On 6 July 2021, the Upper Tribunal (Tax and Chancery Chamber) published a judgment which overruled the decision of both the FCA and PRA (the “Regulators”) in relation to the conduct of Mr Stuart Forsyth, former CEO of the Scottish Boatowners Mutual Insurance Association (“SBMIA”).
Following an investigation, prompted by a letter from a whistleblower, the FCA and PRA had both concluded that Mr Forsyth’s conduct had demonstrated a serious lack of integrity and therefore he was not a fit and proper person to carry on any function in relation to a regulated activity. Both Regulators had issued Decision Notices banning Mr Forsyth from performing any function in relation to regulated activities, along with fines of £78,318 and £76,180 respectively. Mr Forsyth referred these Decision Notices to the Upper Tribunal.
The key issue to be determined by the Upper Tribunal was whether the FCA and PRA had made out their case that Mr Forsyth had failed to act with integrity. Having undertaken a complete rehearing of the issues which gave rise to the decisions of the FCA and PRA, the Upper Tribunal unanimously concluded that it could not support any finding of a lack of integrity on the part of Mr Forsyth and directed that the FCA and PRA not impose a financial penalty and re-consider the prohibition orders.
A further argument put forward by Mr Forsyth was that the Regulators had issued warning notices outside of the applicable limitation period. As the Tribunal held that Mr Forsyth did not fail to act with integrity it did not consider the limitation issue in any detail. However, the Tribunal was heavily critical of the regulators approach to disclosure in relation to this limitation issue and made a number of recommendations to the Regulators.
This was the first instance that the Tribunal had heard a reference for a decision made by the PRA. The judgment contains useful material on what acting with integrity means. The decision is also of wider importance to the exercise by the Regulators of their supervisory and enforcement powers, since it contains a detailed overview of both Regulators’ disclosure obligations and makes some significant observations and recommendations as regards ongoing compliance with those obligations by the FCA and PRA.
The judgment is likely to be of interest to senior managers and certified persons, but it is also very relevant for those involved in dealing with and challenging the exercise by the FCA of its supervisory and enforcement powers. In this briefing we set out the key aspects of the decision.
Background: FCA and PRA investigation
The FCA and PRA undertook a joint investigation into the actions of Mr Forsyth between 2010 and 2016, following receipt by the PRA of a letter from a whistleblower. The Decision Notices published on 30 September 2019 found that Mr Forsyth’s conduct demonstrated a serious lack of Integrity and that he was therefore not a fit and proper person.
It was alleged by the Regulators that Mr Forsyth had been paying his wife an excessive proportion of his salary in compensation for minor administrative support and occasional hospitality work in order to reduce his own income tax liability and that he took steps to conceal that arrangement. In particular, that between 2010 and 2016, Mr Forsyth transferred increasing amounts of his salary to Mrs Forsyth, being in aggregate £200,000 over this period. As a result of these arrangements, Mr Forsyth paid approximately £18,000 less in income tax than he would otherwise have done.
It was contended that the level of payments were concealed from the SBMIA’s Board and Remuneration Committee by Mr Forsyth. In this regard various assertions were made, including that false minutes had been created to demonstrate that the board had agreed the salary over a number of years, that Mr Forsyth had improperly involved himself in an external audit investigation, and that he had provided the allegedly false minutes to the PRA following an information request in 2016.
A question of integrity
During the relevant period Mr Forsyth was subject to both the old approved persons regime and, for a short period following its introduction, the Senior Managers Regime. Both regimes required Mr Forsyth to act with integrity. The relevant rules were as follows:
- Statement of Principle 1 (Integrity) of the FCA’s and PRA’s Statements of Principle for Approved Persons;
- Rule 1 (Integrity) of the FCA’s Individual Conduct Rules and Individual Conduct Standard 1 (Integrity) of the PRA’s Insurance Conduct Standards.
As noted in the Tribunal’s judgment, the legal approach to the question of integrity has been considered in many cases before the Tribunal and its predecessor, the Financial Services and Markets Tribunal. The Tribunal referred to the case of Tinnery v FCA  UKUT 0435 (TCC) which set out guidance on this issue which the Tribunal adopted:
- "Even though a person might not have been dishonest, if they either lack an ethical compass, or their ethical compass to a material extent points them in the wrong direction, that person will lack integrity."
- “A lack of integrity does not necessarily equate to dishonesty. While a person who acts dishonestly is obviously also acting without integrity, a person may lack integrity without being dishonest. One example of a lack of integrity not involving dishonesty is recklessness as to the truth of statements made to others who will or may rely on them or wilful disregard of information contradicting the truth of such statements.”
- “'recklessness' is a difficult concept that is not defined in the FSMA or Statements of Principle produced by the FCA”. The Law Commission has proposed a useful definition 'A person acts recklessly with respect to a result if he is aware of a risk that it will occur and it is unreasonable to take that risk having regard to the circumstances as he knows or believes them to be'."
The judgment also made reference to the Court of Appeal case of Wingate v SRA  1 WLR 3696 which contains a number of observations as to the standard of conduct expected of a professional person acting with integrity.
The Tribunal noted that “Mr Forsyth, as the Chief Executive of a regulated insurance firm, would be expected to adhere to higher standards than those expected from general members of the public because of the trust that the public rightly put in those who lead regulated financial services firms. This is one of the ways of distinguishing 'integrity' from 'honesty'”…. “a person who is dishonest in his conduct is guilty of more serious misconduct than a person who acts without integrity”.
The Tribunal noted that the Regulators had not specifically pleaded that Mr Forsyth acted dishonestly. However, the Tribunal’s view was that the Regulators’ allegation that Mr Forsyth deliberately allocated excessive remuneration to Mrs Forsyth in order to reduce his own income tax liability was an allegation of dishonesty since it was alleging that the actions were for the purposes of committing a tax fraud. In addition, the allegation that Mr Forsyth created false minutes of the Remuneration Committee in order "deliberately to create a misleading record" was an allegation of dishonesty
It is the case, which was noted by the Tribunal, that in any case regarding integrity, the burden of proving a person failed to act with integrity to the required standard rests with the Regulators judged to the ordinary civil standard ie, what was more likely than not. As a result, it was up to the Regulators to prove their case.
Upper Tribunal decision
The Upper Tribunal determined that Mr Forsyth had not acted without integrity.
In relation to the allegations, it was found that the remuneration paid to Mrs Forsyth was not excessive or unjustified. The Board and Remuneration Committee of SMBIA were aware of Mrs Forsyth’s role and had set a combined figure of remuneration for Mr and Mrs Forsyth. In addition, Mr Forsyth was found not to have improperly interfered with external investigations and not to have created false minutes.
Impact on Mr Forsyth
The Tribunal’s decision has exonerated Mr Forsyth who has been found not to have acted without integrity. The judgment also contains supportive statements regarding Mr Forsyth in that he was found:
“to be an honest and credible witness in respect of all of the disputed matters and consistent in his evidence in all material respects”.
“open and cooperative in his answers, at no time giving the impression that he was acting defensively and was willing to accept that in certain respects, with hindsight, he would have acted differently in a number of respects, particularly with regard to the documentary evidence of the remuneration arrangements for himself and his wife”.
The reference to documentary evidence above is a salutary reminder to all those in the financial services industry to keep such documentary records – hopefully they will never be needed, but this is perhaps an example of a case that may not have progressed as far as it did had better documentary records been available.
The financial penalties have been dismissed and the FCA and PRA have withdrawn the restrictions on Mr Forsyth working in the financial services sector. However, the financial, reputational and other significant consequences of this matter for Mr Forsyth will have been far reaching.
Serious disclosure failings by the Regulators
The Regulators were criticised for the approach they had taken, particularly with regards to the inadequate disclosure of documents in the context of the limitation issue - Mr Forsyth had argued that the expiration of the limitation period for the regulators to bring action predated the Warning Notices.
The Tribunal was very troubled by the failures of both Regulators to comply with disclosure obligations imposed under the Tribunal’s procedural rules. Documents relevant to the limitation issue were disclosed just before and during the Tribunal hearing, which should have been disclosed at a much earlier stage in the Tribunal proceedings but also in the earlier regulatory proceedings, with the Tribunal commenting that the FCA and PRA’s failure to disclose key documents was a:
“most serious failing on the part of the Regulators. Such failures threaten the integrity of the Tribunal process. If these documents had not come to light, then it is possible that the Tribunal would have made a finding on an issue in respect of which it had no jurisdiction because of the expiry of the limitation period. It goes without saying that the result is that Mr Forsyth has not been dealt fairly in respect of this aspect of the proceedings, in respect of matters which are entirely within the control of the Regulators themselves”.
As the Tribunal found that Mr Forsyth had not acted without integrity, the issue of limitation was not determined, but the Tribunal made clear that the procedural flaws identified were nevertheless unacceptable, with the Tribunal noting that:
“the Regulators’ conduct has fallen well below the standards which Mr Forsyth, the regulated community and public at large, are entitled to expect.”
Given the failings identified by both Regulators the strength of the criticism levelled by the Tribunal is unsurprising. Having considered the explanations provided by the Regulators, the Tribunal concluded that the FCA’s failings “appear to be largely due to human error which may have been caused by a basic lack of competence” and that “in relation to the PRA, the problems appear to be more systematic because of a lack of the systems which replicate those maintained by the FCA”.
The Tribunal went on to make a number of recommendations as to how the Regulators might ensure better outcomes in the future, including recommending that:
- The FCA consider whether its staff are adequately trained and have an adequate understanding of proper records management in the context of potential enforcement proceedings and the consequences that could follow if those procedures are not followed;
- The FCA review its procedures for handling requests for the disclosure of documents once the usual disclosure process has been completed;
- The FCA review the adequacy of its Disclosure Memorandum and whether it is fit for purpose in its current form;
- The FCA should keep legally privileged material separate from other material;
- The FCA should make an assessment as to when a relevant limitation begins and regularly review that assessment as new material becomes available; and
- The PRA should undertake a full review of its processes for the recording of supervisory and other information that may be relevant to possible enforcement actions.
In addition, the Tribunal questioned the appropriateness of joint FCA/PRA investigations, given that the PRA held a minimal role in the process, yet dual decision-making procedures were followed culminating in separate outcomes. It was expressed that a single investigation would have been more efficient.
Effect on the regulatory landscape
The PRA and FCA have released statements accepting the finding that errors were made resulting in late disclosure of information. Both regulators have apologised to Mr Forsyth and to the Tribunal for those errors. In light of the determination, the regulators have confirmed that they will re-consider the matter and the recommendations but, as noted above, the prohibition orders have not yet been revoked.
Moving forward, the judgment is likely to have an impact on regulatory investigations, with the decision demonstrating weaknesses within the procedures of the FCA and PRA. As the Tribunal’s judgment makes clear, the identified failures by the Regulators to disclose documents at a much earlier stage occurred despite earlier representations having been made to the PRA and the FCA by Mr Forsyth’s solicitors to the effect that there must be internal documents at the Regulators that could assist with the issues, and the documents were in fact only disclosed following further specific disclosure requests made by Mr Forsyth. It is of course to be hoped that the recommendations made by the Tribunal will be effectively implemented by the Regulators, but the judgment serves as a reminder to those involved in enforcement action of the importance of understanding, probing and, where necessary, challenging the processes adopted by the Regulators. If the recommendations of the Tribunal are followed, it is also likely that we will see fewer joint investigations being carried out, with responsibility instead allocated to a single regulator.
Finally, some of the failings identified in the judgment perhaps serve as a note of caution at a time when the FCA has stated its intention to be a more assertive regulator and is consulting on proposals to reduce the role played by the Regulatory Decisions Committee (“RDC”) in some of the FCA’s decision-making. The stated aim of the FCA’s proposed changes to its decision-making processes are to ensure that it can make fast and effective decisions, but that must not come at the cost of accuracy and fairness. The RDC, while not independent of the FCA, is a committee that draws members from different professional backgrounds and, other than the Chair, its members are not FCA employees. The role of the RDC is to provide challenge and oversight of decisions proposed by the FCA staff. Admittedly, the involvement of the RDC did not assist Mr Forsyth from suffering the consequences of the errors made in this case, but the situation that Mr Forsyth found himself in is perhaps nevertheless a timely reminder of the importance of prioritising accuracy and fairness over speed and efficiency of decision-making.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, August 2021