Upper Tribunal upholds decisions against Metro Bank's former CEO and CFO, but reduces both fines by 25%

In November 2022, the FCA issued Decision Notices to Metro Bank's former CEO (Craig Donaldson) and CFO (David Arden), in relation to their role in Metro Bank's contravention of Listing Rule 1.3.3R (misleading information not to be published), for which it was fined £10,002,300. Mr Donaldson and Mr Arden referred their Decision Notices to the Upper Tribunal, which upheld the FCA's decision that they were knowingly concerned in Metro Bank's contravention of the listing rules, but reduced both fines by 25%, to £167,325 for Mr Donaldson and £100,950 for Mr Arden.  

Background 

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 totalled £7,398 million.  

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 Mr Arden and Mr Donaldson in particular, being aware that the size of the necessary adjustment to the RWA figure would be substantial.  

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, an external consultant that Metro Bank had retained emailed Mr 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. 

 The basis of the appeal 

It was common ground between the parties that Metro Bank had used the wrong risk-weighting for CLIP Loans and the statement in the 24 October 2018 announcement was incorrect. However, Mr Donaldson and Mr Arden's position was that: 

• Metro Bank had not breached Listing Rule 1.3.3R for 10 separate reasons, including that: a) Metro Bank was prevented by its obligations of confidentiality to the PRA from disclosing the RWA issue to the market at the time the 24 October 2018 announcement was made; and b) Metro Bank relied on advice given by its in house counsel, its solicitors and its Board and Audit Committee;  
• If there was a breach of Listing Rule 1.3.3R, Mr Donaldson and Mr Arden were not knowingly concerned in it; and 
• If Mr Donaldson and Mr Arden were knowingly concerned in the breach, the penalties charged should be replaced by a public censure or significantly reduced.  

The Upper Tribunal's judgment 

The Upper Tribunal's key findings include the following: 

1. Overall, Metro Bank had breached Listing Rule 1.3.3R:  
   1. It was not credible that Metro Bank, Mr Donaldson or Mr Arden took the view that they were bound by a requirement of confidentiality not to disclose accurate information about the RWA when making the 24 October 2018 announcement. 
   2. In respect of the advice provided to Metro Bank by its solicitors, the Upper Tribunal found that key information was not provided to the solicitors prior to making the 24 October 2018 announcement, and the solicitors did not provide Metro Bank with advice about the 24 October 2018 announcement itself, and instead, about whether an immediate disclosure was required under the Market Abuse Regulation. It was therefore not reasonable for Metro Bank to treat the advice as if it related to the 24 October 2018 announcement. 
   3. In respect of the reliance on the Board and Audit Committee, the Upper Tribunal found that the Board and Audit Committee were also provided with incorrect information (both directly and indirectly). Accordingly, the Upper Tribunal rejected the submission that Metro Bank had acted reasonably by following proper internal governance procedures, because some of the information provided at relevant meetings was partial or wrong, and the overall impression was misleading. 
2. The Upper Tribunal found that both Mr Donaldson and Mr Arden: 
   1. knew that the CLIP loans had been wrongly risk-weighted; 
   2. knew that the CLIP loan error was material to the RWA figure being reported as part of the 24 October 2018 announcement; and 
   3. had no reasonable basis on which they could have thought that the reported RWA figure was materially correct. 

In light of the above, Mr Donaldson and Mr Arden were knowingly concerned in Metro Bank's breach of Listing Rule 1.3.3R. 

3. As to whether the penalties should be replaced with a public censure, the Upper Tribunal agreed with the FCA that publishing an RWA number which was known to be materially incorrect had serious consequences, in particular, that investors proceeded under the positive misapprehension that the published RWA figure was reliable when it was not. Further, the Upper Tribunal disagreed with the submission that Mr Donaldson and Mr Arden had little or no culpability, on the basis that they were the only two executive directors of Metro Bank, the only legal advice obtained related to compliance with the Market Abuse Regulation and not to the 24 October 2018 announcement, and the information provided to the Audit Committee and Board downplayed the RWA error. Accordingly, the Upper Tribunal agreed with the FCA that public censure was insufficient. 
4. As to the level of the financial penalty, we analyse this aspect of the case elsewhere in Enforcement Watch.The Upper Tribunal agreed with the FCA on its approach to calculating the penalty, but allowed 25% by way of mitigation for cooperating fully with the FCA and PRA.   

Points to consider 

First, notwithstanding the significant fines imposed on Mr Donaldson and Mr Arden, it will be of some comfort to individuals that it was common ground between the parties that the Applicants were entitled to take a different position to Metro Bank, which had previously accepted the finding that it had breached LR 1.3.3R. That is particularly important in circumstances where the Decision Notice against the individual is published at the same time as the Final Notice against the firm. However, it brings into focus the question of whether the disclaimer on a Decision Notice, which only notes that the "Decision Notice has been referred to the Upper Tribunal to determine what (if any) the appropriate action is for the Authority to take, and remit the matter to the Authority with such directions as the Tribunal considers appropriate" is sufficient, given the lack of explicit reference to the possibility of substantially different findings as to whether a breach had occurred. 

Second, the judgment emphasises the importance of providing external legal advisers and internal committees with complete and accurate information, if individuals wish to rely on such advice and consultation in mitigation. Moreover, it is crucial that in seeking legal advice, the question posed to external legal advisers is responsive to the situation at hand. In this case, the individuals could not rely upon the application of separate advice which, while relevant, went to a different matter.