Bluecrest Capital Management (UK) LLP v The Financial Conduct Authority

The Authority’s Principles for Businesses provide a general statement of the fundamental obligations of firms under the regulatory system as set out in the Authority’s Handbook. The Principles derive their authority from the Authority’s rule-making powers set out in s.138 of FSMA (as originally enacted).

Principle 7 provides: “A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading”.

Principle 8 provides: “A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client”.

The Authority also relies upon the Conduct of Business Rules (‘COBS’). COBS 4.2.1(1)R provides: “A firm must ensure that a communication or a financial promotion is fair, clear and not misleading”.

Senior Management Arrangements, Systems and Controls (‘SYSC’) sets out rules and guidance for firms in relation to systems and controls. During the Relevant Period SYSC 10.1.3R, 10.1.7R and 10.1.8R provided:

Section 207(1) FSMA provides that when the Authority proposes to impose a penalty for misconduct on an authorised pursuant to s.206 (“Disciplinary measures”) the Authority “must” give a warning notice. If the Authority decides to impose such a penalty, under s.208(1) it “must” give a decision notice. Sections 387 and 388 provide that warning notices and decision notices “must” “give reasons” for the proposed action and decision respectively. Similar requirements exist in relation to the reference from the FSN: see s.55Y(4) and (5)(b) FSMA in respect of action under s.55L.

These sections confer (as we discuss below) fundamentally important procedural protections for applicants, enabling them to know the case that they must meet, to make effective representations, and to understand the reasons for the Authority’s decisions, and thus whether and on what basis to refer them to the Tribunal.

Section 208(4)(b) provides that, “If a regulator decides to impose a penalty on an authorised person under section 206… the authorised person may refer the matter to the Tribunal.”

The operative provision for the Tribunal’s jurisdiction is s.133 FSMA (“Proceedings before Tribunal: general provision”). It provides, in relevant part:

The words “subject-matter of the reference” and “matter” in respect of which the Tribunal must determine the appropriate action are not defined. The provision is (as the title indicates) a general provision, which caters for appeals as well as references to the Tribunal, from decisions of a variety of regulatory bodies in relation to financial services as well as the Authority. In its broadest terms, reading s. 208(5) and s. 133 (4) together, the subject matter of the reference in this case in relation to the DN is the decision of the Authority to impose a financial penalty on the Applicant. However, as we shall see, the authorities give a narrower interpretation.

Section 133A(1) provides insofar as relevant as follows: “In determining in accordance with section 133(5) a reference made … as a result of a decision notice …, the Tribunal may not direct the body to take action which it would not, as a result of section 388(2), have had power to take when giving the notice.”

The question of what is within the subject matter of a reference to the Tribunal has been considered in a number of authorities. The starting point is the decision of this Tribunal’s predecessor, the Financial Services and Market Tribunal, in Jabre v Financial Services Authority (Decision on Jurisdiction) [2002] UKFSM FSM035 (10 July 2006).

In that particular case the Warning Notice issued to Mr Jabre proposed to impose a penalty on him for market abuse and also to withdraw the approval given to him by the Authority under s.59 FSMA that allowed him to perform certain functions for his employer, a firm regulated by the Authority, on the basis that his actions meant that he was not fit and proper to perform those functions.

Having considered Mr Jabre’s representations the RDC decided to maintain the financial penalty but declined to withdraw Mr Jabre’s approval and issued a Decision Notice accordingly.

When Mr Jabre referred the decision to impose the financial penalty to the Tribunal, the Authority in its statement of case argued for Mr Jabre’s approval to be withdrawn in addition to the imposition of the financial penalty. Mr Jabre argued that it was not open to the Tribunal to take that course because it did not form part of the “matter” referred to the Tribunal as it was not provided for in the RDC’s decision notice. The Tribunal decided that the “matter” referred was not the decision as expressed in the decision notice, but it was the circumstances on which the decision is based that fall to be considered and evaluated; it was for the Tribunal to decide what was the appropriate action to take in the light of those matters and any further relevant evidence presented to it.

The Tribunal stated at [28]-[29]:

It is clear that [28] and [29] of Jabre circumscribe the subject matter of the reference, the foundations for which must be contained in the Decision Notice. Per [28]: the circumstances, the evidence and the allegations before the Regulatory Decisions Committee (‘RDC’), and not the decision, are "the subject-matter of the reference"’. The Tribunal explains at [29] that even if findings are not made in the Decision Notice the subject matter may include the allegations which were before the RDC - the facts and circumstances on which the findings were sought by the Authority may form the subject matter of the reference i.e. allegations which were in the statutory notices and made to the RDC may be revived before the Tribunal.

The Tribunal in Jabre distinguished the facts of James Parker v FSA (FSMT, 13 October 2004) where a new allegation unconnected with the factual context that gave rise to the original decision was found to be outside the subject matter. The “matter” referred extends beyond the decision notice to the “circumstances, the evidence and the allegations before the [RDC]”, as the Tribunal put it – and hence included allegations (lack of fitness justifying withdrawal of approvals and prohibition order) which the Authority had included in the warning notice as to fitness and which were therefore before the RDC (and able to be addressed by Mr Jabre), even though the RDC had chosen not to rely on them in the decision notice (albeit included as matters on which it chose not to rely). This was why, as the Tribunal reasoned, its decision was consistent with Parker v FSA, where the new allegation of market abuse sought to be added had not been ventilated before the RDC nor included in the decision notice, and was therefore not part of the matter referred.

It is clear from the passages in Jabre quoted above that the Tribunal placed some emphasis on the fact that the matters on which the Authority relied in its Statement of Case before the Tribunal were “the facts and matters before the RDC” and therefore those facts and matters were capable of being pleaded before the Tribunal in the Authority’s Statement of Case. That is so even if findings on those facts and matters are not made in the Decision Notice. Consequently, allegations which were in the statutory notices and made to the RDC may be pursued before the Tribunal even if the RDC rejected them.

The reference to the “statutory notices” is important. The Authority’s decision-making procedure which must be followed before it can decide to impose a financial penalty requires regulatory proceedings to be commenced by the issue of a Warning Notice. Section 387 FSMA states that a warning notice “must” state, among other things “the action which the [Authority] proposes to take” and “give reasons for the proposed action.” In this case, therefore, it was incumbent on the Authority to issue a Warning Notice to the Applicant stating that the Authority was proposing to impose a financial penalty. It must then set out the reasons why the Authority is seeking to take that action. We consider later what is meant by the “reasons” in this context.

The purpose of the Warning Notice is clear. It enables the subject of it to make effective representations to the RDC as to why the Authority should not proceed with the proposed action. It is therefore important that the subject of the notice knows the reasons for the proposed actions so they can consider whether to contest the proceedings at the administrative decision making phase. The approach taken in Jabre

Nonetheless, and non-controversially, the Tribunal may consider any “evidence” relating to the subject matter of the reference, whether available to the Authority at the RDC stage or not: this is expressly provided for in s.133(4) FSMA.

This therefore raises the question as to the circumstances in which it may be possible for the Tribunal to have jurisdiction in respect of allegations or facts and circumstances not forming part of the reasons set out in the relevant warning notice or decision notice.

In the recent case of Seiler, Whitestone and Raitzen v FCA [2023] UKUT 133 (TCC) (‘Whitestone’) the Tribunal referred to a number of cases where it has been held that the Tribunal has jurisdiction to consider an allegation that was not made in the relevant warning notice or decision notice..

At [969] of that decision, the Tribunal referred to the decision of the Tribunal in Allen v Financial Services Authority (2012) FS/2012/0019 (‘Allen’) which the Tribunal said showed that the Tribunal may, exercising its case management powers, permit the respondent in a financial services case to amend its statement of case to enable account to be taken of facts and matters not relied on in the warning notice.

Allen was a case where the Authority was seeking a prohibition order under s.56 FSMA against Mr Allen on the basis that he was not fit and proper to perform any function in relation to regulated activities because he lacked honesty and integrity. The Authority sought to rely in the proceedings before the Tribunal on new allegations which demonstrated that Mr Allen was not a fit and proper person by reason of him lacking honesty and integrity. The Tribunal allowed the new allegations to be pleaded because the allegation in the Decision Notice was that Mr Allen was not a fit and proper person to perform any function in relation to regulated activities generally because he lacked honesty and integrity. Consequently, the Tribunal held that any evidence that related to Mr Allen’s honesty and integrity, whether or not it was available to the Authority at the time of the Decision Notice, may be considered by the Upper Tribunal: see [19] of the decision in Allen.

At [976] of Whitestone the Tribunal commented on this decision as follows:

Similarly, as discussed at [977] to [982] of Whitestone, the Court of Appeal in Financial Conduct Authority v Hobbs [2013] EWCA Civ 918 (‘Hobbs’), had to consider circumstances where new allegations of the applicant acting dishonestly arose after the issue of the relevant warning notice. In that case the Authority proposed to make a prohibition order against Mr Hobbs on the basis that he had engaged in market abuse. The Authority had also contended, in the warning notice issued to Mr Hobbs, that he had lied to his employer and the Authority during the course of the investigation into his conduct and these allegations also formed part of the basis of the RDC’s decision to prohibit Mr Hobbs. Mr Hobbs referred the matter to the Tribunal which allowed his reference as it decided that Mr Hobbs’ trading did not amount to market abuse. The Tribunal found that Mr Hobbs had lied to the Tribunal about why he had undertaken the trades in question but decided that since the Authority’s case had rested on a consideration of Mr Hobbs’ alleged conduct in committing market abuse and then lying about it, it was not satisfied that the Authority had made its case that Mr Hobbs was not a fit and proper person.

The Authority appealed against the Tribunal’s decision upholding a reference concerning a prohibition order, in part on the basis that the Tribunal had not considered its alternative case that the prohibition order was justified in light of the applicant’s lies during the course of the investigation. The Court of Appeal recognised that it was necessary for the allegations as to the applicant’s lies to be part of the “matter referred”. The Court of Appeal noted (at [32]) counsels’ agreement as to the broad meaning of “the matter”: “The matter’ includes the facts and evidence referred to in the decision notice on the basis of which the Authority concluded that the person in question was not fit and proper and that a prohibition order was appropriate”.

The Court of Appeal was satisfied that the allegation as to Mr Hobbs’ honesty was a basis for the decision (at [34]), and thus that it was incumbent on the Tribunal to consider it as part of the “matter referred”. Consequently, in the Court of Appeal’s view as Mr Hobbs’ lying was part of the case before the RDC and Mr Hobbs’ lying was one of the bases for the Authority’s conclusion that Mr Hobbs was not fit and proper, it was incumbent on the Upper Tribunal to address the issue.

Furthermore, as the Tribunal observed at [981] of Whitestone, at [38] of Hobbs the Court of Appeal, recognised that there is a wider public interest in regulatory proceedings than is the case with ordinary civil litigation, and was of the view that the Tribunal should avoid any narrowing of the inquiry and any potential prejudice to the applicant could be addressed by giving him a fair opportunity to address the case.

As the Tribunal observed at [982] of Whitestone, it is important to note that in both Allen and Hobbs, the Authority sought to rely on facts and circumstances which arose after the regulatory process had been completed and therefore were not capable of being included in the original warning notice.

As discussed at [983] to [984] of Whitestone the position where the new allegation could have been included in the warning notice but was not, as is the case in these proceedings, may lead to a different outcome. In that regard, the Tribunal referred to Khan v Financial Conduct Authority [2014] UKUT 186 (TCC) (‘Khan’) which the Tribunal said demonstrates that where the Authority seeks to make an allegation in its Statement of Case before the Tribunal which was not pursued before the RDC (but could have been) it is necessary that the allegation was raised during the RDC process.

The Tribunal approved a passage at [87] of Khan to the effect that the subject matter of a reference did not embrace matters which did not relate to a change in circumstances after a warning notice had been issued without those circumstances having been the subject of a full investigation and the warning notice procedure.

In our view, the authorities demonstrate that where the allegations sought to be introduced by the Authority in its Statement of Case relate to matters which arose after the issue of the warning notice then provided those allegations fall within the scope of the “matter referred” then the Tribunal has jurisdiction to consider those allegations, subject to exercising its case management powers so as to permit the Authority to rely on a matter which was not relied on in the warning notice. In both Allen and Hobbs, for instance, the subject matter of the relevant reference was whether the applicant was not fit and proper by reason of a lack of honesty and integrity. Thus, the Tribunal had, as a matter of jurisdiction, the power to consider allegations which post-dated the warning notice. Whether it chose to do so, would be a matter for the exercise of its case management powers, taking into account any potential prejudice to the applicant.

Therefore, when the Tribunal is faced with the situation where the Authority seeks to rely on allegations which were not made in the warning notice but could have been the starting point is to consider whether those allegations and the facts relied on in support of the allegations form part of the subject matter of the reference.

We are satisfied that the passages from Jabre and the later authorities are to be read as follows. In order for such allegations to form part of the subject matter of the reference and be considered or determined by the Tribunal, they must be of the same nature and based upon the same factual background as the allegations made to the RDC and contained in the warning and decision notices, even if no findings are made upon them therein.

If the Tribunal is of the view that the new matters on which the Authority seeks to rely do fall within the scope of the subject matter of the reference, even though not contained in the warning notice, then the Tribunal has a discretion as to whether to allow matters concerned to be pleaded, exercised through its case management powers. In that regard, see the discussion at [988] to [1012] of Whitestone, which we refer to in more detail below. In those circumstances, as that discussion indicates, the burden on the Authority to satisfy the Tribunal that the new allegations should be pleaded will be a heavy one.

Clearly, if the Tribunal takes the view that the matters concerned do fall within the scope of the allegations made in the warning notice as well as the facts and matters on which the Authority relied in support of those allegations, then it will simply be a case of the Tribunal considering whether, exercising its case management powers in accordance with principles referred to below, it should permit the matters concerned to be pleaded.

In relation to the FSN, which as we have said, is the subject of a non-disciplinary reference, Parliament, in introducing the distinction between disciplinary and non-disciplinary references by way of the Financial Services Act 2012, considered that “matter” was limited to allegations which had been properly ventilated before the RDC, such that there could be an intelligible and meaningful review of their lawfulness and reasonableness on a non-disciplinary reference. Parliament, in other words, cannot have intended or considered “matter” (in either subsection) to have a wider meaning than it was given in the Jabre case back in 2006, requiring the allegation to have been ventilated before the RDC.

This in no way prevents the Authority, on a reference to the Tribunal, from relying on fresh evidence that was not capable of being contained within the Decision Notice in relation to allegations or findings that are contained in the Decision Notice. Section 133(4) of the Act specifically contemplates this and empowers the Tribunal to make findings on a reference based upon evidence that was not available to the decision-maker (in this case the RDC of the Authority) at the time of the decision so long as the evidence relates to the subject matter of the reference.

Pursuant to Rule 5(3)(c) of the UT Rules, the Tribunal has power to “permit or require a party to amend a document”, including a party’s statement of case.

The Tribunal must exercise that power: (1) in accordance with the overriding objective (as set out in Rule 2 which includes consideration of what is just and fair); and (2) with regard to the well-established principles that apply to amendments to statements of case under the Civil Procedure Rules. These principles include those explained in Bittar v Financial Conduct Authority [2017] UKUT 0082 (TCC) (‘Bittar’) at [53]-[55]:

The Authority’s original SoC dated 7 January 2022 began with a very short summary of its case in support of the DN and FSN:

“Principle 8” referred to is contained within ‘The Principles for Businesses’: a general statement of the fundamental obligations of firms under the regulatory system as set out in the Authority’s Handbook. The Principles derive their authority from the Authority’s rule-making powers set out in FSMA. Principle 8 provides:

In summary, the original and unamended allegations of breach of Principle 8 (as set out in [154] to [170] of the SoC) were as follows:

The conclusion on breach of Principle 8 was explained at [172] and [174] of the SoC:

The Authority’s case as to the consequences of the Applicant’s breach was brief and set out at [173] of the SoC as follows:

BCMUK denied any breach of Principle 8 as set out in its Reply. Its response to the unamended allegations of breach was in short summary as follows:

As to RMT, BCMUK submitted that the Authority had fundamentally misunderstood the nature of the programme, how it was used, and its performance; and had drawn unjustified inferences from the fact that the allocation of RMT was temporarily removed from the Internal Fund as a result of the ‘taper tantrum’ within the market (when this was due simply to the differing leverage and thus cash stress parameters within the funds) before being again employed in the Internal Fund (Reply, paras 102 to 123).

It appears to us that the pleadings made in the original SoC are consistent with the reasons given by the Authority for the regulatory action decided on in the DN and accordingly raised no concerns as to whether any of the matters pleaded went beyond the scope of the subject matter of the reference.

The Authority applied, pursuant to Rule 5(3)(c) of the UT Rules, to amend its Statement of Case on 29 July 2022. The Authority’s draft amended Statement of Case (the ASoC) contains a number of amendments, a large proportion of which are contested by the Applicant.

Some amendments were not in dispute. For example, at the hearing the Applicant confirmed that, while disputing the allegation, it no longer objected to an amendment to the case pleaded by the Authority that: even if the only “client” of the Applicant was the External Fund, and the relevant conflict of interest was capable of remedy and/or mitigation by disclosure to the External Fund’s directors, the Applicant breached Principle 8 by failing adequately to disclose the relevant conflict of interest to the External Fund’s directors.

Mr Herberg KC, for the Applicant, accepted that the amendment was no more than an elaboration of the existing case on behalf of the Authority. He accepted it proceeded on the correct basis that the client was the board of the relevant fund and it alleged that that conflict was not adequately disclosed to the directors, i.e. to the client. While the Applicant denied the factual allegations therein, it did not oppose the amendment and accepted that it is a matter for trial and that it is not some new or different case in principle which is sought to be advanced by the Authority.

Therefore, the amendment sought at ASoC [170B] reads as follows:

The Authority pleaded a number of amendments within the ASoC to which the Applicant objected on the basis that they raised four new cases not previously pleaded: therefore (i) they were outside the Tribunal’s jurisdiction because they were not matters pursued by the Authority before the RDC or in its statutory Warning and Decision Notices; and (ii) the Tribunal should not exercise its case management powers to permit them.

The first two contested amendments rely on breaches of Principle 8 (the same Principle already alleged in the original SoC).

The first contested amendment alleges that even if the only “client” of the Applicant was the External Fund, the Applicant breached Principle 8 in circumstances where the relevant conflict of interest was only disclosed to the External Fund’s directors. Such disclosure was not capable of managing the conflict of interest fairly in circumstances where the External Fund directors were themselves subject to the same conflict. This proposed and contested amendment is to be found at ASoC [42A(c)]:

The second contested amendment alleges that the Applicant’s role under the MSA, (mentioned only once in passing in the original SoC at [81]) involved the provision of services to the External Fund’s investors in the course of carrying out the regulated activities of “making arrangements with a view to transactions in investments” and/or “arranging (bringing about) deals in investments”. This meant that the investors in the External Fund were indeed “clients” of the Applicant for the purposes of Principle 8. It was alleged that in breach of that Principle, disclosure of the relevant conflicts of interest to those underlying investors was inadequate. The contested amending paragraphs are at ASoC [21], [41A], [42], [42A(f) & (g)], [81], [158A], [170A] and [170B].

Most relevantly, 42A(f) & (g) of the ASoC alleges that the investors in the External Fund were clients of the Applicant:

Paragraph 170A of the ASoC alleges a further breach of Principle 8 based on the Applicant’s alleged duty to the investors as clients:

The third contested amendment relies on a breach of Principle 7 which provides:

The fourth contested amendment relies upon the Conduct of Business Rules (“COBS”). COBS 4.2.1(1)R provides:

The third amendment alleges that the Applicant’s role under the MSA for the reasons set out in paragraph 42A(f) & (g) of the ASoC, meant that the External Fund’s investors were clients of the Applicant for the purposes also of Principle 7.

The Authority seeks to contend that, in breach of Principle 7, the Applicant failed to communicate relevant information to the underlying investors in a way that was clear, fair and not misleading. The disputed paragraphs are at ASoC [15], [42B], [174 (second sentence)] and Appendix 2 (excluding paragraph 20) read with ASoC [21], [41A] [42], [42A(f)], [81], [158A] and [170A].

The fourth amendment is that by virtue of the same matters set out in the paragraph above, the Applicant breached COBS 4.2.1R (1).

For example, paragraph 42B of the ASoC alleges as to the Applicant’s duty to the investors in the External Fund:

The conclusion at [172] ASoC remained as set out in the original SoC (bar for an immaterial deletion in respect of ExCo’s strategic decision-making powers in relation to the Internal Fund).

However, [174] of the ASoC contained an amendment as underlined as regards the Applicant’s alleged breach of duty to the External Fund investors as clients:

The Applicant objected to the Authority’s amendment application on the basis of two grounds. First, as a matter of law and on the basis of a consistent line of Tribunal decisions, the Tribunal does not have jurisdiction to entertain or determine the four amendments which raise new cases. Second and alternatively, the Tribunal should not in its discretion permit the Authority in all the circumstances to introduce the amendments and new cases at this stage in the proceedings.

In summary, Mr Herberg KC for the Applicant submitted that the four amendments raised new cases to which the Applicant objected. The first two proposed amendments constitute new cases of fact in relation to breach of Principle 8 that were not contained within the Authority’s Warning Notice, nor the FSN / DN nor the original SoC.

He submitted that the second two proposed amendments constitute a new case in fact and in law (new legal foundations are relied upon) to those relied upon in the statutory Warning and Decision Notices. It matters not that the Applicant chose to expedite the RDC process as this does not affect the Authority’s obligation to set out its position in the statutory notices to be issued. He submitted that the Authority could not realistically submit that it did not have the opportunity to change or correct its case at that stage given the history of draft annotated notices being issued and representations being made earlier in the process.

He objected to the four amendments for the following reasons.

First, the proposed amendment at para 42A(c) of the ASoC raises a new allegation that BCMUK breached Principle 8 by failing to conclude that its client (the External Fund, acting through its board) was conflicted and that it was therefore necessary to ‘bypass’ its client and make disclosures directly to the investors in the External Fund (“New Para 42A(c) Case”). Mr Herberg KC contended that there was a different alleged conflict in issue from that originally pleaded. He submitted: (i) that the new Para 42A(c) Case is bad in law and has no real prospects of success such that the Tribunal should not exercise its discretion to permit the amendment; and (ii) in any event that it was a new factual case which the Tribunal had no jurisdiction to hear.

Second, the proposed amendment of breach of Principle 8 relating to the MSA introduced an entirely new case on the facts when the Authority had previously only relied upon breaches relating to the Sub-IMAs in its statutory notices and in its SoC. Mr Herberg KC argued that it was based on a different conflict of interest. The existing case in the SoC concerned conflicts in managing the Internal and External Funds and transferring Portfolio Managers between the two and allegations that BCMUK did not control or supervise or disclose this. The new case is about conflict in failures of communication to investors and financial promotions to potential clients and that is not a regulated activity – there is a distinction to be drawn between financial promotion and arranging deals.

The third and fourth proposed amendments raised new cases of fact and new allegations of law – breaches of Principle 7 and COBS - that were not contained within the Authority’s Warning Notice, nor the FSN / DN nor the original SoC.

In relation to the factual case, Mr Herberg KC contended that it was not the subject of the original case that BCMUK failed to communicate relevant information to the investors in a way that was clear, fair and not misleading. In relation to the legal case, he argued that a substantial purpose of the third and fourth amendments was to add two entirely new cases to the effect that BCMUK breached obligations pursuant to Principle 7 of the Principles for Businesses and COBS 4.2.1R(1) (the “New Principle 7/COBS Case”).

Mr Herberg KC submitted that these new cases are a response to BCMUK’s Reply pointing out fundamental legal defects in the Authority’s original case which was framed entirely on the basis of an alleged breach of Principle 8. The last three amendments all arise out of new obligations and related activities and none of the Authority’s original case was based on a breach of the MSA or investors as clients. The new cases were based on how activities were performed and different facts and circumstances as well as different legal principles.

Mr George KC submitted that two remaining categories of amendments are in dispute. Both are responsive to the Applicant’s case, advanced for the first time in its Reply to the Statement of Case, that the investors in the External Fund were not “clients” of the Applicant:

The first category, the first and second disputed amendments are “Principle 8 Amendments”. For the purposes of the Principle 8 case already pleaded in the SoC, the Authority seeks to advance the cases identified as set out above.

The second category, the third and fourth disputed amendments, are “Principle 7 / COBS Amendments”. The Authority seeks to plead that the Applicant was required under Principle 7 and/or COBS 4.2.1 R (1) to ensure that it communicated information to the External Fund’s investors and/or prospective investors in a way that was clear, fair and not misleading by way of the cases identified above.

Mr George KC argued that the Authority has consistently pleaded at all stages that the relevant “clients” of the Applicant included both the underlying investors and the External Fund. He relied on four further matters.

First, the Authority’s amendment application arises in circumstances where the Applicant, in its pleaded Reply to the SoC, departed for the first time from a position which previously appeared to be common ground, namely (1) that the relevant “clients” of the Applicant included the underlying investors in the External Fund; and (2) that those clients received regulated services from the Applicant by virtue of the MSA.

Second, the disputed amendments arise substantially out of the same underlying facts and matters that are already set out in the SoC. The focus of the Authority’s case was and remains the Applicant’s failure over the Relevant Period (1 October 2011 – 31 December 2015) appropriately to manage the conflict of interest that arose between the Internal Fund and the External Fund. More specifically, the Authority’s case was and remains that the failure to manage the conflict arose from inadequate arrangements for managing the conflict and a failure appropriately to disclose the existence of the conflict. The disputed amendments provide further particularisation of the same essential failure.

Third, in light of the fact that the amendments arise out of substantially the same underlying facts and matters, the Applicant has failed to identify any concrete prejudice that it would suffer by virtue of these amendments: there is no suggestion that the amendments (i) would add to the length of the final hearing of the reference (nor indeed has the final hearing yet been listed); (ii) expand the scope of the evidence and factual investigations required in order for the Applicant to pursue its references; or (iii) raise any issue in respect of which there may be difficulties obtaining evidence (e.g. due to the degradation of witness memory over time or for any other reason).

The absence of any concrete prejudice to the Applicant is a significant factor to be taken into account when assessing the Authority’s application for permission to amend.

Fourth, in connection with the FSN reference, the proposed amendments must be seen against the backdrop of the Authority’s case on loss as already pleaded in the SoC. In particular, the investors and/or the External Fund itself have suffered a real loss in respect of the defective services that the Applicant provided in breach of its regulatory obligations. One central question arising on the FSN reference is whether section 55L FSMA provides a lawful route for the Authority to require the Applicant to provide redress for that loss.

BCMUK objects to the proposed amendment at para 42A(c) of the Authority’s ASoC as it argues that it raises a new allegation that, on the assumption that the External Fund was BCMUK’s client (i.e. BCMUK’s case), BCMUK nevertheless breached Principle 8 by failing to conclude that its client, the External Fund acting through its board, was conflicted and that it was therefore necessary for it to ‘bypass’ its client and make disclosures directly to the investors in its client.

Mr George submits that the Authority’s proposed case in this regard has a real prospect of success in the law. The case raises (at the very least) a serious issue to be tried, namely whether, in the particular circumstances of this case and on the factual findings subsequently made at trial, it would have been necessary, if the breach were capable of remedy by any form of disclosure, for the Applicant to make proper disclosure of the conflict of interest not only to the External Fund itself, but to those underlying investors who would be affected by it.

He contends that the purpose of this amendment is to emphasise that, in fact, little turns on whether the clients were the Funds or the investors, because there could never have been a properly managed conflict of interest on the present facts without the underlying investors to the External Fund being given sufficient detail: (i) to understand (a) the nature of the conflict of interest; (b) that there was a risk of damage to their interests by reason of the conflict of interest; and (c) the risks to the investors that arose as a result of that conflict of interest; and then (ii) in all the circumstances to take an informed decision as to whether to invest in the circumstances of the conflict of interest.

He argues that in a case like the present where the firm has not prevented a conflict of interest arising, the question is whether there is adequate disclosure to manage that conflict of interest in such a way that the potential harm presented by the conflict of interest is managed. On the present facts, that risk of harm does not operate solely in respect of the Funds themselves. The risk of harm extends to the underlying investors. Accordingly, any disclosure capable of managing the conflict of interest would need to address the harm as it arises in full.

He contends that even if it were correct that the Applicant’s only relevant “client” was the External Fund, the Applicant’s objection elides the questions of (i) identifying and preventing a conflict of interest arising between clients on the one hand, and (ii) the disclosure required properly to manage a conflict of interest once it has arisen. That distinction is of particular significance on the present facts, where each of the directors of the External Fund was also (potentially) subject to exactly the same conflict between the Funds – no purpose is served by disclosing a conflict to someone who is part of the conflict. Further, the Applicant itself was in fact communicating with the external investors, and was doing so in the context of further regulated activities.

We reject Mr George’s submissions on this point.

As our analysis of the statutory notices set out above confirms, under the terms of its Sub-IMA the Applicant agreed to manage the assets of the External Fund. In relation to these investment services, the obligation to identify and manage conflicts of interest arose. It is therefore the customer relationship created pursuant to the investment management agreement which gave rise to the Applicant’s obligations under Principle 8.

Principle 8 is clear in its terms. The obligation under it to manage conflicts of interest fairly arises “both between itself and its customers and between a customer and another client”. In this case, the term “customer” has the same meaning as “client” as used in the Authority’s Handbook Glossary. By virtue of COBS 3.2.1R(1)(a), the “client” is the person or entity to whom a firm provides “a service in the course of carrying on a regulated activity”. As we have said, in this case in relation to the sub- investment management agreement, the person to whom the service was provided was the External Fund and not the underlying investors.

Accordingly, the conflict that has to be managed in this case is that which has arisen as a result of managing the assets of two different clients, that is the Internal Fund and the External Fund. These are the persons to whom the duty is owed. Insofar as the client is concerned, in this case the External Fund, has a conflict, for example because the members of its Board are conflicted because of their connection with the Internal Fund, then that is a matter which that client must manage.

Therefore, in this case insofar as the Applicant had a duty of disclosure because of the conflict which arose in the context of managing both the assets of the Internal Fund and the External Fund, the duty of disclosure will be owed to its client, the External Fund. In these circumstances, the Board of the External Fund would need to consider what steps it should then take in the light of its own duties to its investors. That may lead to a disclosure exercise on its own part, for example through the prospectus or other marketing material which it itself used or authorised its agents to use.

We agree with Mr Herberg’s submission that there is no basis in statute or in the Authority’s rules or guidance for the proposition that an obligation under Principle 8 can be owed to persons who are not a firm’s clients, and the ASoC does not seek to identify any.

We consider that, applying the factors to be considered as set out in Bittar, the Authority’s proposed New Principle 8 Case set out at 42A(c) of the ASoC should be refused as a matter of discretion. That is because this case has no real prospect of success because the amendment is bad as a matter of law for the reasons set out above.

In addition, Mr Herberg on behalf of the Applicant took a jurisdictional objection to this new case. He contended that it raises a new allegation of fact that does not form part of the subject matter of the reference as it was not explored or contained within the RDC proceedings nor statutory notices.

In view of our conclusion on the prospects of success of the proposed amendment, we do not need to consider this point further.

Mr Herberg submits that this amendment concerns a different agreement between BCMUK and the Investment Manager. Instead of the Sub-IMAs referred to above under which BCMUK provided investment management services, the amendments relate to services provided under the MSA, pursuant to which BCMUK was appointed by the Investment Manager to market and sell subscriptions for investment in the External Fund (ASoC, [21]).

Mr Herberg submits that the amendment concerns different activities on the part of BCMUK, namely the marketing and sale of investments and/or the communication of financial promotions, and/or a different regulated activity, that of “making arrangements with a view to transactions in investments” and/or “arranging (bringing about) deals in investments” (ASoC, para 41A and 42A(f)), rather than investment management.

As submitted by Mr Herberg, the amendment concerns BCMUK’s provision of services to different persons, namely to the External Fund’s investors (as opposed to the External Fund itself) (ASoC, para 42A(f), and (g).

Finally, Mr Herberg submits that the amendment concerns a fundamentally different body of disclosure by BCMUK to its client. Specifically: in respect of the Principle 8 case as originally pleaded by the Authority, the relevant client to whom the Principle 8 duties to disclose any conflict were owed could and should only have been the External Fund and not the underlying investors. With respect to the amended case, the relevant persons for the purposes of the New Principle 8 Case are the underlying investors. The relevant disclosure to be made by BCMUK for the purposes of the new cases would therefore be quite different. It would concern the disclosure made by way of the offering documents and other communications made directly to the investors, pursuant to its activities in marketing and selling subscriptions.

Accordingly, Mr Herberg submits that the New Principle 8 Case set out in this amendment was never (whether as a matter of substance or form) put to the RDC, considered by the RDC, nor relied on by the RDC in promulgating either the DN or the FSN therefore, on the basis of the case law summarised above, the matters covered by this amendment do not form part of the subject matter of the reference and therefore the Tribunal has no jurisdiction to consider them.

We disagree with Mr Herberg’s submissions on this point.

Our analysis of the statutory notices as set out at [25] to [38] above leads inevitably to the conclusion that the matters pleaded at 42A(f) and 42A (g) of the ASoC are within the scope of the subject matter of the reference and accordingly the Tribunal has the jurisdiction to consider them.

As we have found, although not stated as clearly as it should have been, we consider that the facts and matters before the RDC included allegations that BCMUK breached Principle 8 by failing to make adequate disclosure of the conflict between the Internal Fund and the External Fund to investors in the External Fund when carrying out its functions under the MSA, which was a different investment service provided to the External Fund to that provided under the Sub-IMA.

The proposed amendment makes an allegation that there was a failure to make adequate disclosure to investors when acting under the MSA and the facts and matters on which BCMUK seeks to rely in the ASoC to support that allegation are consistent with the facts and matters relied on in the DN: see 81 to 102 of the ASoC. Those provisions correspond closely to the matters set out at 4.62 to 4.81 of the DN.

Since the matters which are the subject of the new amendment are consistent with the reasons set out in the statutory notices for the proposed regulatory action, no point may be taken that the Authority is seeking to plead matters that did not form part of the reasons for this regulatory action as required by s.387 and s.388 FSMA respectively.

For completeness, we should mention that our analysis of the statutory notices was to the effect that the Authority had not stated with any clarity that the disclosure obligation was owed to the External Fund, as opposed to the underlying investors. That proposition was the subject of the amendment at [170B] of the ASoC proposed by the Authority, which, as discussed above, the Applicant did not oppose. We have therefore considered whether, notwithstanding the fact that it was unopposed, we should take the view that an allegation that the Applicant had not made adequate disclosure to the External Fund did not form part of the facts and matters before the RDC.

However, as we have said, the DN does not set out the Authority’s reasoning with any degree of clarity. It is certainly possible to imply, as the Applicant certainly did, that the DN could be read as including an allegation that there was a failure to make adequate disclosure to the External Fund as well as the investors. That is presumably why it did not oppose the first amendment. Mindful of the statement of the Court of Appeal in Hobbs to the effect that the Tribunal should not take an approach which unnecessarily narrowed the enquiry to be made in the Tribunal, we consider that we should take the view that it can be properly implied that an allegation that the Applicant failed to make adequate disclosure of the conflict to the External Fund falls within the scope of the matter referred to the Tribunal. Accordingly, in the absence of any challenge from the Applicant on the ground that we should not exercise our discretion to permit the amendment, we permit it to be made.

Having decided that the Tribunal has jurisdiction to consider facts and matters relating to the second contested amendment, we now consider whether, in exercise of our discretion, we should permit the Authority to amend the SoC in that regard.

In exercising its power under Rule 5(3)(c) of the UT Rules to permit a party to amend a document, the Tribunal should have regard to the overriding objective as set out in UT Rule 2, asking whether it would be fair and just to permit the Authority to add the allegations. It should also have regard to the relevant factors set out by Judge Herrington in Bittar v Financial Conduct Authority [2017] UKUT 82 (TCC) at [53] to [55], set out above which for convenience we repeat as follows:

As has been emphasised in the case law, the starting point is that the Authority should be expected to advance the same case as before the RDC, save where there is a new and unexpected change of circumstances (see Legal & General v Financial Services Authority [2005] UKFSM 11, at [15]; Allen at [19]).

As far as the first factor referred to in Bittar is concerned, the Applicant does not seek to argue that the pleading is bad in law and accordingly we are satisfied that the proposed amendments have a real prospect of success.

As regards the timing of the amendment, the application was made relatively early in the Tribunal proceedings, before directions have been made for the preparation of witness evidence. The amendments were proposed in response to statements in the Applicant’s Reply and, as our analysis of the statutory notice demonstrates, in effect they clarify the case that was originally put before the RDC. Accordingly, we do not consider that the amendment would result in the Authority presenting a significantly different new case before the Tribunal on Principle 8 to that which was originally pleaded.

We are therefore satisfied that the Applicant will not be significantly prejudiced by the introduction of the amendment at this stage in the proceedings. The underlying facts and circumstances which support the allegation made by the amendment are already pleaded in the SoC at paragraphs 81 to 102 and there is no application to amend those provisions. The Applicant is therefore already familiar with those provisions and will have adequate opportunity to address them in evidence and by submissions.

As to whether there was a good reason why the relevant allegations were not pleaded earlier, the reason given by the Authority was that until the Applicant filed its Reply, it had raised no objections to the Authority’s clear and consistent position that the Applicant’s clients included the underlying investors in the External Fund.

We accept that the amendments are responsive to the Reply. However, we do not consider that the Applicant is to be criticised for not having objected to the position earlier. Quite properly, it exercised its right not to exercise its right to make representations to the RDC and the Authority will have to live with the consequences of that election. There is no reason why the Authority could not have made a clearer pleading in the SoC. That it did not do so was as the result of the lack of clarity in the statutory notices. Accordingly, although the fact that the amendment is responsive to the Reply is a mitigating factor, it does not in our view give rise to a good reason in itself why the allegation could not have been pleaded earlier.

We also accept that the proposed amendment is set out with appropriate detail and clarity. In our view, there can be no suggestion that the Applicant is unable adequately to respond to the proposed case.

Consequently, our assessment of the first, second and fourth factors point strongly in favour of permitting the amendment. In our view, these factors outweigh the fact that the Authority has not advanced a particularly strong reason why the allegation was not made earlier. The strength of that factor is, in our view, diminished because the amendment is made in response to the Reply and in order to clarify what, albeit not clearly, was originally pleaded.

We therefore permit the second contested amendment to be made.

In respect of the third and fourth contested amendments the Authority’s case relies on a duty and breach of Principle 7 / COBS as set out at paragraphs 42B and 173 of the ASoC. Mr George KC submits that the Applicant was required under Principle 7 and/or COBS 4.2.1R (1) to ensure that it communicated (or took reasonable steps to communicate) information to the External Fund’s investors and/or prospective investors in a way that was clear, fair and not misleading. The proposed amendments serve to show that the same facts and matters which are relevant to the Principle 8 case (i.e. the Applicant’s role under the Master Sales Agreement which was already pleaded at SoC [81]) can also be viewed through the prism of different regulatory requirements (Principle 7 and COBS 4.2.1R(1)), such that there can be no doubt that the underlying investors in the External Fund were clients of the Applicant.

He argues that the Applicant is wrong to assert that the Principle 7 / COBS amendments constitute a substantial shift in the Authority’s case. The proposed amendments serve to show that the same facts and matters which have already been advanced by the Authority can also be viewed through the prism of different regulatory requirements (i.e. Principle 7 and COBS 4.2.1R(1)). In particular the proposed amendments concern the same agreement between the Applicant and the investment manager as already pleaded at SoC [81], namely the MSA. As already set out in the Authority’s pleaded case, pursuant to that Agreement the Applicant was appointed by the Investment Manager to market and sell subscriptions for investment in the External Fund. It has consistently formed part of the Authority’s case (including as advanced before the RDC) that the underlying investors in the External Fund were “clients” of the Applicant by virtue of that Agreement.

He contends that the proposed amendments concern the provision of inadequate services to the same persons as already pleaded at SoC [173], namely the underlying investors in the External Fund. In this regard, the Authority has already pleaded that “the failings by the Applicant were such that the level of service received by the investors was therefore below that which could reasonably be expected to be commensurate with the fees paid by those investors”.

He submits that the proposed amendments concern the same body of disclosure to that which is already pleaded, namely disclosure to the underlying investors in the External Fund. The inadequacy of the disclosure made to those investors by way of offering documents and other direct communications is already pleaded at SoC [78-119].

Whilst we accept that the New Principle 7 and COBS allegations do, to a large extent, rely on the same body of disclosure to that pleaded in relation to the Principle 8 allegations regarding disclosure to the investors, and do rely on the same regulated activity, namely the services provided by the Applicant pursuant to the MSA, there are significant differences which lead us to the conclusion that these allegations do not fall within the subject matter of the reference and accordingly the Tribunal has no jurisdiction to consider them.

The reason why we take a different view to our position on the second contested amendment is that notwithstanding the need not to take too narrow an approach to the question of what constitutes the “subject-matter of the reference”, we consider that there must come a point at which a hard edge is applied to the Tribunal’s jurisdiction.

We would seek to define that edge by reference to the question as to whether the amendment proposed embraced an allegation that was made as one of the key reasons for the regulatory action proposed in the Warning Notice. In our view the third and fourth contested amendments raise allegations which are based on different regulatory provisions to that originally pleaded so fall outside the scope of the subject matter of the reference. This is particularly the case in circumstances where these allegations could have been, and should have been, made at the time of the issue of the relevant statutory notices.

As we stated at [75] above, in order for an allegation to form part of the subject matter of the reference and be considered or determined by the Tribunal, they must not only be based on the same factual background as the allegations made to the RDC but also must be of the same nature. In our view, where the allegation is in respect of a different regulatory provision then it cannot be considered to be of the same nature.

The reason we consider that a hard edge should be identified is because, as we observed at [58] and [59] above, Parliament has placed particular importance on the need for there to be a statutory notice which “must” state the reasons for the action the Authority proposes to take. That enables the subject to take an informed decision as to whether to contest the matter contained in the warning notice before the RDC or to contest a matter contained in a decision notice in a reference to the Tribunal knowing clearly what the allegations are being made against him.

We expand further on that important point in our conclusions below.

We should also point out that the Authority does also seek to rely on facts and matters which have not been previously pleaded in the context of the allegations of breach of Principle 8. The fourth contested amendment seeks to plead at [174] of the ASoC new facts relating to the knowledge of particular individuals to whom the Authority seeks to attribute responsibility for the alleged misconduct, as set out at [106] above. Those facts and matters clearly fall outside the scope of the subject matter of the reference.

The New Principle 7/COBS case was not addressed, still less advanced, by the Authority (whether by the RDC, Enforcement or otherwise) at any time prior to its introduction by way of the Authority’s amendment application. Following an investigation lasting 44 months, the case which went forward to the RDC concerned Principle 8 alone and in much narrower terms. It is worth considering this in a little more detail below.

The investigation of BCMUK by the Authority never considered any breach of Principle 7 or indeed COBS.

On 23 February 2017 the Authority issued a Memorandum of Appointment of Investigators and a Notice of Appointment of Investigators, and then on 14 July 2017 the Authority issued a Memorandum of Appointment of Investigators (Change of Scope) and a Notice of Change of Scope of Investigation which each provided that the investigators were appointed under s.168(5) FSMA as a result of s.168(4) FSMA to conduct an investigation into BCMUK. The reasons given for the appointment were that there were circumstances suggesting potential contraventions of Principles 2, 3, 6 and 8.

It does not appear that the investigation ever addressed BCMUK’s regulated activity of making arrangements with a view to transactions through its marketing and sales role. This was notwithstanding that the MSAs were disclosed to the Authority at a relatively early stage in the investigation, in response to a generic information request for “Master Sales Agents Agreements” and other “Sales and Distribution Agreements” relating to the funds made on 12 December 2017.

The Note of Substantive Communications between the RDC and the Authority Enforcement case team, dated 30 September 2021, provides (at para 3) that:

The Enforcement Submissions Document (‘ESD’), provided to the RDC by the Authority’s investigations team on 13 November 2020, includes a section entitled “Analysis of breaches, relevant statutory and regulatory provisions, and policy”. In this section, only Principle 8 is addressed, stating “The relevant Principle in this case is Principle 8”.

The Authority has not filed any evidence offering any clarification or explanation of the proceedings before the RDC, or stated clearly that the allegations were not advanced earlier (or why). This in itself is noteworthy given the clear and express guidance to the Authority from the Tribunal in Khan v Financial Conduct Authority [2014] UKUT B6 (TCC) at [88] that:

The New Principle 7/COBS Case was not raised within any of the statutory notices relevant to these proceedings. The Draft Annotated Warning Notice dated 3 March 2020 alleged in its “Summary of Reasons” that BCMUK breached Principle 8 by having a conflict of interest and having insufficient arrangements for managing the conflict to ensure, “with reasonable confidence, that the interests of its customers would not be damaged”, and also alleged that by failing to disclose this conflict, BCMUK breached SYSC 10.1.8R.

BCMUK responded to this in a Response dated 17 April 2020. The revised draft Annotated Warning Notice, dated 19 October 2020 (sent to the RDC on 13 November 2020), abandoned the breach of SYSC allegation, relying solely on the alleged breach of Principle 8.

BCMUK exercised its right to use the expedited process so as to forfeit participation in the oral representations process before the RDC, but rather refer the matter directly to the Upper Tribunal at the first opportunity. It took the view that there were fundamental issues dividing the Authority and it which would not be resolved by oral representations, such that it was more sensible and efficient for the matter to come before the Tribunal.

The Authority’s DN (imposing a financial penalty of £40,806,700 on BCMUK), issued on 4 November 2021, likewise relied solely on Principle 8. It did not contain any reference to, let alone a finding of, any breach of Principle 7/COBS.

The FSN was issued on 30 September 2021 and sets out the decision of the Authority to impose a requirement on BCMUK to pay redress to “those customers who were non-US investors [...] in the External Fund during the Relevant Period”. The “Reasons for Action” indicate that the Authority likewise relied solely upon the breach of Principle 8: see para 4.

Accordingly, the New Principle 7/COBS Case was never (whether as a matter of substance or form) put to the RDC, considered by the RDC (whether at its own initiative or otherwise), nor relied upon by the RDC in promulgating either of the two Notices referred to this Tribunal.

On 27 October 2021 BCMUK referred the FSN to the Upper Tribunal by way of a reference notice (the “FSN Reference”), and on 22 November 2021 referred the DN to the Upper Tribunal by way of a reference notice (the “DN Reference”).

In the light of the authorities, we are satisfied that the Tribunal does not have jurisdiction to determine the New Principle 7/COBS Case in respect of the DN Reference, because the New Principle 7/COBS Case was not part of the “reference” or “matter” referred pursuant to s.133(5) and (6) FSMA. Therefore, the Tribunal has no jurisdiction to permit the third and fourth contested amendments contained in the ASoC.

The “matter referred” and thus the ambit of the Tribunal’s jurisdiction is the “allegations made in the decision notice and the circumstances on which these are based” (Jabre at [28]). It is clear that the alleged breach of Principle 7 and/or COBS was not only not advanced or referred to in the DN; they were not contained or foreshadowed in the WN nor were they raised by the RDC of its own initiative, nor otherwise discussed during the RDC process.

There are before the Tribunal both a disciplinary reference (the DN Reference) and a non-disciplinary reference (the FSN Reference) within the meaning of s.133 FSMA. As the New Principle 7/COBS case was not included in the DN or the FSN, it was not possible for it to be included or referred to within the DN Reference or FSN Reference.

The New Principle 7/COBS Case remained absent from the Authority’s Statement of Case on the FSN Reference and the DN Reference (together, the ‘References’), filed on 7 January 2022.

The freshness of the new Principle 7/COBS case means that the Authority failed to follow the mandatory statutory procedure in respect of them. It did not issue a Warning Notice embodying any such case, as is required pursuant to s 207 FSMA. As a consequence, BCMUK was not afforded any opportunity to make any representations (and to decide whether or not to make representations) to the RDC in respect of the new allegation.

As emphasised in Khan, an important reason why the allegations of regulatory breach must have been properly before the RDC to form part of the “matter referred” is that this ensures satisfaction (or substantial satisfaction) of the objective of the statutory notice requirements. As is explained in [434]-[435] of Markou v FCA UKUT 2023 101 (TCC):

This passage emphasises that the proceedings in the Tribunal, although starting afresh and not an appeal, are part of the regulatory process started by the Authority. Therefore, particularly in relation to disciplinary references, the Tribunal stands in the shoes of the Authority and makes a decision as to the appropriate action to take on the basis of the case investigated by the Authority. The scheme did not envisage that the Authority could change significantly the basis of the action it wishes to take when it came to the Tribunal proceedings. Parliament intended that the subject of enforcement action should have the right to have the Authority’s decision reviewed through a judicial process but that did not mean that the process in the Tribunal could become significantly divorced from the regulatory proceedings.

This feature of the process was emphasised recently in Whitestone. The Tribunal said this at [1001] to [1012]:

Although at that point in its decision the Tribunal was addressing the question as to whether it should exercise its discretion to amend a Statement of Case where it had held that the amendment proposed was within the scope of the matter referred, the reasoning is equally applicable when considering the question of jurisdiction and what comes within the scope of the subject matter of a reference.

In our view it is not necessary to enquire into the extent to which the facts and evidence included in the warning notice and/or canvassed by the RDC could have supported a breach of Principle 7 or COBS. The consistent line of case law requires that the allegations of regulatory breach be at the very least canvassed before the RDC and potentially must be (a) at least referred to if not relied on in the decision notice (Jabre) and (b) fall within the scope of the allegations made in the warning notice for them to form part of the “matter referred”. We agree with the Applicant that the failure to present the Principle 7 and/or COBS case at any point prior to the current application goes beyond a failure to attach legal “labels” to the Authority’s case. It involves a new and different allegation.

We should also address a further argument that Mr George relied upon. He suggested that the Principle 7 allegation regarding BCMUK failing to make sufficient disclosure was in effect subsumed as a matter of law within the existing Principle 8 allegations regarding failure to manage the conflict. He relied by analogy on the case of Carrimjee v Financial Conduct Authority [2015] UKUT 0079 (TCC) at [58]-[61] where the Tribunal, with the consent of both parties, went on to consider an allegation of a breach of Statement of Principle 2 (acting without due skill, care and diligence) as an alternative to Statement of Principle 1 (a lack of integrity) despite it not being pleaded or pursued before the RDC.

We are not satisfied that this authority is sufficient to confer jurisdiction in relation to the Principle 7 amendment in this case. First, the question of jurisdiction was never fully argued in Carrimjee and the alternative case proceeded on an agreed basis (where it is keenly contested in this case). Second, in any event, we do not accept that allegations of failures to communicate or disclose for the purposes of Principle 7 automatically form a subset of the non-disclosure of conflicts for the purposes of Principle 8. There is no sense in which a Principle 7 allegation can be automatically deemed to be subsumed within a Principle 8 allegation as an alternative or lesser allegation. Third, in any event, the nature of the factual allegation upon which the Principle 7 amendment relies is to an extent different to that contained within the original Principle 8 allegation as pleaded.

Accordingly, we refuse permission to make the third and fourth amendments to the SoC. We have concluded that we do not have jurisdiction to permit these amendments, therefore we do not need to consider the question as to whether we should do so as a matter of discretion.

BCMUK’s strike out application proceeds on the basis that the Authority should be barred from participating in the reference in respect of the FSN. The application involves a determination of two questions.

The first is: what statutory conditions must the Authority satisfy before imposing a redress requirement upon it as a single firm (a single firm consumer redress scheme)?

The second question is: does the Authority have a reasonable prospect of satisfying the statutory conditions for the imposition of a single firm consumer redress scheme on the basis of its pleaded case (taking into account the permitted amendments and its rejoinder to BCMUK’s reply)?

The first question involves considering BCMUK’s argument that there is no freestanding power under section 55L FSMA alone to impose the redress requirement upon it. BCMUK submits the Authority only has the power to impose a single firm consumer redress scheme upon it by virtue of sections 55L FSMA and 404F(7) FSMA which requires the scheme to correspond or be similar to a multi-firm consumer redress scheme imposed by virtue of section 404.

Thus, BCMUK submits that, on the proper construction of s.55L and s.404F(7) FSMA, and reading in the requirements contained in section 404A(1)(c) and (3) FSMA, the Authority may only impose a redress scheme on individual firms if the Authority is able to establish four statutory conditions that:

The Authority’s case is that it does not need to satisfy the requirements of s.404F(7) FSMA (or the rules under section 404A) in order to impose a single firm consumer redress scheme. It submits that the conditions for the exercise of the operative statutory power in section 55L FSMA are clearly and expressly stated within section 55L itself. The only relevant condition in the present case is simply that “it appears to the FCA that… it is desirable to exercise the power in order to advance one or more of the FCA's operational objectives” (see section 55L(2)(c)).

The Authority relies in this regard on its consumer protection objective, which is to secure an “appropriate” degree of protection for consumers (see section 1C(1) FSMA). Accordingly, it submits that the question to be asked in assessing whether the Authority had power to impose the Redress Requirement under s.55L is a short and simple one: was there a rational basis for the Authority to conclude that it was desirable to impose the requirement in order to advance its operational objective of providing an appropriate degree of protection to consumers? The statute requires no more and no less than this.

The second question involves determining BCMUK’s argument that the Authority’s case as pleaded (including the permitted amendments within the ASoC and pleadings in the Draft Redress Rejoinder) holds no reasonable prospect of satisfying the four statutory conditions set out above (or all of those conditions which the Tribunal finds are required).

The Authority submits that its case as proposed to be pleaded, in the ASoC and Draft Redress Rejoinder, satisfies any required conditions in any event.

The Tribunal is empowered to strike out part or all of a party’s case. This power is set out in UT Rule 8 which provides relevantly as follows:

The strike out power under 8(3)(c) may thus be exercised to bar the Authority (as respondent) from taking further part in the proceedings on the FSN Reference by virtue of rule 8(7)(a) and summarily determine proceedings against it by virtue of rule 8(8). The power may be exercised if the Tribunal is satisfied that there is no reasonable prospect of the Authority’s case succeeding.

The test for strike out under the above UT Rules is the same as that applied under Part 24 of the Civil Procedure Rules. The relevant principles were set out by Lewison J (as he then was) in Easyair Ltd (t/a Openair) v Opal Telecom Ltd [2009] EWHC 339 (Ch) at [15]; (as cited in The First De Sales Partnership and others v HMRC [2018] UKUT 396 (TCC) at [33]). One of the principles set out in Easyair concerned the proper approach of the Court when considering strike out based on a point of law. Lewison J found as follows (at [15(vii)]):

The first stage in BCMUK’s strike out application is a pure question of law and the Tribunal has already decided that it should “grasp the nettle” and finally determine it – as Judge Herrington indicated in his Reasons for the Directions, at paragraph 27. This stage requires the Tribunal to take the Authority’s pleaded case at its highest and determine whether that case has a “reasonable prospect” of establishing the matters deemed legally necessary by the first question.

We begin by recording the relevant statutory provisions within FSMA that apply to the FSN in this reference and as are currently in force.

The redress requirement, for BCMUK to pay redress to customers who were non-US investors in the External Fund was imposed by the Authority under the FSN dated 30 September 2021. The FSN stated that it was imposed “pursuant to section 55L of the Act” which provides:

The Authority relies upon ss.55L(2)(c) and (3)(a) as the source of its power.

There are further provisions in FSMA which are potentially relevant to the statutory construction arguments.

The first is section 55N FSMA:

Section 138D FSMA limits the basis on which a contravention of a rule is actionable:

Section 404 FSMA provides for the Authority to impose multi-firm consumer redress schemes, applying the steps required by virtue of subsections (4)-(7), if certain conditions are satisfied under subsection (1):

Section 404A provides for the scope of the rules which the Authority may make under section 404(3):

Section 404F sets out various definitions that are used in the foregoing provisions, including the following:

Section 404F(7) provides for the possibility of the Authority imposing a single firm consumer redress scheme, with requirements on the firm corresponding to a multi-firm consumer redress scheme. The Applicant argues that this subsection is the only source of the power to impose redress requirements on a single firm:

Section 404B provides for Complaints to the Ombudsman Scheme and subsection (4) provides that a relevant complaint is to be determined by reference to what, in the opinion of the ombudsman, the determination under the consumer redress scheme should be or should have been (subject to subsection 5).

The Authority also relies on section 415A of the Act which states that “Any power which the FCA…has under any provision of this Act is not limited in any way by any other power which it has under any other provision of this Act.”

It is necessary to consider the history and development of FSMA in order to construe its current scope and the powers that might be available to impose a consumer redress requirement on a single firm.

As originally enacted, FSMA provided four means by which clients or customers of authorised firms could obtain redress where breaches of certain regulatory rules in or made under FSMA were established. Notwithstanding the subsequent amendments set out below, these remain the four means of redress provided by FSMA.

The first means of redress was that, pursuant to s.150 FSMA as originally enacted, a private person could seek damages by way of a civil claim where that person could establish that they had “suffer[ed] loss as a result of the contravention” by an authorised person “of a rule”.

Section 150(2) FSMA provided that the Authority could provide in its rules that contravention of certain rules did not give rise to an action under section 150(1) (pursuant to the Financial Services Act 2012 (‘FSA 2012’, addressed below), s.150(1) was replaced by s.138D(2) FSMA in materially the same form. Thus s.150(2) is now replaced in similar terms by section 138D(2) FSMA as set out above).

PRIN 3.4.4R duly provided pursuant to that provision (and still provides) that a contravention of the Authority’s Statement of Principles (such as Principle 8) does not give rise to a right of action by a private person under section 150(1) (now section 138D(3)). The rationale for breaches of the Principles not being actionable, is contained in the Authority’s Consultation Paper (CP 13, The FSA Principles for Businesses) published in September 1998 made available to Parliament during the passing of the Bill that became FSMA:

The second means of redress was that, pursuant to ss.382 and 384 FSMA, the court and the Authority respectively could require an authorised firm to pay restitution where a person “has contravened a relevant requirement, or been knowingly concerned in the contravention of such a requirement, and … (b) … one or more persons have suffered loss or been otherwise adversely affected as a result of the contravention.” As to the quantum of the redress, pursuant to ss.382(2) and 384(5) the court and Authority respectively were empowered to order payment of a sum as appeared “to be just having regard … to the extent of the loss or other adverse effect”. Sections 382 and 384 have remained in materially the same form since.

The third means of redress was that, pursuant to section 404 FSMA, the Treasury (not the Authority) had the power to impose a consumer redress scheme. Such a scheme could be imposed where the Treasury was satisfied that there was “evidence suggesting—(a) that there has been a widespread or regular failure on the part of authorised persons to comply with rules relating to a particular kind of activity; and (b) that, as a result, private persons have suffered (or will suffer) loss in respect of which authorised persons are (or will be) liable to make payments (‘compensation payments’)” (s.404(1), as originally enacted).

The Authority was required to produce a report setting out the details of the alleged failure and of the scheme proposed (s.404(4)). The Treasury would then obtain Parliamentary approval for the scheme and, if obtained, would authorise the Authority to establish and operate a scheme for “(a) determining the nature and extent of the failure; (b) establishing the liability of authorised persons to make compensation payments; and (c) determining the amounts payable by way of compensation payments” (s.404(2)). This provision was substantially amended by the Financial Services Act 2010 (‘FSA 2010’), as set out in more detail below.

The fourth means of redress was that, pursuant to Part XVI FSMA, the Financial Ombudsman Service (“FOS”) was empowered to resolve complaints which “relate[d] to an act or omission of a person … in carrying on an activity” (s.226(1) as originally enacted). Complaints were determined on the basis of what, in the opinion of the ombudsman, was “fair and reasonable in all the circumstances of the case” (s.228(2)).

As to financial redress, the FOS was empowered to make “an award against the respondent of such amount as the ombudsman considers fair compensation for loss or damage … suffered by the complainant” (s.229(2)(a)). The loss and damage for which such an award could be made was limited to “(a) financial loss, or (b) any other loss, or any other damage, of a specified kind” (s.229(3)). Where compensation was for “other loss, or any other damage, of a specified kind” it must only be up to a limit prescribed by the rules (s.229(4)). All compensation that could be awarded is subject to a “the monetary limit” as specified from time to time (s.229(6)). Originally this limit was £100,000. It was increased to £150,000 from 1 January 2012 and from 2019 to £350,000.

As set out above, each of the four powers of redress as originally set out in FSMA required the Authority (or the FOS) to establish (at a minimum) that (a) a person had suffered loss (Loss); (b) that loss or damage has been caused by a wrong on the part of an authorised firm (Causation); and (c) that the loss or damage was suffered by a person or persons in respect of whom the wrong was committed (Duty). Additionally, both the consumer redress power and action for damages power required that the relevant wrong be actionable (Actionability).

Also pursuant to FSMA (as originally enacted), where the Authority granted permission to a firm to carry on regulated activities it could do so on the condition that the firm complied with certain specified “requirements”. Thus s.43 FSMA provided that when granting a permission, the Authority “may include such requirements as the Authority considers appropriate” (s.43(1)) and those requirements may include a requirement to “take specified action” (s.43(2)(a)). Section 43(3) further provided that “A requirement may extend to activities which are not regulated activities”. (Footnote: ¹)

Sections 44 and 45 FSMA as originally enacted further provided the Authority with the power to vary thereafter a permission or to cancel it, either on the application of the authorised person (s.44) or on the Authority’s own initiative (s.45). The latter power was referred to as the Authority’s “own-initiative power” and the Authority could employ it, inter alia, where it considered it “desirable to exercise that power in order to protect the interests of consumers or potential consumers” (s.45(1)(c)). The Authority’s power to vary a permission included a power to include any provision that could have been included if a fresh permission were being sought (s.45(4)).

The main relevant amendment to FSMA made by the FSA 2010 was to the power to impose multi-firm consumer redress schemes under s. 404. The primary purpose of the amendment was to provide the Authority itself with the power to impose consumer redress schemes without the need for that scheme to be approved by Parliament via the Treasury. (Footnote: ²)

This required both the amendment of s.404 and the inclusion of a number of new provisions (at ss.404A to G) which together gave the Authority a new rule-making power to impose rules on certain firms for the purposes of establishing a consumer redress scheme, and also placed significant restrictions on the Authority’s use of that power.

Four provisions introduced by the amendments are worth highlighting.

First, section 404(3) provided that the Authority “may make rules requiring each relevant firm (or each relevant firm of a specified description) which has carried on the activity on or after the specified date to establish and operate a consumer redress scheme”. Further restrictions on the scope of the rules were imposed pursuant to s.404A (as referred to further below).

Second, pursuant to s.404(1) the Authority could make those rules and impose the redress scheme only if the Authority considered that: (a) there had been “widespread or regular failure by relevant firms” (plural) to comply with requirements; (b) “it appears to it that, as a result, consumers have suffered (or may suffer) loss or damage in respect of which, if they brought legal proceedings, a remedy or relief would be available in the proceedings”; and (c) it considers that it is “desirable” to impose the scheme to secure redress for consumers. Thus, the Authority was permitted to impose the scheme only if all four elements of Loss, Causation, Duty and Actionability were established. Breaches of the Principles are not actionable for this purpose (see above and also CONRED 1.3.16G and 1.3.17G).

Third, section 404B provided for rules as to how the FOS should approach complaints that fell within the scope of an existing consumer redress scheme which had been established by the Authority. Specifically, by s.404B(4), in such a case the FOS was required to determine the complaint in line with the rules of the redress scheme (and, pursuant to s.404B, could make a monetary award in accordance with those rules subject to the usual monetary limit).

Fourth, a further new provision that was added as part of these amendments was s.404F(7). This provision is significant and is addressed in more detail below. On enactment of FSA 2010, s.404F(7) provided as follows:

By virtue of s.404F(8) the variation of permission referred to in s.404F(7) was, inter alia, a variation under s.44 or s.45 FSMA. Save that “Authority” is now “FCA”, section 404F(7) has remained in the same terms since enactment.

The material amendment to FSMA introduced pursuant to the FSA 2012 was to the Authority’s power to impose requirements on a firm’s permission.

The existing power of the Authority to impose a requirement on a firm when determining an application for permission (under s.43) was retained in materially the same terms by the introduction of s.55L(1). The Authority’s existing “own initiative power” (under s.45) was retained in materially the same terms by way of s.55L(2) and (3). Section 404F(8) was amended by FSA 2012 to refer to s.55L.

Section 55N introduced “further provisions” relevant to the powers under s.55L. These included the pre-existing provisions that a “requirement may extend to activities which are not regulated activities” (s.55N(2), previously s.43(3)) and that a requirement “may, in particular, be imposed—(a) so as to require the person concerned to take specified action” (s.55N(1)(a), previously s.43(2)(a)).

Section 55N also included a new provision that a requirement “may refer to the past conduct of the person concerned (for example, by requiring the person concerned to review or take remedial action in respect of past conduct)” (s.55N(5). The Explanatory Notes to FSA 2012, at [206], state in respect of that new provision as follows:

The Authority’s argument was extensive and is summarised as follows.

Mr George KC argues that there is a freestanding power under s55L to impose the redress requirement on BCMUK. He submits that the requirements of section 404F(7) for a single firm consumer redress scheme and the Applicant’s four proposed conditions by virtue of sections 404 and 404A (causation, loss, actionability and duty) do not need to be satisfied by the Authority in order to impose a redress requirement.

Mr George KC contends that the operative statutory power is set out in section 55L(3)(a) FSMA: “(3) The FCA's power under this subsection is a power—(a) to impose a new requirement” and the only conditions to be satisfied before which this power may be exercised are set out in section 55L(2) FSMA which provides as follows:

He submits that the relevant operational objective under s.55L(2)(c) in the present case is the Authority’s consumer protection objective: see sections 1B(3)(a) and 1C FSMA. This objective is defined in section 1C(1) FSMA as securing an “appropriate” degree of protection for consumers. Section 1C(2) FSMA then provides a list of matters to which the FCA must have regard “in considering what degree of protection for consumers may be appropriate”.

He also relies on the fact that section 55L is supplemented by section 55N (entitled “Requirements under section 55L or 55M: further provisions”) which makes clear in subsection (1) that the Authority may impose a requirement that the person in question take any specified action: “(1) A requirement may, in particular, be imposed— (a) so as to require the person concerned to take specified action, ...”

Drawing these provisions together, he emphasises that section 55L(2)-(3) relevantly provides the Authority with a broad and flexible statutory power to impose a new requirement (section 55L(3)(a)) requiring the person in question to take any specified action (section 55N(1)(a)) provided only that “it appears to the FCA” that it is “ desirable to exercise the power” in order to advance one or more of the FCA's operational objectives (section 55L(2)(c)) including the objective of providing an “appropriate” degree of protection to consumers (section 1C(1)).

He contends therefore that the statutory scheme thereby explicitly confers a wide discretion on the Authority to ascertain whether it “appears” to be “desirable” to exercise the section 55L power in order to obtain an “appropriate” degree of protection for consumers. The assessment of these matters is a matter for the Authority subject only to the ordinary public law constraints such as rationality and proper purpose.

Moreover, he argues that in circumstances where section 55L expressly defines the conditions under which the power may be exercised, it would be wrong to imply or interpolate further restrictions (as the Applicant seeks to do). He relies on the judgment of the Court of Appeal in R (Rudewicz) v Secretary of State for Justice [2012] EWCA Civ 499, [2013] QB 410 at [30]:

He submits that there are no special circumstances in this case that would support the implication of further limits; indeed, the position is quite the contrary because s.415A FSMA expressly provides that each of the Authority’s powers under FSMA “is not limited in any way by any other power which it has under any other provision of this Act”. Accordingly, he submits that the exercise on which the Applicant is seeking to embark (i.e. seeking to imply or interpolate limits into the general power in s.55L(3) based on specific examples provided in other statutory provisions) is fundamentally misconceived.

Mr George KC argues that the Applicant is seeking to transplant alleged limitations in other sections of FSMA into the broad and flexible power under section 55L. That is a fundamentally misconceived exercise because it is clearly and explicitly excluded by s.415A FSMA, which provides that each of the Authority’s powers under FSMA “is not limited in any way by any other power which it has under any other provision of this Act.”

In summary the Authority’s position is as follows. The question to be asked in assessing whether the Authority had power to impose the Redress Requirement under s.55L(3) FSMA is a short and simple one: was there a rational basis for the Authority to conclude that it was desirable to impose the requirement in order to advance its operational objective of providing an appropriate degree of protection to consumers? The statute requires no more and no less than this.

Where (as here) the Authority imposes a requirement to provide redress, establishing a rational connection with its consumer protection objective may of course require the Authority to adopt a rational approach to the identification and assessment of the “loss” to be redressed.

However, Mr George KC submits that it would be quite wrong to elevate the requirement of “loss” to the status of a statutory precondition or to assume that the definition of “loss” used in a claim for civil damages must necessarily be applied by the Authority in the exercise of its statutory power.

In the event, he argues that the Redress Requirement imposed by the Authority in this case is consistent with (and supported by) the primary measure of civil damages recognised in the authorities in respect of common law claims for the defective provision of services. Nonetheless, he contends that there is no basis under the statutory scheme for concluding that the Authority would be obliged to adopt this particular approach to the identification and assessment of loss in all cases in which it exercises its section 55L(3) power to require the provision of redress.

Mr George KC also raises a further contextual point which he submits provides further support for the Authority’s analysis of section 55L. It concerns the express power to make “restitution orders” under ss.382 and 384 FSMA.

The Authority has a separate power under section 384 FSMA to order restitution where (among other scenarios) a person has contravened a relevant requirement and “one or more persons have suffered loss or been otherwise adversely affected as a result of the contravention” (emphasis added). As the plain terms of section 384 make clear, this power is not limited to loss but also extends to other adverse effects.

Mr George KC argues that the High Court has observed in relation to the analogous provision allowing the court to order restitution under s.382 FSMA, the power is not circumscribed by the common law principles governing claims to civil damages. See Financial Conduct Authority v Avacade Ltd [2020] EWHC 2175 (Ch) at [46] emphasising that “it is clear from the face of s.382 FSMA itself that this remedial jurisdiction is intended to operate flexibly and not as a facsimile of common law principles governing damages calculated by reference to loss or profit” and “the quantum of any restitution order is a matter of discretion”. He contends that these observations are equally accurate in relation to the Authority’s power to order restitution under section 384.

He submits that these points provide further support for the analysis and conclusions set out above: in particular, the section 55L power does not require the establishment of loss as a statutory precondition and is not necessarily circumscribed by the common law principles governing claims to civil damages. There would otherwise be the anomalous consequence that the Authority’s power to order restitution under section 384 is not bounded by these limitations, and yet the broad and flexible power to impose a requirement under section 55L is so bounded.

He further argues that there is neither room nor need to interpolate further statutory preconditions into section 55L as the Applicant seeks to do through section 404F(7). Section 404F(7) is a permissive and empowering provision in circumstances where a requirement is to operate a scheme “similar” to a consumer redress scheme; its significance is in enabling the Authority to impose requirements under section 55L which bind the ombudsman scheme. But the Authority does not seek to bind the ombudsman in this case and therefore has not relied, and does not need to rely, on section 404F(7) as the basis for the redress requirement.

He also submits that the allegedly limiting provisions relied upon by the Applicant are not in fact limitations at all. Section 55N(5) identifies that a requirement may refer to “past conduct”, and “for example” may require “remedial action in respect of past conduct”; that is only one example of the many scenarios in which the section 55L power may be exercised (and even that illustrative example is not limited in the way the Applicant alleges).

Finally he contends that, the consequence of section 404F(7) cannot be to transplant the criteria for an industry-wide consumer redress scheme under section 404(1) into the power to impose a requirement on a particular firm under section 55L, as the Applicant alleges. The criteria in section 404(1) are expressly and necessarily directed towards wider industry failures that might justify the imposition of a consumer redress scheme on a plurality of relevant firms, and they cannot logically or justifiably be carried across into the power to impose a particular requirement on a particular firm based on its particular failings and circumstances under section 55L.

We have accepted much of the submissions made by Mr Herberg KC on behalf of the Applicant so do not repeat them here but incorporate them within our discussion below.

The Authority’s case as to its power to impose a consumer redress scheme on a single firm, (originally set out in paras 10 to 17 of its Draft Redress Rejoinder) is that section 55L(3) provides a power to impose on a single firm a requirement to operate a consumer redress scheme subject only to the Authority considering it “desirable” to do so in order to further any of the Authority’s operational objectives (55L(2)(c) - here, its consumer protection objective).

The Authority submits that its power to impose a redress scheme under s.55L is not constrained by the need to establish any of the four elements of Loss, Causation, Duty or Actionability which BCMUK submits that sections 404F(7) and 404A(1) and (3) import. It argues that ss.55N(1)(a) and (5) are only clarificatory provisions confirming certain types of requirement which may be imposed by the Authority and do not restrict the power in s. 55L.

It contends that section 404F(7) also does not give the Authority the original source of the power to impose a single firm consumer redress scheme (which already exists under s.55L(3)) but does permit the Authority to “include certain conditions some of which: (1) affect the operation of third parties, including the Financial Ombudsman Service; and/or (2) would not be available to the Authority absent the provisions of section 404F(7)” (see para 13 of the Draft Redress Rejoinder). The Authority further argues that it does not seek to impose any of the conditions for which it would be necessary to invoke section 404F(7).

The Authority’s case is thus that the power to impose a redress scheme on a single firm is constrained only by the need to consider that the scheme is desirable to advance its objectives and that there is a rational exercise of its discretion in so doing.

The task of statutory interpretation in this case is not straightforward. We bear in mind Lord Bingham’s words in R (Quintavalle) v Secretary of State for Health [2003] UKHL 13, [2003] 2 AC 687, [8]:

Lord Hodge, giving the leading judgment for the Supreme Court in the case of R (on the application of O) v Secretary of State for the Home Department [2022] UKSC 3, [2022] 2 WLR 343 said at [29]-[31]:

In construing the relevant statutory provisions within FSMA we must therefore ascertain the meaning of the words in the light of their context and the purpose of the provision. There is a presumption that Parliament intends to act reasonably and so should not be taken to “intend a statute to have consequences which are objectionable or undesirable; or absurd; or unworkable or impracticable; or merely inconvenient; or anomalous or illogical; or futile or pointless”: R (Edison First Power) v Central Valuation Officer [2003] UKHL 20, at [116].The more unreasonable the result produced, the less likely it is that Parliament intended it: Edison at [117].

Before embarking on any construction of the relevant provisions it is worth noting that the Authority’s interpretation of FSMA would create a surprising result in this case (and in others). It would mean that the Authority could require a firm to pay something which the Authority refers to as “redress” to its customers (in this case in the sum estimated by the Authority to be over US$700 million) without there being any statutory requirement on the Authority to establish in respect of those customers any of the four elements referred to above (loss suffered by the customers, breach by the firm causing loss to customers, duty owed by the firm to customers or actionability of breach by customers). It would also mean that the Authority could do so without needing to show that the firm had breached a regulatory requirement at all or that the redress proposed even related to regulated activities.

Further, in conducting this exercise, we have not found it necessary nor determinative to consider the arguments we heard from both parties as to whether the Authority’s interpretation of section 55L would violate BCMUK’s rights under Article 1 of Protocol 1 to the European Convention on Human Rights such that section 3 of the Human Rights Act 1998 requires us to adopt a compatible interpretation. Nonetheless, we are satisfied that our interpretation, applying the restrictions of section 404F(7) and 404A to section 55L, is so compatible.

Likewise, we do not find it necessary to consider BCMUK’s arguments that common law has similar effect on our interpretation and requires these restrictions. We would observe however that any interpretation of s.55L read with s.404F(7) which permitted the imposition of a requirement on BCMUK to pay substantial “redress” (purportedly pursuant to a consumer protection objective) without the Authority being required to be satisfied that any consumer actually suffered any loss, or that the firm caused any loss that was suffered as a result of any wrong which it had committed, may well not to be “in the public interest”.

When considering the proper construction of the relevant provisions, we have taken into account whether the Authority’s interpretation of its powers is consistent with Parliament acting reasonably: we consider that the power to impose a consumer redress scheme on a single firm by virtue of s.55L(2)(c) and (3)(a) must be constrained beyond that asserted by the Authority so as to avoid unreasonable or absurd results.

We are satisfied that the power in section 55L is in fact constrained as set out below by the terms of s.404F(7) and the rules under section 404, namely section 404A. These provisions require the Authority to establish the four conditions BCMUK contends, namely causation, loss, duty and actionability, before a redress requirement may be imposed upon a single firm.

We have set out above the history and development of the relevant provisions of FSMA from inception and as amended in 2010 and 2012. We consider that Parliament originally provided for the four carefully tailored means of redress set out in FSMA, summarised above (action for damages, restitution, consumer redress schemes and the FOS scheme) each of which require specific statutory hurdles to be satisfied (such as a failure to comply with a duty – a breach, together with causation and loss).

Thereafter, it is unlikely that Parliament also intended to provide the Authority with a further general power under section 55L, or previously under s.45 to impose a “redress” scheme on a single firm by way of a “requirement” without any restriction or statutory hurdles beyond the Authority considering it “desirable” to do so for its operational objectives. Such a largely unrestricted power might render both the Authority’s restitution power and consumer redress power otiose.

It would also give rise to a striking anomaly in giving the Authority the power to require redress be paid by single firms to consumers without significant restriction when a multi-firm consumer redress scheme cannot be imposed without establishing the conditions of causation, loss, actionability and duty under section 404 FSMA.

Moreover, the development and amendments to the legislation point strongly away from the Authority’s interpretation.

A necessary implication of the Authority’s case is that its power to impose a redress scheme on a firm if desirable for operational objectives has always been available to the Authority, ever since FSMA was first enacted. This is so by virtue of the fact that s.55L(2)(c) merely replicates s.45(1)(c), which existed in the original FSMA.

We are satisfied that this cannot be correct for the following reasons.

First, as originally enacted, the Authority was required to seek specific permission of the Treasury before implementing a (multi-firm or collective) consumer redress scheme under s.404. It cannot reasonably have been the intention of Parliament that, notwithstanding such onerous oversight, the Authority could of its own initiative simply have imposed consumer redress schemes on a firm-by-firm basis (and thus on as many firms as it liked), bypassing all restrictions beyond considering it to be desirable to do so for operational objectives.

Second, after s.404 was amended by FSA 2010 to permit the Authority to impose consumer redress schemes (without reference to the Treasury), it again cannot reasonably have been the intention of Parliament (on the one hand) to impose restrictions on the use of that power by, for example, restricting how a firm subject to a collective consumer redress scheme is required to determine loss to consumers (by adopting the approach that would be taken by the courts), while (on the other hand) at the same time to have allowed the Authority to implement (single firm) consumer redress schemes on a firm-by-firm basis without any of those restrictions.

Third, section 404F(7)(a) introduced the power for the Authority to include in a firm’s permission provision imposing requirements on the person corresponding to those that could be included in rules made under section 404 (multi-firm consumer redress schemes). If it were the case that the Authority already had an unfettered power to impose a consumer redress scheme on individual firms absent s.404F(7), there would be no need for subsection 404F(7)(a) of that provision at all; it would be redundant. The Authority could simply make requirements that corresponded to those set out in the s.404 rules if it wished under the unfettered variation power (under s.55L or previously s. 45).

Section 404F(7)(a) provides: “If the FCA varies a permission or authorisation of a person so as to impose requirements on the person to establish and operate a scheme which corresponds to, or is similar to, a consumer redress scheme, the provision that may be included in the permission or authorisation as varied includes:…”.

On its proper construction, s.404F(7) enables the Authority to impose on a single firm a requirement under s.55L(3) which corresponds to or is similar to a consumer redress scheme, and provides that if the Authority does so the requirements that the Authority is permitted to impose on that firm are those corresponding to the rules for consumer redress schemes against multiple firms (as set out in s.404 and s.404A).

Section 404F(7) ensures, in essence, that the statutory criteria are aligned whichever statutory route is chosen: the single or multiple firm route.

The Authority asserts that the purpose of s.404F(7)(a) is to “include certain conditions … which … would not be available to the Authority absent the provisions of section 404F(7)” (Draft Redress Rejoinder, para 13). It is hard to see why (on the Authority’s construction) the Authority would require such statutory authorisation to include those conditions if the power under s.55L(3) is as wide and unconstrained as the Authority contends.

We consider that the use of the word “may” in section 404F(7)(a) (as in “the provision that may be included” in the varied permission) is not intended to be merely “clarificatory”, permissive or intended only to provide an example of the type of requirement that the Authority is entitled to impose. Rather, it is to permit the Authority to impose requirements that, but for s.404F(7), it would not otherwise have the power to impose. In this regard it reflects the wording of s.404(3) (“The FCA may make rules requiring each relevant firm … to establish and operate a consumer redress scheme”) which in turn reflects the use of that word in the general rule making power at s.137A(1) (“The FCA may make such rules applying to authorised persons”…”), both of which provisions undoubtedly grant statutory powers to the Authority.

The Authority’s case is that the purpose of s.404F(7) is to “permit the Authority … to include certain conditions” which (but for that provision) it would otherwise not have the power under s.55L to impose (Draft Redress Rejoinder, para 13). The dispute is thus as to the extent of what s.404F(7) permits in this way.

The construction set out above is consistent with how the provision came to be introduced. As set out above, the amendments to s.404 were introduced in order to permit the Authority to impose consumer redress schemes itself, without the need to seek the permission of the Treasury. It thus must follow that the Authority did not have that power (with respect to individual firms) prior to the enactment of FSA 2010, otherwise there would have been no need for the amendment to add s.404F(7). Further, as noted above, it would have been inconsistent for FSMA (as originally enacted) to have required the Authority to seek the consent of the Treasury to impose consumer redress schemes on multiple firms but to also have a completely unfettered ability to impose such scheme on individual firms (and thus multiple individual firms).

We take into account the White Paper for the bill that would become the FSA 2010 (Footnote: ³) stated relevantly as follows: “The FSA has existing powers to impose redress schemes on a firm-by-firm basis where a large number of consumers are affected. The power of the Treasury to initiate a collective redress scheme on a wider basis is set out in section 404 of FSMA. The Government believes there should be new powers for the FSA to require a firm or firms to make redress either on an industry wide or firm-by-firm basis as appropriate.”

Thus, the intention was that the amendments to s.404 would introduce a new power to impose a redress scheme on a single firm. That new power did not come from s.404 and s.404A alone: it is clear that s.404 and 404A only apply where redress is sought from multiple firms (see for example “widespread failure by relevant firms”, thereafter referring to either “relevant firms” or “each relevant firm”). Rather, that new power to impose a redress scheme on a single firm only arose by virtue of s.404F(7), which conferred a new broader power to vary permissions or authorisation under (inter alia) s.55L.

The amendments made by FSA 2010 allowing the Authority to impose such schemes imposed a number of statutory requirements which restrained how the Authority could use that power. Again, as noted above, those constraints would have been unnecessary (and could be circumvented) if the Authority also had a largely unfettered power (subject to rational exercise) to impose consumer redress schemes on single firms (and thus multiple single firms) in the interests of consumer protection.

Furthermore, this construction is also consistent with subsequent legislation which has referred to s.404F(7) as providing a separate power under which a s.55L requirement (specifically, a requirement for a consumer redress scheme) may be imposed.

For example, Article 58(6) of the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2013/1881 provides as follows:

Article 82(12) of the Financial Services and Markets Act 2000 (Claims Management Activity) Order 2018/1253, provides as follows:

The construction is also consistent with how (prior to this case) the Authority has itself considered the power, and how it has explained its potential use of that power to authorised firms by way of its published guidance.

Soon after FSA 2010 came into force, the Authority released guidance on s.404F(7) in a document called “Use of s404F(7) power on single firms”. The guidance made it clear that the Authority considered s.404F(7)(a) to be a new power; and s.404F(7)(b) to allow the Authority to implement rules contained in ss.404 and 404A which it otherwise not be permitted to do. Specifically, the guidance stated relevantly as follows:

The Authority’s guidance on the use of s.404F(7) came to be set out in CONRED (which remains the current guidance). This guidance, again, expressly provides (contrary to the Authority’s case) that it is s.404F(7) which provides the power to impose a redress scheme on a single firm by way of a requirement under s.55L. CONRED 1.8 is entitled “Imposing a consumer redress scheme on a firm under section 404F(7) of the Act”. It provides, relevantly, as follows:

It is apparent that the Authority did not mention in its guidance that it also had a separate, parallel power (under s.55L alone) to impose a consumer redress scheme on a firm without any of the statutory safeguards and requirements attendant on the power described in CONRED. Further, this description of the s.404F(7) power is also reflected elsewhere in the Authority’s guidance. In the context of describing forms of redress that the Authority can require firms to pay for loss suffered as a result of unfair terms, for example, UNFCOG 1.6.1G(3) states:

Even if, as the Authority asserts, it is s.55L(3) “alone” (without s.404F(7)) that provides the Authority with power to impose a consumer redress scheme on a single firm, the extent of that power must be construed in light of the restrictions placed on consumer redress schemes by s.404 and s.404A. It cannot reasonably have been the intention of Parliament that the Authority should have wider scope to impose a consumer redress scheme on a single firm than it had on multiple firms (not least because, as noted above, there would be nothing to prevent the Authority from imposing such a scheme on multiple firms by way of s.55L(2) alone).

The construction is also supported by the later introduction of section 55N(5) which provides the Authority with a further power to impose a requirement which requires a relevant firm to “take remedial action” with regard to past conduct. As set out above, s.55N(5) was added to FSMA pursuant to FSA 2012: thus after s.404F(7) had been added pursuant to FSA 2010. Thus, by the time s.55N(5) was added the Authority already had the power to impose a requirement which corresponded to or was similar to a consumer redress scheme.

If s.55L(3) were really as unlimited a power as is contended, there would be little purpose whatsoever to be served by s.55N(5). In reality, as the Explanatory Notes to FSA 2012 (referred to above) make clear, s.55N(5) was intended to afford the Authority a new and additional power.

We therefore consider that s.55N was not intended to provide the Authority with an independent power to impose a requirement to pay redress (which would have been unnecessary in light of s.404F(7)). Rather, as explained below, the “remedial action” referred to was intended to denote such activities as a review of past business. But even if this were too limited an interpretation of what was intended, the extent to which “remedial action” can entail payment of redress is limited by the requirements of s.404F(7) as addressed above.

There is a distinction between “remedial action” and “redress”, which is drawn in the Authority’s own guidance. DISP, for example, repeatedly refers to “remedial action or redress (or both)”: see DISP 1.1A.20R(3); DISP 1.4.1R(2)(c); and DISP 1.3.6G(2) (“redress or remediation exercise”). In DISP 1.3.3 R , the Authority sets out examples of how a firm might “remed[y] any recurring or systemic problems”, none of which resemble an action akin to setting up a consumer redress scheme, namely: “analysing the causes of individual complaints so as to identify root causes common to types of complaint”; “considering whether such root causes may also affect other processes or products, including those not directly complained of”; and “correcting, where reasonable to do so, such root causes”.

But even if s.55N(5) does provide a power to require payment of redress, or, on the Authority’s case, ‘clarify’ the extent of the power under s.55L(2) (see Draft Redress Rejoinder at para 11) then the reference to “remedial action” equally requires that the Authority establish the four elements of Loss, Causation, Duty and Actionability. These are integral to the concept of remedying a wrong done by the firm to an affected consumer.

We reject the Authority’s arguments as to the implications of section 415A. Section 415A merely provides that one power under FSMA does not limit any other. The provision has no other relevant effect – it is not seeking to imply restrictions or limitations otherwise as to how relevant provisions are to be interpreted. The Applicant is not seeking to argue, against the legislative framework that, s. 404F(7) has a narrow ambit because of a broader power.

Thus, on the proper construction of FSMA, the source of the power to impose a redress requirement on a single firm is by virtue of section 55L, read together with and restricted by, the terms of s.404F(7). There is no free-standing power under section 55L(2)(c) and (3) for the Authority to impose a redress requirement simply by being satisfied for rational reasons that the consumer protection objective is met.

The requirements that the Authority is permitted to impose when requiring a single firm to conduct a consumer redress scheme under s.55L and section 404F(7)(a) (inter alia) are those that may be imposed by way of rules made under section 404, which are provided for in s.404A.

The four conditions of loss, causation, breach of duty (failure to comply) and actionability are required by a multi-firm consumer redress scheme as imposed under section 404 FSMA. Section 404(1)(b) addresses actionability, subsection (5) addresses breach of duty, subsection (6) addresses causation and loss, and subsection (7) addresses the payment or enforcement of redress in the following terms:

We consider that corresponding statutory conditions must be satisfied in order to impose a single firm redress scheme under s. 404F(7)(a) through provisions which correspond to those that could be provided in rules made under section 404. These are those contained in section 404A.

The s.404A requirements correspond to the same four conditions required by a multi-firm consumer redress scheme as imposed under section 404(1)(b) & (5)-(7) such that there is no anomaly between the two.

Section 404A (1) provides that:

Subsection 404A(1)(c) therefore addresses the three corresponding conditions of breach of duty (failure to comply with a condition), causation and loss.

For similar reasons to those set out above in relation to s.404F(7), the effect of the word “may” in s. 404A is to permit the Authority to impose requirements under the rules rather than to leave the decision to impose the requirements to the Authority’s complete discretion. Section 404F(7) makes clear that the requirements to be imposed are those that could be included in the rules made under section 404. Section 404A is to be read in light of section 404F(7) and as applicable to a single firm redress scheme (for example reference to “firms” in section 404A must be read as applying to a single firm). That does not require consideration of all the rules that may be available for a multi-firm redress scheme enabled under section 404A. The single firm and multi firm redress schemes must correspond but are not required to be identical (for example a multi-firm redress scheme requires a widespread or regular failure by relevant firms by virtue of s. 404(1)(a)).

Nonetheless we reject the submission of Mr George KC that there is anything inconsistent with this interpretation with the other subsections of s.404A. For example, s.404A(1)(m) provides for rules as to the enforcement of any redress and payment by a relevant firm. He submits that this is not something that would be empowered by a variation of permission pursuant to section 55L so the introduction of s. 404F(7) is expanding the existing powers available under section 55L rather than introducing them but s. 404A(1)(m) may still be applicable to a single firm redress requirement imposed upon the firm by the Authority as part of granting it permission.

Even if there were any inconsistency between the provisions of s. 404A and s. 404F(7), any such provision of s. 404A would simply be disapplied. Section 404A should be read compatibly with s. 404F(7) so as to achieve the corresponding purpose that it is seeking to achieve – effective redress under a single firm scheme is to be provided to customers who have suffered damage as a consequence of a firm’s actionable failure to comply with requirements. This is made clear by s. 404F(7) where the single firm scheme is required to “correspond to, or [be] similar to a [multi-firm] consumer redress scheme.” This provision, contrary to Mr George’s submission, does not import only a loose correspondence such that the four statutory conditions found in s. 404 and mirrored in s.404A do not require to be imported. Any single-firm scheme which did not import such fundamental conditions would no longer correspond to or be similar to a multi-firm scheme.

Accordingly, s.404F(7) imports into a single firm redress scheme the requirement to prescribe conditions which correspond to rules that could be made under s.404A(1)(c) which necessitate that the Authority may only impose a requirement on the firm to pay redress where the customers of the firm have suffered loss which has been caused by a breach of a duty (a failure to comply with a requirement).

The fourth necessary condition is contained in s.404A(3) which provides that: “Matters may not be set out in the rules as a result of subsection (1)(c) if they have not been, or would not be, taken into account by a court or tribunal for the purpose mentioned there.”

We are satisfied that this subsection (s. 404F(7) read with s.404A(3)) imports a requirement of actionability upon a single firm redress scheme.

The wording on actionability for a multi-firm scheme contained in s.404(1)(b) is not in identical terms to that of s. 404A(3). However, we are satisfied that the same limitation is imposed by s.404A(3). Matters such as a failure to comply with a Principle which caused loss or damage to consumers would not be taken into account by a court or tribunal because they are not actionable before it. This is because section 138D(3) and PRIN 3.4.4R provide that a contravention of the Authority’s Principles for Businesses (such as Principle 8) does not give rise to a right of action by a private person. Therefore, any failure to comply with a Principle causing loss to a consumer cannot be taken into account for the purposes of a single firm redress scheme imposed under ss.55L, 404F(7) and 404A FSMA.

Thus, Mr George’s submission - that the statutory language of s.404F(7), even if it were the source of the power, is only that a single firm scheme be “similar to” or “corresponding to” a multi-firm scheme and not be identical – does not assist the Authority. Single firm schemes imposed by virtue of s.404F(7) with rules corresponding to those in s.404A do not mirror the identical requirement of s.404(1)(a) but that is for the obvious reason that they do not require the widespread or collective failures by multiple firms. Nonetheless the purpose of the provision is clear that – in so far as is relevant – the single firm scheme should mirror the multi-firm scheme. Thus, the fact that neither s.404F(7) nor s.404A expressly states that the four conditions are imported into single-firm schemes does not mean that they are not imported. The conditions are expressly within s. 404 and mirrored, although not identically in s. 404A – a provision originally drafted to have application to multi-firm schemes. Single firm schemes are to correspond to these conditions by virtue of section 404F(7).

For the same reasons as set out above, we are satisfied that the proper construction of the variation power is that it is being subject to the same principles for single firm redress under section 55L and 404F(7) that are applicable to the corresponding/similar multi-firm consumer redress power under s.404 (accepting that there are additional conditions that must be satisfied, for example under s.404(1)(a), before a multi-firm consumer redress scheme can be imposed). This ensures consistency of approach and alignment of the requirements as section 404F(7) makes clear that they should correspond or be similar to each other.

Our conclusion is that the four statutory conditions are required to be satisfied by virtue of ss.55L, 407F(7) and 404A before a single firm consumer redress requirement can be imposed, namely: loss, causation, duty and actionability must therefore be established. These correspond to and are similar to the four necessary conditions that are required to be satisfied before multi-firm consumer redress schemes can be imposed by virtue of s.404.

The failure to comply with a requirement (breach of duty), causation and loss must each be matters that would be actionable in a court or tribunal. Breach of duty, causation and loss are to be determined in accordance with the approach of the civil courts. All the four conditions of loss, causation, duty and actionability must therefore be established.

This leads to the second question as to whether the Authority’s remaining case (including the permitted amendments to the SoC and its Draft Redress Rejoinder) which relies only upon an allegation of a breach of Principle 8 has a reasonable prospect of satisfying the four statutory conditions (including actionability by a consumer - a right of action by a private person).

We address each of the four statutory conditions in turn. We note that at the strike out stage the question is whether the Authority has pleaded a case that has a reasonable prospect of success in respect of each.

The sole paragraph of the ASoC (in both its original and amended form) which sets out the Authority’s case as to loss and causation is paragraph 173. This is confirmed by the reference to that paragraph in para 17 of the Redress Rejoinder. Paragraph 173 of the SoC / ASoC states as follows:

Paragraph 17 of the Authority’s Rejoinder to the Applicant’s case on Redress provides as follows:

Mr Herberg KC argues that in assessing whether the Authority’s case discloses an arguable case that consumers have suffered loss, both loss and causation are to be assessed in a manner consistent with how those concepts would be assessed in the civil courts. Based on the way in which the Authority puts its case in the Draft Redress Rejoinder (notably at para 17.3) this is understood to be common ground. In any event, this is the implication of s.404F(7) and s.404A(3) further specifies that the rules that the Authority can impose for the purpose of determining causation and loss must be consistent with the approach of the civil courts. Specifically, “Matters may not be set out in the rules as a result of subsection (1)(c) if they have not been, or would not be, taken into account by a court or tribunal for the purpose mentioned there” (s.404A(3).

He contends that the extent of the Authority’s case on loss is thus that the “level of service” was affected by the alleged conflict of interest and/or the alleged failure to disclose it. The Authority does not allege that the External Fund suffered any loss of return by reason of the alleged breaches. He submits that properly understood, the allegation at para 173 of the ASoC is not an allegation of loss at all. Rather it is merely a restatement of the alleged breach: that the service which the customers received was the service subject to an unremedied conflict of interest (which is labelled “substandard”).

He notes that the Authority denies it has failed to plead loss and relies on para 17 of the Redress Rejoinder but submits that this is limited to an explanation as to why it was permissible and appropriate for the Authority to employ a “proxy measure” in order to determine the quantum of difference between the service “contracted for” and the service received. That, of course, merely presupposes that a loss has been suffered.

Mr Herberg KC submits that each of the examples provided at para 17.3 of the Authority’s Draft Redress Rejoinder are instances where the courts, having determined that financial loss has been suffered, deem it necessary to employ a proxy measure of some kind in order to determine the quantum of that loss but that is not the position in this case because no financial loss has been pleaded at all. The point is that the Authority’s pleading is consistent with the proposition that all investors were, financially, in exactly the same position as they would have been had there been no breach.

Mr Herberg KC submits that the upshot of the Authority’s case at para 173 of the ASoC appears to be, as a matter of principle, that any breach by an authorised firm of its regulatory obligations when providing a service must inherently cause financial loss because a client would have “paid less” for that (compromised) service, even though those services did not result in any financial loss to that client.

Mr Herberg KC submits that notwithstanding that that is not pleaded anywhere in the SoC (in original or amended form), that appears to be the implication of both para 173 ASoC and the metrics proposed for calculating redress (at para 4) which proceeds on the basis that the investors should have paid a reduced management fee (the industry average) and reduced performance fee (based on the industry average performance).

He submits there is no legal basis for that assertion. There is no way in which a lower “value” can be placed on a service compromised by failures to comply with a firm’s regulatory obligations (and it is obvious that that is not a service which can be offered or accepted); no value (different or otherwise to that paid for) can be placed upon services provided in breach of a Principle for Businesses or any regulatory requirement. Therefore, the only measure of loss can be whether the breach of regulatory obligations has caused a loss to the beneficiaries of the service.

As set out in para 64 of the Reply, the service provided by BCMUK was to manage investments in a manner which achieved risk-appropriate returns. As set out above, the Authority does not allege that the External Fund obtained a lower return by reason of the alleged breach. There self-evidently cannot have been any overpayment of performance fees (given that they reflected the level of return, which is not challenged). Equally, in circumstances where the level of return is not challenged there is no basis on which it could be said that BCMUK should have charged lower management fees.

As set out above, the Redress Requirement imposed by the Authority seeks to compensate Non-US Investors in respect of the alleged excessive fees they paid for a substandard service, namely: (1) management fees which exceeded both: (i) operating expenses, and (ii) industry average management fees; and (2) performance fees that did not relate to a performance in excess of the industry average.

The alleged breach by the Applicant and the substandard nature of the service that it is alleged to have been provided are matters which (as the Tribunal has already ruled) are to be assumed in the Authority’s favour for the purpose of this hearing: as set out in the Tribunal’s reasons for its directions dated 14 November 2022 at [32].

We reject the submissions on causation and loss on behalf of BCMUK. We are satisfied that the Authority has pleaded a case (taking into account paragraph 17 of the Draft Redress Rejoinder) which holds a real prospect of successfully establishing that the alleged breaches of Principle 8 (which are permitted to proceed) have caused loss to consumers.

As set out in its Draft Redress Rejoinder, such payment of redress is an arguable proxy measure for the alleged loss suffered by the underlying investors and/or the External Fund by reason of the sub-standard service that they received. The fact that the nature of the sub-standard service, as alleged, also gives rise to a breach of Principle, does not mean that this measure of loss cannot be adopted (e.g. there is no need to examine the authorities on whether a criminal or unlawful service has any monetary value).

We agree with Mr George KC that the common law recognises the availability of loss as pleaded at paragraph 17 of the redress rejoinder. In the case of defective provision of services, a primary measure of loss is the difference in value between (on the one hand) the service that ought to have been provided and (on the other) the service that was in fact provided. The point is stated in Chitty on Contracts (34th ed) at para 29-062 by reference to a number of the leading cases (as addressed below):

This extract relies upon three authorities.

The first is Sir Thomas Bingham MR sitting in the Court of Appeal in White Arrow Express Limited v Lamey's Distribution Limited [1995] CLC 1251 (‘White Arrow’) where he emphasised that if there is a difference between the market value of what was contracted for and what was supplied, this difference could properly form the subject of a damages claim (at p.1256):

He illustrated the point by giving a number of examples (at pp.1254-1255):

The second authority is Giedo van der Garde BV v Force India Formula One Team Ltd [2010] EWHC 2373 (QB) (“Force India”) in which the High Court held, following the Court of Appeal in White Arrow, that the claimant was indeed entitled to bring a freestanding claim for the difference in market value between the service promised and that provided ([435]):

Mr Justice Stadlen further made clear that, in order to refute a damages claim based on the difference in value between the services promised and those provided, the burden would lie on the defendant to prove that the inferior services had in fact been just as effective in securing the intended objective of the services. The mere fact that the claimant faced “evidential difficulty in establishing substantial consequential loss” was not enough to deprive them of a claim based on the difference in value of the services. Thus, he held ([436]):

The third authority is the decision of the Supreme Court in Morris-Garner v One Step (Support) Ltd [2018] UKSC 20, [2019] AC 649 (‘One-Step’). Lord Reed (giving the majority judgment) carried out a careful analysis of the principles governing the assessment of compensatory damages and specifically confirmed the availability of a damages award based on “the difference between the value of the goods or services contracted for and those actually provided”, which he regarded as supported by authority([80]):

The Authority’s case on loss is that: (i) the Applicant’s failings “resulted in a substandard investment management service being provided to the External Fund and its investors”; and (ii) these failings “were such that the level of service received by the investors was therefore below that which could reasonably be expected to be commensurate with the fees paid by those investors” (see ASoC [173]). The Redress Requirement imposed by the Authority is designed to compensate for this loss.

We accept that the Authority does not contend that it can quantify the relevant loss by reference to a counterfactual comparison with what precise sums would have been earned by the External Fund and its investors but for the breach. Nonetheless, we consider that the Authority has pleaded and may be able to evidence at trial specific deleterious consequences of the Applicant’s failure properly to manage the conflict of interest on the (supposedly “deluxe”) services provided to investors in the External Fund and the External Fund itself. The allegations may be made by reference to evidence as to:

The Authority’s approach to causation and loss is consistent with a primary measure of damages in cases of defective provision of services in the authorities set out above: namely, the difference in value between the services that ought to have been provided and those which were in fact provided (such as loss from skimped performance). Once the above-mentioned authorities on loss are properly taken into account, the first two of the statutory conditions hold a real prospect of being satisfied, namely that the pleadings disclose an arguable case that “persons have suffered loss or damage” and “that loss or damage has been caused by a wrong on the part of the firm”.

Some of the objections taken by BCMUK as to how loss can be measured are matters for trial. The preliminary hearing assumes that the Authority will be able to evidence its assertions of loss at trial such that the Authority does not need expert evidence at this stage as to the value of the sub-standard service compared to that paid for. The strike out application proceeds on assumed facts and takes the Authority’s case at its highest. Disputes as to the facts and evidence and how one can value the diminution in the substandard service are matters for trial so long as there is an arguable basis for the allegations in law. The allegation of sub-standard service is taken to be assumed – once this is accepted for the purpose of the application then the measure of the loss, if it can be permissibly pursued as a matter of law, would be for trial.

We are therefore satisfied that the Authority’s pleadings at [173] of the ASoC and [17] of the Draft Redress Rejoinder give rise to a reasonable prospect of success that causation and loss can be made out.

Mr Herberg KC submits that, for the reasons set out above, a consumer redress scheme can only be imposed pursuant to s.404 (and thus s.404F(7)) if consumers have suffered actionable loss as a result of the failure of the relevant firm to comply with regulatory duties. No actionable loss could have been suffered by consumers to whom the relevant regulatory duty was not owed.

He argues that, as set out in paras 34 and 35 of BCMUK’s Reply, and as we have accepted, the relevant client of BCMUK, for the purposes of Principle 8, was the External Fund. This is so given that the “client” to whom the Principle 8 duty is owed is the person or entity to whom a firm provides “a service in the course of carrying on a regulated activity” (by virtue of COBS 3.2.1R(1)).

He contends that the “service” provided by BCMUK as sub-investment manager (by reason of the relevant contracts, being the IMA and Sub-IMA as defined in the Reply) was provided to the External Fund only.

By reason of COBS 3.2.1R(1) and COBS 3.3.1R(2), BCMUK was required to specifically identify the External Fund as its client in advance of commencing the provision of investment management services to the External Fund, and did so by way of clause 3.1 of the Sub-IMA.

Notwithstanding this, Mr Herberg KC points out that the Authority’s unamended Statement of Case is pleaded entirely on the basis that the underlying investors were the clients of BCMUK and on the basis that it was those investors that have thus suffered loss as a result of the breach.

By way of example, from the section of the ASoC (in original or amended form) entitled “The Authority’s Case” “in conflict with the duties they owed to investors in the External Fund” (para 164) “the Applicant’s systems and controls did not manage the risk that Portfolio Managers could be allocated in a way that favoured investors in the Internal Fund over those of the External Fund” (para 166) “the Applicant’s disclosures to its investors regarding the existence of the Internal Fund, and the conflicts arising, were entirely insufficient and, at times, misleading. External Fund investors were not told … the Applicant also failed to provide sufficient disclosure to investors in the External Fund regarding ...” (para 169) and by way of conclusion “Based on the facts and matters set out above, the Authority contends that the Applicant breached Principle 8 in that it failed to manage conflicts of interest fairly, between the investors in the External and Internal Funds” (para 174).

In his witness statement on behalf of the Authority, Mr Duncan disputes this and asserts that “the Authority has always maintained that the Applicant's clients, for the purposes of the alleged breaches of Principle 8, included the External Fund itself” (para 19). There is however no basis for this assertion. The only paragraph in the Statement of Case that Mr Duncan is able to refer to in this regard is para 42 which states that “the Funds and their underlying investors had professional client status” (para 18 of Duncan 1). This plainly does not support Mr Duncan’s assertion, which elides two quite distinct concepts.

As stated above, Mr Duncan states expressly (at para 15) that the “purpose” for the late amendments which the Authority seeks to make is precisely to remedy this flaw in its pleading and to advance a case by which the underlying investors are the clients. If permission to make those amendments is refused by the Tribunal then the Authority would have no pleaded case that any actionable duty was owed to the underlying investors.

Mr Herberg KC submits that even if the amendments are permitted, the amendments relate only to the DN Reference (as set out above). Consistent with this, no loss is pleaded as arising from the breach of Principle 7/COBS 4.2.1R(1). As discussed above, he argues that the only loss pleaded is that in para 173 of the ASoC. Even if it did amount to a case on loss, it is not a loss which arises from the new case set out in the ASoC. Specifically, it is not loss arising from a breach of Principle 7/COBS 4.2.1R(1) or the operation of the MSA or the communication of financial promotions or the regulated activities of “making arrangements with a view to transactions in investments” or “arranging (bringing about) deals in investments”. Rather it refers only to the “failure to appropriately manage [the] conflict” as giving rise to a “sub-standard investment management service” which relates only to the unamended case. Specifically, it relates only to Principle 8, the investment management service provided pursuant to the IMAs and Sub-IMAs and the regulated activity of managing investments.

We are satisfied that there is a reasonable prospect of the Authority establishing that a duty was owed to the External Fund and its investors. This is for the reasons set out above as to the scope of the DN and the facts and matters (see [27]-[35]) and in accepting the second amendment at [145]-[147] that the Authority may allege the Applicant breached Principle 8 by failing to make adequate disclosure of the conflict between the Internal Fund and the External Fund to investors in the External Fund when carrying out its functions under the MSA, which was a different investment service provided to the External Fund to that provided under the Sub- IMA.

In any event, on the Authority’s existing and unamended pleaded case, the allegation of duty to the External Fund and investors is clearly pleaded.

The Authority pleads that the Applicant’s failings “resulted in a substandard investment management service being provided to the External Fund and its investors” (see ASoC [173], emphasis added). Further, as set out above, the relevant loss consists of the difference in value of the services that ought to have been provided and those which were in fact provided. Accordingly, there is no difficulty in characterising this as a loss suffered by both the External Fund and the investors as the recipients of the defective services.

Moreover, it was money from the underlying investors’ investments in the External Fund (i.e. money which was initially paid to and then subsequently paid out by the External Fund) which was used to pay the relevant management and performance fees (via a separate BlueCrest entity which acted as the investment manager for the fund).

Still further, the Draft Redress Rejoinder reiterates the Authority’s case that “the External Fund and/or its investors suffered loss and damage” (§17) and that “the Authority has sought to impose a fair and reasonable redress scheme taking into account both the breaches committed by the Applicant and the management services and performance which were provided to the External Fund and its investors.” ([17.4], emphasis added)

For all of these reasons it is incorrect for the Applicant to suggest that “the Authority does not allege any actual or applicable loss or damage to the External Fund”.

Accordingly, even on the Applicant’s case that the only relevant duty was owed to the External Fund, there is no difficulty in concluding (on the pleaded facts that fall to be assumed for the purposes of this hearing) that the External Fund has itself suffered a loss as a result of the Applicant’s breach of duty.

The third condition is therefore satisfied even on the Authority’s existing pleaded case and as a result of the second amendment which we have permitted.

Mr George KC argues that actionability is not a required condition for the imposition of a single firm consumer redress scheme but in any event, the Authority’s amended case (relying upon alleged breaches of 4.2.1R of COBS) is actionable.

He rejects a requirement of actionability in principle, submitting that the consequence of the Applicant’s contentions would be to undermine the Authority’s statutory consumer protection objective in a legally unnecessary and unsound fashion. He contends that the effect of the Applicant’s contentions is that even if the Applicant has breached its duties under Principle 8 and even if this breach has caused loss to the underlying investors, the Authority is unable to require the Applicant to give redress in respect of this loss. To deprive the underlying investors of redress in this fashion would undermine the Authority’s statutory objective of providing an appropriate degree of protection for consumers, and there is no basis in the statutory and regulatory scheme for suggesting that this unjust and implausible outcome is required.

He submits that the Applicant is seeking to apply the criterion of private actionability far beyond its proper territory. The statutory conditions for actionability in court proceedings (as now set out in section 138D FSMA) merely define the limits of one route of recourse (i.e. a direct action by a private person in court proceedings) and do not detract from scope of the Authority’s distinct powers to take action itself.

He further contends that the courts have emphasised the distinct and important coverage provided by the Authority’s own action, including in circumstances where an aggrieved party is unable to bring a claim for breach of statutory duty under the FSMA regime.

He relies upon two authorities.

In Grant Estates Ltd v The Royal Bank of Scotland plc [2012] CSOH 133 (a decision of Lord Hodge sitting in the Outer House of the Court of Session), the pursuer (a company) sought to bring a claim for breach of the COBS rules and argued that it was incompatible with EU law for actionability to be limited to private persons under (what was then) section 150 FSMA. Lord Hodge rejected this contention precisely because FSMA provides a range of regulatory remedies which are distinct and additional to any right of private recourse and are not limited to private persons (at [47]).

In Flex-E-Vouchers Ltd v Royal Bank of Scotland [2016] EWHC 2604 (QB), the claimant (who again was not a “private person” and was therefore unable to bring a claim under s.138D FSMA) sought instead to bring a contractual claim on the basis of an alleged implied term requiring compliance with the FSA’s Handbook (see [5] & [18]). The High Court struck out this element of the Claimant’s case. Relevantly for present purposes, the High Court emphasised that "(t)he fact that one may not have a remedy for breach of statutory duty does not mean that a claimant affected by an alleged breach of any of those rules has no remedy at all” and noted that action taken by the Authority may also provide a remedy (at [19]).

Moreover, he submits that the starting point under s.138D FSMA is that breaches of all of the Authority’s rules (including the Principles) are actionable: see s.138D(2). The only reason why a breach of the Principles is not actionable is that s.138D(3) empowers the Authority to make rules disapplying the right to bring a damages claim under s.138D(2), and the Authority has in fact made such a rule in respect of the Principles: see the Authority’s Handbook at PRIN 3.4.4R.

Mr George KC notes that PRIN 3.4.4R is very narrowly drafted: it specifically refers to s.138D(3) FSMA and is intended to do no more than exercise the power granted under that sub-section to disapply that statutory right of action that would otherwise attach to infringements of the Principles.

He argues that there is nothing within either section 138D FSMA or PRIN 3.4.4R to suggest that the Principles were to be deprived of any of the other legal incidents and effects that attached to them as rules enacted under the FCA’s general rule-making powers and forming part of the regulatory system.

We have rejected Mr George’s submissions that actionability is not a requirement of a single firm redress scheme imposed by virtue of ss.55L, 404F(7) and 404A(3). This is for the reasons set out above.

The Authority’s case is now only permitted to proceed based on a breach of the Principles for Businesses– Principle 8 only. This is because the Authority’s amendment application to add alleged breaches of Principle 7 and COBS 4.2.1R(1) is refused.

There is no dispute that a breach of the Principles is not actionable under s.138D(3) FSMA (see PRIN 3.4.4R). The rationale for this is explained above. Breaches of the Authority’s rules beneath the high level of Principles are actionable but we have refused the amendment for the Authority to rely upon a breach of COBS 4.2.1R(1) because it is outside the subject matter of this reference.

As we have explained above, it is s.404F(7) that provides the power, together with s.55L(3), for the Authority to impose requirements corresponding to or similar to a multi-firm consumer redress scheme under section 404. It follows from our analysis of the conditions required by s.404A that the Authority has no power to impose a single firm consumer redress based on breach of Principle 8 alone, or any other Principle, because they are not actionable. This would be the identical position if there were to be a multi-firm scheme redress power in relation to similar breaches by other firms. It is common ground, that “a consumer redress scheme cannot be used to require redress in relation to breaches of the Principles” (CONRED 1.3.16G and 1.3.17G).

In any event, as set out above, even if, as the Authority asserts, it is s.55L(3) alone that provides the Authority with the power to impose a consumer redress scheme on a single firm, the extent of that power must be construed in light of the restrictions placed on consumer redress schemes by s.404 and s.404A. It must follow therefore, that if a consumer redress scheme can only be imposed on multiple firms if the relevant breach is actionable, then the same must also apply to a consumer redress scheme imposed on a single firm.

Our conclusions do not give rise to such a surprising result as it may first appear. In the appropriate case, the Authority may be able to bring a case based on the breach of relevant rules (such as SYSC or COBS) which are actionable, but which the Authority chose not to plead in its original SoC in this case. In the appropriate case, and subject to issues such as the limitation period, the Authority may be permitted to bring a fresh case to the RDC pleading allegations which the tribunal has refused to amend a statement of case to include as being outside the subject matter of the original reference. Based even upon the Authority’s current permitted case, as amended, there may be other remedies available to consumers by the various statutory avenues referred to at [231] above.

In conclusion, we are satisfied that the Authority’s case, as permitted to proceed, has no reasonable prospect of success in establishing any actionable loss as is required by virtue of section 404F(7) in order to impose the single firm redress requirement which is imposed under the FSN.

We therefore bar the Authority from defending the reference and strike out the Authority’s case. We summarily determine the reference in respect of the FSN in the Applicant’s favour on the basis that the redress requirement cannot be lawfully imposed.

In light of the fact that the Draft Redress Rejoinder does not disclose a case of actionable loss with a reasonable prospect of success, the application is refused.

The Authority’s amendment application in relation to those amendments which are disputed succeeds only in respect of the second disputed amendment in relation to a breach of Principle 8 ([42A(f) & (g)] and [170A] ASoC). The first disputed amendment in relation to a breach of Principle 8 ([42A(c)] ASoC) is refused as a matter of discretion as it does not raise a case with a realistic prospect of success. The third and fourth disputed amendments, alleging a breach of Principle 7 and COBS 4.2.1R(1) ([42B] and [174] ASoC), are refused as falling outside the subject matter of the reference and not being within the tribunal’s jurisdiction. They introduce new allegations of fact and law which were not considered before the Regulatory Decisions Committee of the Authority nor included in the statutory notices (the Warning and Decision Notices).

Permission is granted for the Authority to make those amendments to the SoC which are not disputed.

BCMUK’s strike out application succeeds. The Authority is barred from participating in the reference in respect of the FSN and it is summarily determined in BCMUK’s favour with the consequence that the reference is allowed. The Authority’s pleaded case at its highest and as amended (with the permitted amendments and in light of the proposed redress rejoinder) does not have a “reasonable prospect” of establishing one of the necessary conditions we have deemed legally necessary for the imposition of a redress requirement upon it. The Authority’s case proceeds on the basis that BCMUK has breached Principle 8 but this is not an actionable cause in respect of which redress may be imposed under section 55L and 404F(7) FSMA. For the same reasons, the rejoinder application is refused.

As we have allowed the reference, the matter is remitted to the Authority with a direction to the Authority to reconsider and reach a decision in accordance with the findings of the Tribunal. In this case, the relevant finding is a finding of law that the Authority has no power to impose a redress requirement on BCMUK as pleaded in the SoC (and the permitted amendments).

An application for permission to appeal in respect of a decision in a financial services case must normally be made or delivered to the Upper Tribunal so that it is received within 14 days after the date on which the Upper Tribunal sent to the person making the application (i) written notice of the decision; (ii) notification of amended reasons for, or correction of, the decision following a review; or (iii) notification that an application for the decision to be set aside has been unsuccessful (see rule 44(3D) of the UT Rules. Given the complexity of the decision in this case, in exercise of the Tribunal’s power under Rule 5(3)(a) of the UT Rules, the time for making an application for permission to appeal is extended to 28 days after the date on which the Upper Tribunal releases this decision in final form.