Defining 'Knowingly Concerned' under FSMA: Court of Appeal Overturns Compensation Order in FCA v Ferreira

Introduction

The Financial Conduct Authority v Ferreira ([2022] EWCA Civ 397) is a pivotal case adjudicated by the England and Wales Court of Appeal (Civil Division) on March 25, 2022. The case centers around the interpretation of section 382 of the Financial Services and Markets Act 2000 (FSMA), specifically concerning the court's authority to impose compensation orders on individuals who have been "knowingly concerned" in contraventions of FSMA requirements. Karen Ferreira, a director of Our Price Records Limited, appealed against a High Court's decision that mandated her to pay approximately £2.7 million to the Financial Conduct Authority (FCA) for misleading retail investors.

Summary of the Judgment

The High Court Judge, Kelyn Bacon QC, found that Ms. Ferreira was "knowingly concerned" in the contravention of section 21 FSMA, which prohibits unauthorized financial promotions. Despite Ms. Ferreira's defense asserting a lack of knowledge regarding the contravention, the Judge concluded that knowing the communication was made in the course of business and invited investment activity was sufficient for liability under section 382 FSMA.

On appeal, the Court of Appeal scrutinized the trial judge's interpretation of "knowingly concerned." The appellate judges, led by Lord Justice Lewison, concluded that for an individual to be "knowingly concerned," they must possess knowledge not only that a communication was made but also the specific facts making that communication a contravention. This includes awareness of any disapplication or exemption provisions that might mitigate the prohibition. Consequently, the appeal was allowed, overturning the High Court's decision and setting a more rigorous standard for establishing "knowing concern" under FSMA.

Analysis

Precedents Cited

The Judgment extensively referenced SIB v Scandex Capital Management [1998] 1 W.L.R. 712, wherein Millett LJ delineated that liability under section 6(2) of the Financial Services Act 1986 required knowledge of all elements constituting the contravention. Additionally, the Judiciary referred to Burton v Bevan [1908] 2 Ch 240, where Neville J emphasized that "knowingly" entails knowledge of the factual circumstances underpinning the statutory contravention, irrespective of legal knowledge.

Legal Reasoning

The core legal debate centered on the interpretation of "knowingly concerned" within section 382 FSMA. The trial judge posited that knowing the occurrence of a prohibited communication sufficed for liability. However, the Court of Appeal, led by Lord Justice Lewison, rejected this narrow interpretation. They argued that "knowingly concerned" necessitates awareness of all factual elements constituting the contravention, including any applicable disapplications under section 21(2) FSMA or the Financial Promotion Order (FPO).

The appellate court emphasized that without knowledge of the facts negating disapplications, it would be unjust to impose personal liability. This nuanced understanding ensures that defendants are only held liable when they are aware of both the prohibited act and the specific circumstances negating any exemptions.

Impact

This Judgment refines the legal threshold for establishing "knowing concern" under FSMA, thereby safeguarding directors and individuals from undue liability. By requiring comprehensive knowledge of all contravention aspects, including disapplication scenarios, the ruling ensures that personal liability is reserved for those with explicit awareness of wrongful acts. This not only aligns with principles of fairness and due process but also delineates clearer boundaries for corporate governance within financial promotions.

Future cases involving section 382 FSMA will now necessitate a thorough inquiry into the defendant's knowledge of both the prohibited communication and the specific facts negating any exemptions. This higher evidentiary standard may limit the scope of compensation orders against individuals, thereby promoting responsible and informed oversight within financial entities.

Complex Concepts Simplified

Section 382 FSMA: Empowers courts to order compensation payments from individuals who have intentionally or knowingly been part of violating specific financial regulations.

Knowingly Concerned: A legal standard requiring an individual not only to be aware that a prohibited act occurred but also to understand the specific factors that make the act unlawful.

Section 21 FSMA: Prohibits unauthorized financial promotions unless certain conditions or exemptions under section 21(2) or the Financial Promotion Order apply.

Financial Promotion Order (FPO): A set of detailed provisions outlining specific situations where the prohibitions under section 21(1) do not apply, such as communications with high net worth individuals.

Conclusion

The Court of Appeal's decision in The Financial Conduct Authority v Ferreira significantly refines the interpretation of "knowingly concerned" within section 382 FSMA. By mandating that individuals must be aware of all factual elements constituting a statutory contravention, including any exemptions, the ruling ensures a fair and precise application of compensation orders. This enhances legal clarity, protects directors and corporate officers from unwarranted liability, and upholds the integrity of financial regulatory frameworks. The Judgment underscores the judiciary's commitment to balanced accountability, ensuring that personal liability under FSMA is both just and accurately enforced.