England and Wales High Court (Administrative Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		18th December 2002

Mr Justice Lightman:

INTRODUCTION

1. This is an application by the Claimants for permission to apply for judicial review of decisions dated the 24^th June 2002 ("the Decisions") of the Defendant the Financial Services Authority ("the FSA") on the grounds that they are ultra vires and an abuse of process. The Decisions were to issue warning notices ("the Notices") under sections 56 and 57 of the Financial Services and Market Act 2000 ("the FSMA"). The Notices are a statutory preliminary before the Regulatory Decisions Committee of the FSA ("the RDC") can resolve to issue a decision notice against the Claimants stating an intention to make a prohibition order under section 56(2) of the FMSA. The FSA contest the application on two grounds. The first is procedural, namely that the challenge to the Decisions should be made to the RDC itself and then any further challenge to decision notices should be made before the Financial Services and Markets Tribunals, rather than to this court in judicial review proceedings. The second is substantive namely that there is no arguable case that the Decisions were ultra vires or an abuse of process. Sir Richard Tucker on the 17^th October 2002 refused permission on the procedural basis that the alternative remedy to judicial review proceedings available under the statutory provisions, namely a challenge made before the RDC, was more appropriate. It was unnecessary for him to express any view on the substance of the challenge. I have however had the advantage of full argument on that issue, and I consider it appropriate in the circumstances in this judgment to decide the substantive issue.

FACTS

2. Until early 2000 Brandeis (Brokers) Limited ("BBL") was a Ring Dealing Member of the London Metal Exchange ("the LME") and until various dates in 2000 the Claimants were registered executives and employees of BBL. A Mr Black, one of BBL's largest customers who traded very significantly on the LME, made serious complaints against BBL, which BBL reported to the Securities and Futures Authority ("the SFA"). The SFA was a self-regulatory organisation established under the Financial Services Act 1986 ("the 1986 Act"), which was responsible for the regulation of firms operating on the LME. Under Rule 7.23A of its rules the SFA had power to institute disciplinary proceedings if a registered person committed an act of misconduct or ceased to be a fit and proper person. The disciplinary procedure contemplated four stages: (1) a Notice of Investigation, which gave rise to an obligation on authorities companies and registered individuals to cooperate with the investigation by attending interviews or providing documents; (2) a Summary of Material Facts which allowed a prospective respondent to make relevant representations; (3) a Notice of Disciplinary Proceedings instituting disciplinary proceedings; and (4) a Disciplinary Hearing.
3. The SFA went through the first of the three stages leading to disciplinary proceedings against the Claimants (and certain other persons) in which the SFA on account of the serious charges made sought expulsion from some or all of the SFA's registers and a contribution to costs. It was not however possible to proceed to the fourth stage, the Disciplinary Hearing, before the 1986 Act was superseded by the FSMA and the SFA ceased to have jurisdiction to proceed further with the disciplinary proceedings. The SFA accordingly wrote to the Claimants stating that the disciplinary proceedings brought by the SFA would have to be discontinued but that the FSA would consider what, if any, action to take against the Claimants under the new powers vested in the FSMA.
4. Under section 59 of the 1986 Act the FSA had a power to make a Disqualification Direction directing that any individual who was not a fit and proper person to be employed in an investment business should not be so employed. The FSA did not see occasion to exercise this power in respect of the Claimants whilst the SFA proceeded with the disciplinary proceedings before it. The FMSA conferred on the FSA two powers. Section 66(1) provided that the FSA might take disciplinary action for misconduct and in respect of such misconduct impose a fine or publish a statement of his misconduct. Section 66(4) however provided that the FSA could not take action under this section after the period of two years beginning with the first day on which the FSA knew of the misconduct. Section 56 of the FSMA (replacing section 59 of the 1986 Act and much to the same effect) provided that if it appeared to the FSMA that an individual is not a fit and proper person to perform functions in relation to a regulated activity carried on by an authorised person, the FSA may make a prohibition order prohibiting him from performing any one or more functions.
5. The FSA Handbook (in paragraph ENF 8.12) affords guidance as to the circumstances in which the FSA will exercise its jurisdiction under section 56 of the FSMA in the following terms:

"The FSA may exercise its power to make a prohibition order where it considers that an individual presents such a risk to consumers or confidence in the market generally that it is necessary either to prevent him from carrying out any function in relation to regulated activities or from being employed by any firm or to restrict the functions which he may carry out or the type of firm by which he may be employed."

6. The FSA resolved effectively to continue the disciplinary proceedings commenced by the SFA by setting in motion procedures apt to lead to a prohibition notice under section 56 of the FSMA and so informed the Claimants by letter dated the 11^th December 2001. Notwithstanding protest by the Claimants that to do so would constitute ultra vires acts and an abuse of power the FSA made the Decisions. The substantive issue before me is whether the Decisions are arguably open to challenge on these grounds.

DECISION

7. The submissions of Mr Beloff for the Claimants are commendably brief as they are commendably clear. He contends that under the FSMA there is only one section applicable to disciplinary proceedings, namely section 66, and that section 66 plainly could not be invoked by the FSA because the two year limitation period has expired. By way of contrast section 56 looks, not to the past, but to the future and it is improper to use that section for disciplinary purposes.
8. In my view, the provisions of the Act cannot be construed as drawing the sharp distinction which Mr Beloff seeks to make. Section 66 is undoubtedly disciplinary. Section 56 is in my view affords both regulatory and disciplinary powers. It enables the FSA to make a prohibition order although there is no misconduct if otherwise it is clear that the individual is not a fit and proper person. Such exercise of power is purely regulatory. But it also enables the FSA in a case of serious misconduct to afford the necessary protection to the public which is not available under section 66. In this case the FSA is proposing to invoke the disciplinary power conferred by section 56, and that is clearly legitimate. It cannot be suggested that the FSA is using section 56 as an illegitimate means to get round the statute bar on invocation of section 66. The penalties available under section 66 are plainly inadequate in this case, The seriousness of charges is such that, if established, an exercise of jurisdiction under section 56 is plainly "on the cards". It is of course no bar to the invocation by the FSA of section 56 that the Claimants may not intend to carry out the functions which the prohibitory direction may forbid. It is sufficient that the Claimants are unfit.

ABUSE OF PROCESS

9. The FSA justify the proposed proceedings by reason of the risk which the Claimants present to confidence in the market generally. The alternative submission by Mr Beloff is that the FSA in commencing the present disciplinary proceedings are acting in contravention of the guidance in the FSA Handbook because they cannot show the necessary risk to confidence in the market.
10. In particular Mr Beloff argues that upon its true construction the paragraph ENF 8.12 requires the FSA to establish as a fact before section 56 proceedings are instituted that the Claimants intend to carry on the functions to be prohibited: otherwise there is no necessity to prevent the Claimants from carrying on those functions; the evidence establishes that the Claimants do not intend to carry on the functions; if the Claimants change their mind later, the FSA are fully protected for the Claimants will need the approval from the FSA and at this stage the FSA can decide whether the charges presently pending are established and act accordingly in deciding whether to grant the licence. (He also prays in aid the fact that the FSA did not invoke its equivalent jurisdiction under the 1986 Act whilst the disciplinary proceedings continued before the SFA: I do not find this fact of any significance: indeed the FSA may have been thought to have been acting oppressively if they had duplicated the SFA proceedings).
11. In my view Mr Beloff's contention is unarguable. What the Handbook says is that the FSA may make a prohibition order where it considers that an individual presents such a risk to the market generally that it is necessary to prevent him from carrying out any function. No reference is made to the intentions of the individual. His character and conduct are the critical factors. If his character and conduct necessitate the action in question, the FSA may exercise its powers. This approach accords with common-sense. Plainly: (1) if charges of unfitness are to be investigated, they should be investigated at the earliest date possible when recollections are clear, not later when and if an application is made for an approval; (2) the market can and should be given the assurance as soon as possible, where this is necessary to maintain confidence in the market, that persons whose conduct has fallen seriously below standard, are made the subject of prohibition orders; and (3) it must for the individual at the substantive hearing to raise, if he wishes to rely on it as a relevant factor, his present intentions (which can surely be relevant only in rare cases if at all): it cannot be for the FSA to have to establish this before it takes action.

CONCLUSION

12. I accordingly hold that there is no substance in the claim for which permission is sought and it should be refused for this reason. It is unnecessary to determine the procedural objection to the application for permission. Mr Beloff submits that the Claimants should be entitled to obtain a determination of the issues raised before me by the court before the merits of the disciplinary proceedings are explored by the RDC and that this court is the appropriate tribunal for this purpose. In the exceptional circumstances of this case, I think that there is force in that submission, but the course which this application has taken renders it academic.