At the tail end of July, as the legal world’s thoughts turned to warm Mediterranean sunshine and chilled rosé wine, the Court of Appeal published its judgment in what is presumably the final chapter of the FCA’s long-running and unsuccessful case against three individuals employed by the Julius Baer Group.
The Court’s decision concerned a costs order made by the Upper Tribunal against the FCA in November 2023, which itself followed the Tribunal’s decision to allow three references by individuals aggrieved at the FCA’s decision to prohibit them.
I have written previously about the Upper Tribunal’s decision in this case, noting that it robustly criticised both the way the FCA investigated these three individuals, and the manner in which the agency conducted itself during the litigation. As well as ordering the FCA to pay some of the applicants’ costs, the Tribunal described a press release that the FCA had issued about the case as “nothing short of disgraceful”.
In its July judgment, the Court of Appeal dismissed the FCA’s appeal against this decision and upheld the Tribunal’s costs order. Assuming the FCA doesn’t seek to appeal against the decision to the Supreme Court[1], the Court of Appeal’s judgment draws a line under this long-running saga.
The judgment likely made uncomfortable poolside reading for the FCA this summer. However, in my view, it has important implications for financial services litigation that extend well beyond the unusual facts of the Julius Baer proceedings.
This article summarises the background and decision, before highlighting three interesting issues, likely to be significant in the future.
The background to the appeal
This case has quite a history. It began in February 2022 with the FCA imposing a financial penalty of over £18m on Julius Baer International Limited (JBI), the UK entity of the wider Julius Baer group. The Final Notice against the firm included criticism of certain key employees. Three of those individuals – Thomas Seiler, Louise Whitestone and Gustavo Raitzin – were then subject to individual enforcement action and the RDC decided to prohibit all three of them.
At the heart of the alleged misconduct was the group’s dealings with an individual within the Yukos group of oil and gas companies. This person was alleged to have introduced Yukos to Julius Baer companies in return for “finders’ fees” which, the FCA alleged, were paid through three “vastly inflated foreign exchange transaction charges levied to Yukos by Julius Baer.”
The FCA’s case was that JBI must have appreciated the risk that these arrangements might amount to facilitating or participating in financial crime. The RDC concluded that the three individuals lacked integrity by recklessly disregarding the risk that Yukos’ funds were being misappropriated via these arrangements.
The Upper Tribunal disagreed. It was not persuaded that anyone had acted with a lack of integrity. It also made a series of trenchant criticisms about the way that the FCA had investigated and litigated the case. These included accepting too easily the narrative provided by a firm willing or eager to settle proceedings (the focus of my previous blog); failing to call relevant witnesses; and – in the case of the so called “Third FX Transaction” – advancing a mistaken factual basis for the transaction at the Warning Notice stage.
The individuals’ decision notices were duly lifted. Mr Seiler and Mrs Whitestone applied for their costs in bringing the references. The relevant rules are found in rule 10(3) of The Tribunal Procedure (Upper Tribunal) Rules 2008:
“10(3) …. the Upper Tribunal may not make an order in respect of costs or expenses except— …
(d) if the Upper Tribunal considers that a party or its representative has acted unreasonably in bringing, defending or conducting the proceedings;
(e) if, in a financial services case … the Upper Tribunal considers that the decision in respect of which the reference was made was unreasonable.” [emphasis added]
In short (and as the Court of Appeal confirmed[2]), there is a “threshold condition” of unreasonableness that must be met before a costs award comes into play. Otherwise, the norm in Tribunal proceedings is that each side pays its own costs.
Judge Herrington concluded that the FCA had not acted unreasonably in reaching the decisions per se, but had acted unreasonably in some of its conduct when defending the references: namely, the failure to call relevant witnesses; a failure to answer certain requests for clarification about its case made by Mr Seiler during the proceedings; and its disastrous handling of the Third FX Transaction. He therefore ordered the FCA to pay the costs associated with the Third FX Transaction; and 5% of Seiler and Whitestone’s overall costs.
The FCA appealed against the costs decision. It was not granted permission to appeal against the Third FX Transaction aspect of the decision, but was granted permission to appeal on grounds relating to the absent witnesses and Mr Seiler’s questions.
Crucially, in order to succeed in the Court of Appeal, the FCA needed to establish that the Tribunal’s decision was wrong on a point of law. This is because the Tribunals, Courts and Enforcement Act 2007 only permits an appeal to the Court of Appeal on a “point of law” – not fact. The difference between the two – as the conflicting judgments of the Court of Appeal show – is not always easy to identify.
The Court of Appeal’s decision
The Court of Appeal, slightly unusually, could not reach a unanimous decision. The leading judgment was given by Fraser LJ, with whom Lewison LJ agreed.
At the heart of Fraser LJ’s decision was the dividing line between the Tribunal’s decisions on matters of law, and its decisions on matters of fact. Fraser LJ concluded that the Tribunal’s decisions on the unreasonableness or otherwise of the FCA’s conduct were not matters of law, but matters of evaluative fact which the Tribunal was best placed to make. Moreover, the actual factual decisions made by Judge Herrington were within the range of decisions that he was entitled (as a matter of law) to make.
The issue of absent witnesses demonstrates this. The FCA argued that, in effect, Judge Herrington had got the law wrong when deciding the FCA had acted unreasonably in failing to call certain witnesses. Fraser LJ disagreed. He quoted at length Judge Herrington’s reasoning on this issue. And he concluded that Judge Herrington had, on the contrary, simply reached factual conclusions as to how the FCA had conducted itself in this case – taking into account all the circumstances of this particular case and the particular role that the FCA plays in regulatory references. In addition, those factual conclusions were “justified” and in any event “within the range of findings properly open to the Upper Tribunal.”[3]
Fraser LJ took the same approach to the question of whether the FCA had acted unreasonably in refusing to answer some of Mr Seiler’s requests. Judge Herrington had not got the law wrong – he had simply made a factual decision that the FCA had acted unreasonably. And that factual decision was, again, one that he was entitled to make.[4]
Laing LJ dissented, arguing there were two problems with the majority’s approach. First, she was concerned that it would leave costs decisions made by the Upper Tribunal as “unreviewable or virtually unreviewable” by the Court of Appeal.[5] Given Lewison LJ’s judgment (discussed below), it seems likely that majority would say this was not what they were suggesting. The more significant disagreement related to whether the Upper Tribunal had misdirected itself (i.e. got the law wrong) in concluding that that the FCA had acted unreasonably. Laing J said that, on the facts of this case, the missing witnesses were not “legally relevant” to the real issues in the case (which concerned the applicants’ integrity).[6] Similarly, Mr Seiler’s questions were not “legally relevant” and, if they were, his remedy should have been to apply to the Tribunal for a direction that the FCA answer them (with strike out if they still refused).[7]
Lewison LJ agreed with Fraser LJ, in a short response to Laing LJ. He said that the Tribunal had reached “evaluative factual judgments” about the FCA’s conduct of the case. But this didn’t mean that the Court of Appeal would never intervene in a costs decision of the Tribunal. He cited Edwards v Bairstow [1956] AC 14, in which Lord Radcliffe held that an error of law could arise “ex facie” (on the face of it); but also by a tribunal reaching a factual decision in which “the facts found are such that no person acting judicially and properly instructed as to the relevant law could have come to the determination.” This was the exercise that Fraser LJ had undertaken, and like Fraser LJ, Lewison LJ was satisfied that Judge Herrington’s factual conclusions were ones that he was entitled to reach.
Finally, Lewison LJ suggested he would be slow to ever conclude that the Tribunal had reached a factual finding so wrong as to amount to an error of law: precisely because of the Tribunal’s specialism and experience in this area.
The FCA as a litigant in the Upper Tribunal
Notwithstanding the majority’s focus on the particular facts of the case, three issues may be of wider application.
First, the case contains important judicial comment on the FCA’s status in Upper Tribunal proceedings. The FCA had argued that it should be treated like any other ordinary civil litigant in civil proceedings:
“On several occasions, [counsel for the FCA] submitted that the Authority should be treated as though it were a litigant in ordinary civil proceedings in the High Court, and that how it conducted itself, both in the investigation and reference before the Upper Tribunal, should be considered against that standard.“[8]
All three Judges appear to have rejected this argument. Fraser LJ said:
“In my judgment, the Authority is engaged in a common enterprise with the Upper Tribunal in ensuring that the objects of the legislation are achieved and that public confidence is maintained in the integrity of financial markets, with those who are not fit and proper persons prohibited from engaging in regulated activity.”[9]
He also highlighted the power that the FCA wields in its enforcement processes:
“The Authority has a regulatory function, whose purpose is to maintain integrity and confidence in financial markets. One of the consequences of a Prohibition Order is that a person subject to such an order may commit a criminal offence if they engage in behaviour which would, absent the order, be entirely legal, but by virtue of the order they are prohibited, under risk of a sanction (a fine), from performing.”[10]
Even Laing LJ agreed – to some extent – remarking that “It is also true that a reference to the Upper Tribunal is not the same thing as ‘ordinary civil litigation’ under the CPR”[11] and agreeing that “the FCA and the Upper Tribunal are engaged in a ‘common enterprise with the Upper Tribunal in ensuring that the objects of the legislation are achieved’ and public confidence is maintained.”[12]
The question is what the FCA’s special status in Upper Tribunal references means in practice – or, to put it another way, what more must the FCA do than an ordinary litigant would? Perhaps inevitably, the Court of Appeal did not attempt to answer this. At the very least, Laing LJ accepted that:
“…because the FCA is public body governed by public law, it must be candid with the Upper Tribunal. But the scope of that duty of candour can be no greater than the duty of candour in judicial review, that is, a duty to explain its decision-making to the Upper Tribunal.”[13]
Fraser LJ referred to the duties of a prosecutor, saying:
“The duty may have some similarities with those upon a prosecutor in a criminal case, who owes higher duties to the principle of fair prosecution and the administration of justice.”[14]
In addition, it seems that the FCA should be more open to answering questions from applicants and clarifying its case ahead of the final hearing (much like the prosecution is sometimes required to ahead of criminal trials).
Beyond this, there is likely to be disagreement as to how this part of the Court’s reasoning is to be interpreted. However these passages are certain to be cited by individuals and firms during Tribunal proceedings whenever the FCA acts more akin to an adversarial civil litigant than an even-handed regulator, working in the public interest.
The Court of Appeal’s jurisdiction over decisions made by the Upper Tribunal
The second important common theme to both majority decisions is the respect for and deference to the specialist Upper Tribunal. Both Fraser and Lewison LJJ’s judgments are replete with references to the fact that the Upper Tribunal is the specialist adjudicator in financial services cases; with the experience and growing body of case law to match.
Lewison LJ, for example, insisted that the Court of Appeal could and would intervene if the Tribunal reached a factual conclusion that not open to it. But he went on to say:
“Whether proceedings have been conducted unreasonably is, to some extent at least, a comparative exercise. It is the Upper Tribunal, and not this court, which has extensive experience of how in practice references such as this have been (and ought to be) conducted. The evaluative judgment of the Upper Tribunal on a question like this commands the utmost respect from this court.”[15] [Emphasis added]
This approach will be important in future appeals from the Upper Tribunal, and not just those relating to costs.
In effect, a party in the Upper Tribunal which is dissatisfied with any evaluative judgment of the Tribunal will have to work extraordinarily hard to persuade the Court of Appeal to intervene. And – as this decision shows – evaluative judgments by the Tribunal are not just limited to decisions as to which evidence it prefers at a final hearing; but can also relate to important procedural steps taken by the parties.
This may have a couple of practical effects: first, there is a real possibility that this decision will make disappointed parties in the Tribunal even slower to seek to appeal to the Court of Appeal. And secondly, recurring procedural issues (such as which witnesses are to be called in Tribunal references, and by whom) are likely to remain matters for the Upper Tribunal to resolve and give guidance on itself – rather than being the subject of binding decisions of the Court of Appeal.
Are the rules on costs in financial services cases in the Upper Tribunal fit for purpose?
In an interesting postscript to his costs decision, Judge Herrington expressed “considerable sympathy” for Mr Seiler and Mrs Whitestone, who were left considerably out of pocket, despite having “won” in the Tribunal and seen the FCA trenchantly criticised for some of its conduct.[16]
In this regard, the FCA was lucky that a Tribunal reference is not“ordinary civil litigation,” where the default position is that the losing party pays the winning party’s costs.
As such, Judge Herrington posed the question as to whether the scheme should be amended. In “complex” tax cases in the First-tier Tribunal, cost shifting applies, whereby the losing party may be ordered to pay the winning party’s costs. The taxpayer can opt out of this regime, but as Judge Herrington put it, this model “does give an appellant who believes that they have a strong case the opportunity of being awarded their costs if the case is successful.”[17]
I suspect the FCA would be strongly resistant to any such amendment to the rules. Some (but not all) applicants to the Tribunal are extremely well-resourced; and the FCA does not have a perfect success rate in defending its decisions.
The balance – as always in litigation involving a regulatory or public authority – lies in protecting individuals from the costs of unreasonable regulatory action; whilst avoiding a chilling effect as regulators or public authorities avoid difficult (or expensive) cases.
However, there may be a simpler remedy for successful applicants. In a Coda to his judgment Fraser LJ argued that the FCA’s appeal was bound to fail once it had been refused permission to appeal against the Third FX Transaction aspect of the costs order. This was because – even if the FCA had succeeded in relation to the witness issue and the Seiler questions issue – there was still an unchallengeable threshold finding by the Tribunal that the FCA had acted unreasonably in relation to the Third FX Transaction:
“That finding of unreasonable conduct is sufficient to clothe the Upper Tribunal with jurisdiction to make a costs order against the Authority, and exercise its discretion to do so. This is because Rule 10(3)(d) states that the Upper Tribunal may not make an order in respect of costs and expenses except “(d) if the Upper Tribunal considers that a party or its representative has acted unreasonably in bringing, defending or conducting the proceedings”. Given that “costs and expenses” must be those in respect of the proceedings, Judge Herrington could, had he so found, have made any number of different costs orders given the breadth of the proceedings which had been dealt with in the references and which had led to the findings in the substantive judgment as a whole.”[18]
What Fraser LJ appears to be saying is that – even if the FCA had succeeded regarding the witnesses and Seiler questions – he would have left the overall costs order undisturbed.
This section is clearly obiter; Lewison LJ did not expressly refer to it; and Laing LJ firmly disagreed.[19]
But it does beg the question (especially when considered alongside the majority’s deference to the Tribunal in general) as to whether the Tribunal has a broader discretion to award costs once the threshold of unreasonableness is passed than Judge Herrington realised.
Conclusion
The FCA will be disappointed with the Court of Appeal’s decision, and not just because the costs order itself was upheld. The FCA presumably hoped to obtain from the Court of Appeal a definitive ruling on the vexed and recurring issue of which witnesses it must call in Tribunal proceedings. Instead:
- The Tribunal will be fortified in its present approach to witnesses;
- The FCA’s desire to be treated as an “ordinary civil litigant” in the Tribunal has been firmly rejected; and
- The case might provide a blueprint for future and more deferential Court of Appeal decisions in financial services appeals.
But none of these developments should be unwelcome for practitioners and would-be applicants. The Court of Appeal has underlined the expertise and experience of the Upper Tribunal in financial services cases, and the integral role it plays in the regulatory system. And as a result, it is more important than ever to get things right in the Tribunal.
Tom Bushnell is an associate barrister at Hickman & Rose. He has considerable experience in contentious FCA work, both criminal and regulatory. He is currently acting for an individual who has referred his Decision Notice to the Upper Tribunal; multiple individuals under dual-track or regulatory investigation for alleged insider dealing; and witnesses in a major FCA investigation.
[1] Which looks like an uphill battle in this case: the essence of the majority’s reasoning was that the Tribunal’s decision concerned matters of fact, not law. Parties can only appeal to the Supreme Court on points of law of general public importance.
[2] Para 18
[3] Para 79-80
[4] Paras 89-91
[5] Paras 101-118
[6] Paras 127-134
[7] Para 135
[8] Para 45
[9] Para 51
[10] Para 58
[11] Para 113
[12] Para 124
[13] Para 123
[14] Para 76
[15] Para 142
[16] Para 154 of the costs decision
[17] Para 155 of the costs decision
[18] Para 95
[19] Para 136
