The FCA has fined Metro Bank Plc £10,002,300 for its contravention of Listing Rule 1.3.3R (misleading information not to be published) and issued a Decision Notice against former CEO Craig Donaldson (who faces a fine of £223,100) and former CFO David Arden (who faces a fine of £134,600) for being knowingly concerned in that contravention. Donaldson and Arden have referred their Decision Notices to the Upper Tribunal.
Factual background
The factual findings set out in the Metro Bank Final Notice and the two Decision Notices are broadly similar. In summary, on 24 October 2018, Metro Bank made an announcement in which it stated that, in respect of its commercial lending portfolio, its Risk Weighted Assets (RWA) in its Q3 trading as at 30 September 2018 totalled £7,398 million. That RWA information was important for Metro Bank's business and investors.
As Donaldson and Arden were aware, the RWA information that Metro Bank published was incorrect. In particular, it included Metro Bank's incorrect application of a risk weighting of 50% to commercial loans secured on immovable property (CLIP Loans), rather than the correct weighting of 100%. Further, the announcement was made despite Metro Bank, and Arden and Donaldson in particular, being aware that the size of the necessary adjustment to the RWA figure would be substantial. For example:
- Arden and Donaldson were provided with an initial estimate and supporting calculation on 24 August 2018 (two months prior to the announcement) of an increase to the RWA of £640 million as a result of correcting the RWA error;
- a consultant confirmed to Metro Bank on 11 September 2018 that 100% was the correct percentage risk weighting for the CLIP Loans, such that "[…] by this date at the latest, Metro Bank and Mr Arden in particular knew that the application of the 50% risk weighting to CLIP Loans was wrong." Mr Donaldson however, did not believe he was made aware of the consultant's view in September 2018, though he was made aware shortly after 11 September 2018 that Metro Bank acknowledged the error and accepted that it needed to be remediated; and
- Metro Bank's Risk Policy and Appetite Committee and its Risk Operating Committee both received a paper for their meetings which took place shortly before the announcement (both of which were attended by Donaldson and Arden) which stated that correcting the RWA error in respect of CLIP Loans would lead to an increase in RWA of approximately £574 million.
At an investor call on 2 November 2018, an investor specifically asked Mr Arden about the risk weightings for the commercial real estate portfolio, noting that they seem "[…] low, given where those standardised risk weights should be." Further, the consultant referred to above emailed Arden on 20 December 2018 stating that the issue identified in the RWA calculation would increase RWA by £0.9 billion - £1 billion and would increase capital requirements by £100m. However, Metro Bank did not qualify or correct the October announcement until 23 January 2019, when the correct information was published in Metro Bank's FY18 Results Preview and Trading Update. In that announcement, the RWA was increased to approximately £8.9 billion. On the day of the announcement, Metro Bank's share price dropped by 39% - the largest single share price drop experienced by a UK bank since 2009.
Comment
The failings, as described in the Notices, appear to have been significant and it appears that the relevant issues were widely known to a number of senior individuals and committees within Metro Bank prior to the publication of the information. Further, the adjustments that had to be made to the RWA were material and followed by a rapid decline in Metro Bank's share price (though Metro Bank, Donaldson and Arden all argued in their submissions that the decline in the share price was solely caused by this). Accordingly, one must be cautious about drawing wide conclusions about the application of the Notices. Nevertheless, the Notices are a reminder to listed companies of the importance of publishing accurate and complete disclosures; all three Notices state that the "[…] UK listing regime relies on disclosure and transparency to allow investors to make fully informed decisions. It is of fundamental importance that […] market disclosures […] are not false, misleading or deceptive and do not omit anything likely to affect the import of the information that is disclosed."
Further, the Notices explicitly state what, in the FCA's view, Metro Bank failed to explain, namely:
- The total RWA figure of £7,398 million included Metro Bank’s application of a risk weighting of 50% for CLIP Loans.
- This risk weighting was incorrect.
- Metro Bank had recognised that it needed to correct this error.
- Metro Bank was carrying out an ongoing review to determine the quantum of the correction.
- The quantum of the necessary correction would be substantial.
This is therefore helpful guidance on the sort of information one might expect the FCA to deem worthy of inclusion in a disclosure in similar circumstances.
A further matter that will be of general interest relates to the issue of discount for cooperation. In its representations, Metro Bank noted that it had been exceptionally cooperative, and by way of example, said that it had voluntarily produced documents, "[…] a number of which were protected by legal privilege." In response, the FCA noted that the contents of the privileged documents were relied upon by Metro Bank as a mitigating factor, and therefore did not consider that Metro Bank "[…] should receive credit for seeking to act in its own interests." In light of this response, firms and their legal advisors may wish to consider if it is worth waiving privilege if it does not have any discernible effect on the reduction of any fine due to cooperation.
Finally, it is interesting to note the potential impact of Donaldson's and Arden's submissions differing significantly to Metro Bank's. In particular, the individuals argued amongst other things that the announcement was not false or misleading and was the most accurate figure available to Metro Bank at the time of publication. That is in stark contrast to Metro Bank's submissions in which, for example, it accepted that "[…] in publishing an unqualified RWA figure in the October Announcement that was likely to be inaccurate, it did not take reasonable care to ensure the announcement was not false and misleading and did not omit anything likely to affect the import of the information it contained […]" (albeit that this acceptance was in the context of a broader submission that the FCA had not considered all relevant facts in determining the appropriate penalty). It is therefore perhaps unsurprising that Donaldson and Arden have appealed to the Upper Tribunal, the outcome of which will be of particular interest. In particular, if the Upper Tribunal finds in favour of Donaldson and Arden about whether the announcement was false or misleading, there will be unsatisfactorily contradictory outcomes for Metro Bank and the individuals. This would highlight flaws in the manner in which related Notices are determined and the inadequacy of merely noting on Metro Bank's Final Notice (albeit prominently) that Donaldson's and Arden's Decision Notices have been referred to the Upper Tribunal. For a more detailed consideration of the difficulties that can arise through considering related cases separately, see our update, 'The issues that arise where one Final Notice is settled before others'.