The Financial Conduct Authority v Bluecrest Capital Management (UK) LLP

Hearing dates: 23 – 25 July 2024

Approved Judgment

This judgment was handed down remotely at 2.00pm on 2 October 2024 by circulation to the parties or their representatives by e-mail and by release to the National Archives.

Introduction

This appeal raises two separate issues, one in relation to the powers of the Financial Conduct Authority (‘the FCA’), and the other as to the jurisdiction of the Upper Tribunal when an FCA decision or notice is referred to it. The FCA has statutory powers and responsibilities under the Financial Services and Markets Act 2000 (‘ FSMA’), which prior to 2012 fell upon its statutory predecessor, the Financial Services Authority (‘the FSA’). I shall refer to the relevant authority over the whole period as the FCA for convenience, at the expense of strict accuracy.

One of the relevant powers and responsibilities is authorising firms to carry out regulated activities by granting, varying or revoking ‘permissions’ under Part 4A of FSMA. Those powers include a power to impose requirements on such firms if it appears desirable to the FCA in order to advance its operational objectives. The operational objectives include the consumer protection objective which by s. 1C is “securing an appropriate degree of protection for consumers”. The FCA also has disciplinary powers to impose a penalty on authorised persons who breach requirements in Rules made by it pursuant to s. 137A FSMA, which are set out in its Handbook. Those Rules include:

(1) Chapter 2 of the Principles for Businesses source book within the FCA Handbook (‘PRIN’) which sets out at PRIN 2.1 a number of Principles for Businesses of general application (‘the Principles’); and

(2) The Conduct of Business Sourcebook Rules (‘COBS’).

The Principles of relevance to the appeal are Principles 7 and 8 which provide:

“7. Communications with clients

A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.

8. Conflicts of Interest

A firm must manage conflicts of interest fairly both between itself and its customers and between a customer and another client.”

A client is a defined term whose meaning is set out in COBS 3.2. It includes any person to whom the firm provides or intends to provide a service in the course of a regulated activity, including a potential client. Customer is also a defined term which in the present case means the same as client.

COBS 4.2 is a Rule giving effect to Principle 7. It provides that “A firm must ensure that a communication or financial promotion is fair, clear and not misleading.”

The Respondent (‘BCMUK’) is an English Limited Liability Partnership and part of the BlueCrest private fund management group founded in 2000. During the relevant period (1 October 2011 to 31 December 2015) BlueCrest ran two funds: an ‘Internal Fund’ only open to certain partners and employees of BlueCrest, whose stated purpose was to attract and retain senior partners and other key members of staff; and an ‘External Fund’ which was open to external investors outside BlueCrest. Each had a typical master fund/feeder fund structure. Each master and feeder fund had an investment manager which was an entity in the BlueCrest group. The investment managers of the External and Internal Funds appointed BCMUK to act as one of the sub-investment managers for the Funds pursuant to a series of sub-investment management agreements.

The proceedings concern two notices given by the FCA to BCMUK:

(1) a first supervisory notice dated 30 September 2021 under s.55L FSMA, (‘the FSN’) imposing a requirement as a condition of BCMUK's continuing permission to carry out regulated activities, that BCMUK pay “redress” to Non-US Investors in the External Fund in accordance with a defined formula; the FCA estimate the sum involved would be over US$ 700 million; and

(2) a decision notice dated 4 November 2021 pursuant to s. 206 FSMA (‘the DN’), following a warning notice dated 30 September 2021 in materially identical terms (‘the WN’), imposing a financial penalty of £40,806,700.

Both the FSN and DN were based on the same alleged wrongdoing by BCMUK. In short, the FCA alleged that BCMUK failed properly to manage a conflict of interest which is alleged to have arisen by reason of BCMUK acting as sub-investment manager in respect of both the External Fund and the Internal Fund; and, specifically to have favoured the Internal Fund, and thereby BlueCrest senior partners and key staff including portfolio managers, at the expense of the External Fund by reason of BCMUK's allocation of traders between the Funds; and by use of a proprietary quantitative trading programme called ‘Rates Management Trading’ by the Funds, which was said to have exacerbated the conflict. The allegations, which are serious, are denied by BCMUK, but for the purposes of the applications under appeal were assumed to be true.

BCMUK exercised its right to refer the notices to the Upper Tribunal (Tax & Chancery Chamber); it referred the FSN on 27 October 2021 pursuant to s. 55Z3 FSMA and the DN on 22 November 2021 pursuant to s. 208(4)(b) FSMA. Each of those sections provides that what is referred to the Upper Tribunal is “the matter”. The references were consolidated and certain preliminary issues were heard together by Upper Tribunal Judges Timothy Herrington and Rupert Jones. The appeal and cross appeal to this court are from their closely reasoned decision of 21 June 2023: [2023] UKUT 00140 (TCC) (‘the UT Decision’).

The FCA's case as set out in the FSN and DN was based solely on an alleged breach by BCMUK of Principle 8. So too was its case in support of the FSN and the DN as pleaded in its original Statement of Case in the references (‘the S/C’).

The UT Decision was concerned with three applications. One was an application dated 13 September 2022 by BCMUK to strike out the parts of the S/C which supported the FCA's case on the FSN imposing the redress requirement (‘the strike out application’). The application was brought on the basis that the relevant statutory power to impose a redress requirement upon which the FCA relied, namely s.55L FSMA, when read with s.404F(7) FSMA, only permitted the FCA to impose such a scheme on an individual firm where it would have such power under s. 404 to impose a market wide redress scheme, and that is only where four conditions are met, being loss, causation, breach of duty and actionability; and that the FSN and S/C did not disclose any real prospect of meeting any of those conditions. The Upper Tribunal (a) accepted BCMUK's case that s. 55L required fulfilment of the four conditions; (b) rejected its case that the matters alleged in the S/C were not capable of fulfilling the first three conditions of loss, causation and duty; but (c) accepted its case that the S/C was not capable of fulfilling the actionability requirement, it being common ground that a breach of Principle 8 by itself is not actionable. The effect of the decision to allow the application on this basis was that the FCA had no power to impose the redress requirement in the FSN and it could not be maintained.

The FCA appeals against the decision on the strike out application, contending that (a) the power to impose a redress requirement in s. 55L is not circumscribed by s. 404F(7) and is not subject to any of the four conditions; (b) alternatively if it is circumscribed, there is no actionability condition.

By a Respondent's Notice BCMUK contends that the strike out decision should be upheld on the following additional grounds:

(1) the UT's construction of s. 55L and s. 404F(7) is further supported by the fact that the FCA's construction would constitute a breach of BCMUK's rights under Article 1 Protocol 1 of the European Convention on Human Rights (‘A1P1’), an argument which the Upper Tribunal did not consider it necessary to decide; and/or

(2) the Upper Tribunal ought to have held that the S/C was not capable of meeting the loss, causation and duty conditions; and/or

(3) if the FCA's construction of s. 55L were correct it would be an unlawful exercise of the power for the FCA to impose the redress requirement if the four conditions were not met in that:

(a) the FSN was a breach of BCMUK's A1P1 rights; and/or

(b) the FSN was a breach of common law principles that property or economic interests should not be impaired except under clear authority of law.

The second application considered by the Upper Tribunal was an application dated 29 July 2022 pursuant to rule 5(3)(c) of the Tribunal Procedure (Upper Tribunal) Rules 2008 (‘the UT Rules’) by which the FCA sought to amend its S/C (‘the amendment application’). While certain amendments were agreed by BCMUK, others were contested. The UT Decision put the contested amendments into four categories. The first contested amendment was refused and there is no appeal from that aspect of the decision. The second contested amendment raised allegations in support of the FCA's case that there had been a breach of Principle 8 (‘Amendment 2’)...