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A case of 'mission creep' by the FCA?

13 October 2022

Bruised by recent criticism, it is likely we will see efforts from the FCA to be more proactive and interventionist, but this could have concerning implications for financial services professionals and their insurers.

In May 2022, the UK’s Court of Appeal upheld an appeal by Karen Ferreira against a claim brought by the Financial Conduct Authority (FCA). 

Ferreira had been ordered by the High Court in 2020 to pay restitution to consumers who had suffered losses following an illegal financial promotion by Our Price Records. 

The FCA’s case was Ferreira had approved illegal financial promotions that were promoted to members of the public by unauthorised marketing agents. The illegal promotion had raised £3.6m ($4.2m) from 250 retail investors – £21,000 of which had been received by Ferreira personally – all of which had been lost when the company entered administration. 

The High Court made an order against Ferreira, ordering her to pay £2.7m to the FCA for the benefit of investors. Ferreira appealed, arguing she was not “knowingly concerned” in Our Price Records’ contravention of rules. 

The FCA’s case was Ferreira had been “knowingly concerned” in the breach of the financial promotions rules, and therefore caught by s382 of the Financial Services and Markets Act 2000 (FSMA), which provides a liability can be imposed upon an individual if the court is satisfied a person has contravened a relevant requirement under FSMA or has been “knowingly concerned” in the contravention of such a requirement. 

It was common ground the financial promotions rules had been breached: the key issue was whether Ferreira could be held personally liable under s382. Ferreira’s defence was she did not know there had been a breach of the rules. She had trusted her co-directors (who had personally benefitted to a far greater extent than her) to organise the share offering in a compliant way. She also believed the financial promotions had been approved by a firm of accountant, which, unbeknown to her, had been duped into indicating the promotion had been approved. 

Knowingly concerned 

The judge at first instance accepted Ferreira did not have actual or imputed knowledge that the financial promotions were illegal. However, she concluded, as a matter of law, this was irrelevant to the question of whether Ferreira was “knowingly concerned”: she knew a communication was being made to investors and it was not a prerequisite to the making of an order under s382 she must also know the promotion was illegal.

The Court of Appeal disagreed and upheld Ferreira’s appeal, pointing out as a preliminary observation the practical effect of the High Court’s decision would be that, if the FCA’s argument was correct, in almost every case where a person is “concerned” in a financial promotions breach they would have the requisite degree of knowledge for an order to be made under s382. This would allow the FCA to cast the net of s382 very widely, such that any agent or employee involved in the sending of a financial promotion might find themselves fixed with personal liability.

The Court of Appeal held the FCA’s argument was flawed and the requisite “knowledge” in Ferreira’s case must have included knowledge the financial promotion was not compliant.

It also rejected the reasoning one of the purposes of s382 was to allow for restitution orders to be made against directors, preventing them from hiding behind the corporate veil of insolvent companies. The court at first instance had interpreted s382 in such a way that personal liability would be imposed on directors simply because they had knowledge of the actions the company was taking in the course of its business. That would be a far-reaching step and would result in limited liability effectively being disregarded in a much wider set of circumstances than those in which the courts have conventionally deemed appropriate – usually, piercing the corporate veil is permitted only in cases of fraud or dishonesty.

It was not open to the FCA to introduce such a radical departure from the principles of limited liability, and the corporate veil could not be disregarded simply because a director was aware of the actions their company was taking in the course of its business. While ultimately unsuccessful, the FCA’s claim against Ferreira is part of a worrying trend of “mission creep” on the part of the FCA and other regulators and the FCA’s attempts to fix Ferreira with personal liability have clear implications for directors of regulated firms and their liability insurers.

Interventionist approach

With the FCA bruised by criticism of its role and lack of oversight in the British Steel pension scheme saga, it is likely we will see the FCA make efforts to be more proactive and to take a more interventionist approach to redress.

In its most recent business plan, the FCA has given clear indications about its likely “direction of travel” in 2022 and beyond. One of the FCA’s stated goals is to improve the redress framework so it is “fairer” for consumers, identifying potential problems earlier and carrying out redress exercises for firms to quickly remedy harm, thereby ensuring consumers have access to redress before firms fail

The scope of the regulatory net is also widening, with the FCA working with stakeholders to design an approach to the regulation of crypto assets, and activities such as funeral plans being drawn into the FCA’s remit. We may also see FCA supervisory action around “greenwashing” allegations.

More widely, we are seeing general “mission creep” by other regulators of financial services professionals. The limit of compensation that can be awarded by the Financial Ombudsman Service has increased to £375,000 and the Financial Services Compensation Scheme (FSCS) has called for a similar increase to its compensation limits, particularly for pensions.

While driven by concerns about consumer protection, the implication for financial services professionals can be concerning, particularly where as a regulator of last resort the FSCS frequently find other parties are “liable” to pay claims, sometimes without a proper understanding of those parties’ roles or responsibilities. Professional indemnity insurers will need to consider wordings and exclusions carefully, while also ensuring they themselves do not find themselves the target of FCA action in relation to market compliance.

This article first appeared in Insurance Day on 31 August 2022.  Lucy Tolond and Harriet Quiney are Partners at DWF

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