Financial Conduct Authority v BlueCrest Capital Management (UK) LLP

Factual and Procedural Background

This appeal concerns two principal issues: the scope of the Financial Conduct Authority's ("the FCA") power to impose redress requirements under section 55L of the Financial Services and Markets Act 2000 ("FSMA"), and the jurisdiction of the Upper Tribunal when an FCA decision or notice is referred to it. The FCA, successor to the Financial Services Authority ("FSA"), regulates firms carrying out regulated activities and has powers to grant, vary, or revoke permissions under Part 4A of FSMA, including imposing requirements to advance its operational objectives such as consumer protection.

The Respondent ("BCMUK") is an English Limited Liability Partnership within a private fund management group. The FCA issued two notices to BCMUK: a supervisory notice imposing a requirement to pay redress to certain investors, estimated at over US$700 million, and a decision notice imposing a financial penalty of approximately £40.8 million. Both notices were based on allegations that BCMUK failed to manage conflicts of interest fairly between two funds it managed, favouring an internal fund over an external one. BCMUK denied wrongdoing but for the purposes of the appeals, the allegations were assumed true.

BCMUK exercised its right to refer both notices to the Upper Tribunal, which consolidated the references and heard preliminary issues. The Upper Tribunal made a decision on 21 June 2023 ("the UT Decision") addressing applications including a strike out of parts of the FCA's case, applications to amend pleadings, and an application to serve a rejoinder. The FCA and BCMUK have appealed aspects of the UT Decision to this court.

Legal Issues Presented

1. Whether the FCA's power under section 55L FSMA to impose a single-firm redress requirement is constrained by the four statutory conditions (loss, causation, duty, and actionability) derived from the consumer redress scheme provisions in section 404 FSMA.
2. Whether the Upper Tribunal's jurisdiction on a reference from the FCA is limited to the allegations and matters contained in the FCA's warning and decision notices, or whether it extends more broadly to related matters arising from the same factual background.

Arguments of the Parties

FCA's Arguments

• The power to impose a redress requirement under section 55L is broad and not subject to the four conditions derived from section 404.
• Section 404F(7) does not restrict or define the FCA's power under section 55L but provides additional provisions applicable if a redress scheme is imposed.
• Section 55N(5) explicitly allows imposing requirements relating to past conduct, including remedial action such as redress.
• The FCA's power is subject only to its operational objectives and public law constraints, including rationality and proper purpose.
• The Upper Tribunal's jurisdiction on a reference should be broadly construed, encompassing any matters with a real and significant connection to the decision or notice referred, not limited strictly to allegations in the warning or decision notices.
• Amendments 3 and 4, which sought to add allegations based on different regulatory provisions but arising from the same factual background, fall within the Tribunal’s jurisdiction and should be allowed.

BCMUK's Arguments

• The FCA's power under section 55L to impose redress requirements is constrained by the four conditions (loss, causation, duty, and actionability) set out in section 404 and related provisions.
• The FCA's construction would lead to surprising and anomalous results, including the ability to impose redress without establishing loss or wrongdoing, which contradicts the statutory scheme and legislative history.
• The Upper Tribunal's interpretation aligns with the legislative intent, statutory context, and the FCA’s own guidance.
• The FCA's construction would infringe BCMUK's rights under Article 1 Protocol 1 of the European Convention on Human Rights ("A1P1") by permitting deprivation of property without sufficient safeguards.
• The Upper Tribunal's jurisdiction on a reference is narrowly confined to allegations and matters contained in the FCA's warning and decision notices; new allegations outside this scope should not be allowed.
• Amendments 3 and 4 are outside the scope of the matter referred and should be disallowed; Amendment 2 should also be disallowed as a matter of discretion and jurisdiction.

Table of Precedents Cited

Court's Reasoning and Analysis

The court undertook a detailed statutory construction exercise, focusing primarily on the language and context of FSMA provisions, particularly sections 55L, 404, 404F(7), and 55N(5). It rejected the Upper Tribunal’s conclusion that the FCA’s power under section 55L to impose a single-firm redress scheme is constrained by the four conditions (loss, causation, duty, and actionability) derived from the consumer redress scheme provisions in section 404.

The court emphasized that section 55L explicitly empowers the FCA to impose requirements, including those referring to past conduct, as a condition of permission to carry out regulated activities. The statutory scheme distinguishes the function of permission requirements, which are prospective and relate to fitness to carry on regulated activities, from sanctions or redress powers, which are retrospective and compensatory.

The court found no express or implied statutory limitation requiring the FCA to satisfy the four conditions before imposing a redress requirement under section 55L. It held that section 404F(7) does not confer or restrict the FCA’s power but rather supplements it by allowing the FCA to include provisions corresponding to market-wide redress schemes when imposing single-firm schemes.

The court also rejected BCMUK’s arguments based on Article 1 Protocol 1 of the European Convention on Human Rights and common law principles, concluding that the FCA’s powers are subject to public law constraints and judicial oversight by the Upper Tribunal, providing sufficient safeguards against arbitrary or disproportionate exercise of power.

Regarding the Upper Tribunal’s jurisdiction on references, the court held that "the matter" referred must have a real and significant connection with the subject matter of the regulatory process culminating in the decision or supervisory notice. The jurisdiction is not narrowly confined to allegations explicitly stated in warning or decision notices. Instead, the Tribunal’s jurisdiction is broad, reflecting that the reference is a continuation of the regulatory process, allowing the FCA to refine or adjust its case, subject to procedural fairness and the Tribunal’s case management discretion.

The court found that Amendments 3 and 4, which involved allegations based on different regulatory provisions but arising from the same factual background, fall within the Tribunal’s jurisdiction and should be allowed. Conversely, the cross-appeal against the allowance of Amendment 2 was dismissed, as it fell within the matter referred and was properly allowed.

Holding and Implications

The court allowed the FCA's appeal on both grounds:

• The FCA's power under section 55L FSMA to impose a single-firm redress requirement is not limited by the four statutory conditions derived from section 404 and related provisions. The FCA may impose such requirements as a condition of permission provided it is a rational exercise advancing its operational objectives, subject to public law constraints and judicial oversight.
• The Upper Tribunal's jurisdiction on a reference from the FCA is broadly construed. "The matter" referred includes allegations and issues that have a real and significant connection to the subject matter of the decision or notice referred, not confined strictly to the contents of warning or decision notices. The Tribunal has wide case management powers to ensure fairness and justice.
• The court remade the Upper Tribunal’s decision by allowing Amendments 3 and 4 to the FCA’s statement of case and dismissing BCMUK’s cross-appeal against the allowance of Amendment 2.

Implications: This decision clarifies the scope of the FCA’s powers to impose redress requirements as conditions of permission, confirming a broad regulatory discretion subject to judicial oversight rather than strict statutory preconditions. It also affirms a wide interpretation of the Upper Tribunal’s jurisdiction on references, facilitating a flexible and comprehensive regulatory adjudication process. No new precedent restricting these powers or jurisdiction was established; rather, the ruling reinforces the FCA’s regulatory framework and the Tribunal’s role within it.