Factual and Procedural Background
The Defendant was the Chief Executive Officer and sole director and shareholder of Company A, a business primarily engaged in residential mortgage broking, a regulated activity with significant risk of mortgage fraud. Company A had been authorised by the Financial Conduct Authority ("FCA") or its predecessor since 2004 to advise on and arrange regulated mortgage contracts. The day-to-day regulated activities were conducted by two self-employed mortgage advisors, both paid on a commission basis.
The FCA, prioritising the combatting of mortgage fraud, requires regulated entities to maintain adequate systems and controls to prevent fraud and to have professional indemnity insurance ("PII") in place to cover claims of professional negligence. The Defendant was approved under financial services legislation to perform senior management functions at Company A and was responsible for oversight of its regulated business.
In January 2021, the FCA issued a Decision Notice withdrawing the Defendant's approval to perform regulated functions, prohibiting him from performing any function relating to regulated activities, and imposing a financial penalty. The Decision Notice related to the period from late 2015 to late 2017, during which the FCA found the Defendant had recklessly failed to implement anti-fraud policies, supervise mortgage advisors properly, and prevent Company A from transacting regulated mortgage business without PII.
The Defendant referred the Decision Notice to the Upper Tribunal ("UT"). The UT, sitting as a first instance tribunal in the regulatory process, allowed the Reference, finding that the Defendant did not act recklessly or lack integrity but remitted certain questions to the FCA for reconsideration. The FCA appealed to the Court on several grounds, including the scope of the UT's jurisdiction and the Defendant's alleged recklessness and lack of integrity.
Legal Issues Presented
- Whether the Upper Tribunal had jurisdiction to consider allegations relating to the Defendant's conduct beyond those initially presented to the Regulatory Decision Committee, specifically concerning reckless misleading of the FCA and the UT itself.
- Whether the Defendant acted recklessly in allowing Company A to carry on regulated activities without professional indemnity insurance.
- Whether the Defendant recklessly provided misleading evidence to the FCA, the previous tribunal, and the UT.
- Whether the Defendant failed to follow the systems and controls established by Company A to safeguard against mortgage fraud, and if such failures amounted to recklessness and demonstrated a lack of integrity.
- Whether the Defendant inadequately supervised the mortgage advisors, and if this constituted recklessness or lack of integrity.
Arguments of the Parties
Appellant's Arguments (FCA)
- The Defendant was reckless in failing to prevent Company A from carrying on regulated mortgage business without PII, a clear breach of regulatory obligations.
- The Defendant recklessly misled the FCA and tribunals by providing inaccurate evidence about the extent of Company A's trading activities during periods without PII.
- The Defendant failed to adhere to Company A's own anti-fraud systems and controls, which he had established and presented to the FCA, thereby breaching his regulatory duties.
- The Defendant inadequately supervised the mortgage advisors, failing to ensure compliance with regulatory requirements.
- The UT erred in law and fact in its findings that the Defendant did not act recklessly or lack integrity, and in its approach to the Defendant's adherence to systems and controls.
Respondent's Arguments (Defendant)
- The Defendant contended that he was unaware that Company A's PII had expired until July 2017 and had instructed mortgage advisors not to take on new business from May 2017.
- He maintained that Company A ceased trading regulated business after the supervisory visit in May 2017.
- The Defendant argued that any inaccuracies in his evidence were honest mistakes rather than reckless or intentional misleading.
- He asserted that he took reasonable steps to comply with regulatory obligations and that any failures to follow systems and controls were minor or excusable.
- The Defendant denied recklessness and lack of integrity, submitting that the UT's findings were correct and should not be disturbed.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Potter v Canada Square Operations Ltd [2021] EWCA Civ 339; [2022] QB 1 |
Definition of recklessness with subjective and objective elements in regulatory context |
The court adopted the two-stage test for recklessness requiring awareness of risk and unreasonableness in taking it. |
| R v G [2003] UKHL 50; [2004] 1 AC 1034 |
Two-stage test for recklessness (subjective and objective) |
Applied to the FCA's allegations of recklessness against the Defendant. |
| Tinney v FCA [2018] UKUT 0435 (TCC) |
Test for recklessness in regulatory proceedings |
Referred to by the UT in applying the recklessness test. |
| Forsyth v FCA and PRA [2021] UKUT 162 (TCC) |
Recklessness and regulatory compliance standards |
Used by the UT as part of the recklessness analysis framework. |
| Seiler v FCA [2023] UKUT 00133 (TCC) |
Relationship between recklessness and lack of integrity |
Confirmed that recklessness can demonstrate lack of integrity, especially for senior regulated persons. |
| Page and others v FCA [2022] UKUT 124 (TCC) |
Higher standards of integrity expected of senior regulated individuals |
Accepted by the UT in assessing the Defendant's conduct. |
| Edwards v Bairstow [1956] AC 14 |
Standard of appellate interference with fact-finding |
Applied in assessing whether the UT's findings were perverse or legally erroneous. |
| Revenue and Customs Commissioners v Pendragon Plc [2015] UKSC 37; [2015] 1 WLR 2838 |
Flexible approach to appellate review of specialist tribunal fact-findings |
Referenced as context for appellate review but not directly applied. |
| FCA v Hobbs [2013] EWCA Civ 918 |
Nature of financial services references and regulatory compliance proceedings |
Explained the UT's role as a first instance tribunal within the regulatory process. |
| FCA v Bluecrest Capital Management (UK) LLP [2024] EWCA Civ 1125 |
Scope of UT's jurisdiction in regulatory references |
Clarified that the UT's jurisdiction extends to matters sufficiently related to the decision triggering the reference. |
Court's Reasoning and Analysis
The Court began by addressing the jurisdictional issue, overruling the UT's earlier finding that it lacked jurisdiction to consider certain allegations related to reckless misleading. The Court adopted the test from Bluecrest, concluding that the new allegations were sufficiently connected to the original regulatory decision to fall within the UT's jurisdiction.
On the merits, the Court critically examined the UT's factual findings concerning the Defendant's knowledge of the absence of PII. It found the UT's conclusion—that the Defendant only became aware of the lack of PII in July 2017—to be unsupported and contradicted by contemporaneous evidence, including admissions by the Defendant himself. The Defendant had instructed the broker not to renew the insurance pending the outcome of the FCA's supervisory visit, thereby knowing that no PII was in place from May 2017.
The Court held that the Defendant recklessly allowed Company A to carry on regulated mortgage activities without PII. His sole verbal instruction to mortgage advisors not to take on new business was insufficient, especially given his positive instructions to continue processing ongoing applications. He failed to follow up, supervise, or check compliance with these instructions, thereby unreasonably running the risk of non-compliance.
Regarding misleading evidence, the Court found that the Defendant gave inaccurate and inconsistent evidence to the FCA, the previous tribunal, and the UT about Company A's trading activities without PII. The Defendant did not take reasonable steps to verify the accuracy of his evidence despite being aware of the risk that it was incorrect. This conduct amounted to recklessness and demonstrated a lack of integrity expected of a senior regulated individual.
On the issue of systems and controls, the Court found that although Company A had policies designed to prevent mortgage fraud, the Defendant failed to adhere to them. In particular, he did not ensure the required documentation was obtained and reviewed, nor did he review all mortgage applications as required by Company A's Mortgage Sales Process. The UT's approach, which considered compliance with other industry standards or reasonableness in a small business context, was erroneous. The Defendant's failures were reckless and inconsistent with the integrity expected.
However, the Court upheld the UT's findings on the adequacy of training, monitoring, and supervision of the mortgage advisors, concluding the UT was entitled to reject the FCA's criticisms in that regard.
Overall, the Court found that the UT had erred in law and fact in significant respects, particularly in its assessment of the Defendant's knowledge, recklessness, and integrity, and in its approach to compliance with established systems and controls.
Holding and Implications
The Court ALLOWED the FCA's appeal on Grounds 1, 2, 3, and in part on Ground 4, and DISMISSED the appeal on the remaining aspects of Ground 4 and on Ground 5.
The Court remade the Decision, concluding that the FCA had established that the Defendant acted recklessly and that this recklessness demonstrated a lack of integrity. Accordingly, the Court dismissed the Reference insofar as it related to the FCA's decision to withdraw the Defendant's approval to perform senior management functions and to prohibit him from performing any regulated functions.
However, since not all allegations were proven, the Court directed that the financial penalty imposed on the Defendant be reduced from £25,000 to £10,000, with the matter remitted to the FCA for the imposition of the lesser penalty.
The decision has direct consequences for the Defendant's regulatory status and financial penalty but does not establish new precedent beyond the application of existing principles to the facts of this case.