FCA v Whitestone and Seiler

The Upper Tribunal has delivered a stinging assessment of the Financial Conduct Authority’s conduct and approach in an important decision relating to three former employees of Julius Baer International Limited (JBI).

Background

The case involved Thomas Seiler, Louise Whitestone and Gustavo Raitzin, who had roles at JBI’s London branch between 2011 and 2015. JBI, a Swiss private banking group, was fined £18m by the FCA due to its dealings with the Yukos Group and an employee of a number of Yukos Group companies, Mr Merinson.The FCA concluded that JBI facilitated corrupt finder’s arrangements whereby Bank Julias Baer paid finder’s fees to Mr Merinson for introducing Yokos Group companies to Julias Baer on the understanding that the Yukos Group companies would then place large cash sums with Julius Baer whereby they would generate sizable revenues. In many cases the Yokos Group companies were then charged far higher than standard rates by the bank. As a result of this corrupt arrangement the FCA concluded that JBI failed to conduct its business with integrity, failed to take reasonable care to organise and control its affairs, and was not open and co-operative with the regulator.

The FCA also issued decision notices against the three employees at JBI relating to their actions during their time in employment. The decision notices prohibited the applicants from working in financial services because they were said to have acted recklessly and without integrity. The FCA argued that they were reckless in their involvement with the Yukos Group and Mr Merinson because they were aware of the relevant risk of financial crime due to the obvious red flags and it was unreasonable of them to take those risks. In essence, a reasonable person in their shoes should have known that the arrangements involved financial crime.

All three employees challenged this decision by the FCA and it was referred to the Upper Tribunal. The Upper Tribunal found in favour of the employees that they had not been reckless and therefore had not lacked integrity as they were not aware of the relevant risks at the time. In response to this decision both Mr Seiler and Mrs Whitestone (“the Applicants”) made an application for an order to recover their legal costs against the FCA, this was referred back to the Upper Tribunal which brings us to the current case.

The Applicable Law

The decision as to whether costs should be awarded in a financial services case is subject to the Upper Tribunal Rules. This means that for the Upper Tribunal to have the jurisdiction to consider whether and to what extent a costs order should be made it had to determine that, either:

1. The FCA’s decision to issue the decision notices was unreasonable.
2. That the FCA has acted unreasonably in bringing, defending or conducting the proceedings.

The Decision

The first question which the Upper Tribunal dealt with was whether it was unreasonable for the FCA to issue the decision notices in the terms it did. In the case of both Applicants the court determined that it wasn’t unreasonable as it was within the reasonable range of decisions open to the FCA. This is because the decision of the Tribunal hinged on the fact that having heard the Applicants’ witness evidence, it accepted their explanations that they were not aware of the relevant risks and without a clear explanation from the Applicants at the time of issuing the decision notices and the strong indications of suspicious activity it was reasonable for the FCA to determine that they must have been aware of the relevant risks and that they were reckless.

While the court didn’t find that the FCAs decision to issue the decision notices was unreasonable, it did find that the FCAs decision to issue the decision notice specifically in respect of a particular transaction, referred to as the “third FX transaction”, was unreasonable in the case of both Applicants. This is because the FCA made amendments to its case between the Warning Notice and Decision Notice stages due to failings in its investigation. The Upper Tribunal found that the only reasonable course of action for the FCA to take was to discontinue any proceedings in relation to the third FX transaction, and as a result its decision to proceed was unreasonable.

The second question which the Upper Tribunal dealt with was whether the FCA had acted unreasonably in bringing, defending or conducting the proceedings. In the case of both Applicants the Upper Tribunal determined that the FCA was not unreasonable in defending and conducting the proceedings in the Tribunal, apart from in relation to specific failings of the FCA. This is because, in light of the Tribunal’s findings that the FCA had an arguable case that the Applicants were aware of the relevant risks, the FCA did not act unreasonably in bringing the case forward.

As indicated above, the Upper Tribunal did accept that there were specific aspects of the FCA’s conduct which were unreasonable. These were:

1. The FCA’s failure to call material witnesses.
2. The FCA’s failure to engage with requests for clarification of evidence and details of the investigation.
3. The FCA’s decision to continue to rely on the third FX transaction.

Key TakeawaysThe determination of costs in this case was largely successful in favour of the FCA. However, in a postscript to the decision, the judge made various comments indicating his discomfort with this outcome, stating:

"Although the [FCA] has been largely successful in relation to these cost applications, it should not take any great comfort from its conduct in relation to these references.”

The judge went on to say:

“I have considerable sympathy for the fact that the Applicants have had to bear the vast majority of the costs that they have incurred in a case where the Authority has been rightly criticised for the manner in which it conducted its investigation and certain aspects of the Tribunal proceedings.”

This case brings into question the restrictive nature of the costs regime applicable to the Upper Tribunal in the financial services jurisdiction. This can be contrasted with the costs regime in commercial litigation whereby the Applicants would have been entitled to the whole of their costs in relation to this matter.

In addition, this case brings into question the FCA’s conduct. Throughout the judgment and postscript the judge made scathing criticisms of how the FCA conducted their investigations and litigation. The criticisms of the FCA related to both their lack of objectivity in the case and the insufficient resourcing of the investigation which led to its failings. This case will likely have an impact on how the FCA approach and resource their investigations and litigation going forward.

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If you have any queries on this article or the FCA, get in touch with Adam Edwards.