The Upper Tribunal (Tax and Chancery Chamber) (the “Tribunal“) has upheld an application by Bluecrest Capital Management (UK) LLP (“Bluecrest“), an investment manager, to summarily strike out a redress requirement imposed by the Financial Conduct Authority (“FCA“) on Bluecrest for purported breaches of Principle 8 of the FCA’s Principles for Businesses. The FCA had applied in tandem to the Tribunal to have its original statement of case amended to include four additional causes of action against Bluecrest.
The FCA had issued a warning notice and final decision notice imposing a £40,806,700 redress requirement on Bluecrest on the basis that Bluecrest had:
- failed to maintain, over a 4 year period, adequate systems and controls so as to manage the conflict of interest arising between its own internal fund and an external fund (the “External Fund“) with outside investors between which Bluecrest portfolio managers regularly rotated; and
- failed to provide adequate disclosure of the same conflict of interest to the ultimate investors in the External Fund.
In late 2020, the SEC took action against Bluecrest’s parent, which agreed to settle charges relating to inadequate disclosures, misstatements and misleading omissions about its transfer of traders between the two funds. FCA then set out its redress requirement, setting out requirements for redress to non-US investors – giving the reason as the firm’s failure appropriately to manage the conflict resulting in it providing a sub-standard investment management service.
Bluecrest did not engage with the RDC process, so the FCA Decision Notice was in the same terms as its original warning notice.
In its judgement, the Upper Tribunal heavily criticised the FCA’s submissions, noting that they appeared to misunderstand the structure of of Bluecrest’s funds and, in particular, the fact that it was the funds (and not underlying investors) who were the direct ‘clients’ of Bluecrest under the relevant investment management agreement. The Tribunal said the notice showed “a considerable amount of muddled thinking” which made it hard to identify the essence of FCA’s reasoning.
In reaching its decision to reject three out of four requests from the FCA to amend its statement of case for the referral, before considering the strike out application, the Tribunal found:
- that the FCA could not argue that Bluecrest’s duty under Principle 8 extended to the underlying customers of the funds on the basis that this duty was engaged only under the investment management agreement entered into between Bluecrest and the funds. The Tribunal highlighted that Bluecrest’s Principle 8 obligation to manage conflicts of interest fairly arises “both between itself and its customers and between a customer and another client” and that under COBS3.2.1R(1) (a), the “client” is the person or entity to whom a firm provides “a service in the course of carrying on a regulated activity” and that the relevant service was provided to the External Fund under the investment management agreement and not to its investors;
- nevertheless, the Tribunal did find that a duty to disclose the conflict of interest (to which Bluecrest had failed adhere) to the underlying investors did arise under a ‘master sales agent agreement’ under which Bluecrest was separately engaged to market the External Fund to investors; and
- that two further amendments requested by the FCA relying on Principle 7 (“A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading”) and COBS 4.2.1(1)R (“firm must ensure that a communication or a financial promotion is fair, clear and not misleading“) could not be introduced at Tribunal stage as they raised allegations based upon completely different regulatory provisions to that originally pleaded and so fell outside the scope of the subject matter of the reference.
Moving on to the strike out application, the Tribunal founds that, contrary to the argument put forward by the FCA, its power to impose a single firm redress scheme under s.55L of the Financial Services and Markets Act 2000 (“FSMA“) was, in fact constrained by the terms of:
- s.404F(7) FSMA; and
- s.404 FSMA.
The Tribunal first considered an application by FCA to amend its statement of case – the amendments essentially provided more detail on the existing case, but Bluecrest contested them. It said, in principle, that the Tribunal did not have authority to consider amendments that raised new issues, and/or that it should not allow the FCA to do so at this stage in the proceedings. The Tribunal considered each of the four amendments and made a determination on them based on the facts of the amendments – and in the case of two of the amendments did determine that the amendment would introduce a “new matter” which was not part of the reference and which, therefore, the Tribunal had no jurisdiction to permit.
The Tribunal moved on to consider whether the FCA’s proposal for the single firm redress scheme had met statutory conditions. In considering the FCA’s powers, the Tribunal looked at how the relevant provision of FSMA had been amended over the years, and noted the material amendment introduced in 2012. The FCA broadly contended that it did not need to establish any of the 4 elements of loss, causation, duty or actionability as a matter of condition, and that it is constrained in deciding to impose a scheme only by whether the scheme is desirable to advance its objectives and that there is a rational exercise of its discretion in so doing. The Tribunal noted that accepting FCA’s argument would create a “surprising” result which would effectively mean the FCA could impose a redress scheme without showing breach of a regulatory requirement or that the redress related to regulated activities. It concluded that the FCA’s power in s55L is (as Bluecrest argued) constrained by the terms of s404 and 404F – so that the FCA does need to establish the 4 conditions. On that basis, it considered whether an allegation of breach of Principle 8 had a reasonable prospect of satisfying those conditions. On causation, loss and duty, it concluded that it did. On actionability, it concluded that it did not, given that there is no dispute that breach of Principle is not actionable under s138D FSMA. As a result, the Tribunal found there was no reasonable prospect the FCA could establish any actionable loss, and so it was barred from defending the reference. The Tribunal struck out FCA’s case and remitted the matter to FCA for it to reconsider based on the Tribunal’s findings.
The Tribunal determined that, read together, these provisions require that any redress scheme imposed on an individual firm must correspond to a collective one imposed under s.404 FSMA. As this was not the case, Bluecrest’s strike out application succeeded.