Third party rights - clarity or yet more uncertainty?

“Third Party Rights” provide an important statutory protection to third parties who are impacted by ongoing Enforcement actions being pursued by the Financial Conduct Authority (the FCA). The scope and application of this statutory regime is complex and the FCA’s approach has been the subject of a number of high profile cases to determine the correct legal interpretation. On 22 March 2017 the Supreme Court upheld the FCA’s appeal against the Court of Appeal’s decision in Financial Conduct Authority v Macris [2015] EWCA Civ 490. The Supreme Court’s ruling is helpful to the FCA and makes it easier for the FCA to avoid triggering third party right.

Third Party Rights - the statutory framework

Section 393 of the Financial Services and Markets Act 2000 (FSMA) provides that if any of the reasons contained in certain warning or decision notices (issued by the FCA pursuant to section 387 and 388 of FSMA respectively):

• identifies a person other than the person to whom the notice is issued (the Third Party), and
• in the opinion of the FCA, is prejudicial to the Third Party

the FCA must give the Third Party:

• a copy of the relevant notice (section 393(1) and 393(4))
• a reasonable time to make representations to the FCA (of not less than 14 days)
• access to the material relied on by the FCA to make the decision which gave rise to the notice (to the extent it relates to the matters which identify the Third Party), and
• access to any secondary material which undermines the decision made by the FCA (to the extent it relates to the matters which identify the Third Party).

Section 393 will not apply in circumstances where the Third Party has been given a separate notice in relation to the same matter. In circumstances where a Third Party is not satisfied with the approach of the FCA and considers that the Third Party regime should have been engaged but was not, an application can be made to the Upper Tribunal (Tax and Chancery Chamber).

The Macris case - the background

This case arises in the context of the well-known “London Whale” case and the behaviour of one senior individual, Mr Macris, who was the Head of the Chief Investment Office International (“CIO International”, a division of JP Morgan located in London). Mr Macris held controlled functions CF29 (Significant Management) and CF30 (Customer). The case concerns the provision of information by Mr Macris to the Financial Services Authority (the FSA, as predecessor of the FCA) between 28 March 2012 and 29 April 2012 (the Relevant Period).

On 19 September 2013 the FCA issued a Final Notice against the firm in respect of certain failings and imposed a financial penalty of £137m. On 14 October 2013 Mr Macris made a reference to the Upper Tribunal asserting that the FCA failed to give him third party rights pursuant to section 393 of FSMA which would have enabled him to make representations on certain matters set out in the final notice issued to the firm as a Third Party.

The key point of law which arises in this matter is the question of whether Mr Macris was “identified” in the final notice issued to the firm. Mr Macris’ application was successful in front of the Upper Tribunal and the Court of Appeal which ruled that he was identifiable by persons familiar with financial services in circumstances where the wording of a statutory notice was combined with publicly available information. On 03 November 2015 the Supreme Court granted the FCA permission to appeal on the grounds that the Court of Appeal had misapplied the statutory test.

On 09 February 2016, notwithstanding this ongoing litigation, the FCA issued a Final Notice against Mr Macris which concluded that he had failed to deal with the FCA in an open and cooperative way and disclose information of which it would reasonably expect notice in breach of Principle 4 of the Statement of Principles for Approved Persons. The scope of the FCA’s findings in respect of Mr Macris’ conduct are worthy of note as the FCA did not:

• conclude that Mr Macris had deliberately misled the FSA (notwithstanding this finding against the firm in 2013)
• make any finding that Mr Macris had failed to act with integrity, or
• impose a prohibition order on Mr Macris which would prevent him from working in the industry.

The Supreme Court - clarity or yet more uncertainty?

The FCA argued before the Supreme Court that a Third Party would be identified in a notice “only if the terms of the notice would reasonably lead the ordinary reader (that is, the reader with a general understanding of financial affairs and aware of publicly and widely available background material, but without specific or special knowledge of the underlying facts of the matter to which the notice and its reasons relate) to conclude that the notice unambiguously identifies the applicant as a person mentioned in the notice”.

In a judgment on 22 March 2017 the Supreme Court determined by a 3/2 majority that Mr Macris had not been identified by the notice issued in September 2013. Lord Sumption delivered the leading judgment.

What amounts to identification?

The Supreme Court adopted a narrow approach and determined that a third party is identified in circumstances where he or she is “identified by name or by a synonym”1 such as an office or a job-title of which the third party must be the sole holder. In the case of a synonym, it must be apparent from the wording of the notice that it could only apply to one person.

What publicly available information can be used?

The Supreme Court held that a third party could be “identified” with reference to information within the four corners of the notice or publicly available information but only to the extent which it “enables one to interpret (as opposed to supplementing) the language of the notice”2. Lord Sumption considered that identification would not arise where the reader supplemented additional facts about a third party “so that if those facts are placed side by side it becomes apparent that they refer to the same person”3.

Who is the appropriate reader?

Notwithstanding the more expansive scope of the appropriate reader test offered by the FCA itself ie a reader with a general understanding of financial affairs and aware of publicly and widely available background material, but without specific or special knowledge of the underlying facts of the matter to which the notice and its reasons relate, Lord Sumption held that the scope of the appropriate reader test was “the public at large”4.

What can we expect next?

The judgment of the Supreme Court recognises the importance of the third party rights regime as a key mechanism by which the regulator must balance the interests of individuals and firms who might be prejudiced by statutory notices and those who are subject to the enforcement process itself. Whilst large financial institutions may continue to favour commercial and speedy settlements, the FCA must balance this against the interests of third parties who have not had an opportunity to address its findings. Lord Wilson’s strong dissenting judgment clearly articulates the tensions which the Supreme Court’s judgment exposes and which will impact the application of this regime going forwards5:

What amounts to a synonym?

Lord Sumption’s definition of a synonym appears to be narrower than the plain English definition “Strictly, a word having the same sense as another (in the same language); but more usually, either or any of two of more words (in the same language) having the same general sense, but possessing each of them meanings which are not shared by the other or others, or having different shades of meaning or implications appropriate to different contexts”6. Lord Sumption describes a relevant synonym as only referring to one person.

It remains to be seen how the FCA will approach this issue in practical terms and whether it will adopt the narrow test outlined by the Supreme Court in assessing whether third party rights are triggered. For example, will the FCA continue to avoid references to collective functions or titles which are easily verifiable by reference to corporate websites (or the FCA’s own register), for example non-executive directors or a formal board committee?

What is the distinction between “interpret” and “supplement”?

The example cited by Lord Sumption of a “chief executive” for which the reader may be “elucidated” by checking the information on a corporate website7 is helpful, but is the most simplistic. In practice, it will likely be difficult to identify the clear bright line between public information which assists the reader to “interpret” the facts in a notice but does not go so far as to “supplement” those facts.

Mr Macris argued that he was identifiable with reference to public information contained within a US Senate Committee report (published on the internet in early 2013) which described his role in the issues outlined in the FCA’s final notice against the firm and identified him by name. Mr Macris argued that if the notice and report were read side by side it would enable the reader to deduce who was being referred to as “CIO London management” in the notice. It is hard to envisage a set of facts which would demonstrate more clearly the ability of a member of the public to easily access information, through the internet, which identifies a third party.

How will the FCA’s approach change as a result of this judgment?

There is no doubt that whilst this high profile and lengthy litigation has been afoot, the FCA has continued to adopt a conservative approach on the issue of third party rights. In light of the Supreme Court’s decision we would expect the FCA to:

• Continue to use careful language in the drafting of statutory notices to avoid the need to trigger third party rights where possible which would delay its enforcement action.
• Seek to keep cases arising out of the same facts running on the same timeline (rather than the historic approach of quick corporate settlements and cases against individuals being concluded years later). As outlined above section 393 will not apply in circumstances where the Third Party has been given a separate notice in relation to the same matter.
• Be more mindful of publicly available information which could enable an ordinary reader (as per the “public at large” test) to “interpret” the drafting of statutory notices. Whilst the FCA is under no obligation to undertake trawls of information in the public domain it will likely seek to avoid further litigation in circumstances where formal information is publicly available. The FCA is also likely to continue to assume some level of general public knowledge of certain key sources of information.

There is no doubt that the FCA will remain acutely aware of the need to strike a balance between quick settlement with one party and the rights of third parties who might be prejudiced by the publication of statutory notices (especially Decision Notices, where the matter is still being contested by the subject).

What does this mean for individual accountability?

The FCA will need carefully to balance its individual accountability agenda, for which enforcement action is a critical stick, with the need to grant third party rights to individuals. There is no doubt that individuals who face the loss of employment or irreparable reputational damage will continue to fight the FCA hard on enforcement actions (whether subject to direct action or as a third party).

The narrow test laid down by the Supreme Court makes it easier for the FCA to avoid triggering the third party rights regime. However, the FCA’s individual accountability agenda will continue to rely on statutory notices educating the market on the standards of behaviour expected by the regulator. This goes hand in hand with identifying those who are responsible for any failings in statutory notices whether this arises from personal misconduct, incompetence, systems and controls or omissions.

Conclusion

The evolution and expansion of the Senior Managers regime will continue to ensure that managing the position of individuals who are involved in enforcement actions (whether as a current or former employee) and are ultimately prejudiced by statutory notices issued by the FCA will remain critical for all involved; the regulator; the firm; and the individual. Unfortunately the Supreme Court judgment has not made it easier for the regulator or potential third parties to anticipate how this important statutory protection will operate in the future, and further litigation seems likely.

1Paragraph 11 Supreme Court judgment
2Paragraph 11 Supreme Court judgment
3Paragraph 11 Supreme Court judgment
4Paragraph 15 Supreme Court judgment
5Paragraph 49 Supreme Court judgment
6Oxford English Dictionary, March 2017
7Paragraph 11 Supreme Court judgment