Davies & Ors v Financial Services Authority

This is an appeal from the refusal of Lightman J on 18 December 2002, after an inter partes oral hearing of a renewed application, to grant permission for judicial review of warning notices given to the applicants by the Financial Services Authority (the Authority) under s 57 of the Financial Services and Markets Act 2000 (the 2000 Act). Laws LJ granted permission to appeal. The issue on the appeal is whether Lightman J was right in holding that the grounds on which the applicants sought judicial review were unarguable. His judgment is reported at [2003] 1 WLR 1284.

The appeal raises some points of practical importance on the exercise of the regulatory powers of the Authority and the appropriate procedures for challenging its decisions and actions. It is the first occasion on which the Court of Appeal has had to consider the points.

The Authority is the independent, non-governmental regulator of the financial services industry under the 2000 Act. It is required to discharge its statutory responsibilities in accordance with the provisions of the 2000 Act and its Handbook of Rules and Guidance.

The Authority must maintain arrangements designed to enable it to determine whether persons, on whom requirements are imposed by or under the 2000 Act, are complying with them. There is a general prohibition on a person carrying on a regulated activity in the United Kingdom, unless he is an authorised person or an exempt person. The Authority has powers of authorisation, supervision and enforcement. It has defined, regulatory objectives: market confidence, public awareness, the protection of consumers and the reduction of financial crime. (It is not alleged that the applicants have been involved in criminal activities). The Authority, which is responsible for maintaining confidence in the financial system, must act compatibly with its objectives and in a way which it considers most appropriate for the purposes of meeting them.

The Authority has disciplinary powers. It may use them to take action against a person, who appears to the Authority to be guilty of misconduct. There is a time limit for taking action. The Authority may not take action under those powers after the end of two years from the date on which it first knew of the misconduct, unless proceedings in respect of it against the person concerned were begun before the end of that period.

The Authority also has specific powers to make orders (prohibition orders) prohibiting an individual from performing functions. If the Authority proposes to make a prohibition order, it must first give the individual concerned a warning notice setting out the terms of the prohibition. If the Authority then decides to make a prohibition order, it must give the individual concerned a decision notice setting out the terms of the order. There is nothing to prevent any person who would be affected by the Authority’s decisions from corresponding with or making representations to the Authority.

A person against whom a decision to make a prohibition order is made may refer the matter to the Financial Services and Markets Tribunal (the Tribunal). The Authority also has power to vary or revoke a prohibition order. If it refuses to do so, the applicant may refer that matter to the Tribunal.

The Tribunal is independent of the Authority. Its function is to hear and determine references from decisions of the Authority. The Tribunal conducts a de novo review of the matters referred to it. It may consider evidence whether or not it was available to the Authority at the material time. It may decide points of law, including disputes about the limits of its own jurisdiction and the lawfulness of the decisions and actions of the Authority.

A party to a reference may (with permission) appeal to the Court of Appeal on a point of law arising from the decision of the Tribunal disposing of the reference. The prohibition notice is not enforced pending the determination of the Tribunal or of the Court of Appeal. The 2000 Act is silent on the availability of judicial review of the decisions and acts of the Authority.

The applicants wish to challenge, by way of judicial review, the lawfulness of the decision of the Authority under s 57 of the 2000 Act to issue warning notices to them. In the notices the Authority, acting through its Regulatory Decisions Committee, warned the applicants of its proposals to make prohibition orders against them under s 56 of the 2000 Act on the ground that they are not fit and proper persons to perform specified functions relating to regulated activities. The application was issued on 6 September 2002.

The applicants were formerly employed by Brandeis (Brokers) Limited (BBL), a ring dealing member of the London Metal Exchange (the LME). In late 1997 one of BBL’s largest customers, Mr Herbert Black, made serious complaints against BBL about the mispricing of Mr Black’s accounts and customers and the misuse of confidential information by its employees. In early 1998 BBL reported the complaints to the Securities and Futures Authority (the SFA). At that time the SFA was the self-regulatory organisation responsible for the regulation of its member firms operating on the LME. It had been established under the Financial Services Act 1986 (the 1986 Act).

The SFA had power to institute proceedings if a registered person committed an act of misconduct, or if he ceased to be a fit and proper person. The SFA conducted its own investigations into the conduct of the applicants. On 31 July 2001 it started proceedings against the applicants. (The Authority had power to make a disqualification direction under s 59 of the 1986 Act against an individual, who was not a fit and proper person, but it did not see occasion to do so while the SFA was proceeding with its charges). Before the SFA proceedings were determined and before any substantive hearing had taken place, the 2000 Act came into force. It replaced the 1986 Act. The SFA ceased to have any jurisdiction to proceed with its charges. Accordingly the proceedings were discontinued. In December 2001 the regulatory jurisdiction of the SFA over its member firms operating on the LME passed to the Authority. There were no relevant transitional provisions enabling the Authority to be substituted for the SFA in the existing proceedings.

The Authority was unable to use its powers to take disciplinary proceedings against the applicants for misconduct under s 66 of the 2000 Act, as the two-year time limit imposed by s 66(4) had expired. The investigations by the predecessor SFA had started four years previously.

On 24 June 2002 the Authority issued the warning notices against the applicants under s 57 of the 2000 Act. The Authority warned them that it proposed to make prohibition orders against them under s 56 of the 2000 Act on the grounds that they were not fit and proper persons to perform certain functions relating to regulated activities.

The arguments on the appeal turn principally on whether the Authority was acting lawfully in seeking to use its powers against the applicants under s 56 of the 2000 Act when, as is agreed, it was no longer entitled to use its powers against them under s 66. It is accordingly necessary to set out the provisions of those sections. The disciplinary powers conferred on the Authority by s 66 provide that:

“ (1) The Authority may take action against a person under this section if-

(a)

it appears to the Authority that he is guilty of misconduct; and

(b)

the Authority is satisfied that it is appropriate in all the circumstances to take action against him.

(2)

A person is guilty of misconduct if, while an approved person-

(a)

he has failed to comply with a statement of principle issued under section 64; or

(b)

he has been knowingly concerned in a contravention by the relevant authorised person of a requirement imposed on that authorised person by or under this Act

(3)

If the Authority is entitled to take action under this section against a person, it may-

impose a penalty on him of such amount as it considers appropriate; or

For the purposes of subsection (4)-

“ Approved person “ has the same meaning as in section 64.

The power to make prohibition orders was conferred on the Authority in the following terms by s 56. The exercise of the powers had to be preceded by the giving of a warning notice under s 57.

“(1)

Subsection (2) applies if it appears to the Authority that an individual is not a fit and proper person to perform functions in relation to a regulated activity carried on by an authorised person.

(2)

The Authority may make an order (“a prohibition order”) prohibiting the individual from performing a specified function, any function falling within a specified description or any function.

A prohibition order may relate to-

As already indicated it is common ground that the Authority was not entitled to use its powers under s66 to take action against the applicants, as the two year time limit had expired by the time that the Authority took over the jurisdiction of the SFA over the LME. The critical issue is whether the Authority could lawfully take the action that it has given notice that it proposes to take against the applicants under section 56.

The applicants challenged the lawfulness of the warning notices on a number of grounds, principally that the issue of them was improper and an abuse of process, as it was proposed to use the prohibition procedure under s 56 for disciplinary purposes in respect of alleged past misconduct in order to avoid the time bar imposed on the Authority bringing such proceedings under s 66.

Mr Michael Beloff QC, who appeared on behalf of the applicants, focused on three points. He contended that, at the very least, they were reasonably arguable at the permission stage. This court should therefore reverse the judge and grant permission for judicial review.

In summary the applicants’ main submissions in the court below and on the appeal were as follows.

Lightman J concluded that the grounds were unarguable. I agree with his reasons for refusing permission and add some of my own. It is unnecessary to cite authority, as the relevant legal principles were not in dispute. The dispute centred on their application to the particular facts of this case.

Although there are different statutory criteria for invoking the procedures in s 56 and s66, there is no clear and sharp punitive/ preventive divide between them, the one looking only forwards to the prevention of future activities and the other looking only backwards to punishment of past misconduct. Both procedures are regulatory. Section 56 is available in cases of past misconduct, enabling the Authority to take prohibition proceedings in respect of it in order afford the necessary future protection of the public. Section 66, under which action was time barred, is not the only provision in the 2000 Act available to the Authority in respect of past misconduct.

The Authority’s proposal to use of s 56 was not barred by the applicants’ protestations that they do not intend to carry out the functions, which the prohibition order might forbid. The fact that the applicants appeared to the Authority to be unfit persons was sufficient to justify the giving of the warning notice setting out the proposed prohibition order. There was no requirement that, in order to be legally entitled to give a warning notice, the Authority had to satisfy itself that the applicants had a present or a future intention to work in the financial services industry. The applicants’ assertions that they have no present plans is not an adequate substitute for or alternative to a prohibition order. Present plans and future intentions are factual points on which the applicants would be entitled to make representations to the Authority or, failing that, to the Tribunal on a reference to it.

Lightman J rightly rejected the submission that the Authority was acting incompatibly with its own published guidance in the Handbook, because it could not show the necessary risk to confidence in the market. I agree with paragraphs 10 and 11 of Lightman J’s judgment at [2003] 1 WLR at p.1288.

In view of his conclusions on the substantive points, with which I agree, the judge did not find it necessary to deal with the procedural objection that the application was premature and should be rejected on the ground that there was a satisfactory alternative procedure provided by the Act itself, namely to make representations and to refer the matter to the Tribunal. I would, however, add some comments on the further reasons advanced by the Authority for rejecting the application and dismissing the appeal.

I agree with Mr Herberg, who made excellent submissions on behalf of the Authority, that the applicants’ submissions do not correctly characterise the nature of the previous SFA proceedings in describing them as disciplinary proceedings for past misconduct. They are also wrong in asserting that the Authority is seeking to continue the SFA’s “disciplinary proceedings” as prohibition proceedings aimed only at future conduct.

Examination of the SFA proceedings reveals that they were never purely “disciplinary proceedings” for past misconduct. There was a forward looking element in the proceedings. The SFA was alleging that the applicants were not fit and proper persons. It sought expulsion of them from the SFA’s Registers. In accordance with rule 7.24A of the rules, under which the SFA acted, the proceedings set out not only the alleged acts of misconduct, but also the reasons why the applicants had ceased to be fit and proper persons.

The Authority was not simply seeking to continue time barred “disciplinary proceedings” by different means. Like the SFA, the Authority was seeking expulsion on the ground that the applicants were not fit and proper persons. Section 56, not s 66, of the 2000 Act was the appropriate procedure available to the Authority to take action, which involved virtually identical charges brought with the same objective. The same considerations applied to both. I would add that, although it is true that there are different statutory criteria for making prohibition orders and for taking disciplinary action, both are available to the Authority in order to send out messages to the financial services industry and to the public about unacceptable conduct in the financial markets and in order to deter others.

Although Mr Herberg did not contend that there was a lack of jurisdiction to entertain an application for judicial review, he invoked the general principle that judicial review is a remedy of last resort. This means that, in the absence of exceptional circumstances, it should not be used, unless the applicant has first exhausted available procedures for objecting to, or appealing against, the decision sought to be judicially reviewed.

The application in this case would, if granted, by-pass the comprehensive statutory scheme. It was specially set up by the 2000 Act. It enabled persons against whom decisions are made and actions taken to refer the matter to the specialist Tribunal, with a right of appeal on points of law direct from the Tribunal to the Court of Appeal. Even if the only point raised was a point of law on the lawfulness of the decision or action of the Authority, that could be dealt with by the Tribunal. It was unnecessary to apply for judicial review to resolve it. There are no exceptional circumstances in this case, in which the grounds of challenge to the warning notice are not restricted to purely jurisdictional grounds.

The legislative purpose evident from the detailed statutory scheme was that those aggrieved by the decisions and actions of the Authority should have recourse to the special procedures and to the specialist Tribunal rather than to the general jurisdiction of the Administrative Court. Only in the most exceptional cases should the Administrative Court entertain applications for judicial review of the actions and decisions of the Authority, which are amenable to the procedures for making representations to the Authority, for referring matters to the Tribunal and for appealing direct from the Tribunal to the Court of Appeal.

I am unable to accept Mr Beloff’s submission that exceptional circumstances exist in this case, which would justify following the judicial review route rather than leaving the applicants to invoke the statutory procedure. He contended that, if the application were rejected on the “alternative remedy” ground, the applicants would be forced to defend themselves at great expense against the allegations of misconduct in proceedings which, on the applicants’ case, the Authority could not lawfully bring against them. They should not, he said, be subjected to the regulatory statutory machinery at all. For the reasons already advanced, the regime under ss 56 and 57 was simply not applicable to their cases.

In my judgment, the points raised in the grounds on which judicial review is sought could and should, if pursued, be the subject of representations to the Authority, or of submissions to the Tribunal. The statutory course could be taken without substantially increasing the expenses already incurred in preparations to defend the discontinued proceedings brought by the SFA. It would be open to the applicants to ask the Tribunal to deal with their contentions on the lawfulness of the Authority’s decisions and actions as preliminary issues. An application by way of judicial review is, in all the circumstances of this case, unjustified.

Mr Herberg also submitted that the application for judicial review was premature and that permission should be refused for that reason. There is force in this submission. The only decision taken by the Authority against the applicants was to issue the warning notices. Standing alone the notices have no legal effect or adverse consequences for the applicants. Further action is required under s 56 before a decision notice is issued. I would not, however, decline to entertain the application on that ground alone. It is reasonable to suppose that, in the circumstances of this case, the giving of the warning notices under s 57 is likely to be followed by decision notices under s56 and by the making of prohibition orders.

I would dismiss the appeal and order the applicants to pay the costs of the respondent to be subject to a detailed assessment, if not agreed.

I agree.

I also agree.