FCA’s Power to Impose Redress Schemes-Update
I’ve had quite a lot of feedback on our last article, and as mentioned, if any of you want to contact Mark from “The Compliance Department,” I’d be happy to put you in touch. Personally, I still don’t think there is any cause for alarm, but it’s important to understand what’s occurred. Here is a refresher on my last article in case you missed it. I do think it’s important to understand the implications.
The Court of Appeal (COA) has overturned the Upper Tribunal’s (UT) decision in The Financial Conduct Authority (FCA) v Bluecrest Capital Management (UK) LLP, reshaping the understanding of the FCA’s powers to impose redress schemes on individual firms.
The COA ruled that the FCA can impose such schemes without needing to prove legal liability—a significant shift from the UT’s stance, which required fulfilment of specific legal conditions as mentioned in my original article.
This decision raises questions about the limits of the FCA’s authority and the implications for regulated firms, particularly in the context of the Consumer Duty’s emphasis on mitigating foreseeable harm. I’ve mentioned it many times before, I think we’re just at the start of our “Consumer Duty” journey.
The Case at a Glance
The case centered on Bluecrest’s management of two investment funds—an external fund for investors and an internal fund for employees. Allegations arose that Bluecrest had favoured the internal fund to the detriment of external investors. Following related action by the US Securities and Exchange Commission (SEC) in 2020, the FCA issued a supervisory notice (FSN) under Section 55L of the Financial Services and Markets Act (FSMA), requiring Bluecrest to compensate non-US investors as a condition for retaining regulatory permissions. A £40.8 million penalty was also imposed for breaches of FCA principles, specifically Principle 8 on managing conflicts of interest.
The UT had initially ruled that the FCA could not impose redress under Section 55L without establishing breach of duty, causation, loss, and actionability. It reasoned that applying redress conditions without meeting these legal thresholds would create inconsistencies with the stricter requirements for industry-wide schemes under Section 404.
COA’s Reversal
The COA disagreed, concluding that Section 55L allows the FCA to impose redress conditions if it advances consumer protection, without needing to fulfil Section 404’s legal liability requirements. It found that the UT’s interpretation wrongly constrained the FCA’s powers. While the COA acknowledged concerns about unchecked authority, it argued that rationality and public law principles provide sufficient safeguards.
Industry Implications
Now, most IFAs, will think, “I can’t see this scenario ever affecting my firm”, and you’re probably right, but it is the change in the FCAs power that should be considered.
The decision empowers the FCA to impose single-firm redress schemes with fewer legal hurdles, creating potential uncertainty for firms.
While the COA maintained that such actions would “rarely” lack justification, the removal of the four-condition safeguard could disproportionately impact smaller firms, which may lack the resources to challenge decisions effectively.
The ruling underscores the need for vigilance in managing compliance risks and preparing for potential redress demands under the FCA’s expanded authority.
The above is just an “ In a nut shell” take on the ruling and your own compliance advisors should be able to assist you with any questions you may have, or as I have mentioned, I’m sure Mark will be pleased to talk to you.