The Financial Conduct Authority (FCA) has enjoyed a string of successes in the Upper Tribunal during this Enforcement Watch period. However, in every case where the FCA has prevailed, the Tribunal has imposed lower penalties than those originally decided by the FCA.
The Tribunal’s approach to penalties
As a matter of established principle, the Upper Tribunal is not bound by the FCA’s penalty framework in DEPP when assessing penalties, nor by the FCA’s interpretation of how it should be applied. That said, the Tribunal does follow earlier precedent and has stated that the starting point should be to consider the relevant DEPP penalty framework. If the Tribunal intends to depart from this framework in a particular case, it must explain why it considers such a departure appropriate. Criminal lawyers will recognise this as the concept of “Guidelines not Tramlines”.
Each of the cases covered below, involved a consideration of how "relevant income" should be determined for the purpose of calculating penalties. Generally, penalties for individuals are calculated as a percentage of income received during the relevant period of the contravention (stage 2 of the FCA's formula for penalty calculation). The more serious the contravention, the higher the percentage. After this calculation, the penalty may be adjusted for mitigating and aggravating factors, deterrence, and a potential 30% discount for settlement.
The case of Lopez Gonzalez, Sheth and Urra (in which Mishcon de Reya acted) concerned three traders found to have committed market abuse and been fined. When calculating relevant income for the senior trader, Mr Urra, the FCA argued that income received in the relevant period should include sums earned in prior years but vested during the relevant period. The Upper Tribunal disagreed, deciding that a bonus awarded in a prior year but not vested until the relevant year should not be included.
In the case of Jes Staley, the Tribunal considered deferred shares awarded in the relevant period, which, due to its findings against Mr Staley, would never vest. The FCA argued that such shares should be included in relevant income if there was a reasonable expectation at the date of misconduct that they would ultimately be received. The Tribunal disagreed, stating it must consider all circumstances at the time of its decision. If benefits expected to be received will not, in fact, be received, the Tribunal must take that into account. While this may sometimes produce a perverse result (e.g. where bonuses are not paid due to misconduct), this can be addressed by applying a deterrence override at stage 4 of the DEPP formula.
The case of Donaldson and Arden can be contrasted with Urra. The Tribunal considered a signing-on bonus paid during the relevant period. Mr Arden argued that the payment was compensation for loss of bonus from a previous employer, not a reward for services in the relevant period. Instead, it compensated him for past services to a different employer, unrelated to the alleged wrongdoing, and forfeited by leaving. The Tribunal disagreed, noting that "benefits" can arise from work carried out over more than one year (e.g. share schemes and options are typically earned over a period, with entitlement crystallising at the end). The term "benefits" thus includes all sums earned in the year, regardless of when the work was done. Consistent with this approach, there is no reason to exclude earnings compensating for loss of income from a previous employer.
Other notable penalty determinations in these cases
In Lopez Gonzalez, Sheth, and Urra, applying the usual formula to the junior traders would have resulted in a figure of less than £100,000 at stage 2 of the penalty calculation. DEPP policy in such cases is to substitute a minimum penalty of £100,000 for market abuse.
Unusually, in the case of junior trader Mr Sheth, the Tribunal reduced his penalty from the usual minimum of £100,000 "in the interests of fairness and justice", taking into account his income relative to his senior colleague. As Mr Sheth earned around 57% of his colleague’s income, his penalty was reduced by a similar proportion to approximately £57,000.
Mitigation for cooperation
Looking at Donaldson and Arden again - Craig Donaldson and David Arden sought a discount on their penalties for remediating the problem at the Bank, cooperating with PRA and FCA supervisors and investigators, and answering questions fully at an FCA compelled interview. The FCA objected, arguing that compliance with regulatory obligations (including attending compulsory interviews) did not merit a reduction in penalty. Surprisingly, the Tribunal disagreed, granting both defendants a 25% reduction for their efforts in dealing with the issue, cooperating with the FCA, and answering questions at compelled interviews. This is welcome news, indicating that even attending a compelled interview can be considered a mitigating factor - provided individuals are open and cooperative during such interviews.
It will be interesting to see how, in light of the Upper Tribunal’s decision, the FCA deals with future arguments for mitigation arising from attending interviews or cooperating generally with the FCA.