The facts underlying the cases brought by the FCA and PRA (the Regulators) against Stuart Michael Forsyth and the decisions reached are set out in our Enforcement Watch Roundup article on the Decision Notices dated 30 September 2019. In summary the Regulators found that Forsyth (the CEO of a small mutual insurance firm) lacked integrity in respect of the way in which he, amongst other things, allocated salary and bonus payments to his wife and involved himself in an internal investigation into those payments.
The allegations levelled against Forsyth were very serious, including tax evasion and covering up his alleged misconduct by creating false documents, seeking to influence an external audit and misleading the regulators. In response, Forsyth denied the impropriety of the remuneration and tax arrangements and maintained that whilst, with the benefit of hindsight, he could have in some respects done certain things better, he had not acted improperly.
In a striking reversal, the Upper Tribunal overturned the finding that Forsyth lacked integrity, set aside the fine and remitted the matter of the prohibition to the FCA (which will no doubt result in its revocation). We anticipated in our article that the decision of the Upper Tribunal (hearing a joint appeal in respect of both Notices and the first reference to the Tribunal in respect of a decision made by the PRA) would provide useful guidance on joint FCA/PRA investigations and this has proven to be the case. In fact, the decision of the Upper Tribunal provides not only recommendations on the conduct of such investigations, but also stinging criticism of the regulators' approach to disclosure and limitation issues. The primary focus of the present article will be on this criticism and the Tribunal's recommendations.
Tribunal criticism in respect of the Regulators' approach to pleadings and evidence
- The Decision Notices found that Forsyth lacked integrity, not that he also lacked honesty. Whilst it is open to the Regulators to up the ante before the Tribunal in terms of its allegations, they did not do so in their pleaded case. The Tribunal found that some of the allegations made by the Regulators in their Statement of Case nonetheless amounted to an allegation of dishonesty in that they alleged deliberate misconduct for the purpose of perpetrating a tax fraud. Despite this case drift, the Tribunal made its decision on the question of whether the regulators had made out their case that Forsyth lacked integrity only. It also declined permission for an un-pleaded allegation that documents were back-dated to form part of the Regulators' case.
- The Tribunal permitted itself to draw adverse inferences from the failure of the Regulators to call additional witnesses to speak to evidence from which it asked the Tribunal to draw adverse inferences. The Tribunal noted that "no explanation as to why other witnesses who may have given relevant evidence as to the documents from which we were asked to draw inferences were not present... we are entitled to draw inferences from their absences". It did this by giving more weight to Forsyth's evidence, finding him to be a credible and "impressive" witness and accepting his evidence in full.
- The Tribunal also found that "somewhat unusually" the Regulators did not produce a formal investigation report on which they based their decision to present a case for regulatory action to their respective decision-makers. Instead, the Regulators relied on a draft Warning Notice which by its nature did not deal in detail with any of the underlying evidence on which the Regulators' conclusions were based.
Tribunal criticism in respect of the Regulators' approach to disclosure
- Forsyth argued (in the alternative) that even if the allegations against him were proven, the Regulators were time-barred from imposing any financial penalty on him. He had also maintained before the hearing that the Regulators must have more material relevant to this point than had been disclosed. Shortly before and during the Tribunal hearing, documents highly relevant to the limitation issue, supportive of Forsyth's position, were disclosed.
- This failure in disclosure caused the Tribunal to require the Regulators to explain their systems and processes and why compliant disclosure had not taken place. The FCA explained that its failures stemmed from the way in which potentially relevant material was stored (otherwise than in the records relating to Forsyth's regulated employer or on the centralised evidence management system), the adequacy of the searches run for material relevant to the limitation issue and the adequacy of the review of that material by the FCA (both in respect of relevance and privilege). The Tribunal recognised that these failures stemmed more from human error than systemic problems. For its part, the PRA (which lacked an evidence management system comparable to the FCA's) said that it outsourced its investigation, including the disclosure aspects, to the FCA. Nonetheless, it too had failed to send potentially relevant material to the FCA for review, either because of a misunderstanding of the process or because material was mis-labelled as privileged. The PRA is recorded by the Tribunal as expressing "sincere regret" for these failures and that it is reviewing its Regulatory Investigation Guide as a result.
The Tribunal described the FCA's failings in respect of disclosure as "serious" and "largely due to human error which may have been caused by a basic lack of competence". It expressed concern about the level of training received and suggested steps such as storing legally privileged documents separately. Damningly, it also said that the FCA must treat new material with an open mind and not "convince itself" that new information has no impact on limitation. The Tribunal also found that there may be a case in future for obtaining external legal advice on the question so that the matter can be considered "entirely objectively". The Tribunal described the PRA's failures as "more systemic" given its lack of evidence management systems such as those operated by the FCA. It described its own efforts to review material it had as "woefully inadequate" after it outsourced matters to the FCA.
Tribunal criticism in respect of the Regulators' approach to the joint investigation
The Tribunal said that whilst there was on the face of it a joint investigation with two separate decision making processes, in reality there was a single investigation conducted by the FCA. The Tribunal questioned why, given that either could have fined and banned Forsyth, there could not have been a single FCA investigation and FCA notice, with full access to PRA material being granted.
Tribunal recommendations
In a particularly striking passage, the Tribunal said that the Regulators' conduct had fallen well below the standards that Forsyth, the regulated community and the public at large were entitled to expect.
The Tribunal made six specific recommendations, pursuant to its powers under s.133A(5) FSMA and asked for the Regulators to respond:
- The FCA should consider whether staff are adequately trained, understand the importance of document management in the context of potential Enforcement proceedings and the consequences if procedures are not followed.
- The FCA should review its procedures for dealing with disclosure requests made after the usual disclosure process has concluded.
- The FCA should review its approach to disclosure and keep legally privileged material separate from other material.
- The FCA should assess when the relevant limitation period started and keep this under review as new information comes to light.
- The PRA should follow recommendations (1)-(4) and also undertake a full review of its processes for recording supervisory and other information that may be relevant to Enforcement action.
- The approach to joint investigations should be reviewed. Where conduct falls equally within the scope of both Regulators, consideration should be given to a single investigation and regulatory decision.
Comment
Whilst there are a litany of criticisms levelled against the Regulators in this recent Tribunal Decision, what is clear is that the Tribunal was, in particular, deeply concerned by the Regulators' failure to comply with its disclosure obligations throughout the proceedings. In circumstances where the subject of regulatory proceedings is so reliant on the Regulator discharging its disclosure obligations effectively, particularly where limitation may be in question, failings in this respect are so fundamental that they "threaten the integrity of the Tribunal process". In this case, had the documents relating to limitation not been unearthed following various requests by Forsyth's legal team, it is possible that the Tribunal would have made a finding on an issue in respect of which it had no jurisdiction. The responsibility therefore "lies squarely with the Regulators in ensuring they take all reasonable steps to trawl their records and databases to discover all relevant information and to ensure that they have adopted processes which enable that to happen in a timely fashion."
The Tribunal found that some of the issues that arose in respect of disclosure may not have occurred had a single investigation by the FCA been undertaken rather than two separate investigations with the PRA's investigation effectively outsourced to the FCA. Undoubtedly there are a number of lessons to be learned by the Regulators following the Tribunal's extremely critical findings and, as a result, we are likely in future to see some very real changes in the way joint investigations are run, with a view to ensuring greater fairness to the subject of the investigation.
The Regulators have been directed to respond with their views on the six recommendations made by the Tribunal and we await their responses with interest. Whatever comes next from the FCA and PRA, it is clear that this Tribunal decision will have far reaching effects on the conduct of regulatory enforcement investigations, hopefully to the benefit of those subject to these often long-running investigations.