In the first ever Focused Resolution Agreement (FRA) case to come before the Upper Tribunal, the Tribunal refused to reduce the penalty that had been imposed by the RDC. The Tribunal ordered that the penalty for Linear Investments Limited would remain at £409,300, after applying the standard discount of 30% for early settlement.
Linear was an authorised firm providing a range of brokerage services, including access to trade execution via electronic Direct Market Access. Linear initially operated on the basis that it could rely on post-trade surveillance undertaken by underlying brokers to discharge its regulatory obligations. This was incorrect as, regardless of the post-trade surveillance checks carried out by underlying brokers, Linear should also have undertaken its own checks using information available to it. At a certain stage, Linear did however understand that it needed to conduct its own post-trade surveillance. However, despite taking steps to do so, there was a further period of time after deployment of the system before it had appropriately calibrated and tested it so that it was operating effectively. Linear's failings were a breach of Principle 3 of the The Principles for Businesses (Management and Control). These facts and the breach had all been agreed by Linear and the FCA in the FRA, and Linear had received a fine of £409,300 in the Decision Notice. It was the level of penalty that Linear referred to the Upper Tribunal.
Linear contested the level of the penalty on five grounds. The Tribunal rejected the appeal and found that £409,300 was an appropriate penalty to impose.
The underlying facts of the matter are not of themselves where the interest lies in this case; instead, it is worth noting the Tribunal's approach to various FRA related issues. The most significant are:
- An FRA will usually state that the parties agree not to reopen any matters agreed, unless the Tribunal decides otherwise. In this case, the Tribunal decided not to open any agreed matters.
- There was debate over whether the applicant was in fact departing from the terms of the FRA in front of the Tribunal. Where there is any doubt over this, the Tribunal said that its approach was to interpret submissions and evidence in a manner that does not conflict with the FRA.
- It was common ground that the terms of the FRA would not prevent Linear from relying on additional facts that did not contradict the facts agreed in the FRA. This is significant as it opens the possibility for the applicant to bring in any number of new matters and facts. It may well be that in future, FRAs are drafted in a much fuller way by the FCA in order to try to avoid this situation arising.
- Given that this matter was all about penalty, there was real focus on the five-step process of penalties in a way that is not common in cases before the Tribunal. This led to interesting comment in terms of how to apply the relevant level of seriousness.
In that context, there was debate about whether this was a level 2 case rather than a level 3 case - significant because a level 3 case involves a doubling of the penalty of a level 2 case. The Tribunal found that, in order to avoid injustice, it is necessary to consider where a case falls within the spectrum represented by a single level. If case X at the lower end of level 3 is only a little more serious than case Y at the higher end of level 2, it would be wrong, it said, for the penalty in case X to be double the penalty in case Y.
In this case, the Tribunal was initially persuaded that the case fell only in the lower part of the range of level 3 cases, but on further reflection changed its view. It therefore saw no reason to adjust the figure given as the result of a "mechanical application" of the percentage appropriate to a level 3 breach. It is not difficult to see how this kind of sliding scale within levels may be argued by parties in future, whether in front of the Tribunal or the RDC, or in settlement discussions with the FCA.