Unsurprisingly, much has already been written about this decision, describing the detail of the judgment and its findings. The purpose of this article is not to repeat those descriptions, but to focus in more detail on the implications of the judgment, and the concerns that regulated firms will inevitably have at the outcome. We will also only focus on one aspect of the judgment, namely the findings in relation to the use by the Financial Conduct Authority (“FCA”) of its power at section 55L of the Financial Services and Markets Act 2000 (“FSMA”) to impose conditions on a regulated firm, in particular a requirement to put in place a remediation scheme. We do not comment in this article on the other main aspect of the judgment in connection with the ability of the FCA to amend its case and the definition of the “matter referred” to the Upper Tribunal, although that also has some significant ramifications.

One reason why this is a particularly highly consequential decision is that it arrives at a time when the FCA’s stated approach is to become more proactive in its use of supervisory powers as a tool in its Enforcement toolkit and to use its powers of intervention in a more extensive way. An analysis of FCA Enforcement activity in 2023/24 demonstrates a continued upward trend in the use of its intervention powers (see our previous article here). Recent FCA Enforcement speeches have emphasised this new approach while indicating that, at the same time, the regulator will try to focus more on fewer and more meaningful Enforcement cases while “prioritis[ing] compensation to consumers over fines where that is the right thing to do” (e.g. Therese Chambers, February 2024). This judgment will therefore embolden the FCA in using this power to secure redress for consumers, as it hinted in its press release following publication of this judgment.

The BlueCrest case: short summary

We will not replicate the very detailed analysis that the Court of Appeal went through in connection with the construction of the various provisions of FSMA and the various subsequent amendments and additions to it.

However, the high level gist of the argument turns on the powers of the FCA to order a firm to put in place a remediation programme to compensate affected customers. The case involved conflicts of interest that BlueCrest allegedly had between allocations between an internal employee fund and an external investor fund and disadvantageous allocations of investments between the two. The FCA has already issued a Decision Notice seeking a substantial fine against BlueCrest for this alleged misconduct, which is subject to an Upper Tribunal referral.

At around the same time and with that backdrop, the FCA also sought to impose a redress scheme on BlueCrest via a Final Supervisory Notice through use of its section 55L power (in combination with the clarificatory provision at section 55N). These sections are part of a series of sections in FSMA headed “Permission to carry on regulatory activities”, and deal with the conditions the FCA may impose in order to satisfy itself as to the fitness and propriety of those it authorises to conduct regulated business, and the variation or cancellation rights the FCA has in respect of such permissions. Section 55L(1) allows the FCA to impose on an authorised person “such requirements…as the FCA considers appropriate”. Section 55L(2) provides that the FCA may impose such requirements where “it is desirable to exercise the power in order to advance one or more of the FCA’s operational objectives”. Section 55N clarifies that “a requirement may refer to past conduct…(for example, by requiring the person concerned to review or take remedial action in respect of past conduct”. Other than these very broad descriptions of the circumstances where the power can be used, there are no other restrictions or conditions on the exercise of these powers stated in the section.

BlueCrest argued, based on section 404 of FSMA (the power of the FCA to order multi-party consumer redress schemes) that the effect of what the FCA was requiring was a remediation scheme which “corresponds to, or is similar to” a remediation scheme under section 404. The ability of the FCA to impose a corresponding or similar scheme on a single entity (as opposed to a multi-party scheme) was introduced in 2012, and is envisaged specifically in section 404F(7): this provides that such a scheme can be imposed using the section 55L power. BlueCrest argued that based on this, the FCA should be subject to the same type of rigorous legal discipline as imposed under section 404 of FSMA for such remediation schemes, namely that before making such a requirement it must establish four conditions, namely that: (i) persons have suffered financial loss or damage (“the Loss Condition”); (ii) the loss or damage was caused by a wrong on the part of the firm (“the Causation Condition”); (iii) the loss or damage has been suffered by a person or persons to whom the relevant regulatory duty was owed (“the Duty Condition”); and (iv) the wrong which caused the loss or damage was an actionable wrong in respect of which a remedy or relief would be available in legal proceedings (“the Actionability Condition”) (together the “Four Conditions”). These conditions are contained in section 404 (specifically, sections 404(1)(b), (6) and (7) of FSMA).

The Court of Appeal however held that:

• As a matter of statutory construction the criteria set out in section 404 should not be read into the power at section 55L of FSMA – and, indeed, there is nothing in Part IV of FSMA (where section 55L is found) which constrains it to cases in which the Four Conditions must be fulfilled. Sections 404 and 55L are two distinct powers and, although there is overlap, they should be read separately. In particular, section 55L deals with conditions of authorisation which, in the Court of Appeal’s opinion, is distinct from what it refers to as disciplinary or punitive action.
• It therefore follows that the FCA is entitled to use its discretion under section 55L to impose remediation schemes (or presumably a range of other “remedial” steps in pursuit of its regulatory objectives) free from the legal restraints set out in section 404.
• The decision specifically recognises that, as a public authority, the FCA is required to follow public law principles in its decision-making process, e.g. to be rational, to not abuse its powers or use them for collateral purposes, to take into account only relevant evidence and disregard irrelevant matters, etc.

Analysis of the decision

This Court of Appeal judgment is therefore both a vindication of the position adopted by the FCA and its view as to the way the section 55L power may be used and the extent to which the discretion that exists under section 55L is limited or restricted. At the same time the judgment will create significant concern to firms faced with the imposition of similar types of requirements. We analyse and critique various aspects of the judgment below.

Lack of constraints on the FCA’s discretion

• The effect of the Court of Appeal judgment is that the power at section 55L to impose conditions on authorisation, including a compensation or redress scheme, is unconstrained by any of the Four Conditions under section 404.
• Under this judgment therefore, it is clear that the FCA has an extremely broad discretion. BlueCrest pointed out the highly surprising result that the FCA could in theory impose a redress scheme in circumstances where none of the Four Conditions applied, which it was suggested would be an absurd outcome. The Court of Appeal disagreed. It was accepted it would be a rare case where such a situation would arise, since it would be hard for the FCA to justify a redress requirement in these circumstances as rational. However equally, the Court of Appeal held this was “not an empty class”.
• The Court of Appeal justified its conclusions in part by reference to other forms of redress enacted under FSMA. It pointed out that the Financial Ombudsman Service (“FOS”) does not require any of the Four Conditions to apply before giving redress. It can order redress by reference to codes of practice or guidance rather than breach of law or FCA rules; it can order redress for mere inconvenience; and it can do whatever is “just and reasonable” without the need to prove actionability or causation. Whilst this is no doubt correct, the judgment does not mention the rationale for the creation of the FOS, namely to be “a scheme under which certain disputes may be resolved quickly and with a minimum of formality” (section 226(1) of FSMA). Further, the FOS’s power to order redress is capped, currently at a maximum of £430,000 in any individual case, and its jurisdiction is circumscribed by, for example, the type of activity complained of, the eligibility of the complainant and the time limit within which to bring a complaint. In the context of the objectives of the scheme and the limits on redress, the lack of applicability of the Four Conditions is much more understandable. A section 55L requirement which could potentially impose unlimited redress (in this case, USD 700 million) is clearly of a completely different order.
• The Court of Appeal also sought to support its views by reference to the power of the FCA (and PRA) to order restitution under section 384 FSMA contending that this power similarly did not require all Four Conditions. It does not require strict actionability. It does require breach of a relevant requirement under FSMA, but this can include a breach of the Principles which are not actionable at law. It does not strictly require loss (since it can order disgorgement of profits) but the section also refers to an “adverse effect” suffered by a person as a trigger for restitution although this could potentially be otherwise than pure financial loss. There is strictly no duty requirement, and whilst there is some causation requirement (the loss or adverse effect must have arisen “as a result of" the contravention), it is not a full requirement of causation in law. However, even this justification is limited: the statute, as indicated above, does have significant limitations and criteria as to when restitution can be required, and is a separately provided route under FSMA for the FCA to obtain restitution for consumers. It is far away from the entirely unlimited, criteria-less power that the Court of Appeal has now held exists at section 55L.

The justification for the unfettered nature of FCA discretion

• BlueCrest argued in this case that the effect of removing the legal disciplines or restraints imposed on schemes under section 404 (i.e. the Four Conditions) is that it leaves the FCA with a largely unfettered power in practice. The discretion left to the FCA to impose very significant or costly conditions on a firm, such as a substantial remediation programme, is extremely wide. The one “threshold” that exists is the subjective judgment of the FCA as to what it regards as being “desirable” in order to advance one or more of its operational objectives - and then, in respect of the consumer protection objective (section 1C(1)), to decide on what conditions the FCA thinks would secure an “appropriate” degree of protection for consumers. (Section 1C(2) identifies seven matters to which the FCA must have regard in deciding what degree of consumer protection may be “appropriate”). Further, the consumer protection objective, along with the other regulatory objectives, are all expressed at a very high level of generality and are therefore very wide and ill-defined. Many firms may feel a lot of sympathy with such an argument and be concerned about such a wide-ranging and largely unfettered discretion this leaves to the FCA.
• The Court of Appeal however disagreed and held there were sufficient constraints in place to mitigate these concerns.
  • First, it said it was commonplace in the regulation of complex market activity to have rules and powers which are expressed in general terms and by reference to high level objectives. It regarded the need for wide discretion in complex market activities to be acceptable and that a wide measure of subjective discretion was appropriate given that this was a “specialist and expert regulatory body”. Whether that is a fair assessment of the FCA’s ability to get the answer right, and whether that is sufficient comfort, is something firms will take their own view on.
  • Second, it is the case that - and the Court of Appeal placed weight on this in its judgment - as a public body, the FCA must act reasonably in a public law sense. It must act rationally, take into account only relevant evidence and disregard irrelevant matters, and it must use its powers for the purposes for which they were granted and not act arbitrarily or oppressively. In that sense, it is therefore wrong to say the power is entirely unfettered. There is therefore a remedy against the FCA if it abuses its powers or acts unlawfully in the public law sense.
  • Third, the Court of Appeal has confirmed that, based on FSMA section 133(6) and 6(A), the Upper Tribunal in judicial review type referrals in these cases has a wider remit than a standard High Court judicial review and, for example, has jurisdiction to investigate the underlying facts. It is thus not bound by the FCA’s view that there has been a deficiency or breach and can form its own view on such issues afresh (i.e. this would go beyond a normal judicial review process, where the question is simply whether the views formed by the FCA were within the band of reasonable decisions for a public authority). This was referred to in the judgment as a “JR plus” which was a remedy beyond the usual judicial review regime. This, the Court of Appeal considered, was an added protection against the unfettered discretion of the FCA. However, the Court of Appeal refused to rule on exactly how far this re-review/“JR plus” goes and whether this involves an independent review of the matters the regulator should have taken into account as opposed to simply the reasonableness of the decision they took based on the evidence before them.
• This still leaves open whether, in practice and in law, this really does provide adequate protection for firms against what is, otherwise, an extremely broad and largely unfettered discretion. It must be remembered that the threshold in section 55L, as set out above, is low, namely that the FCA can impose “appropriate” conditions if it considers it “desirable” to do so. It may be that on a “JR plus” the Tribunal can be more active in assessing and testing the factual basis for the exercise of the discretion, but equally it is still constrained: it cannot substitute its own decision for that of the FCA unless it finds that the FCA has operated on a flawed factual or legal basis, and the same subjective test of “desirable” remains, and will in practice be very difficult to overturn, quite apart from the time, cost and delay involved in such proceedings for a firm trying to challenge such a decision. (Costs are unlikely to be recoverable in Tribunal proceedings unless unreasonable conduct can be shown).  

Supervisory action or disciplinary sanctions?

• The Court of Appeal judgment tries to draw a distinction between disciplinary action, including the power to impose compensation or redress as a separate sanction under section 404 on the one hand, and supervisory action in the form of an own-initiative imposition of requirements under section 55L on the other.
• The Court of Appeal held that the FCA’s powers to regulate the fitness and propriety of authorised firms may encompass imposing any type of requirements on firms (within the bounds of public law reasonableness and for the purpose of advancing one or more of the operational objectives) and tries to maintain that this is an entirely separate matter from the FCA’s disciplinary jurisdiction. This logic is based on the idea that the FCA’s use of such an own-initiative requirement is forward-looking, and aimed at ensuring the prospective fitness and propriety of the regulated person. The Court of Appeal approved the idea that past conduct of a firm can and should be used as an evidential basis to make the fitness assessment: it pointed out that questions such as honesty and integrity were naturally to be judged in the light of past conduct. Thus, if the FCA concludes that compensation or redress needs (or is “desirable”) to be paid by the firm in order to address past issues, then payment of such sums (or failure to do so) is something that goes to its assessment of prospective fitness and propriety, rather than a “sanction” which performs a different function. Further, the Court of Appeal held that while a sanction must relate to regulated activity, a permission requirement need not do so (section 55N(2)). The FCA may, according to the Court of Appeal, rationally impose a requirement related to entirely non-regulatory matters to the extent it determined this as desirable to ensure the fitness and propriety of the authorised person.
• Whether such a sharp distinction is realistic or meaningful is questionable. In this case, the requirement was virtually contemporaneous with the issue of a Decision Notice seeking the imposition of a substantial fine for breach of FCA Principles. It is therefore hard to see the distinction the FCA was arguing for. Where a firm is on the receiving end of a potential multi -million pound redress requirement in respect of past conduct issues, at the same time as the proposed imposition of a fine for misconduct, this is likely to be a distinction without a difference.

Construction of FSMA

• Much of the legal reasoning in the judgment turns on the Court of Appeal’s conclusions as a strict and narrow matter of legal construction of the relevant sections of FSMA. The more holistic approach adopted by the Upper Tribunal, including looking at the legislative history behind the introduction of these various sections, and reference to other aids to construction, were found not to assist.
• It is not the purpose of this article to recite the various points on construction made by the Court of Appeal. However, the result the Court of Appeal has arrived at nonetheless leaves an uncomfortable and seemingly somewhat illogical result. This arises from the fact that FSMA (and its various amendments and added sections) provides a detailed framework for redress schemes for consumers in both section 404, which includes the ability to require individual firms to implement such schemes in a similar or corresponding way. Similarly, section 384, which creates further specific powers for the FCA to order restitution to be paid by firms, has its own statutory criteria. What is the point of these specific provisions if, as the Court of Appeal now holds, the FCA has had the power all along to impose as part of its on-going supervisory powers, to vary a firm’s permissions and order redress and restitution schemes, completely free from all the other restrictions and criteria set out in sections 404 and 384? It is true, as the judgment points out, that use of the section 404 power may bring an additional benefit of locking the FOS into a scheme (both multi-firm and single firm) which would not be available under section 55L. But in terms of the concept, these are details. We are left therefore with the situation where the imposition of a scheme of redress through each of the routes seems to largely overlap in terms of the objective and potential result - but the section 404 and 384 routes provide various statutory guardrails as their use, while on the Court of Appeal’s approach these guardrails can all be sidestepped by use of section 55L. The result is both illogical and concerning.

Human Rights Act 1998

• Although Human Rights Act points were argued, in particular that this imposition of a substantial remediation scheme of this nature via such a broad but untrammelled discretion represented a breach of Article 1 Protocol 1 of the European Convention on Human Rights (“ECHR”) (right to peaceful enjoyment of possessions), these submissions were ultimately rejected by the Court of Appeal. This was on a similar basis to that set out above, that the protections of “JR plus” meant that use of this power to override private property interests was compliant with the ECHR requirements of public interest, fulfilment of conditions provided for by law, and proportionality.
• Nonetheless, it seems hard to resist the conclusion that the exercise of regulatory discretion, with such a low trigger threshold (“desirable”), with no other legal constraints such as the Four Conditions discussed above and the only restriction being a difficult-to-enforce right to review by the Upper Tribunal (even if on a “JR plus” basis), swings the balance of power in relation to matters such as restitution and redress very heavily in the regulator’s favour.

Conclusion

It waits to be seen whether this case will be appealed to the Supreme Court and/or whether permission will be granted. If it is, it is to be hoped that the more holistic approach to the interpretation of FSMA that found favour with the Upper Tribunal will be given due weight by the Supreme Court.  

It certainly feels uncomfortable for firms to be subject to such an overly broad and powerful discretion, to impose highly significant or potential firm-ending financial requirements in circumstances where all legal guardrails and constraints are disapplied, and the discretion is effectively untrammelled and absolute, subject only to the need for the FCA to act reasonably in a public law sense, and the “JR plus” remedy in the Upper Tribunal, for what that is worth.

Firms will be worried by these developments, particularly in light of the direction of travel of the FCA more generally in relation to use of these powers. We will be following future developments, both in the Courts and with the FCA, with interest.

If you would like to discuss this article, or any of the issues it raises, please get in touch with one of the contacts listed, or your usual contact at Hogan Lovells.

Authored by Philip Parish and Daniela Vella.