The Financial Conduct Authority ("FCA") recently achieved a significant victory in the Court of Appeal in successfully seeking to overturn an adverse decision of the Upper Tribunal in an enforcement case. The case also provides a clear exposition of the relevant legal tests to be applied in a challenge to the Upper Tribunal's decision-making and in seeking to prove recklessness in relation to senior managers' regulatory responsibilities under the Financial Services and Markets Act 2000 ("FSMA").
Background
Mr. Markou was CEO, sole director and shareholder of Financial Solutions (Euro) Limited ("FSE"). FSE's business consisted almost exclusively of residential mortgage broking.
The business was required to establish, maintain and operate appropriate systems and controls to safeguard against the risk of mortgage fraud. Such a business was also required to maintain an appropriate level of professional indemnity insurance ("PII") which covers them against claims for professional negligence in the provision of services to their clients.
Mr Markou was approved to perform SMF1 (Director) and SMF3 (Chief Executive) controlled functions. He was responsible for establishing and maintaining FSE's systems and controls and for having proper oversight of its regulated business.
By a Decision Notice issued in 2021, the FCA withdrew his approval, made a prohibition order under section 56 of FSMA and imposed a financial penalty on him of £25,000.
In essence, the FCA decided that Mr Markou failed to have proper oversight of FSE's regulated mortgage business in that he recklessly:
(a) failed to implement FSE's policies to combat mortgage fraud;
(b) failed to properly supervise the two mortgage advisors who carried out the day-to-day business of FSE; and
(c) failed to take sufficient steps to prevent FSE from transacting regulated mortgage business during a period in 2017 when he knew it had no PII cover in place.
The FCA found that Mr Markou's conduct had demonstrated a lack of integrity (thereby failing to comply with Statement of Principle 1) and that he was not a fit and proper person. Mr Markou referred the Decision Notice to the Upper Tribunal ("UT").
In the UT's Decision in April 2023, they allowed Mr. Markou's Reference, finding that his conduct did not demonstrate a failure to act with integrity and that he did not act dishonestly or recklessly in any regard. Although the UT did find that Mr Markou had failed to ensure that FSE did not conduct regulated mortgage business without PII, it remitted to the FCA the question of whether he had failed to act with due skill, care and diligence in that regard. It directed the FCA to reconsider the matter and decide what, if any, appropriate enforcement or supervisory action to take in the light of the findings of the UT.
The FCA appealed the UT's Decision to the Court of Appeal on various grounds. Ground 1 concerned the scope of the jurisdiction of the UT under section 133 of FSMA, and specifically whether it had jurisdiction to entertain allegations that Mr Markou had recklessly misled the FCA through its Regulatory Decision Committee ("RDC") and misled the UT in oral evidence given in a related FCA case against FSE in relation to his knowledge of FSE trading without PII. The UT had held that it lacked jurisdiction because those matters, though pleaded, were not "of the same nature and based on the same factual background as the allegations made to the RDC and contained in the Warning and Decision Notices". However, for the sake of completeness, it went on to decide the substantive issue, and absolved Mr Markou.
That ground of appeal had been overtaken by events following the Court of Appeal's more recent judgment in FCA v Bluecrest Capital Management (UK) LLP [2024] EWCA Civ 1125, ("Bluecrest") in which it was held that the jurisdiction of the UT was not so confined as above. Popplewell LJ in Bluecrest indicated the correct test was:
"…. something is sufficiently related to the decision which triggers the reference to amount to or be included in "the matter" if it has a real and sufficient 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. Such connection must be real and significant, not fanciful or tenuous. But if so, that is sufficient."
The Court of Appeal held that test was met in Mr Markou's case. This was evident from the fact that the UT was able to consider the allegations within the same Reference, having regard to the same evidence as had been served for the Reference. Having rightly found that the new allegations were connected to the same background circumstances as one of the existing complaints (FSE trading without PII), the UT had been wrong to find that it had no jurisdiction to hear them. Ground 1 therefore succeeded, but that would be insufficient by itself to justify interfering with the UT's Decision.
The four remaining grounds took issue with the UT's exoneration of Mr Markou of recklessness and its conclusion that he did not lack integrity.
Relevant legal principles
The FCA contended that Mr Markou had acted recklessly in relation to compliance with FSE's regulatory obligations, and that in the circumstances of the case, this demonstrated a lack of integrity. The Court of Appeal indicated that recklessness in this context had both subjective and objective elements (Potter v Canada Square Operations Ltd [2021] EWCA Civ 339; [2022] QB 1), applying the two-stage test enunciated by Lord Bingham in R v G [2003] UKHL 50; [2004] 1 AC 1034).
The subjective element requires a finding that the person concerned appreciates that there is a risk that a relevant circumstance exists or that a relevant result may occur; the objective element requires a finding that it was unreasonable for them to take that risk. To put it succinctly, someone who runs an unreasonable risk of breaching regulatory obligations is acting recklessly.
The UT in the present case had correctly adopted that test, albeit by reference to earlier decisions of the UT, Tinney v FCA [2018] UKUT 0435 (TCC) and Forsyth v FCA and PRA [2021] UKUT 162 (TCC). It correctly directed itself that:
"A person acts recklessly with respect to a result if he is aware of a risk that it will occur and it is unreasonable to take that risk having regard to the circumstances as he knows or believes them to be".
In order to establish that Mr Markou was reckless, it must be established on the balance of probabilities that he appreciated that there was a risk of FSE failing to comply with its regulatory obligations, (or, on Ground 3, a risk of his misleading the regulator and the UT) and that he acted unreasonably in taking that risk. The second stage would necessarily involve an evaluation of what, if any, steps were taken by Mr Markou in the knowledge of the risk to safeguard against the acts or omissions which would constitute the non-compliance. It does not have to be shown that the risk eventuated. However, if it did, the inadequacy of the steps taken to prevent it from occurring would play a significant role in the assessment of the reasonableness of taking the risk.
The Court of Appeal also highlighted that recklessness in this context was capable of demonstrating a lack of integrity, though it may not amount to it (Seiler v FCA [2023] UKUT 00133 (TCC) at [41]). It was more likely to demonstrate a lack of integrity in a person carrying out senior regulated functions such as director and CEO: individuals carrying out such functions can reasonably be held to higher standards than the general public (Page and others v FCA [2022] UKUT 124 (TCC) at [59]). This had been accepted by the UT.
To the extent that the FCA sought to disturb any factual findings made by the UT, the applicable test was set out in Edwards v Bairstow [1956] AC 14 at 36, namely, that "no person acting judicially and properly instructed as to the relevant law could have come to the determination under appeal." That included a situation in which there is no evidence to support a particular fact-finding, or where the tribunal has misdirected itself by addressing the wrong question, or took into account matters which are irrelevant to the issue it has to decide. The Court of Appeal referred to this as the "high hurdle set in Edwards v Bairstow ".
Application to the facts
Applying these principles to the facts, the Court of Appeal allowed the FCA's appeal on the basis of some but not all of the FCA's Grounds of Appeal. By way of example, ground 2 was that even on the facts the UT had found, (though some were challenged as perverse), the UT had reached an irrational conclusion that recklessness was not established in respect of the risk of FSE carrying on regulated activities without PII being in place. The Court of Appeal held Mr. Markou subjectively knew of the relevant risk and related facts, namely that there was no PII in place after 12 May 2017, contrary to the UT's finding. The evidence established Mr Markou did know that FSE's PII had expired on 11 May.
The Court of Appeal held "[t]here was a real and apparent risk that unless FSE stopped trading altogether, it would carry on regulated business without PII, which Mr Markou knew it was not allowed to do. That risk was obvious, and it could not be described as negligible. It was unnecessary to show that the risk eventuated, just that it existed….."
As to whether taking the risk was objectively unreasonable, the Court of Appeal held that "the UT's conclusion… that it was "not unreasonable to take the risk of continuing with ongoing business" was irrational, even on its own mistaken assumption that Mr Markou thought that PII was still in place up to 10 July but did nothing to satisfy himself that it was. It is tantamount to encouraging regulated persons to flout their regulatory obligations."
The Court of Appeal found that the UT, having made a perverse finding that Mr Markou did not know that there was no PII in place until 10 July 2017, erred in law by failing to ask itself the right questions, namely:
(1) in the light of his knowledge that there was no PII, did his encouragement to continue processing ongoing applications and his desultory efforts to prevent the carrying on of new regulated business amount to recklessness? and if so,
(2) did that recklessness demonstrate a lack of integrity in a senior manager and Chief Executive Officer of the regulated business?
The answer to each of those questions was yes.
Outcome
The Court of Appeal, on the basis of applying the relevant legal test to the facts, allowed the FCA's appeal on most but not all of the Grounds of Appeal.
Having found that the FCA did establish that Mr Markou was reckless and that his recklessness demonstrated a lack of integrity, the Court of Appeal dismissed Mr. Markou's Reference in respect of the FCA's decision to withdraw the approval given to Mr Markou to perform the SMF1 and SMF 3 functions and in respect of the FCA's decision to make a prohibition order. However, since not all the allegations made by the FCA were proven, the level of the appropriate financial penalty to be imposed on Mr Markou should be adjusted to reflect this and that aspect was remitted to the FCA on the basis of a penalty of £10,000 rather than £25,000.
Commentary
The key takeaways are firstly that the test to interfere with the findings of the Upper Tribunal involves a high but not insurmountable hurdle – "no person acting judicially and properly instructed as to the relevant law could have come to the determination under appeal."
In determining whether an individual has acted recklessly in relation to compliance with their/their firm's regulatory obligations, recklessness in this context had both subjective and objective elements. The subjective element requires a finding that the person concerned appreciated that there is a risk that a relevant circumstance exists or that a relevant result may occur. The objective element requires a finding that it was unreasonable for them to take that risk. Someone who runs an unreasonable risk of breaching regulatory obligations is acting recklessly.
Furthermore, recklessness in this context was capable of demonstrating a lack of integrity in some cases, although it also may not in others. It was more likely to demonstrate a lack of integrity in a person carrying out senior regulated functions such as director and CEO; individuals carrying out such functions can reasonably be held to higher standards than the general public.
Finally, the test in Bluecrest was applied, namely that something is sufficiently related to the decision which triggers a Reference to the UT, so as to amount to or be included in the "matter" under S.133 of FSMA, if it has a real and sufficient 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.
This is also the second success for the FCA in challenging Upper Tribunal decisions in recent months, following the Court of Appeal's decision in Bluecrest in October 2024.
