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FINANCIAL SERVICES: An Introduction

Introduction 

As the financial services industry emerges from lockdown, it is plain that the pace of market activity is returning to pre-COVID levels, with the inevitable consequence that the same uptick in legal activity will follow. The combination of industry innovation (crypto currency being a classic example), global efforts to detect and prevent money laundering and financial crime and the FCA resuming various workstreams now that lockdown has ceased, means that for FS lawyers, the outlook for the year ahead is a busy one.

Regulatory Action 

After a relative lull in enforcement activity during COVID, there have been a triumvirate of cases in the courts, where, unusually, the FCA has found itself very much on the back foot. Forsyth v FCA [2021] UKUT 0162, the highly publicised first joint enforcement action by the PRA and the FCA, proved to be an unmitigated disaster, with the regulator not only losing on the substantive facts, but receiving much criticism from the Upper Tribunal as to how it had conducted its case, from the shape of the pleading right through to the disclosure exercise. The decision will no doubt serve as a salutary lesson for the regulator going forward. The FCA suffered another rare defeat, this time in the Administrative Court, in the case of T& I v FCA [2021] EWHC 396 (Admin) where the Court ordered a stay of the RDC proceedings, pending the outcome of parallel civil proceedings in the SKAT litigation. Of particular note was the Court’s comment that the length of time that the FCA had taken to issue a Warning Notice (nearly 5 years) did not “suggest this matter has figured as one of the FCA’s high priorities…” The Upper Tribunal also considered the first case arising out of non-financial misconduct: Frensham v FCA [2021] UKUT 0222. Whilst the Upper Tribunal upheld the regulator’s decision to prohibit Mr Frensham, it was hugely critical of some of the FCA’s witnesses. These recent decisions may signal a shifting in the sands, and certainly the judicial comments in Forsyth will no doubt be used in other enforcement cases as a stick to beat the regulator with. During lockdown there was a general sense that enforcement activity had slowed down; an upsurge in enforcement activity is therefore expected, and no doubt the decisions set out above (and Forsyth in particular) will be useful to practitioners acting for the party under investigation. In addition to the foregoing, it is expected that the FCA will make further announcements about a new duty of care with regard to consumers.

Civil Litigation 

The volume of civil litigation arising out of the FS markets has also grown, and as one often sees following a major event such as the pandemic, there has been a burst of activity in respect of civil fraud actions between private parties. As regards the FCA, there have in fact been a number of high profile cases relating to unauthorised activity, which suggests that the FCA’s appetite to use its powers under FSMA 2000 and FSA 2012 to obtain declarations, injunctions and restitutionary orders has not dampened. A recent speech by Charles Randell affirmed the FCA’s desire to take action against ‘those firms which are not doing the right thing’; hence, the trend relating to civil action is likely to continue, especially following the FCA’s recent success in the long-awaited appeal decision in Avacade Ltd [2021] EWCA Civ 1206, which upheld the first instance decision that the directors were knowingly concerned in the contraventions of the company. The FCA has issued similar proceedings against Park First Limited (investments in multi-storey car parks at airports) and Qualia Care Homes (investments in care homes); the former may resolve itself by mutual agreement, the latter pushes the legal boundaries of the concept of ‘knowing concern’ and raises the interesting legal point as to the extent to which taking legal advice can prevent a party from being ‘knowingly concerned’. Both these cases will be of huge interest to practitioners in the field.

Financial Crime 

The FCA has also demonstrated its willingness to use its financial crime powers – the recent guilty plea by NatWest being a paradigm example of this. Both domestically and globally, regulators are taking an increasingly bullish stance in respect of financial crime concerns, with ever increasing fines for KYC/AML and other systems and control failings. The proliferation of international sanctions (which has been complicated by the EU non-blocking regulation) serve to emphasise this recent trend. Financial institutions now find themselves in a difficult conundrum: failing to comply with the international sanctions regime could lead to action by a domestic and overseas regulator, purported compliance could lead to action being taken pursuant to the EU non-blocking regulation – it is ‘catch-22’ indeed. Allied to this is the pattern of financial, institutions seeking to “de-risk” themselves by closing down (or freezing) customer accounts with little or no notice. There is a real danger for some individuals and SMEs that they risk being part of the ‘unbanked’ community – namely those that are unable to readily access the banking system; in an increasingly digital world, the adverse consequences of this are obvious.

Conclusion  

The combination of regulatory, civil and criminal action by both domestic and global regulators means that the outlook for litigation arising out of financial services is bullish to say the least. Possibly the only party to breathe a sigh of relief in this maelstrom is the Government: the disruption caused by COVID has to some extent distracted attention away from Brexit. In respect of financial services, as was predicted back in 2016 when the referendum decision was first announced, no satisfactory substitute for the loss of passporting has been found. The Chancellor’s recent speech in Mansion House accepted that the Government’s ambition “to reach a comprehensive set of mutual decisions on financial services equivalence” had failed and indicated that the Government would instead seek “closer links with advanced and emerging financial centres”. What this means in practice remains to be seen, but it will be interesting to see how this develops in the next 12 months.

Saima Hanif QC

3VB