Background and facts
The Court of Appeal has largely overturned the decision of the Upper Tribunal in Markou v FCA [2023] UKUT 00101 (TCC), following an appeal by the FCA.
Mr Markou is the Chief Executive Officer, sole director and shareholder of Financial Solutions (Euro) Limited (FSE). In January 2021, by a Decision Notice, the FCA withdrew its approval for Mr Markou to perform SMF1 and SMF3 controlled functions at FSE, a residential mortgage broker, on the grounds that during the period November 24, 2015 to October 14, 2017 (which predates the Senior Managers Regime applying to FSE) he had demonstrated a lack of integrity (and so failed to comply with Statement of Principle 1) and that he was not a fit and proper person to perform any function in relation to any regulated activity. The FCA made a prohibition order against Mr Markou under section 56 of the Financial Services and Markets Act 2000 (FSMA) and imposed a financial penalty on him of GBP25,000.
The FCA found that Mr Markou had failed to have proper oversight of FSE, in that he recklessly: failed to implement its policies to combat mortgage fraud, failed to properly supervise two mortgage advisors and failed to take sufficient steps to prevent FSE from carrying out regulated activities during a period when he knew FSE did not have professional indemnity insurance (PII).
Mr Markou referred the Decision Notice to the Upper Tribunal (the Tribunal). In April 2023, the Tribunal allowed Mr Markou’s reference, finding that he had not acted recklessly and, therefore, did not lack integrity. It remitted the matter to the FCA with a number of directions, including that the FCA consider whether further enforcement or supervisory action was appropriate and proportionate in light of the Tribunal’s findings and a long list of mitigating factors that had been identified by the Tribunal. The Tribunal declined to consider whether Mr Markou’s conduct, which was not without fault, demonstrated a lack of due skill, care and diligence, in breach of Statement of Principle 2, on the basis that it would not be in the interests of justice to do so.
The FCA appealed to the Court of Appeal on five grounds. Ground 1 concerned the scope of the Tribunal’s jurisdiction under section 133 of FSMA. The remaining grounds took issue with the way in which the Upper Tribunal reached its conclusion that Mr Markou did not lack integrity.
Decision
Ground 1: scope of the Upper Tribunal’s jurisdiction
The Tribunal considered whether it had jurisdiction to consider allegations that Mr Markou had recklessly misled the Regulatory Decision Committee (RDC) and the Tribunal in relation to his knowledge of FSE transacting without PII. In its decision, the Tribunal held that it did not have jurisdiction to consider this matter, because it was not of the same nature as the allegations made to the RDC (and in the Warning Notice and Decision Notice).
The Court of Appeal noted that this ground had been overtaken by events, namely the Court of Appeal decision in FCA v Bluecrest Capital Management (UK) LLP [2024] EWCA Civ 1125 (Bluecrest), which held that the scope of “the matter” referred to the Tribunal encompasses that which “has a real and significant connection with the subject matter of the process, in the sense of its procedural or substantive content, which has culminated in the decision notice or supervisory notice”. This test was met and so the FCA succeeded on this ground. However, the Court of Appeal held that this success was insufficient, by itself, to justify the Court of Appeal interfering with the Tribunal’s decision.
Grounds 2 and 3: reckless conduct
The Court of Appeal considered these grounds together. On ground 2, the FCA argued that, even on the facts found (which it claimed were perverse), the Tribunal had reached an irrational conclusion in finding that the FCA had not established Mr Markou acted recklessly in respect of the risk of FSE transacting without PII. On ground 3 the FCA claimed that the Tribunal erred in fact and in law in relation to whether Mr Markou misled the RDC and the Tribunal, and, if so, whether he did so recklessly.
The Court of Appeal allowed the FCA's appeal on this ground 2, finding that the Tribunal made a perverse finding that Mr Markou did not know that there was no PII in place until July 10, 2017, when he was informed by his broker that the cover would not be renewed. The Court of Appeal held that the evidence before the Tribunal, including contemporaneous documents and Mr Markou's own admissions, contradicted this finding and established that Mr Markou did know that FSE had no PII from May 12, 2017 onwards, and that he expressly instructed the mortgage advisers to continue processing ongoing cases for mortgage approval.
The Court of Appeal held that the Tribunal erred in law by failing to ask itself the right questions, namely whether Mr Markou's conduct amounted to recklessness and, if it did, whether it demonstrated a lack of integrity in a senior manager and CEO of a regulated business. The Court of Appeal answered both questions in the affirmative, finding that Mr Markou displayed a cavalier attitude towards the imminent risk of regulatory non-compliance by FSE.
The Court of Appeal also allowed the FCA's appeal on ground 3, finding that the Tribunal erred in acquitting Mr Markou of being reckless as to the evidence that he gave. The Court of Appeal held that Mr Markou unreasonably took the risk of giving inaccurate or misleading evidence to the regulator or the Tribunal in the course of regulatory proceedings on matters of importance, and that such behaviour on the part of a senior regulated person is indicative of a lack of integrity. The Court of Appeal rejected the Tribunal's reasoning that Mr Markou was not required to know or seek to find out what regulated activity FSE was carrying out until the FCA disclosed FSE's own documents back to him. It held that Mr Markou failed to take any of the reasonable steps available to him to check the accuracy of his evidence and instead relied on his own recollection and a desire to vindicate his own behaviour.
Ground 4: systems and controls
The FCA contended that the Tribunal erred in law in its overall approach to the allegations that Mr Markou failed to implement and enforce systems and controls at FSE to safeguard against the risk of fraud occurring in the regulated mortgage business. The Court of Appeal allowed the FCA's appeal in part on this ground, finding that the Tribunal did fall into error in its approach, though not in every respect alleged by the FCA.
The Court of Appeal held that the Tribunal was wrong to measure compliance by reference to a notional yardstick of reasonableness across the residential mortgage sector, and to place significance on a lack of evidence that the non-compliance led to exposure to mortgage fraud, which was legally irrelevant. Instead, the Court of Appeal held that the Tribunal should have focused on the question of what the non-adherence to the systems and controls which FSE had adopted revealed about the fitness and propriety of Mr Markou to be in charge of that business. The Court of Appeal held that Mr Markou was aware of the risk that FSE was not complying with its adopted policies, which he had provided to the FCA and which were designed to protect against fraud, and that he deliberately chose to take that risk, which was reckless and indicative of a lack of integrity.
Ground 5: adequacy of training and supervision
Finally, the FCA contended that the Tribunal erred in law in rejecting the FCA's complaint about the inadequacy of the training, monitoring and supervision of two mortgage advisors, who worked away from FSE's premises.
The Court of Appeal dismissed this ground of appeal. The Tribunal had had the benefit of considering all the relevant evidence in detail and was, therefore, in a better position to make an evaluation of the training and supervision provided. The Court of Appeal held that the Tribunal was entitled to make the findings that it did.
Decision insights
Recklessness
The Court of Appeal's decision demonstrates the importance of applying the correct legal test for recklessness in the context of regulatory proceedings, and of distinguishing between the subjective and objective elements of that test. The Court of Appeal emphasised that recklessness involves both an appreciation of a risk and an unreasonable taking of that risk, and that the reasonableness of taking the risk must be evaluated by reference to the steps taken or not taken to safeguard against the acts or omissions that would constitute the regulatory non-compliance.
The Court of Appeal also noted that the regulatory system is based on risk-based prevention, not on whether claims or fraud have actually occurred. The absence, as in this case, of any claims against FSE was a matter of good fortune but it did not mitigate the recklessness of Mr Markou failing to comply with his regulatory obligations.
Recklessness: senior managers
The decision notice issued to Mr Markou in 2023, which he challenged before the Tribunal, found that he lacked integrity on the basis that he had been reckless, rather than dishonest.
Citing the recent case of Seiler v FCA [2023] UKUT 00133 (TCC), the Court of Appeal re-confirmed that recklessness is capable of demonstrating a lack of integrity. The Court of Appeal considered recklessness was more likely to demonstrate a lack of integrity in a person carrying out senior regulated functions such as director or CEO because individuals carrying out those roles can reasonably be held out to higher standards than the general public (Page and others v FCA [2022] UKUT 00124 (TCC)).
The regulatory process
Building on the Court of Appeal decision in Bluecrest, the Court of Appeal noted that while proceedings in the Tribunal are adversarial, they are an integral part of the regulatory process, and any appeals to the Court of Appeal are a continuation of that process. While an appellate court should be slow to interfere with the assessments of credibility made by the Tribunal, it is nonetheless in a good position to evaluate the attitude of a senior regulated person taken toward their responsibilities to the regulator, and in doing so, somewhat unusually, in this instance, overturned some of the Tribunal’s findings of fact.
Shortly after the Tribunal handed down its judgment in 2023, the FCA published a press statement stating that it believed the Tribunal’s decision to be “incorrect and irrational”. It is unusual for the FCA to publicly criticise the court process or findings in this way. However, it is likely to feel vindicated by the findings of the Court of Appeal, which included that the Tribunal’s reasoning in this case had been indefensible, and that it had made fundamental errors, perverse findings and failed to focus on the mischief of which the FCA was complaining.
Appealing mistakes of fact
It is unusual for appeals to be made on the basis that a first instance court has made a mistake of fact and even more unusual for them to succeed. Appeal courts are generally reluctant to interfere with findings of fact made by a first instance court that will have had the benefit of reviewing all of the evidence presented by all the parties to a dispute. In this case the Tribunal had heard Mr Markou give oral evidence over several days.
However, the Court of Appeal was willing to interfere with certain findings of fact made by the Tribunal on the basis that there was no evidence to support them and the evidence before the Tribunal, including contemporaneous documents, contradicted the findings of fact made. Such circumstances are rare and attempts to appeal a finding of fact are, therefore, likely to remain challenging.
This article first appeared on Practical Law and is reproduced with the permission of the publishers.
