Summary
Rangecourt SA (formerly Banque Havilland) (the Bank) and two former employees of the Bank were largely unsuccessful (except, for the Bank, as to financial penalty) in their Upper Tribunal references of FCA enforcement action for acting without integrity in formulating a market manipulation strategy. This is an important decision for principles of corporate attribution in FCA and PRA enforcement cases, which provides greater clarity on the principles that apply to cases involving allegations of a lack of integrity but leaves some uncertainty about how the Tribunal will approach attribution in other types of cases.
Facts
In September 2017, employees of the Bank produced a presentation describing a strategy involving market manipulation to put pressure on the Qatari currency with a view to breaking the peg between the Qatari Riyal and the US dollar (the Presentation). The Bank employees involved in producing the Presentation included Mr Rowland (former UK branch CEO), Mr Weller (former UK branch Head of Asset Management) and Mr Bolelyy (former personal assistant of Mr Rowland and investment analyst, although the exact scope of his role was disputed). The Presentation was leaked, leading to an FCA Enforcement investigation.
Following this investigation, the FCA decided to fine the Bank, Mr Rowland, Mr Weller and Mr Bolelyy and to ban all three individuals from working in financial services. By creating and disseminating the document, the FCA found that the Bank had breached Principle 1 of the FCA Handbook (“[a] firm must conduct its business with integrity”) and that the individuals had breached Individual Conduct Rule 1 (“[you] must act with integrity”) (ICR1).
The Bank, Mr Rowland and Mr Bolelyy referred their Decision Notices to the Upper Tribunal. Mr Weller did not. Another individual connected with the Bank - David Rowland - made a third-party rights reference.
Decision
After a detailed factual analysis, the Tribunal concluded that Mr Rowland and Mr Bolelyy breached ICR 1. The Tribunal also found that the conduct of Mr Rowland and Mr Weller (who it also found acted without integrity) was attributable to the Bank, so the Bank breached Principle 1.
The Tribunal did not vary Mr Rowland’s or Mr Bolelyy’s fine. It reduced the Bank’s fine from GBP10 million to GBP4 million largely on fact-specific grounds, including finding that the Bank’s thorough internal investigation and full co-operation were mitigating factors.
David Rowland was largely successful in his third-party reference, again on fact-specific grounds.
Insights
The Tribunal’s reasoning on corporate attribution is nuanced and leaves a number of open questions, particularly in relation to how attribution will be approached in other types of cases. However, a number of key points can be extracted:
- The way that the corporate attribution test applies to any given rule or Principle is specific to that rule and depends on its context and purpose. The Tribunal said that Principle 1 has two elements. First, the relevant activity must be part of the firm’s “business”. Secondly, the individual in question must have a state of mind (i.e. lack of “integrity”) that is attributable to the firm. The Tribunal said that, in determining these questions, it must “stand back” and consider whether the objective of Principle 1 requires an employee’s conduct to be characterised as part of the firm’s business and the employee’s lack of integrity be attributed to the firm.
- The Tribunal’s key determination was that, for an alleged Principle 1 breach, if the employee’s relevant conduct forms part of the firm’s business, that alone is enough for the employee’s lack of integrity to be attributed to the firm. In reaching this conclusion, the Tribunal drew on the concept of “enterprise risk”, which forms the policy rationale for imposing vicarious liability in tort and requires that a firm taking the benefit of an employee’s activities should also bear the cost of harm the employee wrongfully causes. The policy imperative of deterrence also supported this conclusion.
- The Tribunal discussed a number of considerations that are relevant to whether an employee’s actions amount to part of the firm’s business. Notably, these are relevant whether or not the employee acted unlawfully:
- The Tribunal considered that the vicarious liability test provides “the most helpful guidance” as to what amounts to a firm’s business; i.e., what was the employee’s role for the firm and was there a sufficient connection between the employee’s role and their wrongful conduct to make it right for the firm to be held accountable.
- Principles of agency may also be relevant, so if an employee is acting within their actual or ostensible authority, that would indicate they are carrying out the firm’s business.
- The firm should be held accountable if the employee intended to further the firm’s interests in some significant way, even if they also intended to further their own personal interests.
- However, it may not be “fair and just” to hold a firm culpable and to have acted without integrity for a very junior employee’s conduct.
- The Tribunal held that the narrower concept of corporate criminal attribution is not relevant, i.e., to determine which individuals constituted the firm’s “directing mind and will”. The obligation under Principle 1 is to conduct “all the firm’s business with integrity”, not just that part of the firm’s business of which an individual with a ‘directing mind’ had knowledge. This conclusion is unsurprising as it is consistent with previous decisions of the Tribunal.
This decision has a potentially wide impact:
- If the FCA can prove a lack of integrity on the part of an employee or officer of a firm, it sets a relatively low bar for then attributing that lack of integrity to the firm to find a Principle 1 breach.
- A lack of integrity on the part of even relatively junior employees may be attributable to a firm. It is not clear from the decision when an employee will be considered so junior that it would not be “fair and just” to hold a firm culpable for their conduct, although the Tribunal’s detailed analysis of Mr Bolelyy’s role is to some extent instructive.
This is a decision about the approach to attribution in a Principle 1 case, but the Tribunal’s reasoning is likely to inform its approach to attribution in cases that involve other rules and Principles that require both a mental element and consideration of whether an employee’s actions formed part of a firm’s “business” (Principle 2, for example, requires that “[a] firm must conduct its business with due skill, care and diligence”) or possibly part of the alternative concept of its “affairs” (Principle 3 provides that “[a] firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems”).
- The Tribunal’s emphasis (albeit in the context of a Principle 1 case, which are typically cases involving some of the most serious misconduct) on the policy imperatives of deterrence and “enterprise risk” may influence future Tribunals to place similar emphasis on those imperatives an formulate wide corporate attribution tests for rules that do not involve the concept of a firm’s “business” or a similar concept.
- While this was an FCA enforcement case, the Tribunal can be expected to apply the same reasoning in equivalent PRA enforcement cases.
From a risk mitigation perspective, the case highlights a number of important issues, but key amongst them are the importance of reinforcing a good culture and conducting effective training to ensure that employees understand the firm’s expectations of their behaviour and the importance of complying with the FCA’s Individual Conduct Rules.
It also reinforces a lesson from a number of prior FCA enforcement actions that, if a firm is considering undertaking a transaction or course of action which may face subsequent regulatory scrutiny, it is important to have a record of the firm, including relevant control functions and governance bodies, assessing the potential regulatory risks associated with it and the reasons for deciding to proceed, including any mitigants of those regulatory risks. While this would not have assisted the Bank in this case, where the proposed strategy was found to be intrinsically improper, in other cases that record could be critical in helping to establish the motivations and intentions of employees involved in the conduct and reduce the risk of them, and therefore the firm, being found to have acted without integrity.
