Katherine Apps* on the Supreme Court judgment in FCA v Macris
In 1494 Botticelli completed painting “the Calumny of Apelles.” It depicts an innocent painter, Apelles, who has been wrongly accused of capital crimes, dragged before the King’s throne by personifications of Slander, Ignorance, Suspicion and Envy. It hangs in the Uffizi today and is thought to have been commissioned by a Florentine banker. In the story Apelles is pardoned from death at the last minute when a third party tells the king that he could not possibly have committed the offence, but the painting captures the moment when Apelles seems inevitably about to meet a sticky end, surrounded and almost entirely enveloped by Slander, Ignorance and Suspicion. Was this commissioned by a worried banker, concerned that he might meet his professional end without the ability to put the record straight or see the underlying disclosure? In Renaissance Florence this is unlikely but it does seem to reflect (at least some) of the anxieties of those who work in regulated professions today, that they may be hampered from obtaining future employment because of their previous employer’s interactions with a regulator.
On the same theme, on 22 March 2017 the Supreme Court gave its long awaited judgment in FCA v Macris  UKSC 19. Although this case arose in the context of financial services enforcement, the majority analysis potentially has an impact on other areas of regulatory enforcement and on how it could affect the management of the employment relationship. Mr Macris was not successful in obtaining “third party” status to challenge the decision made, but the recent introduction of the Senior Managers Regime and Certification Regime, people such as Mr Macris may soon slip out of the frying pan into the firing range as subjects of direct regulatory enforcement.
The legislative regime
Under section 393 of the Financial Services and Markets Act 2000 (“FMSA”) a person who is prejudicially identified in an FCA warning or decision notice has the right to be treated as a “third party,” including the right to make representations on his own behalf on the criticisms made, and under s.394, the right to receive disclosure from the FCA of underlying documents. This is a valuable status as it gives rise to the potential to obtain material from which to influence regulatory action and limit damage when applying for future roles.
FMSA provides for a three stage decision making process.
First the FCA makes a warning notice, which lists the action which the FCA is provisionally minded to take (s.207).
Then the FCA makes a decision notice, which describes the relevant conduct and gives right to a statutory right to refer the matter to the Upper Tribunal (s.208).
After the Upper Tribunal has considered any appeal, or once time has expired, the decision notice becomes final (s.390). Each of these currently contains a brief statement of action proposed with more a lengthy narrative reasons.
The FCA does not always publish its decisions, but usually does.
As Lord Neuberger observed at :
“The interests of the addressee of a notice who is accused of failings, and those of a third party such as an employee of the addressee, who may be identifiable as responsible for, or implicated in, the alleged failings, are by no means necessarily aligned. Thus, it may well be that an employer would want to try and curtail any publicity about the alleged failings by quickly negotiating and paying a penalty, even if there may be grounds for challenging the allegation in whole or in part. But this may often not suit the employee, who might well feel that, in the absence of the Tribunal exonerating him, his reputation, and therefore his future employment prospects, could be severely harmed or even ruined.”
Apelles’ employer (if he had one) might have no interest in saving Apelles from being surrounded by Slander, Ignorance and Suspicion, whereas his future professional life may depend on it.
Since this case, provisions of the Financial Services (Banking Reform) Act 2013 which amend FSMA have come into force. These introduce the Senior Managers Regime and Certification Reform (recently brought into effect from 7 March 2017) which are aimed at increasing the direct accountability of senior individuals and those who are “material risk takers.” There is no analysis in the judgments of the Supreme Court or the Court of Appeal on how the legal principles would now apply in the new regime. However, as set out below, this case cuts in a different direction to the policy of these new legislative changes. The Supreme Court apply a narrow approach to the construction of the regulatory decision, championing regulatory efficiency above protections from individual prejudice.
Mr Macris was JP Morgan’s International Chief Investment Officer (“CIO”) during the period when JP Morgan’s Synthetic Credit Portfolio suffered $billions of losses. The FCA warning and decision notices were critical of the investment strategy, weak management and inadequate response when risk factors ought to have alerted the bank. The warning and decision notices did not refer to Mr Macris name or his job title, but made repeated critical references to CIO London Management. Mr Macris claimed that this identified him as a third party such that he was entitled to make representations and obtain disclosure from the FCA. The FCA argued that it did not.
The lower decisions
The Upper Tribunal, chaired by a former senior financial services enforcement lawyer, held that Mr Macris was identified in the warning and reasons. He was identified by reference to his position in the hierarchy of the organisation. As a result, he was entitled to be treated as a third party. There was unchallenged evidence that those in the industry could recognise Mr Macris from the description in the notice.
Gloster LJ giving the lead judgment of the Court of Appeal agreed with the Upper Tribunal’s result, but not the reasoning. She held that the reference to CIO London management were, in context, references to an individual (i.e. him). By analogy with the law of defamation she had held that the relevant audience were “persons acquainted with Mr Macris or who operated in his area of the financial services industry.” She also held that his identification to the US Senate Committee report, referred to by the FCA, entitled the Judge to conclude that Mr Macris was identifiable as a “piece in the jigsaw.”
The Majority of the Supreme Court
Lord Sumption gave the leading majority judgment of the Supreme Court (with which Lords Hodge and Neuberger agreed). In a short judgment he rejected the Court of Appeal’s analogy with defamation and the Upper Tribunal’s reference to the hierarchy. As the warning and decision notice do not use terms which are a “synonym” for Mr Macris, he was held not to be a third party .
Lord Neuberger concurs, but gives more detailed reasoning because “there is no doubt that the case for giving a wider meaning to section 393(1)(a) of FMSA…has considerable force.” Ultimately he agreed with Lord Sumption because he considered that “any research or investigation” as to who is a third party should be “straightforward and simple”. It should not “require any detective work” such as would be required by Gloster LJ’s jigsaw approach .
Lord Wilson dissented both on the law and its application to the facts. Lord Wilson supported the FCA’s own interpretation of FSMA, that if a notice would lead “the ordinary reader (that is, the reader with a general understanding of financial affairs and ware of publicly and widely available background material, but without specific or special knowledge of the underlying facts of the matter to which the notice and its reasons relate) to conclude that the notice unambiguously identifies the applicant as a person mentioned in the notice” .
Lord Wilson concluded that this construction was necessary to achieve balance between the ability of a regulator to regulate, and of individuals wrongly criticised in a warning to put them right .
His judgment does not delve into the Strasbourg Jurisprudence on the point, but it has long been held that a regulator’s decisions make amount to “determinations” of an individual’s “civil rights and obligations” so as to engage Article 6 (1) civil ECHR. Lord Wilson gave the majority judgment in the case of R(G) v X School  UKSC 30, in which he set out the test for when Article 6 would be engaged in the regulatory context.
Lord Mance agreed with Lord Wilson on the law, but disagreed on its application to the facts, observing that Lord Sumption had taken a narrower view of the legislation than even the FCA had advanced.
Implications in Financial Services regulation
The Supreme Court, in allowing the FCA’s appeal, have taken a more hawkish approach to the legislation than the FCA had. The practical effect of this judgment in the Financial Services context is to narrow the potential scope for a person to become a “third party” for the purposes of FSMA. Only those who are unambiguously identified by name or a, in effect by a synonym, will be third parties. All others, even though they may be indirectly identifiable to those in their industry, or to curious members of the public through a quick google investigation, will not be permitted third party rights.
It will be interesting to see how this will play out now that the legislation has changed, and the FCA have positively been encouraged to go against senior managers. Senior managers, such as Mr Macris, may more often find themselves primary parties of enforcement action. If so, such individuals will have the right to appeal to the Upper Tribunal. The regulatory culture has shifted away from criticising risk management teams in the abstract, towards direct personal responsibility.
However, this does not remove the potential prejudice to an individual of a published decision in relation to their firm. It is not uncommon for the FCA to proceed against different individuals or firms at different paces. They may ultimately be exonerated by the FCA in personal enforcement proceedings at a later date than a decision in relation to their firm which appears to implicate him. In the meantime, the regulatory reference regime (outlined below) is likely to make it difficult for them to find employment.
Impact to other regulatory proceedings
FSMA is relatively unusual in having an express process whereby a third party has the ability to make representations when they are not the party subject to investigation. The SRA, for example, can proceed against individual solicitors, or firms but there is no separate third party process. If the SRA proceeded against a firm, and then discovered evidence against a particular solicitor, they would need to place the solicitor under investigation.
The language of “third parties” is used in Competition law enforcement, but in an rather different context. This refers more usually to the party who initially made the complaint, who may wish to be involved in proceedings as a “third party” usually with a view later to making a private law claim for damages against the infringer. The third party in that context is usually the person who has spotted the breach, and is not the person ultimately criticised by the regulatory body.
However, as Lord Wilson recognised, in R(G) v X, the decision of one body can sometimes have the practical effect of having a “substantial influence or effect” on a person’s right to practice their profession. If it does, this is a determination of their Art 6(1) civil ECHR rights, which require a fair process to be followed. This case does not change the position that, even if another regulator does not have a formal third party procedure, if their decision (particularly where it may be published) subjects an individual (or a synonym of an individual) to a regulatory finding which has a sufficient impact on their ability to practice their profession, that regulator cannot escape complying with Article 6(1) civil standards of fairness. This case signals that Courts are likely to look very narrowly at whether a determination against one entity, includes findings against an unrepresented other which are sufficiently unambiguous as to be a “determination” identifiably against them, but it does not preclude it.
In the financial services sector regulatory investigations and enforcement processes can take a substantial length of time. What often happens more quickly is that an employee is subjected to an internal investigation or process by their employer. Since the recent changes, employers in this sector will often be keen to demonstrate to the regulator that they are taking necessary internal steps to enforce standards. How does this case impact on the rights of employees at this earlier stage?
The simple answer is that this case does not directly influence the employment legal landscape. However, this case, taken together with the recent legislative changes, throws into sharp relief the position of senior managers. It is now more likely than ever that senior managers will seek legal representation, both at internal employment proceedings (as G had in R(G) v X School) and potentially in meetings with FCA officials in which their bank or entity is being investigated. Under the new regulatory reference regime, as an employer is likely to have to provide a reference including all warnings given over the past six years to all future employers, this is likely to have the quickest and most immediate impact on individuals (Guidance published in PS16/22 in September). If that reference records sanction for involvement in a matter under investigation by the FCA, that individual may well already be severely hampered in the employment market, even before the FCA warning has been made.
The decision of the Supreme Court is a narrow one, in all senses. It considerably clarifies the position for the FCA. For individuals, the position has already become rather less clear since the new legislative changes. Their ability to individually provide representations to the FCA and Upper Tribunal have been reduced, so long as they are not personally the subject of enforcement action. However, the legislative changes mean that they may well be more likely to be primary subjects than third parties in future.
 Fostering revolt in Tyre as an accomplice of Theodotas, Ptolemy’s Governor in Phonecia. Altrocci, The Calumny of Apelles in the Literature of the Quattrocento 1921 at 455
With thanks to Niran de Silva and Hope Revell who read a previous version, to Carol Davis, Liz Dux and Alistair Crosby who helped with the title, and to David Hunt at Farrers, a chat with whom gave rise to one of the ideas in this paper. My errors are entirely my own.