FCA secures US $101m redress from BlueCrest over conflicts management issues

The FCA has issued its Final Notice to BlueCrest Capital Management (UK) LLP (BCMUK), bringing to an end lengthy proceedings concerning BlueCrest’s management of conflicts of interest and securing US $101 million in redress for non-US investors. 

While the Notice is directed only at BCMUK, the underlying events and issues also touch on some of the BlueCrest group’s broader systems and processes. The FCA’s decision underlines both the importance of effectively addressing potential or actual conflicts as well as the breadth of the FCA’s powers. BlueCrest’s withdrawal of its appeal to the Supreme Court also leaves the FCA with what it will consider to be useful clarification both of its ability to use its supervisory powers to order redress (outside of formal sschemes under other FSMA provisions) and its ability to amend its case during the course of an Upper Tribunal reference. 

The matter’s (lengthy) history

In addition to funds open to external investors, BlueCrest previously operated a number of internal funds open only to its staff. The FCA’s concerns centred upon a specific internal fund launched in 2011, the stated purpose of which was to attract and retain senior partners and key staff. Shortly after its launch, BlueCrest began reallocating portfolio managers and traders from its flagship and largest (by assets under management) external fund to cover this new internal fund. Although the FCA’s Final Notice does not make this explicit, a related Order by the US Securities and Exchange Commission (SEC) subsequently found BlueCrest to have been transferring a majority of its highest-performing traders to the internal fund. 

Following an initial investigation, the FCA issued a Decision Notice in 2021 imposing a £40.8 million penalty for breaches of Principle 8 of its Principles for Businesses, which requires firms to manage conflicts of interest fairly – including between itself and its customers. It also issued a Supervisory Notice imposing an Own-Initiative Requirement (OIREQ) requiring BlueCrest to pay non-US investors redress in excess of an estimated US $700 million.

BlueCrest successfully challenged the Supervisory Notice before the Tribunal, which found that the FCA had exceeded its powers by seeking to impose a redress scheme on BlueCrest under s 55L FSMA. It also found that amendments to the FCA’s statement of case were outside of the ‘matter referred’ to the Tribunal. 

The FCA then successfully appealed the Tribunal’s decision to the Court of Appeal. The Court held that, in principle, the FCA was entitled to impose a redress scheme on a single firm under s 55L. It also took a wide view of the meaning of the ‘matter referred’ to the Tribunal, allowing the FCA’s amendments to its case on the basis that these were ‘sufficiently related’ to the process triggering the reference. (Further details of the Court of Appeal’s decision can be found here.)

The Supreme Court was due to hear BlueCrest’s further appeal before the end of the year but this has now been withdrawn (along with the remaining substantive reference to the Tribunal). 

The FCA’s findings and decision

The FCA’s investigation found that BCMUK had ultimately recognised that there was an inherent conflict of interest in relation to reallocating its portfolio managers. However, despite regulatory (and internal policy and procedural) requirements to manage such conflicts, minimal controls or mitigants were put in place. The primary control relied on was the fact that decisions concerning the re-allocations were made by senior individuals who had regulatory and fiduciary duties to serve the interests of the funds and their investors. However, those same senior individuals were all invested in – and significantly exposed to – the internal fund. The FCA found that BCMUK failed to recognise that this control was not only ineffective but was in fact exacerbating the risk of preferential allocation. 

BlueCrest also failed to sufficiently disclose these conflicts or how they were being managed (among other matters) to external investors. The disclosures that were made were limited, generic and at times misleading. Importantly, they did not enable external investors to scrutinise the substance of the conflicts or assess how they were being managed. The FCA found that these disclosures continued to be inadequate even after regulatory and investor scrutiny around the internal fund started to increase.

The result was that the FCA determined BCMUK’s arrangements for managing the conflicts of interest were insufficient to ensure with reasonable confidence that the interests of its clients would not be damaged – resulting in a sub-standard investment management service being provided to the external fund and its investors.

The outcome and sanction

Referring to the Enforcement Guide, the FCA concluded BCMUK’s conduct was serious and would justify a significant penalty. However, given the circumstances, the FCA noted its objectives could also be appropriately achieved by means of a public censure because:

• BCMUK agreed to the imposition under s 55L(5) of FSMA to pay redress to non-US investors of US $101 million. It also agreed to bear the costs of administering that scheme, meaning the entire sum would be made available to investors.

• As a result of the voluntary redress scheme, investors would get redress more quickly than if they had to await the determination of BCMUK’s reference to the Tribunal (and any appeals).

• Had the FCA imposed a financial penalty, it would have reduced the amount available to pay redress.

The Final Notice does not address how this amount relates to the earlier order to pay redress, which was significantly larger and estimated to exceed US $700 million. (These amounts are also separate from the US $170 million the SEC ordered BlueCrest to pay US investors.)

Lessons for other firms

The Final Notice means that the Supreme Court will not weigh in on whether the Court of Appeal correctly interpreted the scope of the FCA’s s 55L powers. That decision will stand unless or until challenged before the Supreme Court at a later date, significantly broadening the FCA’s ability to impose redress schemes on firms. On a practical note, the final notice also gives clear insight into the FCA’s expectations for regulated firms when it comes to manging conflicts of interest – and conflicts between a firm’s and its clients’ interests in particular.

Reflecting on these proceedings and the latest decision, regulated firms should note the following:

• Expect broad FCA redress powers to stay. The FCA is now able to rely upon s 55L FSMA to impose redress on a distinct and additional basis to its powers under ss 404, 404F and 384. Both the ss 404 and 384 powers require the FCA satisfy several requirements before redress can be imposed. However, the Court determined that as s 55L served a distinct regulatory purpose it could be used without proof of loss to consumers, recoverability or breach of a rule. The s 55L power is therefore likely to be significantly easier for the FCA to rely upon in practice. It may prove to be a useful tool given the regulator’s more interventionist and assertive approach to supervision – especially if it can provide a shortcut around procedural or evidential barriers. (For more information, see also our earlier briefing note on the of Court of Appeal judgment, as well as our webinar outlining its implications on contentious regulatory strategy.)

• Substantively address and/or disclose your conflicts of interest. BCMUK did not sufficiently consider whether the senior staff it was relying upon to manage the conflict were themselves conflicted. Simply pointing to the existence of a regulatory (or fiduciary) obligation to act a certain way will not be enough, as this does not actually manage the very real risk that those obligations may not be complied with. Second line functions should also be able to effectively assess the likelihood of such risks materialising, whereas the FCA decision noted that BlueCrest’s Compliance function was not actively aware of which senior staff were invested in the internal fund or their levels of exposure. Further, extra thought should be given to whether more fulsome disclosure is needed in the event a conflicts issue starts to attract extensive external scrutiny, with failure to do so risking opening the gates to yet more criticism down the line.

• As a regulated firm, make sure you are comfortable with the decisions being made by others in your group – especially where they touch on your own regulatory obligations. The FCA decision is clear that it is targeted only at BCMUK, even though the overarching responsibility for determining the allocation of portfolio managers sat with the group’s Executive Committee. As such, the basis on which BCMUK was held to be responsible was that it was ‘aware of and ratified’ those reallocations – rather than having itself directed or been the driving force behind them. Regulated firms must understand and be comfortable with the decisions being made by others in their groups, especially where those decisions will have an impact on the performance of firms’ own regulatory obligations – responsibility for which remains with them (and not with other, unregulated entities who may also be overseas and/or less aware of UK regulatory requirements).

If you would like to further discuss this decision or its implications for you or your firm, please reach out to us or your usual Linklaters contacts.