The Tribunal also directed the penalties proposed by the FCA to be reduced by 25% to reflect the individuals’ co-operation with the FCA and steps they took to remediate the firm’s breach, setting a surprisingly low bar for FCA co-operation and remediation credit in the process.
Background
In 2018, the bank published a Q3 trading update that contained statements about its capital ratios and risk-weighted assets that were incorrect. When the bank published amended figures the following quarter, its share price dropped by 39%.
The FCA and the Prudential Regulation Authority (PRA) investigated the matter. In December 2021, the PRA fined Metro Bank GBP5.4 million for failing to act with due skill, care and diligence in relation to the regulatory reporting of its capital position and for failings in its regulatory reporting governance, controls and investment with respect to its Common Reporting returns. In December 2022 the FCA fined Metro Bank GBP10m for failing to take reasonable care to ensure that its Q3 trading update was not false or misleading and did not omit anything likely to affect the import of the information contained within in it, in breach of listing rule 1.3.3R. The FCA also issued decision notices to Mr Donaldson, the bank’s CEO, and Mr Arden, the bank’s CFO, for being knowingly concerned in the bank’s breach of the listing rules. The PRA did not take action against Donaldson or Arden.
Donaldson and Arden referred their FCA decision notices to the Upper Tribunal for a re-hearing. They argued that the bank had not breached LR 1.3.3R (even though it had settled with the FCA on that basis) and, even if it had, they were not knowingly concerned in that breach. They also argued that the penalties proposed by the FCA were disproportionate.
Knowingly concerned: legal test confirmed
Section 91 Financial Services and Markets Act (FSMA) empowers the FCA to impose a penalty on a listed issuer that breaches the listing rules. It may also impose a penalty on an individual who was a director of the listed issuer at the time of the breach and was knowingly concerned in the breach. The Tribunal decided that the bank had breached LR 1.3.3R, so the question was then whether Arden and Donaldson were knowingly concerned in its breach.
Arden and Donaldson disagreed with the FCA’s position on what it was required to prove in order to establish that an individual was knowingly concerned in an issuer’s breach. The term “knowingly concerned” is not defined in FSMA and has not previously been considered by the courts in relation to listing rule breaches, although it has been considered in other contexts.
Donaldson and Arden argued that they could only be held liable if the FCA could demonstrate some personal wrongdoing on their part. The Tribunal rejected this. Following the Court of Appeal’s ruling in Ferreira v FCA (2022), it held that an individual is knowingly concerned in a breach if they:
- were actually aware of the breach; and
- had knowledge of all the elements which made up the breach.
No personal wrongdoing is required and ignorance of the law is no defence, so the individual does not need to know that the facts of which they are aware constitute a breach (for example, not appreciating that omitting a particular statement would be a breach of the listing rules).
Reasonable steps: obtaining and relying on legal advice
Donaldson and Arden argued that, in reviewing and approving the Q3 trading update, they had relied on independent legal advice which said that they did not need to include more recently calculated risk-weighted assets figures in the update.
In FCA v Foster (2023), the High Court accepted that describing a person as being knowingly concerned in a firm’s breach, in circumstances where that individual has obtained independent legal advice that the relevant conduct is not a breach, would strain the meaning of knowingly concerned beyond any reasonable compass. However, it also cautioned that the individual must interrogate the factual assumptions on which the legal advice is based.
The legal advice, on which Arden and Donaldson sought to rely, had been obtained during a short, unplanned, meeting with one of the bank’s lawyers, at the end of a training session on a different topic. There were no written instructions and the lawyer was not asked to confirm in writing the advice given. Relying on contemporaneous emails circulated within the bank and Mr Arden’s witness evidence on cross-examination, the Tribunal found that he had provided the bank’s lawyers with an incomplete and inaccurate picture of the facts. He had also asked them to advise on a different issue. Arden had asked the bank’s lawyers whether the bank was required to make a proactive announcement under the market abuse regime. He had not provided the lawyers with a draft copy of the bank’s Q3 trading update, nor had he sought advice on whether the bank could report a risk-weighted assets figure in the Q3 update which it knew to be materially inaccurate. It was, therefore, unreasonable for him to have relied on this advice to support a belief that including a risk-weighted assets figure that he knew to be inaccurate was not a breach of the listing rules.
While Arden and Donaldson’s case did not concern breaches of the FCA and PRA Senior Manger rules, the FCA and Tribunal are likely to adopt a similar approach if asked to consider whether a senior manager can rely on legal advice to demonstrate that they have taken reasonable steps and would expect them to ensure that they understand the basis upon which that advice had been given.
Co-operation credit: redefined
The Tribunal upheld the FCA’s findings that the bank had breached the listing rules and that Arden and Donaldson had been knowingly concerned in its breach. However, it directed that the financial penalties imposed on them be reduced by 25% to reflect Arden and Donaldson’s co-operation with the FCA’s investigation and their contribution to remediating the firm’s breach.
In relation to cooperation, Arden and Donaldson had both attended interviews with the FCA and PRA and Arden had led a teach-in that the PRA had requested on the bank’s governance and control framework and the process it used to prepare regulatory reports. The FCA argued that none of this was relevant to mitigation because both individuals had a legal obligation to attend the interviews and answer all questions put to them and the PRA teach-in was not directly relevant to the FCA’s investigation.
The Tribunal disagreed, relying on the wording of paragraph 6.5B.3G of the FCA’s Decision and Procedure Penalties manual (DEPP), which lists factors that may have the effect of aggravating or mitigating a breach and refers to “the degree of co-operation the individual showed during the investigation of the breach, by the FCA or any other regulatory body”. The Tribunal accepted that Arden and Donaldson were legally required to attend the FCA interviews but also considered interviews to be “a significant part of the approach taken to investigations”.
As far as remediation was concerned, Arden and Donaldson worked with the PRA, the FCA, and consultants engaged by the bank, to correct the breaches and to address the root causes of the incorrect risk weighted assets having been applied. This included making a market announcement in January 2019. The FCA argued that this remedial action had been taken to ensure compliance with the bank’s obligations under the listing principles and the market abuse regime, rather than to remedy any harm caused by the listing rule breach. The Tribunal rejected this interpretation of DEPP 6.5B.3(d), finding it unreasonably narrow.
It has long been the FCA’s policy, frequently emphasised in its enforcement notices, only to award mitigation credit for co-operation and remediation where firms and individuals do something “above and beyond” that which they are required to do. The Tribunal’s decision sets the bar some way below this, so it is likely that the FCA will challenge this aspect of the decision.
Witness credibility: failure to give straightforward answers
The Tribunal rejected significant portions of Arden’s witness evidence. It found that he was often reluctant to give straightforward answers on key evidential points and that the overall focus of his written and oral evidence was to support his case, rather than to describe events in a straightforward manner.
Following the events in question, Arden had been repeatedly required to justify and explain what had happened and the Tribunal considered it likely that his memory had been revised to make it more consistent with his current beliefs, rather than reflecting the position at the time. The Tribunal attributed Arden’s inability to give straightforward answers to him being confronted with contemporaneous evidence which was inconsistent with his revised memory, and it did not consider him to be deliberately attempting to mislead it. However, this clearly impacted the credibility of his testimony.
These potential limitations with witness evidence should be taken into account when gathering evidence more generally in investigations, particularly where individuals may be concerned about their own liability or reputation and when a significant amount of time has elapsed since the events under investigation.
