Legal Briefing

The importance of assessing the potential regulatory risk arising from legal proceedings: lessons learned from the Anthony Verrier Decision Notice

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Finance | 01 September 2012

On 16 May 2012, the Financial Services Authority (FSA) announced that it had decided to ban Anthony Verrier, a senior executive at BGC Brokers LP (BGC), from performing a controlled function in the financial services industry. The FSA banned Mr Verrier because it believes that he is not a fit and proper person due to concerns over his honesty, integrity and reputation. Mr Verrier is appealing the FSA’s decision to the Upper Tribunal.

The Verrier prohibition is interesting in a number of respects. Firstly, the FSA did not conduct an investigation before it decided to ban Mr Verrier. Second, following the FSA’s decision, it appears that a deliberate breach of the civil law (not merely the criminal law), which is unrelated to regulated activity, may be sufficient to justify an FSA ban. Third, the case is instructive regarding the potential regulatory risk arising from commercial litigation. Firms and individuals operating in the regulated sector need to be mindful of the potential regulatory consequences of being the subject of adverse criticism by a judge at trial. The judge’s findings had far-reaching consequences for Mr Verrier, as we shall see.

BACKGROUND: THE FIT AND PROPER TEST FOR APPROVED PERSONS (FIT)

Individuals who perform certain key ‘controlled’ functions in the financial services industry in the UK must be ‘approved’ by the FSA. Individuals who are FSA approved have a continuing obligation to remain fit and proper to hold such approval. In practice, this means satisfying what is known as the FSA’s FIT test.

The FSA will take the following matters into consideration when assessing whether an individual is fit and proper to hold a controlled function:

  1. honesty, integrity and reputation;
  2. competence and capability; and
  3. financial soundness.

If the FSA is satisfied that an individual does not meet the FIT test by reference to these criteria and related guidance, then it can refuse to approve them or, if the person is already approved, the FSA may issue a prohibition order against that person under s56 of the Financial Services and Markets Act (FSMA) 2000. The terms of a prohibition order can vary, but, at its most far reaching, an individual can be prohibited from performing any function in relation to any regulated activity.

FSA guidance sets out that, when assessing fitness and propriety, the FSA will have regard to all relevant matters which may have arisen either in the UK or elsewhere. In deciding to ban Mr Verrier, the FSA relied on the guidance in its Handbook (FIT 2.1.3G), which sets out that the FSA will take into account:

‘… whether the person has been the subject of any adverse finding in civil proceedings, particularly in connection with investment or other financial business, misconduct, fraud…’

and also:

‘… whether the person, or any business with which the person has been involved, has been… criticised by a… court… whether publicly or privately’.

The range of matters that the FSA can take into consideration when assessing fitness and propriety is far wider than that which the FSA can take into consideration when it takes action against approved persons for misconduct under s66 of FSMA 2000. In order to take action for regulatory misconduct, which gives the FSA the ability to impose financial penalties on an individual, the misconduct must be within the scope of the controlled function held by the individual, or be necessary or incidental to the performance of the controlled function. In this case, Mr Verrier’s conduct did not relate to the controlled functions that he held and, consequently, the FSA did not have jurisdiction to make a finding of misconduct or to fine him. However, since the conduct of an individual in any walk of life is relevant to an assessment of their fitness and propriety to hold a controlled function, the FSA did have jurisdiction to impose a prohibition order on Mr Verrier.

WHAT IS UNIQUE ABOUT THIS CASE?

The FSA based its decision to ban Mr Verrier solely on the findings of the High Court in a commercial dispute to which Mr Verrier was a party.

The High Court litigation was commenced by Tullett Prebon plc against BGC Brokers LP, Mr Verrier and others. The dispute centred on allegations against Mr Verrier and BGC in relation to Mr Verrier’s conduct after his resignation from Tullett. Tullett claimed that after Mr Verrier left its employment to join rival broker, BGC, he tried to poach thirteen ex-colleagues from Tullett by inducing them to breach the terms of their employment contracts in order to join BGC.

The FSA did not carry out its own enforcement investigation into Mr Verrier’s actions. Consequently, the FSA did not carry out its own evidence-gathering exercise. Instead, the FSA based its assessment of the fitness and propriety of Mr Verrier to hold a controlled function exclusively on the findings of the High Court judge, as recorded in his judgment in the case between Tullett and BGC (and others).

The FSA has previously relied on the existence of criminal convictions to demonstrate a lack of fitness and propriety and to prohibit individuals1, however, this is the first time that the FSA has relied on the findings of a judge in a civil case to issue a prohibition order against a senior executive.

WHAT EVIDENCE DID THE FSA RELY ON TO PROHIBIT MR VERRIER?

The FSA based its decision to make a prohibition order on the basis of a number of adverse findings by the judge in relation to Mr Verrier, which, in the view of the FSA, demonstrated his lack of fitness and propriety.

Involvement in an unlawful means conspiracy

In his judgment, the judge was highly critical of Mr Verrier. He found that Mr Verrier:

‘… participated in an unlawful means conspiracy, the unlawful means including the inducement of the broker defendants to breach their contracts of employment with Tullett by leaving early without lawful justification.’

Furthermore, to avoid the potential problems that the recruits had with long-term contracts at Tullet, Mr Verrier:

‘… decided that, come what may, this is, whether or not the recruits and each of them had good grounds, weak grounds, or no grounds, to claim constructive dismissal, within a short period of signing with BGC he would instruct his recruits to leave Tullett en masse… It was Mr Verrier’s plan to do what he could to induce Tullett to “foul up” and to give grounds for alleging constructive dismissal.’

Testimony

In relation to the evidence given by Mr Verrier in court, the judge gave numerous examples of Mr Verrier’s version of events that he found to be untrue, including that:

‘I found that in his evidence Mr Verrier stuck to the truth where he was able to, but departed from it with equanimity and adroitness where the truth was inconvenient.’

‘Loss’ of evidence

The court was also satisfied that it was:

‘Mr Verrier’s gambit to “lose” Blackberries whenever he thought they might contain inconvenient material, and that his instructions were the cause of at least some of the mobiles being lost.’

In relation to a report which Mr Verrier had produced referring to the recruitment campaign, the court found that:

‘… other copies and copies of any further reports as foreseen by the e-mail were destroyed. They were also deleted from BGC’s computer system’.

The FSA decided that the findings of the judge (which followed a lengthy trial and legal proceedings during which the evidence disclosed by all sides was subjected to a thorough forensic examination) were sufficient to entitle the FSA to conclude, in accordance with s56 of FSMA 2000, that Mr Verrier was:

‘… not a fit and proper person to perform functions in relation to a regulated activity carried on by an authorised person.’

The FSA decided that a further investigation into the matter would not have been an efficient use of its resources. Interestingly, the judge’s findings that Mr Verrier participated in an unlawful means conspiracy and that he failed to give truthful evidence in court appear to have been accorded equal weight in the FSA’s decision to ban Mr Verrier.

Mr Verrier objected that the FSA did not consider the judge’s findings in their proper context or give him the opportunity to explain his conduct and has referred the FSA’s decision to the Upper Tribunal. It will be several months before we know whether the Tribunal has decided to uphold the FSA’s decision or not.

LESSONS TO BE LEARNED IN RELATION TO REGULATORY RISK FROM COMMERCIAL LITIGATION

On one level, this case is a warning to the financial services industry about the potential regulatory consequences of deliberately breaking the law for commercial gain. Where the infringing behaviour is sufficiently serious to call into question the fitness and propriety of individuals to work in the financial services sector, the FSA has indicated that it will ban those individuals from the industry.

However, there are also a number of lessons that can be learned from the case about the importance of undertaking a rigorous assessment of the potential regulatory risks arising from a commercial dispute at the outset of litigation proceedings where any of the parties operates in the financial services sector.

In this case, much of the evidence regarding which the judge made damaging findings which were relevant to the FSA’s assessment of Mr Verrier’s fitness and propriety, was adduced in support of BGC’s counterclaim against Tullett. In the event, BGC’s counterclaim was dismissed by the court. However, the judge’s findings on the evidence adduced by BGC had far-reaching implications for Mr Verrier since they formed much of the basis for the FSA’s enforcement action against him.

The lesson underlying this case for potential parties to litigation, who operate in the financial services sector, is clear. Before making formal claims, defences or counterclaims in legal proceedings, careful consideration needs to be given to the way in which the case is put, the nature of the evidence that it is intended to adduce in support of such claims or defences (including who will be called to give witness evidence), and to the risk of the court making damaging findings at trial based on such evidence, which may subsequently give rise to regulatory sanctions.

Conversely, a party should also be aware that, as a strategic measure to put it under pressure to settle proceedings before trial, counterparties may consider making allegations that will require the disclosure of evidence, or the calling of witnesses that may shed light on regulatory shortcomings (for example, regarding weak systems and controls or failures to comply with FSA rules and principles).

Where the findings of fact at trial call into question the honesty or integrity of employees of the parties to the litigation, or of the parties themselves, the Verrier case demonstrates that the FSA is likely to take action as a consequence and that it may do so without carrying out an investigation of its own.

In the case of Mr Verrier, the FSA used its relatively new power to publish its Decision Notice, even though the matter had been referred to the Upper Tribunal, for a de novo hearing. The existence of this power to publish Decision Notices only serves to increase the importance of taking a timely and considered approach to assessing the regulatory risk arising from legal proceedings. The Tribunal may not find in favour of the FSA in due course, but reputational damage will already have been sustained by the firm and/or the individual following publication of the Decision Notice.

Note

  1. Waqas Ahmed Siddique Final Notice, dated 5 February 2009.