The Supreme Court handed down judgment in Financial Conduct Authority v. Macris [2017] UKSC 19 on Wednesday 22 March 2017.1 The central issue in the appeal was whether Mr. Macris had been "identified" in a public notice. Diverging views amongst the Court’s panel reveal the complexities raised by the case. At its heart, the judgment of the Majority is founded on pragmatism. Tasked to weigh the due process interests of third party individuals against the practical implications for the regulator, the Majority preferred the latter, adopting a narrow interpretation of identification. The decision is driven by a belief that an alternative approach would have resulted in a test which was unworkable, through want of clarity and certainty. This blog piece considers the judgment and questions whether the Majority’s pessimism about an alternative approach was justified.
Mr. Macris’ case against the FCA
Mr. Macris was a banker employed as the head of a unit called the Chief Investment Office (or "CIO International"), the function of which included the management of a specific portfolio. In July 2012 losses sustained by the portfolio prompted the FCA to initiate an investigation. Subsequently, the FCA issued a Decision notice ("the Notice"), accepted by the bank following settlement. The Notice included the findings that the loss had been caused by, amongst other matters, a high risk trading strategy and weak management of that strategy. The Notice became public on 19 September 2013.
Mr. Macris’ claim against the FCA arose from references in the Notice to conduct committed by "CIO London management" or other similar expressions. Mr. Macris claimed that these references had the effect of "identifying" him for the purposes of section 393 of the Financial Services and Markets Act 2000 (FSMA), thereby requiring the FCA to serve him with a copy of the notice prior to publication and allow him to make representations. The FCA had not considered Mr. Macris to be identified by the Notice and therefore did not believe he should be afforded third party rights.
Section 393 provides that:
If any of the reasons contained in a notice to which this section applies relates to a matter which:
a) identifies a person (“the third party”) other than the person to whom the notice is given, and
b) in the opinion of the Authority, is prejudicial to the third party, a copy of the notice must be given to the third party.
There was no dispute that the references in the notice were "prejudicial". The Supreme Court was therefore tasked with addressing a single issue: whether Mr. Macris had been "identified" in the Notice for the purposes of section 393.
In support of his case Mr. Macris relied on a report, published in March 2013 by a United States Senate Subcommittee, on the losses sustained by the portfolio under CIO ("the Senate Report"). The Senate Report contained multiple references to Mr. Macris by name and "described his role in the incurring and treatment of [the] losses".2 The Senate Report was available publicly online. Mr. Macris claimed that any person reading the Notice side by side with the Senate Report could deduce that "CIO London Management" referred to him. His claim does not seem to have been challenged by the FCA.
The Majority Approach
Overturning the Court of Appeal’s decision, the Supreme Court found in the FCA’s favour and adopted a comparatively restrictive interpretation of "identifies" for the purposes of section 393. Delivering the majority judgment, Lord Sumption concluded that the section is only engaged where a person is "identified by name or by synonym", for example by her office or job title.3 Where the description of a person could apply to more than one individual, no person could claim to be "identified".
Essentially, the Majority’s test asks if a description or synonym of the individual’s position can be extrapolated from the terms of the Notice, before using the description to look up, from a publicly available source, the corresponding name: 'who is the CEO of Company X?'; 'who is the structured products Desk Head of Bank Y?'. Lord Mance referred to this as "a dictionary approach",4 although the metaphor of a single Google search could be more fitting in a modern context.
In evaluating whether an individual is identified through a "synonym", Lord Sumption considered the "public at large" to be the appropriate audience.5 Identification by either "persons acquainted" with the individual or those "who operated in his area of the financial services industry" was deemed too specific. Relatedly, reliance on publicly available information, to show that a person was identifiable from the Notice, is only permissible where it "enables one to interpret (as opposed to supplementing) the language of the Notice". Therefore, third party rights only apply where "freely and publicly available sources would easily reveal [the] individual by reference to his position or office".6 The test is not met where identification is achieved by fitting together pieces of information from different sources.7
The "public at large" yardstick - overly pessimistic?
Lord Wilson and Lord Mance provided a dissenting view, considering the Majority’s approach to be too narrow. They preferred a test which assessed identification from the perspective of the financial industry. In the author’s view such a test is more appropriate in the context of section 393 and, contrary to the opinion of the Majority, would be sufficiently workable. Moreover, it more adequately balances the due process interests of the third party against the practical difficulties faced by the FCA.
Whilst the issue of prejudice—the second limb of section 393—did not fall to be considered in this appeal, its meaning and scope should have proved instructive to the Court. Whether the terms of a notice are prejudicial to an individual must be considered in the context of the financial services industry. FSMA represents the statutory framework through which that industry is regulated. Why then should the issue of identification be assessed from a different perspective?8 To do so would result in a disconnect between the two limbs of the statutory test.
Pragmatism and policy were clearly important factors in steering the Majority to a narrow interpretation of identification. In its view, any formulation which requires the FCA to assess identification against a class of people smaller than the "public at large" would be unworkable for lack of clarity: "it would be a matter of subjective assessment as to how wide a scope to give it". Lord Wilson disagreed. He proposed that the assessment should be made from the perspective of the sector in which the individual operated.
It is unclear why such an approach would be unworkable. In considering its obligations under section 393, the FCA could first appropriately categorise the sector in which the individual works, before assessing whether the Notice would have the effect of identifying him within that sector. Such a formulation, whilst not perfect, is not unworkable and would not be overly burdensome. The FCA has specialised supervisory teams with an intimate knowledge of most regulated sectors, which are capable of drawing on a body of data spanning the industry.
Use of extraneous information - impact of the Senate Report
In arriving at its view, the Majority considered the implications of any test which obliged the FCA to draw on information generally known only within the financial services industry. The example of the Senate Report appeared to play a hand in its conclusion. If the Senate Report was widely known across the industry, application of a more subjective test would have triggered third party rights. As a matter of policy, the Majority was understandably concerned that such an approach would present too substantial a burden on the FCA, requiring it to consider information across the Internet.
One wonders whether the impact of the specific implications of the Senate Report should have influenced the Majority view. On the present facts, would reliance on the Senate Report to prove identification not negate a claim of prejudice? The Senate Report is itself prejudicial, connecting Mr. Macris with the substantial losses incurred and thereby implying failures of management and oversight. If the Senate Report was so widely accessible such as to facilitate Mr. Macris’ identification, has not the damage already been done?
Future of third party rights
The Majority judgment was clearly policy-driven. An alternative approach, whilst difficult to formulate, was not unachievable. The application of a more subjective test, as approved by the Minority of the Court, would have required the FCA to exercise a finer judgment. However, the resulting margin of ambiguity represented a modest price when compared with the cost now tolled on the due process rights of third party individuals.
Since
the decision, Mark Steward, head of the FCA’s Enforcement Division, has said
that the FCA should seek to avoid reliance on third party rights by striving to
have actions against firms run in parallel with those against individuals.9 This way, notices against
implicated individuals would be released concurrently with those for the firm. This is a welcome aim which may partly address the concern that there is
inadequate due process for third parties following the Macris judgment. However, it
also may prove ambitious. Firms have traditionally been more inclined to settle
enforcement actions, and want to do so promptly. Furthermore, it is typically more difficult
to conduct a robust assessment of liability for an individual, compared with
firms. Generally, the FCA need not pinpoint which individuals are responsible
(or how) in order to present a persuasive case against a corporate. In any event, it seems that the FCA’s change
in practice may curiously address the concerns of individuals.
1 https://www.supremecourt.uk/cases/docs/uksc-2015-0143-judgment.pdf
2 Para. 8 of the judgment.
3 Para. 11 of the judgment.
4 Para. 33 of the judgment.
5 Para. 15 of the judgment.
6 Para. 26 of the judgment.
7 Para. 27 of the judgment.
8 See for example para. 60 of the judgment.