Upper Tribunal criticises FCA and overturns Julius Baer managers’ ban

In a blow to the Financial Conduct Authority (FCA), last week the Upper Tribunal (UT) handed down its decision in Seiler and others v FCA  which overturned the FCA’s prohibitions of the individuals involved in the Julius Baer commission scandal. Notably, the judgment includes lengthy criticism of the FCA’s conduct and management of the investigation which we consider below.

Background

In February 2022, the FCA fined Julius Baer International Limited GBP18 million for facilitating the payment of USD50 million in unlawful finder’s fees. The FCA also issued prohibition orders against three individuals at the bank. The FCA determined that the individuals were aware of the risks posed by the fee arrangements and acted without integrity. This included the Relationship Manager, Ms Whitestone, prepared the arrangements to allow the fees to be paid and to be kept confidential, plus two senior managers, Mr Seiler and Mr Raitzin who approved the payments. They each appealed their Decision Notices to the UT.

Tribunal decision on lack of integrity

The UT did not accept the FCA’s finding that the individuals had acted recklessly to the risks, and did not support the finding of a lack of integrity. Relevantly, Ms Whitestone was relatively junior, did not receive sufficient training or managerial support and due to lack of experience did not recognise the risks or have her suspicions raised. She was satisfied of the commercial legitimacy of the fee and had sought approval from the Compliance teams within the bank which the UT considered to be ultimately at fault.

In respect of Mr Seiler and Mr Raitzin, the UT was satisfied that they did not have sufficient information to spot the red flags, and were entitled to rely on the involvement of Compliance and the assurances of their teams.

The UT held it was irrational to impose a full or partial ban. Findings of lack of competence and capability were made, and FCA can consider alternative prohibitions on these grounds.

Criticism of the FCA

The UT was highly critical of the FCA’s conduct of its investigation into the three individuals which it considered to be fraught with a number of errors.

1. The FCA failed to call key witnesses, including the original whistle blower, Ms Whitestone’s direct manager. The UT took the punitive step of drawing adverse inferences against the FCA in matters where this witness’s evidence may have been relevant.
2. Disclosure – the FCA failed to disclose a document which the UT said on its face was clearly highly relevant, even though the FCA have said it was of limited significance. Criticisms were made of the document gathering process, with relevant email accounts and key words not searched. The UT made a formal recommendation that the FCA reviews its disclosure processes. The UT found it ‘exasperating that basic errors still seem to occur.’
3. Delay – the investigation moved at a ‘glacial pace’. It took 5 years from the FCA commencing its investigation into the individuals, to issuing a Decision Notice to Ms Whitestone. This was considered unacceptable. The UT even questioned whether the FCA should continue with an investigation when it does not have the resources to complete it within a reasonable time.
4. Staff changes at the FCA exacerbated the above – it was noted that there has ‘not been a single member of staff which has been with the case from the outset’.
5. The FCA had relied too heavily on the results of the bank’s own internal investigations to present its version of events.

The decision will be a disappointment to the FCA, in its aim is to become a more forceful regulator. It demonstrates that staffing problems have directly impacted upon the pace of investigations, has led to disclosure errors, and potentially the failure to make the correct decisions over relevant witnesses.

The decision indicates failures in the FCA enforcement process and the importance of an independent, well-resourced and accountable Regulatory Decisions Committee (RDC) to act as a safeguard to the FCA powers.