The Upper Tribunal has upheld the Financial Conduct Authority’s (FCA) decision to fine the former CEO and CFO of Metro Bank under s.91 FSMA 2000 for being knowingly concerned in a breach of Listing Rule 1.3.3R. The Tribunal’s decision provides useful commentary on the meaning of being “knowingly concerned” in a regulatory breach. 

While the decision does not relate to the Senior Managers and Certification Regime, the similarities in the statutory language mean that this commentary may be useful to those seeking to understand s.66A FSMA, which introduces the Senior Managers’ duty of responsibility. S.66A provides that Senior Managers can be guilty of misconduct if they have been knowingly concerned in relevant regulatory contraventions.

Background

Metro Bank is a listed company and is regulated by the FCA and the Prudential Regulatory Authority (PRA). As a listed company, the Bank provides quarterly results to the market. 

In October 2018, the Bank made an announcement to the market which included inaccurate information about its Risk Weighted Assets (RWA). RWA in turn affects the amount of regulatory capital a firm must hold. When the information was corrected in an announcement in January 2019, the Bank’s share price fell by 39%.

Following an investigation by the FCA, Metro Bank was found to have contravened Listing Rule 1.3.3R, which requires an issuer to take reasonable care to ensure information it makes available to the market is not misleading, false or deceptive and does not omit anything likely to affect the import of the information. 

The FCA also found that the Bank’s CEO and CFO had been knowingly concerned in the breach. This enabled the FCA to invoke its power under s.91(2) FSMA 2000 to impose a penalty on a director who was “knowingly concerned” in a breach of the listing rules by the company. 

The CEO and CFO referred the FCA’s decision to the Upper Tribunal. The Upper Tribunal has jurisdiction to conduct a full hearing on the matter. This includes a review of the finding that Metro Bank had breached the Listing Rules, notwithstanding that the Bank itself accepted the FCA’s decision.

The Upper Tribunal’s decision

The Upper Tribunal found that Metro Bank had contravened Listing Rule 1.3.3R. At the time of the October 2018 announcement, the Bank knew that it had miscalculated its RWA. The Bank was conducting a review to determine the size of the correction needed but had wrongly and unreasonably decided that while that review was ongoing, it could and should publish the existing, inaccurate number without any caveat. 

Having decided that Metro Bank had breached Listing Rule 1.3.3R, the Tribunal had to consider whether the CEO and CFO had been knowingly concerned in this breach under s.91(2) FSMA 2000. 

The Tribunal noted that it had not been taken to any prior case law on the meaning of the term “knowingly concerned” in s.91(2), but that the appearance of this phrase in other sections of FSMA 2000 and predecessor statutes was relevant.

The Tribunal considered several previous cases, including Court of Appeal authority on a predecessor piece of legislation, the Financial Services Act 1986, which also imposed liability for being knowingly concerned in a contravention. The Court of Appeal had said that to be “knowingly concerned in the contravention” required that the person have knowledge of all elements of the contravention in question (which in the case at hand had been the carrying on of an unauthorised investment business).

The Upper Tribunal noted that to be “knowingly concerned” does not require the director in question to have committed some “personal wrongdoing”, such as fraud, recklessness or acting without integrity – it has broader application.

Applying the principles derived from analogous case law, the Tribunal summarised that to be knowingly concerned in a breach:

• “a person must have been actually involved in the contravention; merely passive knowledge is not sufficient; and
• must have had knowledge of the facts on which the contravention depends; and
• it is immaterial whether he had knowledge of the law unless:
  • he had received and was relying on independent legal advice that the activity concerned was not in contravention of the law; and
  • that advice was based on a correct and complete factual matrix.” 

In this case, it was common ground that the CEO and CFO had been “involved in the contravention” rather than having had only passive knowledge. The question was therefore whether they had knowledge of the facts on which the contravention depended. The Tribunal found on the facts that they did have the requisite knowledge. They knew, amongst other things, that the CLIP Loans had been erroneously risk weighted at 50% instead of 100%, and that on a best estimate basis the impact of this was likely to be material. 

The directors sought to argue that they could not be knowingly concerned in the breach because they were following legal advice. The Tribunal found that they could not rely on the legal advice to avoid being “knowingly concerned” because the advice given related to the bank’s disclosure obligations under the Market Abuse Regulation and not specifically to the bank’s proposed trading update.

The Tribunal therefore upheld the FCA’s decision to find a contravention of s.91(2) FSMA 2000 in the case of both individuals.

However, the Tribunal disagreed with the FCA’s finding that there had been no mitigating factors. While agreeing that public censure was insufficient in light of the seriousness of the matter, the Tribunal decided that the penalties imposed on the individuals should be reduced. Considering the list of potential aggravating or mitigating factors in DEPP 6.5B.3, the Tribunal took into account the below.

• The individuals had co-operated fully with the FCA’s investigation. The FCA’s position had been that attendance at compelled interviews was a legal obligation and so mitigating credit should not be given for this. The Tribunal disagreed, saying that while a person must answer questions in a compelled interview, “there can nevertheless be varying degrees of co-operation and there is no basis for excluding interviews from [mitigating factors] as a matter of principle.” The Tribunal endorsed the submission that the individuals had never tried to do anything other than present a full and honest account of events.
• The directors had co-operated with the PRA. The Tribunal found that this was an additional mitigating factor as the PRA fell within the category of “another regulatory authority allowed to share information with the FCA” for the purposes of DEPP 6.5B.3(b).
• The individuals had worked to remediate the breach and improve the systems and controls deficiencies that had contributed to it. The FCA’s position that remediation is only a relevant mitigating factor where the steps taken were “to remedy directly any harm arising” was an unreasonably narrow interpretation of the penalty framework. The Tribunal therefore reduced the financial penalties by 25%.

Comment

Whether a director was “knowingly concerned” in a breach is necessarily fact specific and so each case must be assessed on its own fact pattern. However, this case serves as a reminder that: (i) personal wrongdoing is not required to establish that a director was “knowingly concerned” in a breach; and (ii) independent legal advice must be based on the full facts in order for a director to rely on it for the purposes of satisfying themselves that there is no breach. 

The Tribunal’s approach to interpreting the meaning of “knowingly concerned” for the purposes of s.91(2) FSMA 2000 has potential read across for the “knowingly concerned” element of s.66A FSMA 2000, which sets out the “duty of responsibility” applicable to senior managers under the Senior Manager and Certification regime. This aspect of the duty of responsibility is yet to be directly interpreted by the Tribunal, and this case sets an analogous precedent.

The Tribunal’s more generous reading of the mitigating factors in DEPP 6.5B.3 will be useful to investigation subjects and is another reminder to regulated firms and individuals of the importance of establishing an open and co-operative relationship with the FCA.