FCA must stay proceedings pending outcome of Commercial Court proceedings

Last week, the Administrative Court ruled that FCA disciplinary proceedings against an individual should be stayed, pending the outcome of civil proceedings in the Commercial Court.

The First Claimant ("T") had challenged, by way of judicial review, the FCA's Regulatory Decisions Committee ("the RDC") decision to refuse his application to stay disciplinary proceedings. T's challenge was successful because the risk of serious prejudice to him, absent a stay of the RDC proceedings, outweighed other public interest considerations. 

The judge refused the FCA's request for permission to appeal, but the FCA has indicated it intends to seek permission to appeal from the Court of Appeal. 

Background

The FCA issued a Warning Notice on 4 June 2020 alleging that T had breached Principle 1 of the FCA's Statements of Principle for Approved Persons due to his involvement, when Chief Executive of the Second Claimant ("I"), in a dividend arbitrage equity trading strategy ("the Strategy"). The FCA alleges that the purpose of the Strategy was to make false claims to the Danish Customs and Tax Administration (the Skatkeforvaltningen, "SKAT") for tax rebates under Danish tax law. As a result, the FCA alleges that T lacks honesty and integrity. 

T applied to stay the RDC proceedings pending the outcome of parallel proceedings in the Commercial Court. The RDC refused that application on 13 July 2020 because it considered that:

• there was no real risk of serious prejudice to T should the RDC proceedings continue; and

• even if there were such a risk, the public interest in determining allegations of serious misconduct would justify their continuation.

The parallel Commercial Court proceedings

In the Commercial Court proceedings, SKAT contends that the Strategy operated in breach of (i) Danish Law requirements, and (ii) the Denmark-US Double Taxation Treaty. SKAT alleges that, as a matter of Danish law, individuals were making rebate claims who were not eligible to do so and that, in some of these claims, I either assisted in or procured this process by making false representations. 

T is not a party to the claims in the Commercial Court. However, part of SKAT's case is that the "knowledge, acts and intentions" of T should be attributed to I because, at the material time, T was the sole shareholder in and director of I. A trial of preliminary issues is listed for six weeks between October and December 2021.

The Judgment

The Administrative Court granted T's application, ruling that the RDC proceedings should be stayed, pending the outcome of a preliminary trial in the Commercial Court proceedings. The judge was satisfied that the risk of serious prejudice to T if the RDC proceedings were not stayed outweighed other public interest considerations in the circumstances (namely, the swift resolution of regulatory proceedings). 

In reaching his judgment, the judge held that:

• the issues raised in the RDC proceedings closely corresponded to those in the Commercial Court proceedings. The RDC proceedings were described by the judge as a satellite of the Commercial Court claim and, in several respects, would need to take account of the court's findings;
• the Commercial Court's determination of questions of law and foreign law, with the benefit of "forensic procedures" available in that court would be of "particular assistance" to the RDC since many of the issues were outside the expertise of the members of the RDC panel;
• the circumstances of the case were unusual in that the allegations in the Warning Notice were "contingent on the matters that will be before the Commercial Court…" at the trial of the preliminary issues;
• any delay caused by the stay was relatively short. Any harm that may be occasioned to the public interest by the passage of time until the Commercial Court judgment would be offset by the advantage that the eventual RDC conclusions would be informed by the Commercial Court's conclusions. The benefit of the conclusions reached by a specialist court would serve the public interest in regulation that is robust, fair and maintains the integrity of the financial system.

Comment

The judge emphasised that the facts of this case were unusual; it was uncommon for the issues to be decided in regulatory proceedings to be contingent on matters that will be before a court in other proceedings.  

The fact-specific nature of this case is likely to limit the degree of reliance that other potential cases might seek to place on this judgment and, of course, it remains to be seen whether the FCA will be permitted to appeal. Nonetheless, it clearly indicates that in certain circumstances, a stay of regulatory proceedings will outweigh the benefit of prompt enforcement action.  

Case reference: R (on the application T) v Financial Conduct Authority [2021] EWHC 396 (Admin)

Authors: David Capps, Anna Varga and Max de Tommaso