Introduction
In a landmark ruling, the Court of Appeal recently confirmed that the FCA can impose a redress requirement on an FCA-regulated firm under section 55L Financial Services and Markets Act 2000 (FSMA) without needing to meet the pre-conditions for a statutory market-wide redress scheme under section 404F FSMA.
Background
BlueCrest Capital Management UK LLP (BlueCrest) was the subject of an FCA investigation in 2021. The conclusion of this investigation found that the hedge fund breached Principle 8 of the FCA’s Principles for Businesses by failing to properly mitigate conflicts of interests when acting as an investment manager. BlueCrest was accused of making decisions that ultimately benefited an internal fund, whose stakeholders included senior partners and key employees, to the detriment of an external fund with external investors. As recompense, the FCA ordered a £40,806,700 penalty against BlueCrest and required it to redress an estimated US$700 million to its investors under section 55L FSMA.
BlueCrest challenged this decision and took its case to the Upper Tribunal. BlueCrest argued that the FCA was not permitted to impose a redress on a single firm under section 55L FSMA without taking into account the four conditions under section 404F(7) FSMA, being loss, causation, breach of duty and actionability, which the FCA must meet before imposing an industry-wide redress scheme.
The Upper Tribunal agreed with this argument and ruled in BlueCrest’s favour.
Additionally, the FCA alleged an additional breach of Principle 7 of the Principles for Businesses which had not initially been discussed in its decision notice against BlueCrest. The Upper Tribunal refused to allow the FCA to amend its statement of case to include this additional breach, stating that it fell outside its jurisdiction as it was not within the “matter referred”[1] to the Upper Tribunal.
The FCA appealed to the Court of Appeal on both points.
Court of Appeal Decision
- The single-firm redress requirement:
The Court found that the FCA were entitled to impose a single firm redress scheme on BlueCrest under section 55L FSMA and the authority to do so was derived from section 55L alone. The Court held that section 55L grants a broad discretion to the FCA to impose what it deems to be necessary to advance its operational objectives without being constrained by the four conditions in section 404F(7) FSMA. This discretion is not limitless though, and the Court noted that it “would readily accept that where none of the Four Conditions are fulfilled, it will rarely be the case that the FCA would be able to justify the imposition of a redress requirement as rational.”[2]
- Jurisdiction of the Upper Tribunal:
The Court held that the Upper Tribunal had erred in finding it did not have the jurisdiction to permit the requested amendments. It found that statutory notices issued by the FCA form part of “a continuous evolving process of adversarial engagement”[3] and that the scope of the matter can extend to any issues with “a real and significant connection with the subject matter of the process, in the sense of its procedural or substantive content, which has culminated in the decision notice or supervisory notice”[4].
Comment
This judgment confirms that the Courts will protect the FCA’s wide discretionary powers to impose redress stipulations on individual firms. This has implications for regulated firms in so far as the FCA will undoubtedly be utilising these powers to fulfil its ever-growing objective of protecting consumers. This is reflected in the FCA’s comments on the Court of Appeal’s judgment: “the ruling has important wider implications for its ability to secure compensation for consumers”[5].
Furthermore, the confirmation that the FCA can continue to amend its case throughout proceedings is likely to impact the appetite of firms to challenge FCA decisions to the Upper Tribunal. This is because it gives the process a level of uncertainty that might prove too risky for firms who would rather take the certainty of the original fine or redress and move on with business. It also requires firms who do proceed to challenge an FCA decision to have a comprehensive understanding of the FCA’s whole case, not just their decision notice.
What Next?
BlueCrest could still seek to appeal this matter to the Supreme Court, and considering the significant financial implications for them as well as the changes to the regulatory landscape going forward, it may well do so.
[1] BlueCrest Capital Management (UK) LLP v The Financial Conduct Authority [2023], UKUT 00140 (TCC), ¶ 197.
[2] Financial Conduct Authority v BlueCrest Capital Management (UK) LLP [2024], EWCA Civ 1125, ¶ 78.
[3] Financial Conduct Authority v BlueCrest Capital Management (UK) LLP [2024], EWCA Civ 1125, ¶ 189.
[4] Financial Conduct Authority v BlueCrest Capital Management (UK) LLP [2024], EWCA Civ 1125, ¶ 202.
[5] ‘FCA wins appeal in BlueCrest case (2024), FCA https://www.fca.org.uk/news/statements/fca-wins-appeal-bluecrest-case.
