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Criticism can hurt. Public criticism by a regulator taking enforcement action can hurt more. The law has long sought to ensure that those potentially subject to criticism have an opportunity to answer what is said against them.

Lord Denning memorably stated this principle at common law in Pergamon Press [1971] Ch 388, 399H-400A:

[I]nspectors can obtain information in any way they think best, but before they condemn or criticise a man, they must give him a fair opportunity for correcting or contradicting what is said against him.

The implications of this principle have sometimes been misunderstood, as identified in a recent report to the Treasury Select Committee by a team of barristers from Blackstone Chambers (myself included). But the principle itself is a sound one. It protects important interests (not least careers and reputations).

How do those important interests fare in enforcement action by financial services regulators? Specific statutory protections are set out in the Financial Services and Markets Act 2000 (‘FSMA’). People who are themselves subject to enforcement action have a statutory right to make representations in response to the warning notice against them (s.397 FSMA) and, if the action yields a decision notice, may refer the matter to the Upper Tribunal. Accordingly, they are relatively well protected in this regard.

But regulatory notices can and often do criticise others too. What of their interests? Statutory protection for “third party rights” is set out in section 393 FSMA. In short summary, section 393 provides that if a warning notice “identifies” a third party and in the opinion of the regulator is “prejudicial” to that person, the third party must be given a copy of the warning notice (s.393(1)) and an opportunity to make representations in response to it (s.393(3)). Further, if a third party is prejudicially identified in a decision notice, they can make a reference to the Upper Tribunal (s.393(4)-(10)). If a third party considers that a copy of a notice should have been given to them and was not, the alleged failure can also be referred to the Upper Tribunal (s.393(11)).

So one key question is this: when is a person ‘identified’ by a regulatory notice for the purposes of the statutory protection in s.393 FSMA? Although this question of statutory construction might at first glance seem innocuous, it has spawned litigation and some difficult case law, including most recently the Supreme Court’s decision in FCA v Macris [2017] UKSC 19 (handed down on 22 March this year). I consider below the decision itself and four questions arising out of it. Javan Herberg QC and Ben Jaffey QC of Blackstone Chambers acted for Mr Macris (but the views expressed in this blog are my own).

The punchlines are these: (1) the majority reasoning in the Supreme Court seems on its face to restrict the scope of protection for third parties under section 393 FSMA; but (2) a number of key questions remain to be resolved, and so the Upper Tribunal may in future references under section 393 FSMA seek to mitigate or even remove the restrictive effect of the Supreme Court’s decision.

The Macris Decision

Mr Macris worked for JP Morgan in London as International Chief Investment Officer, heading a unit called the Chief Investment Office (‘CIO International’). In July 2012, the bank announced that one of its trading portfolios (managed by CIO International) had suffered huge losses. FCA enforcement action against the bank ensued. The bank settled and accepted a penalty of £137,610,000. The final notice against the bank was published in September 2013. Mr Macris was not given a copy of the preceding decision notice and so had no opportunity to make representations on it. He therefore made a reference to the Upper Tribunal under s.393(11) FSMA.  

The Upper Tribunal (Judge Timothy Herrington) considered as a preliminary issue whether the FCA’s decision notice ‘identified’ Mr Macris for the purposes of section 393 FSMA. The learned judge answered yes (FS/2013/0010) and the Court of Appeal agreed ([2015] EWCA Civ 490).

The Supreme Court disagreed by a majority of three to two on the law and four to one on the facts. In other words, the majority concluded that Mr Macris was not identified by the decision notice. Lord Sumption gave the leading judgment (§§1-17). Lord Hodge agreed with Lord Sumption. So too did Lord Neuberger who also gave a short concurring judgment (§§18-30). Lord Mance disagreed with Lords Sumption, Hodge and Neuberger on the law but reached the same outcome on the facts (§§31-40). Lord Wilson, in a powerful dissent to which I shall return below, disagreed on both the law and the outcome on the facts (§§41-68).

In summary, Lord Sumption stated the law as follows (§11):

  1. To be identified for the purposes of section 393 FSMA, a person must be identified “by name or by a synonym for him”.
  2. If a person is to be identified by synonym, “it must be apparent from the notice itself that it could apply to only one person and that person must be identifiable from information which is either in the notice or publicly available elsewhere.”
  3. Examples of synonyms include the “office or job title” of the person in question. But those examples are not an exhaustive list:  Lord Sumption accepted that “CIO London Management” could in principle be a “relevant synonym”, although this was not established on the facts.
  4. [R]esort to information publicly available elsewhere is permissible only where it enables one to interpret (as opposed to supplementing) the language of the notice.
  5. By contrast, “[w]hat is not permissible is to resort to additional facts about the person so described so that if those facts and the notice are placed side by side it becomes apparent that they refer to the same person.

This account of the law raises many questions (perhaps more than it answers). Before turning to four such questions, it is worthwhile to consider Lord Wilson’s dissent because it may well have an influence on future development of the law. Lord Wilson stated inter alia as follows:   

  1. Parliament intended by section 393 FSMA to create “an approach which could strike a fair balance between individual reputation and regulatory efficiency” (§42).
  2. The court’s decision today does not strike a fair balance” (§44).  
  3. Lord Sumption’s construction of section 393 FSMA “appears to narrow the field of those upon whom it confers third party rights even more than the Authority itself suggests to be correct. But I say that his construction "appears" to narrow the field because I confess that I find it — indeed it follows that I find the whole basis of the court's decision today — slightly hard to understand.”

Lord Wilson proceeded to explain the specific reasons for his “perplexity, which I trust that readers of our judgments will not share” (§49a-g).  Those reasons repay reading in full, and I will touch on some of them below.

Outstanding questions

(1) What is a ‘synonym’ for these purposes?

Lord Sumption’s formulation requires identification by name or by “synonym” (§11). But it is unclear how far this notion extends. If we compare a person’s name with their job title, the literal meaning of those two things is not the same or close to the same. To state the obvious: one is a name, one is a job title. So they are not synonymous in any ordinary sense. This point is underscored by Lord Sumption’s further example: he accepted that “CIO London Management” could in principle be a “relevant synonym” (§11). Lord Wilson rightly noted the oddity of this usage of ‘synonym’ (§§49a-e).  

Some room for flexibility is therefore evident in Lord Sumption’s formulation. His test must be focused on words which are in practical terms synonymous even though they are not literally so. It will be possible to argue in many cases that, when the relevant words in the notice are interpreted in light of the salient publicly available information, they are practically synonymous with the name of the third party. Indeed, if the “synonym” test is understood and applied in a flexible manner, it may amount to no more than a paraphrase of the statutory test (rather than a restrictive gloss on that test). In practice, the FCA may reach results that are similar to those it did previously.

(2) Interpreting vs supplementing

On Lord Sumption’s statement of the law, resort to publicly available information is permissible only to “interpret (as opposed to supplementing)” the statutory notice in question (§§11 and 13). But it is not obvious what this distinction really amounts to, as noted by Lord Wilson at §49(f). Perhaps Lord Sumption had in mind the Supreme Court’s recent decision on the construction and implication of contractual terms in Marks and Spencer v BNP Paribas [2016] AC 742. There, Lord Neuberger (with whom Lord Sumption himself agreed) reaffirmed that “construing the words used [in a contract] and implying additional words are different processes governed by different rules” (§26). But in the next paragraph, Lord Neuberger acknowledged that the surrounding circumstances are relevant to both processes: 

Of course, it is fair to say that the factors to be taken into account on an issue of construction, namely the words used in the contract, the surrounding circumstances known to both parties at the time of the contract, commercial common sense, and the reasonable reader or reasonable parties, are also taken into account on an issue of implication.

Accordingly, Lord Sumption’s interpretation/supplementation distinction may not be an effective limit on the scope of information relied upon in future attempts to establish ‘third party’ status under section 393 FSMA. The same information will be relied upon, but arguments will be carefully framed so that they can be classified as ‘interpretation’ rather than a more invasive process. If the Upper Tribunal proves receptive to such interpretation arguments, this too may mitigate any restrictive effect of the Macris decision.

(3) Possible impact of the European Convention on Human Rights (ECHR)

If the scope of the section 393 FSMA protection is significantly restricted by the Macris decision (and for the reasons set out above that remains to be seen), the ECHR may well come to the fore.  There is a clear avenue for raising ECHR arguments in this context: future references to the Upper Tribunal could rely on section 3 of the Human Rights Act 1998 and argue that section 393 FSMA must be interpreted compatibly with ECHR rights.

Which rights might be relied upon? Most obviously (and perhaps fruitfully) the right to respect for “private and family life” under Article 8 ECHR implicitly includes a right to respect for honour and reputation. More tentatively, it may be arguable that the right to a fair trial under Article 6 ECHR requires that third parties have access to a court (or tribunal) to challenge any attack on their civil right to a good reputation. These are deep waters. A detailed assessment is beyond the scope of this blog post. But a useful jumping off point is provided by Helen Quane, ‘Challenging the report of an independent inquiry under the Human Rights Act’ [2007] Public Law 529, 535-544.

(4) Can the common law help?

The public law duty of fairness requires (in short summary) that a person who is potentially subject to criticism has an opportunity to answer what is said against them: Pergamon Press [1971] Ch 388, 399H-400A.

Lord Sumption took as his “starting point” that section 393 FSMA “covers the same ground as the general obligation imposed by public law” and does so “in a more limited way”, thereby defining “what fairness requires in the context of warning and decision notices” (§12). In other words, Lord Sumption took the view that section 393 FSMA impliedly excludes any more extensive common law protection. This part of Lord Sumption’s judgment is arguably obiter: the issue before the Supreme Court was whether Mr Macris was identified within the meaning of section 393 FSMA; the question of how that statutory section might impact on the common law does not appear to have been the subject of argument.   

There is something to be said for the contrary view, namely that the common law and section 393 FSMA operate side by side and provide different and only partially overlapping protections:

  • The common law protection is broader in that it does not contain the same strict requirement of ‘identification’ as section 393 FSMA. Instead, the common law focuses more substantively on whether a person’s “interests (including in that term career or reputation) may be adversely affected” by the proposed finding: Mahon v Air New Zealand Ltd [1984] AC 808 (PC), 820H.
  • But in a different respect, the common law protection may be narrower. Third party rights under section 393 FSMA apply even if the third party had an opportunity to meet the criticisms during the FCA’s investigation (for example in interview). By contrast, the common law may not require that a third party who has already had a fair opportunity to meet the potential criticisms at the investigative stage of the process is given a further opportunity at a later stage. That is the common law position if the principles stated in Pergamon Press apply in this context, and they may well do. As set out in Part B of our report to the Treasury Select Committee (here), those principles apply in a wide variety of inquiries and investigations ranging from the ‘inquisitorial’ to the more ‘adversarial’ end of the spectrum. There may be a tenable analogy between third parties to enforcement action and people who stand to be criticised in public investigations: the principal harm in both cases is likely to be to career and/or reputation. (Of course the position is different in relation to the person who is actually subject to the enforcement action, for they risk not only reputational damage but also a regulatory penalty or other outcome.)
  • The payoff of the two protections is also very different. The common law protection would require only that the third party have an opportunity to make representations to the FCA (and the FCA consider those representations properly before making its decision). By contrast, section 393 FSMA also allows for a reference to the Upper Tribunal on the matter. As Lord Mance noted in the Macris decision, “(s)ection 393 gives rights which go beyond any which would arise at common law under principles discussed in [Pergamon Press]” (§36).

Accordingly, if section 393 FSMA is given a restrictive interpretation in light of the Macris decision, there may well be room for arguments based on the common law. As Lord Justice Laws emphasised, “a right to be heard [can] be inserted or implied into the statutory scheme not by virtue of the statute’s words, but by force of our public law standards of procedural fairness”: R (Khatun) v Newham LBC [2005] Q.B. 37 at §30. (interested readers can see further De Smith's Judicial Review (7th Ed) §7-012 – 7-015). Lord Wilson’s dissent in Macris would be grist to this mill.

Conclusion

It is doubtful that the Macris decision will be the last word on third party rights in FCA enforcement proceedings. It is perhaps ironic that, while the majority decision was overtly motivated by the “implications for the conduct of the [FCA’s] investigatory and disciplinary functions” (§1), it leaves considerable uncertainty (for the FCA as much as the regulated community) and is likely to spawn further litigation in this area.

Ajay Ratan

This article was first published on Enforcd on Monday 27 March 2017.

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