FCA suffers defeat in Julius Baer case - with important individual accountability implications

You wouldn't know it from reading the FCA's statement, but the FCA has experienced a major loss in the Upper Tribunal (UT).  The UT has allowed the references made by three ex-Julius Baer (JB) employees challenging prohibition orders made by the FCA on the basis that the individuals had acted recklessly and with a lack of integrity in relation to their role in the management and oversight of relationships between JB and the Yukos Group and an introducer/finder associated with the Yukos Group.

It's a long (209 pages!) decision so let's cut through with a high-level summary and just a few of the key implications.  Prefer to listen?  Then check out our podcast episode.  And you can always reach out to us to discuss further.

TL;DR

The FCA fined JB £18m in February 2022 in connection with certain FX transactions it executed for Yukos, where part of its commission was paid to a Yukos associate as a finder (who in turn shared part with another individual connected with Yukos). The FCA said that there was a clear risk that the arrangements could involve JB facilitating or participating in financial crime, but the firm recklessly allowed the arrangements to continue and had poor systems and controls to manage the risks associated with finders relationships connected to its clients.

Significant reliance was placed in the JB notice on the knowledge and actions of the three individuals for whom prohibition orders were made. Ordinarily their conduct (which took place over 10 years ago) would be dealt with via disciplinary action, but one of the three individuals was not actually an approved person, and it’s also possible that the FCA would have faced limitation issues in pursuing disciplinary action against the other two.

However, the FCA failed to demonstrate to the UT’s satisfaction that the individuals had acted recklessly or with a lack of integrity. The UT concluded that each of the individuals could potentially have asked more questions and taken greater care, but found that there was insufficient evidence of a lack of integrity / recklessness on the part of any of the individuals. The UT was highly critical of the reliance the FCA had placed on the evidence of another individual (that the FCA did not call as a witness). It concluded that the FCA had swallowed what the individual had said 

“hook, line and sinker….and…continued to do so notwithstanding its later doubts about [his] veracity, his dubious status as a whistleblower, and the subsequent disclosures that were made… It does not appear that at any point the Authority stepped back and considered whether it was more likely that the Applicants, with nothing in their background and life experiences to suggest that they would act without integrity over a prolonged period of time, were aware of the risk of fraud and did nothing about it, as opposed to it being more likely that, against a background of defective systems and controls, the Applicants in a number of respects failed to demonstrate the level of competence expected when faced with two individuals who were able to exploit the weaknesses concerned”.

The result

• All references allowed.
• UT directions given to the FCA to remake its decision the effect of which is likely to preclude the FCA from making fresh prohibition orders on competence/capability grounds.
• Strident UT criticism of FCA’s handling of the case.

Key points of interest

• Re-evaluating whether prohibition orders are appropriate.  This is the second case in quick succession where the UT has criticised the FCA for pursuing unjustified prohibition orders. Taken together with the Markou decision, the FCA will need to think carefully about whether it will be able to make out a case based on recklessness/a lack of integrity. It may be preferable to focus on competence/capability, but the FCA might need to do more in these circumstances to explain why the lack of competence/capability is so serious as to justify a prohibition.
• Clarification of UT’s views in relation to test for recklessness.  The UT rejected the FCA’s argument that it was sufficient, for the purposes of demonstrating recklessness, to show that a reasonable person in the individual’s position would have appreciated the risk and that the risk was unreasonably disregarded. It was necessary to show that the individual appreciated the relevant risk (either from evidence of actual knowledge or inferences as to awareness from matters that would have been obvious to the person concerned), before then going on to consider whether it was reasonable for the individual to ignore that risk. 
• Pressure on the FCA either to get on with it or discontinue. The UT was highly critical of the delays in the FCA investigation – it took 5 years from commencement of the investigation for a decision notice to be issued to Ms Whitestone. The UT said that “it appears to us that when such a situation arises, it is for the Authority to give serious consideration as to whether it is appropriate to continue with an investigation which it does not have the resources to complete within a reasonable period of time and where it has decided that its priorities for its limited resource lie elsewhere.”
• Is the FCA really 'litigation ready' (per Mark Steward)? The FCA will need to re-examine its approach to contested cases – the UT delivered possibly its most strident criticism ever of the FCA's approach to disclosure and witness evidence. The UT was clearly exasperated by the disclosure failings: “there are only so many times that the Authority can apologise for its failings, insist that lessons have been learned and then expect that those affected should simply move on.” In relation to witness evidence, the UT said that the FCA is not an ordinary litigant – as a public body, the FCA was expected to ensure relevant witness evidence was placed before the UT even if that evidence might undermine the FCA’s case theory.
• Firm vs Individuals.  The perennial debate about concurrent vs consecutive action against firms and individuals might be about to get a new lease of life. The UT's findings directly contradict many aspects of the Final Notice to JB, which relied heavily on findings regarding the conduct of the individuals and attributing their conduct and alleged knowledge / awareness to the firm - so much so that the UT suggested that the FCA should remove the notice from its website and replace it with a short statement, because leaving the notice up would be unfair to the individuals.  And the UT criticised the extent to which the FCA based its case against the individuals on the version of events that JB put forward (e.g. in internal investigation reports), rather than developing views based on its own independent investigation.  Might this lead to greater reluctance on the part of the FCA to place weight on firm-commissioned investigation reports? The PRA will be watching closely given its proposed Early Account Scheme which envisages the PRA relying more heavily on (and giving credit for) early firm-commissioned reports.  Things are going to get interesting …