As we all take a sharp intake of breath due to the cold weather that has arrived, this seemed like a fitting moment to circulate our most recent Disputes View. The turning of the year is a time to reflect not just on what has passed but also to look at what might lie ahead. Reflecting on developments since the last edition of View and themes to be discerned from 2023 more broadly, we offer a few bold predictions for 2024. After all, as Marcus Aurelius said "never let the future disturb you. You will meet it, if you have to, with the same weapons of reason which today arm you against the present."
What's Coming Up...
The final rules and legal instruments for mandatory APP scam reimbursement were recently published and will come into effect in October 2024. There is much for the industry to do to get ready for the new regime and still a great deal of uncertainty around how it will operate. We are providing training to banks and PSPs on the reforms and how they fit into the wider regulatory and disputes context. If your team would be interested in receiving this training please contact Robert Allen (Partner) or Doug Robinson (Managing Associate).
On 6 February, we will be hosting a webinar to help clients prepare for the upcoming changes to corporate criminal liability (see our Predictions for 2024 - below). These changes, which include a new offence of Failure to Prevent Fraud and a new "senior manager" test for criminal liability for corporates, will require significant work to ensure that organisations in all sectors are in compliance.
We are also developing a Toolkit to help guide firms through the additional obligations arising from these changes. The Toolkit will contain practical resources, templates and guidance on how to comply, with a menu including for example:
Senior Manager briefing - focused guidance covering the salient points for your Board and senior managers to consider
Scoping tool to help you identify your senior managers under the new regime - this will be sector-specific
Training module for senior managers on the new regime (30 mins) - we will prepare a pre-recorded session, or we can deliver it live
Scoping tool to help identify whether your firm is within scope of Failure to Prevent Fraud offence
Outline of key legal and compliance risks to be managed by the firm under the Failure to Prevent Fraud offence
Risk assessment scoping tool to help you identify the risks relating to Failure to Prevent/economic offences under the new rules
Training module on the Failure to Prevent Fraud offence
Policy wording - to ensure that your financial crime policies appropriately cover the new requirements
Standard contractual clauses - to ensure that the new requirements are covered in your contracts with relevant third parties
Invitations to the webinar will be sent shortly but if you would like more information about it or the toolkit, please contact Camilla de Silva (Partner) or Jon Malik (Supervising Associate).
Our predictions for 2024
2023 saw significant change in many aspects of the disputes landscape. What key developments lie ahead?
Our Predictions for 2024 cover a range of issues, themes and trends across:
- ESG regulation and claims
- Changes to corporate criminal liability
- Regulation of non-financial misconduct
- Technology, cyber and data disputes and regulation
- Building Safety - remediation, regulation and claims
- Collective redress - a big year for class actions
- Litigation funding shake-up
- Scrutiny of investor - state arbitration
- The Regulators - Consumer Duty
- The Regulators - Redress
We would be delighted to discuss our Predictions with you, in the context of your business. Please submit an email, or liaise with your usual Simmons' contact, to arrange.
FCA and PRA enforcement themes from the last year
Looking back at the many PRA and FCA enforcement decisions in 2023 we could tell you about the total value of the fines (higher for the PRA and lower for the FCA than recently) or the number of notices (it's picked up again after a bit of a lull), but we thought you might find it more interesting to read our top five themes to emerge this year.
First, getting your governance right continues to prove problematic - which is probably why the FCA believes it is the root cause of many failings. Examples last year included:
Senior management lying to the Board Risk and Compliance committees when challenged about the slow progress of remediation activities (Guaranty Trust Bank)
Excessive delegation from the board to executive management which allowed transactions to be entered into with insufficient interrogation or challenge (Wyelands Bank)
No meaningful systems and controls being in place to ensure key legal opinions existed and trading accorded with them (ED&F Man)
A key oversight committee failing to fully understand its role and responsibilities (Credit Suisse)
A UK regulated entity not being informed by its US parent in a timely way of issues affecting UK customers, leading to the FCA finding out about a huge data leak from the press (Equifax)
Second, firms are getting bolder at referring matters to the Upper Tribunal. This is a step that has traditionally been the preserve of individual subjects, but the FCA's increasingly robust approach (remember Nikil Rathi's 2021 July speech about building "a more assertive FCA"?) seems to be giving firms pause for thought and we think it will continue to do so. Particularly noteworthy is that last summer's lengthy Bluecrest preliminary issues decision is being appealed and it will be fascinating to see the outcome both in relation to: (i) the FCA's ability to amend its case after the Decision Notice has been issued - an issue that has gone under the radar but which has potentially important implications for the Enforcement process; and (ii) the issue of whether the FCA can impose a single firm redress scheme using its powers under section 55L FSMA without reference to the four conditions (loss, causation, breach of duty and actionability) set down in section 404 FSMA.
Third, dealing with under resourcing continues to cause issues. Two firms resolved this by diverting resource away from other processes - stopping quality control checks of complaints in Equifax and allowing a backlog of file reviews to build up in Guaranty Trust Bank.
Fourth, the bar continues to be raised on what you need to do to get a penalty discount for co-operation. ED&F Man commissioned forensic reviews, accepted their findings and provided unredacted privileged reports, which led to a 10% reduction. Lighthouse Advisory Services put in place a redress methodology that went "above and beyond" what was strictly required by the FCA, provided its investigation report without asserting privilege, continued to employ a key employee solely so that they could assist with the provision of information to the FCA, and proactively brought information to the attention of the FCA which enabled it to scope targeted information requirements. This co-operation were some of the factors that led to a public censure being the penalty rather than a fine.
Finally, having the right documents, at the right time remains challenging. Amigo Loans negligently deleted email accounts of relevant staff (who had left the firm) after the FCA investigation had commenced and Guaranty Trust Bank's records of file reviews, while perfectly preserved, seemed only to evidence that no file review had in fact taken place. But the FCA continues to delight us by finding some gems hidden deep in firms' paperwork. Our favourite last year was a customer risk assessment that stated that the customer had studied at the "University of Life, Nigeria" - we suspect it wasn't necessary for the FCA to clarify that that was "not a recognised formal institute of higher education".
If you would like to discuss any of these issues please speak to Caroline Hunter-Yeats (Partner) or Tom Makin (Managing Associate).
FCA - round up of recent decision and final notices
Just a few for this edition:
(1) First, we have a new SMF related PRA Final Notice to start off 2024. This Final Notice relates to the former CEO of Wyelands Bank Plc (the Bank), Mr. Hunter, who held the SMF 1 (CEO), SMF 2 (CFO) and SMF 4 (CRO) roles; he's been fined approximately £118,808 and was found to have breached the Individual Conduct Rule 2 (due skill, care and diligence), Senior Manager Conduct Rule 1 (control the business of the firm effectively), and Senior Manager Conduct Rule 2 (compliance with the regulatory system). The Bank was also censured in April last year (see here). This notice is covered in more detail in this month's SMCR+ View.
(2) Secondly, we have a Decision Notice against Ian Slinger, cancelling his Part 4A permission to carry out a number of regulated activities as a result of his failure to submit certain regulatory returns, including the Directory Persons Attestation to the FCA within the relevant period. A warning that the FCA does take notice if your Directory Returns are not completed...
(3) Thirdly, more fallout from the British Steel Pension Scheme advice scandal, with a number of individuals being fined and/or banned. The Final Notice regarding Mr. Armin resulted in a ban from performing any SMF role, and he would have been fined nearly £1.5 million; however, he was required to pay into the Financial Services Compensation Scheme (FSCS) instead. Mr. Lewis's Final Notice saw him banned from performing a SMF role in the future and he was fined £26,800. The FCA determined that the individuals had provided unsuitable pension transfer advice (or "seriously incompetent" in the FCA's words in Mr. Armin's Final Notice) which was not in the best interests of the customers. The conduct of both individuals was found to be particularly serious because they may have caused detriment to a large number of potentially vulnerable customers and obtained substantial financial benefits as a result. Additionally, they were aware of the deficiencies in the advice.
(4) Fourthly, the Final Notice in respect of Ms. Jones who acted without due skill, care and diligence in giving unsuitable pension transfer advice to customers. The FCA has banned Ms. Jones from carrying out regulated functions and they would have fined her £64,614 for a breach of Statement of Principle 2 (equivalent to Individual Conduct Rule 2 now). Instead she will pay £40,888 to the FSCS. The relevant period was pre-SMCR but she held the CF 30 (now client dealing function) under the Approved Persons Regime (APR). Whilst the FCA didn't find that she exploited or sought to exploit customers, the failings were serious because (i) they caused significant risk of loss to customers, and (ii) the advice disproportionately affected those in a vulnerable position.
If you have any questions, please reach out to Emma Sutcliffe (Partner) or Tom Makin (Managing Associate).
The nickel saga continues
At the end of last November the Administrative Court refused the application brought by commodities traders for judicial review of the decision by the London Metal Exchange to suspend and cancel nickel trades worth around $12 billion during a period of disorderly trading in the metal. Contrary to the arguments put forward by the traders the court held that the LME had acted lawfully. Their claims for damages for alleged breach of their right to "peaceful enjoyment of their possessions" under the Human Rights Act 1998 were also rejected.
The case is interesting because of the importance of the context in which the subject decision was made. In particular, the court considered the interaction between the private law nature of the LME's trading rules and the regulatory context in which they are required to operate. The contractual context was also relevant and the court took into account the fact that the traders had chosen to contract on the LME's rules - a situation different from that in most applications for judicial review where the applicant has no such choice. Lastly, the court emphasised the importance of the context in which the LME was operating, noting that the exchange had specialist knowledge and experience in a niche area of commercial activity. Where a decision maker has such specialist knowledge the court will permit it sensible latitude.
The decision is not the end of the matter, however, as the traders now have permission to take their case to the Court of Appeal. We will report back when we know more.
The FCA's ghosts of Christmas past
Going into 2024, the FCA will be thinking long and hard about ways it can improve its methods of supervision of regulated firms following another critical assessment of its handling of a disastrous result for investors.
In December, the Complaints Commissioner issued her final report into the FCA's oversight of Premier FX, which collapsed in 2018. The FCA previously accepted that it failed to appropriately regulate and supervise Premier FX and apologised "unreservedly for the distress, and inconvenience, that our actions, and inactions, caused", principally as a result of its light touch supervision of the firm. The Complaints Commissioner upheld this finding, and went on to criticise the FCA for stopping short of providing compensation for distress, inconvenience, and consequential loss to the victims of the collapse. In her report, the Complaints Commissioner considered that as the victim's losses were attributable in no small amount to the FCA's failings to supervise PFX, it would be reasonable to make payment. It is clear that if the FCA is put in the same position again where it is forced to confront its supervisory failings, it may face pressure if it seeks to keep its purse strings tight.
The Complaints Commissioner's final report into Premier FX came off the back of the FCA's letter to Treasury select committee chairperson Harriett Baldwin, where it confirmed that it would not take any action against NCM Fund Services and Northern Provident Investments, the two firms which approved the financial promotions of Blackmore's mini-bonds. Blackmore Bond was set up in 2016 and, until 2018, ran an unregulated investment scheme where potential clients were offered mini-bonds with an attractive level of interest. The company raised millions of pounds from investors to fund property developments, but fell into administration in April 2020. Some 2,000 investors were deprived of £46 million, much of which was never recovered. Whilst the FCA was unable to find a breach of financial promotion rules which would prompt it to take action, many are questioning how the regulator allowed these firms to continually promote Blackmore bonds to retail investors without taking firmer action. The FCA has 26 complaints referring to Blackmore, alleging the FCA failed to protect investors, and will confirm its response to those in due course.
These alleged failures are of course both reminiscent of the FCA's involvement in the collapse of London Capital and Finance plc, which left around 11,000 investors facing £237 million in losses. In her November 2020 final report, Dame Elizabeth Gloster gave a damning assessment of the FCA's supervision of LCF, which led to an inquiry by the Treasury Committee into the FCA's management and supervision as a whole. In particular, it found that the FCA ought to be more interventionist and should make more frequent use of its powers rather than maintaining a culture of risk aversion.
Going into 2024 therefore, the sounds of "Christmases past" will be ringing in the FCA's ears and it may feel compelled to act on these lessons and take a more active approach in the supervision of firms.
Presents from the Supreme Court
The Supreme Court handed down two judgments just before Christmas and, in doing so, decided a couple of interesting issues.
In the first case, Byers and others v Saudi National Bank [2023] UKSC 51 the court held that a claim for knowing receipt cannot be made if a claimant's equitable interest in the property in question has been extinguished by the time of the defendant's knowing receipt of the property. As the court noted, existing case law pointed towards that conclusion, but had not previously provided a definitive answer.
In the second case, Thaler v Comptroller-General of Patents, Designs and Trade Marks [2023] UKSC 49 the court was required to enter the debate over the nature of AI and was asked to consider whether a machine (in this case an AI system called DABUS) could be recognised as an "inventor" for the purposes of the Patents Act 1977. The court held that it could not and that an inventor within the meaning of the Act had to be a natural person. The court added that Mr. Thaler's ownership of DABUS did not entitle him to apply for and obtain a patent over any technical advances created by the machine. The court's decision is clearly limited to a specific Act and does not comment more generally on the legal nature of AI and it leaves open many questions about that but it is nevertheless of interest as part of a much wider and highly emotive debate.
For more on this decision please see our latest AI View.
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