Stuart Forsyth v the Financial Conduct Authority and the Prudential Regulatory Authority: Limitation and Disclosure Findings

Published 7 July 2021

On 6 July 2021 the Upper Tribunal handed down judgment in Mr Forsyth’s reference challenging the Financial Conduct Authority’s (“FCA”) and the Prudential Regulation Authority’s (“PRA”) (together, the “Regulators”) decision to prohibit him from working in the regulated sector and imposing a combined fine of £154,498.

As we outlined in our press release here the Tribunal’s judgment sets aside the fine and directs the Regulators to give effect to the Tribunal’s clear and unequivocal determination that Mr Forsyth did not fail to act with integrity.

Aside from its decision on Mr Forsyth’s conduct, the Tribunal also made stark findings on failings by the Regulators to comply with their duties of disclosure.

The Tribunal said in this respect:

“the Regulators’ conduct has fallen well below the standards which Mr Forsyth, the regulated community and public at large, are entitled to expect.”

Why was the disclosure required?

In relation to the financial penalty aspect of the Regulators’ decision notices, a limitation issue arose under section 66 of the Financial Services and Markets Act (“FSMA”) in respect of certain aspects of the alleged conduct predating 24 July 2014.  In order to be within the limitation period the Regulator was required to issue a Warning Notice by 25 April 2019.  The warning notices were issued on 24 April 2019.

As decided in Jeffrey v FCA (2013) “Although the Authority may only take action under s.66(1) if it appears to it that the relevant person is guilty of misconduct, the limitation period starts to run from an earlier time, when the Authority knows or has information from which the misconduct can reasonably be inferred.  The Authority must, however have sufficient knowledge of the particular misconduct, or such knowledge must be capable of being reasonably inferred, to justify an investigation. Mere suspicion is not enough, not is any general impression that misconduct may have taken place.” 

Mr Forsyth pleaded that the Regulators had the requisite knowledge by 6 November 2015 by reason of specific allegations made to the PRA by a whistleblower that, “[Mr Forsyth] has arranged…to pay part of his salary and bonus to his wife who does not work in the business to reduce his tax liability thereby committing tax fraud”.

As a consequence of this pleading, it was incumbent on the Regulators to make disclosure of any further material which might reasonably be expected to assist Mr Forsyth’s case on limitation. 

What happened?  

The Regulators made disclosure of key documents, relevant to this issue of limitation, just before and during the Tribunal hearing.  Disclosure of these documents should not only have been made far earlier in the proceedings, but also much earlier in the regulatory investigation and enforcement process, prior to any decision made by the regulatory decision panels, the EDMC and RDC.

The Tribunal considered such failures could not be “regarded as anything but the most serious failing on the part of the Regulators. Such failings threaten the integrity of the Tribunal process. If these documents had not come to light, then it is possible that the Tribunal would have made a finding on an issued in respect of which it had no jurisdiction because of the expiry of the limitation period. It goes without saying that the result is also that Mr Forsyth has not been dealt fairly in respect of this aspect of the proceedings, in respect of matters which are entirely within the control of the Regulators themselves”.

Given that the Tribunal found in the Applicant’s favour and allowed the Applicant’s references in full, it did not need to decide the issue of limitation.  However, given the nature of the failings, it chose in any event to direct the Regulators provide (i) an explanation as to the systems and guidance at the Regulators regarding disclosure proceedings, and (ii) an explanation as to what occurred in this case that resulted in such late disclosure.  This was to assist the Tribunal in considering whether to exercise its powers to make recommendations as to the Regulators’ procedures.  

What did the Tribunal find?

In light of explanations provide by both the Regulators for the late disclosure, the Tribunal observed that there were failings (a) to locate documents due to inadequate document management processes; and   (b) to appreciate the significance of documents that they had identified as potentially relevant.  Mistakes included:

1. A key document had been stored in the FCA’s “general supervision” file rather than matter specific file, so had not originally been searched by the FCA;
2. Inboxes of certain FCA employees, who attended a key meeting of the PRA and FCA supervisory teams, had not been properly searched; 
3. Searches had not been undertaken of the sent items of inboxes of various FCA employees;
4. Certain documents had not been uploaded to EDT (the FCA’s evidence management system);
5. The FCA failed to respond appropriately to requests for disclosure made by the Applicant;
6. Document had been marked as legally professional privileged, with no proper basis or record of why such a decision had been made, with the result that it had not been considered whether such documents were potentially undermining or not; and
7. Records of the former Regulatory Action Division (“RAD”) (what is now the PRA’s Enforcement and Litigation Division) were not properly reviewed. 

The Tribunal observed that the FCA’s processes appeared to be “appropriate and adequate”, but that the failings appeared to be largely due to human error which may have been caused by a “basic lack of competence on the part of those entrusted” to perform the tasks the processes require.

With respect the PRA, it said the problems appeared to be “more systemic” given they lacked the systems maintained by the PRA.

What now?

Both Regulators have apologised and expressed regret on their failings in the case.

The PRA says it is reviewing its Regulation Investigation Guide to ensure that disclosure risks related to joint investigations are addressed and to learn the lessons for this experience.

The Tribunal made the following recommendations:

1. The FCA should consider whether its staff are adequately trained and have an adequate understanding of the importance of proper record management in the context of potential enforcement proceedings and consequences that could follow if those procedures are not followed;
2. The FCA should review its procedures for dealing with requests for disclosure of documents made after the usual disclosure process has been completed;
3. The FCA should review the adequacy of its Disclosure Memorandum (the purpose of which is to log all key decision with respect to disclosure) in its current form and whether it is fit for purpose as it is currently being used. Legally privileged material should be kept separate to other material;
4. The FCA should make an assessment as to when the relevant limitation period begins which should be regularly reviewed as new information comes to its attention;
5. The recommendations set out above are equally applicable to the PRA, as appropriate. In addition the PRA should undertake a full review of its processes for the recording of supervisory and other information that may be relevant to possible enforcement actions; and
6. The approach to joint investigations should be reviewed. Where the conduct concerned falls equally within the scope of both the Regulators, consideration should be given as to whether there should be a single investigation by one for the Regulators and a single regulatory decision.

The Tribunal directed that the Regulators respond with their views on the recommendations.  We await the Regulators’ response, but given that they have accepted failings to have occurred, we expect them to be receptive to the recommendations made. 

Comment

This is not the first time the Tribunal has had to highlight the Regulators’ failure to comply with their disclosure obligations – see e.g. see Hussein v FCA [2018] UKUT 186 (TCC) and Alistair Burns v FCA [2019] UKUT 0049.  While it is accepted that human error will lead to occasional error, it is the number of documents, the importance of them, and the timing of eventual disclosure that is particularly stark in this case. 

It is hoped the Regulators will take on board the findings and recommendations of the Tribunal and their procedures will become more robust and reliable in the future. 

It is also a lesson that a regulator’s disclosure cannot be taken for granted, but needs be scrutinised, questioned and challenged – it is only for the Applicant’s repeated requests for documents that the omissions came to light.

As the Tribunal noted, the responsibility for effective review of documents and disclosure lies squarely with the Regulators.  It is a fundamental part of discovering the truth, and failures jeopardise the fairness of proceedings – where someone’s livelihood is at risk, such as the case of Mr Forsyth, there simply cannot be any room for such failings.