Upper Tribunal's decisions.

Redress scheme

The most significant aspect of the ruling relates to the FCA's authority to impose a redress scheme under section 55L of the FSMA, which empowers the FCA to take action against firms in the form of a variation to a firm's permissions. This action can be taken in certain circumstances, including where "it is desirable to exercise the power in order to advance one or more of the FCA's operational objectives". Those operational objectives are: (i) protecting consumers; (ii) protecting the integrity of the UK financial system; and (iii) promoting effective competition.

At first instance, the Upper Tribunal held that four conditions had to be satisfied for the FCA to use its powers under section 55L of the FSMA:

• persons have suffered loss or damage (Loss);
• the loss or damage has been caused by a wrong on the part of the firm (Causation);
• the loss or damage was suffered by a person or persons to whom the relevant regulatory duty was owed (Duty); and
• the wrong which caused the loss or damage was an actionable wrong (being a wrong in respect of which a remedy or relief would be available in legal proceedings, including a breach of a regulatory requirement actionable by virtue of FSMA) (Actionability).

The Court of Appeal determined that the conditions for imposing a redress scheme are limited to those expressly stated in section 55L. They are limited, with the FCA benefiting from a broad discretion. There was no need for additional preconditions such as establishing Loss, Causation, Duty, or Actionability, as had been accepted by the Upper Tribunal. The Court of Appeal also reinstated the FCA's order requiring BCMUK to provide redress to its investors.

The Court of Appeal's decision has a significant impact on the financial services industry in relation to the FCA's power to require firms to compensate investors. By clarifying that the statutory conditions in section 55L of the FSMA are sufficient for imposing a redress scheme, the ruling removes the need for the FCA to prove loss or breach of duty before ordering compensation. This lowers the threshold for regulatory intervention and marks a significant difference from market-wide redress schemes which the FCA is able to implement under section 404 of the FSMA. In many ways, this is an unsurprising result with the Upper Tribunal decision marking a temporary departure from long-established principles that the FCA has been using in enforcement proceedings.

Amendment of case

The Court of Appeal's other main decision related to amendments to the FCA's case. The FCA had sought to amend its case before the Upper Tribunal, seeking to rely on points not made in the warning notice, namely that: (i) BCMUK failed to manage conflicts of interest by disclosing only to conflicted directors instead of investors (in breach of Principle 8); (ii) BCMUK's contractual role required adequate disclosure of conflicts; (iii) BCMUK failed to communicate information to investors clearly and fairly (breaching Principle 7);¹ and (iv) the communications breached COBS 4.2.1R by not being fair, clear or non-misleading. BCMUK successfully resisted these amendments before the Upper Tribunal, which ruled that the amendments fell outside its jurisdiction under section 133 of the FSMA.²

The Court of Appeal clarified that the scope of the "matter" referred to the Upper Tribunal includes issues with a real and significant connection to the content of the FCA's decision notice. As such, the Upper Tribunal was wrong to exclude the proposed amendments on jurisdictional grounds. This is a clear win and, while important from a procedural standpoint, this decision is secondary to the court's conclusions on redress, which have more substantial implications for firms. However, it does serve as a reminder of the FCA's capacity to amend and strengthen its case during proceedings.

Learning point

The FCA's redress powers are broad and firms must prioritise investor protection to avoid severe financial penalties and compensation demands. The decision serves as a stark reminder that the economic cost of enforcement proceedings can extend beyond a financial penalty to include redress schemes. Faced with this reality, the prospect of proactively offering redress at an early stage of proceedings may become increasingly attractive, particularly where that can result in the FCA choosing not to take action against a firm, and in light of the cost and reputational damage than can result from such action.

With thanks to Jemilia Hartley for her assistance in drafting this article.

1. A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading.
2. Under section 133 of the FSMA, the Upper Tribunal's jurisdiction is confined to considering the subject matter which was originally presented.