The recent Court of Appeal decision in the Bluecrest case sets expansive parameters for the scope of the regulator’s powers to require individual firms to undertake customer redress exercises. It is essential that all authorised firms, particularly those who may be reviewing historic conduct, take notice of the decision as it may well guide their approach to remediation and redress exercises.

The decision confirms that the FCA can use its supervisory powers to mandate a customer redress scheme and that these powers extend to scenarios where none of the requirements for a market-wide redress scheme are met; when no final decision has been made regarding whether a breach has occurred and even where the redress concerns unregulated activities.  

In the Bluecrest case, the FCA originally considered the firm to have breached Principle 8 as a result of an alleged failure to manage conflicts of interest in connection with particular funds. As a result, the FCA sought to impose on Bluecrest both a financial penalty of over £40 million and a requirement to provide redress to customers estimated to be over $700 million.  

Bluecrest challenged both the requirement and the penalty. Since Principle 8 does not give rise to a private right of action by customers, Bluecrest argued that the FCA would not have been able to satisfy the conditions for a multi-firm redress scheme (under section 404 FSMA).  However, the Court of Appeal held that the same conditions did not apply when imposing a redress requirement on a single firm under the section 55 OIREQ provisions and also that the FCA could introduce new allegations in respect of a breach of Principle 7 and the corresponding actionable rule in COBS which requires customer communications and promotions to be clear, fair and not misleading.  

The Court of Appeal’s decision recognises that the imposition of permission requirements is concerned with whether firms meet and will continue to meet the Threshold Conditions regarding suitability. Past conduct provides an evidential basis for this assessment and misconduct relating to regulated or unregulated activities could be relevant.  These comments may be instructive to any regulated firm considering next steps in respect of past misdemeanours:

“if a person has indulged in conduct which demands some form of compensation or redress, they are unlikely to be regarded as fit and proper if they do not pay such compensation or make such redress.  That is a matter of protection of future consumers of their regulated activities, not merely those to whom compensation or redress is due.  It applies to past conduct which may be unrelated to regulated activities, just as past conduct unrelated to regulated activities may be relevant to questions of honesty and integrity”; 

“Nor should equivalent conduct in relation to unregulated activities necessarily fall outside the scope of the FCA’s ability to order redress as a permission requirement.  If an authorised person has engaged in inappropriate but not illegal behaviour outside the regulated activity workspace, such as rudeness or bullying which has caused distress or inconvenience, the FCA might rationally take the view that some redress was required if the person were to continue to be regarded as a fit and proper person”

Our multi-disciplinary financial services team has considerable recent experience of advising on regulatory interventions such as OIREQs and VREQs and on the design and implementation of complex redress and remediation issues.  Please contact Katie Stephen or Matthew Gregory if you would like to discuss.