Notices: FCA freed to fire from the hip

The Supreme Court’s recent decision in FCA v Macris is likely to have a significant effect on the way that enforcement bodies draft, publish and craft their warnings and final enforcement notices.

To begin, please consider the following scenarios:

Scenario A: A notice is drafted that places blame with a particular set of individuals. The notice is able to precisely outline what the errors were and how they should have been prevented. Since no party is explicitly identified, there are no grounds for it to be challenged and therefore it can be drafted with less regard to legal concerns and consequences. Due to its specificity, the notice serves as a valuable instrument for educating the public at large and the industry in particular on what constitutes good practice. However, while the individual isn’t named, the notice’s description, an industry expert would be able to find out who is at fault and why.

Scenario B: A notice is drafted that places blame with a particular individual. The event that led to the notice is widely publicised and many of the characters involved are readily known by the public. While no individual is mentioned, the notice makes a number of accusatory remarks against a department. In particular, that the department misled and deceived the enforcement body. As an act of good will, the company accepts the conclusions without challenging them and moves on to settle the case. The department head rejects the notice’s findings, however without being specifically mentioned, is unable to challenge them. The conclusions of the notice have a long-term negative impact on the department heads’ career.

It is within this tension between these two scenarios that the decision of Macris v The FCA was formulated. In attempting to navigate through opposing policies, the Supreme Court have crafted an opinion that at once tries to afford proper recognition to the needs of efficiency in enforcement, while at the same time providing protection to the reputation of the individual. The decision is likely to significantly change the way in which notices are drafted and administered, having dramatically narrowed the grounds on which representation can be made. In this way, the judgment in Macris v FCA should be of concern to everyone in the financial industry. Individuals should now expect notices to become more frequent and more critical in their commentary.

By releasing notices, the FCA can hold companies accountable. As noted by the Director of Enforcement at the FCA “it provides a clear framework in which the responsibilities of senior managers are identified and allocated.” By releasing these notices to the public, they can serve as a valuable instrument for instructing what constitutes good practice.

Following on from the “London Whale Trades“ the FCA, by way of notice, criticised the senior management of JP Morgan’s investment committee for its inability to prevent the losses. In particular, the FCA noted that the “CIO Investment Management” had intentionally misled the investigation and that its actions had directly contributed to its loss. Macris, the acting head, argued that since the notice had been drafted with such a specific focus towards the actions of a particular individual; it was clear that the notice was referring to him. In this way, he contended, that the use of “CIO Investment Management” was a thinly veiled reference to him and that he should have been afforded representation.

Interpreting Identification 

At the outset of the decision, it was clear that the result would hinge on “the meaning of identity and on the meaning of the notice to which that word [was] being applied.” While the definition of “identification” is clear at face value, on a practical level it is anything but; there are two competing theories on how the term should operate. On one side, the “relative interpretation” holds that the term should be construed in a manner that recognises its context. On the other hand, the “public interpretation” takes a much more accessible approach by focusing solely on whether or not the general public could identify an individual from the notice.

Within the relative interpretation is the idea that an act of identification does not happen in a vacuum and what therefore matters is who is likely to make the identification. This has the effect of relating the term “identification” to the particular relevant industry rather than the public at large. In this way, when asking “can an individual be identified within the notice?” the focus should be on whether an individual in a particular industry could identify the individual. This allows for specific knowledge to be taken into account making it an easier standard to satisfy.

However, with the “public interpretation”, the question is more straightforward – Can a reasonable member of the public identify the individual? This has the effect of severely restricting the individual’s ability to make representation in his/her defence. Whereas a party who works in a specialist or technical profession might more readily identify an individual given their industry understanding; the likelihood of this occurring from a member of the general public is far more limited. For example, while a doctor might know who the country’s leading ophthalmologist is, a member of the general public probably would not.

The impetus for this limitation appears to be practicality. The difficulty with the relative interpretation is that it fails to set parameters on how and what outside knowledge can be used. While it indicates specific knowledge must be taken account, it fails to outline at which level. For example, if a notice makes reference to a derivatives lawyer – whose perspective do we adopt? A reasonable lawyer’s? A reasonable lawyer who works in the financial industry? A reasonable lawyer who works specifically in the derivatives industry? Without clear guidance on what level of generality must be used the test becomes of little value.

Equally, if the relative interpretation is adopted, it is incumbent upon the enforcement agency to ensure that the notice is drafted conservatively and without specificity, so as to guarantee that even ex poste disclosures of information cannot identify a particular subject. For example, if the notice makes reference to an “unnamed company” that does work with the “derivative lawyer” and the company subsequently becomes named thus identifying the derivatives lawyer, does this qualify?

The Decision

For the reasons outlined above, the decision of the Supreme Court appears to have largely favoured the public interpretation approach.  Lord Sumption, speaking for the majority, noted that a third party’s right to make representation is only afforded where an individual is either expressly mentioned or where a term is used in a manner that can be construed as “synonymous” with said individual.

To qualify for this “synonymous” identification, Lord Sumption noted that the following factors must be present:

• A position or office must be mentioned
• The individual must be the sole holder of that position or office and
• The public must be able to identify them from information that is easily accessible.

Within this construction, it is clear that the Court has indicated its willingness to limit the grounds of representation in exchange for practicality. When it came to the arguments relating to harm, the Court noted that the purpose of such notices wasn’t to cause reputational damage, but to instead educate the public on acceptable industry standards. The interests of enforcement outweighed any concerns about identification and the harm it could cause the individual.

While Macris clearly comes down in favour of pragmatism, it must be noted that beyond the seemingly technical rules for identification, the test still remains largely fact-dependant. As noted by the majority “there is no entirely logical basis for justifying any particular conclusion as to the precise point at which one draws the line between the two extremes” of representation and practicality.   One does come away with the feeling that the Supreme Justices of the Court were less concerned about developing a coherent body of law, instead ensuring that there was some element of public retribution for recklessness in the financial industry.

Conclusion

The decision has drastically limited the ability of individuals to defend their reputation where they are not directly named in an FCA notice.  The notice can serve as a valuable instrument in educating the broader financial industry about regulatory compliance. In particular, where the notice does not directly identify an individual, it allows for the FCA to project its concerns in an efficient manner without being bogged down in legal hearings.

The problem with this lies in instances wherein the individual is not directly named but it is clear that they are the subject of criticism. This has the toxic effect of both tarnishing the individual’s reputation while also preventing a proper legal response. Without being named, a subject isn’t afforded rights of representation. It is clear that in determining what qualifies as “identification” a balance must be struck between an individual’s reputation and regulatory efficiency.  However, as is clear from the decision in Macris, the Courts have found in favour of the latter.

Going forward, it is clear that individuals, must take a more proactive role when notices are being drafted. The Macris v FCA decision appears to encourage scenarios that misalign the common interests of the principal and agent. In particular, Senior Management should be cautious in assuming that their own personal reputation and the reputation of the company are one and the same. With a natural incentive to settle, it is very possible that a company would be willing to accept a specific criticism of a department in exchange for a Deferred Prosecution Agreement. While the value of an enforcement notice is rooted in the idea of public education, it is clear that it can now serve a secondary function of punishing without representation. Senior Manager may think it wise to keep their own lawyers on speed dial.

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