Angela Burns v The Financial Conduct Authority (previously the Financial Services Authority) [2015] UKUT 0252 (TCC) – Upper Tribunal finds FCA sanction was not commensurate with facts found proved by FCA (then the FSA) and reduces financial penalty imposed

Conflict of interests

1. Angela Burns was an FCA regulated Approved Person holding Controlled Function 2 (“CF2”) non-executive director (“NED”) positions at two organisations:  Marine and General Mutual Life Assurance Society (“MGM”) from 19 January 2009 until her resignation on 22 May 2011; and Teachers Provident Society (“Teachers”) from 5 May 2010 until she resigned on 31 May 2011.

2. Action was taken by the FCA due to perceived conflicts of interest between Ms Burns’ role as a NED at MGM and Teachers, and her dealings with the Investment Manager dealing with both societies (“the Investment Manager”).  The FCA’s Decision Notice was issued on 28 November 2012.  In summary, the FCA took action against Ms Burns in respect of a number of instances of alleged conflict, including:

1. failing to disclose her conflicts of interest to the Mutual Societies;
2. disregarding  her duties under companies legislation and under the Mutual Societies’ articles of association and rules and conflicts documentation to declare her interest in the Mutual Societies’ contracts (whether past or anticipated) with the Investment Manager;
3. telling the CEO of and chairman of the board at MGM that she neither had a commercial arrangement nor a prospect of working with the Investment Manager, despite suggesting to the Investment Manager that she could work with them on a consultancy capacity;
4. failing to update the declaration of interest she executed with Teachers to inform it of her attempts to engage in a business relationship with the Investment Manager.

3. Importantly, the FCA indicated that the breaches began on 21 January 2009 (when Ms Burns first attended a MGM Board meeting at which the Board first raised the possibility of using the Investment Manager) and continued until 31 May 2011, when she resigned from Teachers.  The FCA cited those dates as comprising the “relevant period”.

Background

1. Prior to her appointment in a NED positon for MGM and Teachers, Ms Burns was engaged in work for her own consultancy business.
2. In 2006, she drafted a report for the Investment Manager recommending its entry into the UK investment market.
3. She expressed an interest in assisting the Investment Manager to do so.

MGM role

1. Two years later, in 2008, the Investment Manager contacted Ms Burns to let her know that it had decided to enter the UK investment market.
   1. Ms Burns met the individual responsible for the Investment Manager’s retail and institutional business in the UK; afterwards, she sent an email to him summarising the areas in which she could provide a service to help the Investment Manager achieve its goals.
   2. In September 2008, Ms Burns met the head of the Investment Manager’s UK business and thereafter issued a formal written proposal outlining the consultancy work she could perform for the Investment Manager.
   3. The proposal would have required the Investment Manager to pay Ms Burns’ business consultancy, a third party, for helping it place funds under management.

2. Ms Burns was formally appointed as a NED for MGM in December 2008; she attended her first board meeting as an observer that month.

3. Shortly afterwards, she sent an email to the Investment Manager advising that she had joined MGM’s board, and she noted

1. “it will be helpful to keep up to date with your plans and see where there may be opportunities”.  She attached her 2008 proposal to the email.

4. She sent three further similar emails to other contacts at the Investment Manager in early January 2009.

5. During board meetings in early 2009,

1. she recommended the Investment Manager’s services to MGM and also emailed the MD of the Investment Manager updating him, in her capacity as NED for MGM, on the process for working with MGM.
2. Within that email, she further attached her 2008 proposal and suggested that she could perform consultancy work for the Investment Manager and
3. serve as a NED for the Investment Manager’s Dublin funds.

6. She then sent further emails on the same theme; they were addressed from her capacity as NED for MGM, but offered her personal business services to MGM.
   1. MGM’s investment committee, of which Ms Burns was Chair, met in June 2009 and agreed to recommend the Investment Manager’s services to the Board.
   2. It subsequently agreed that the Investment Manager should look after MGM’s £350 million investment mandate.

7. A similar email was sent in August 2010, without MGM’s knowledge  in which Ms Burns stated that
   1. “I think it would be productive for us to have a serious talk re your UK ambitions and my ability and willingness to help. When might you be free?”

8. Ms Burns resigned as a NED of MGM, effective from 22 May 2011.

Board of Teachers role

1. A similar story is told regarding her role at Teachers. Under that role, Ms Burns had a duty to disclose conflicts of interest under the prevailing legislation and also Teachers’ own Conflicts Policy, which states: “the simple rule is, disclose always’.

2. During Ms Burns’ tenure on the Board of Teachers, she recommended the Investment Manager to manage Teachers’ investment mandate of £750 million.  Teachers was aware that Ms Burns had done consultancy work for the Investment Manager in 2006 but was unaware that she was still seeking consultancy work.

3. On 5 November 2010, Ms Burns sent the Investment Manager an email, which the Investment Manager viewed as using her position at Teachers to facilitate the placement of investment mandates at those firms with the Investment Manager, and seeking payment for doing so.

4. The Investment Manager viewed this as a conflict of interest and withdrew from the tender process to carry out Teachers’ investments.

5. Ms Burns ceased acting for a NED at Teachers effective 31 May 2011.

6. FCA ruled “interest was very real and was substantial”

7. Ms Burns provided the FCA with both oral and written submissions, setting out why she did not believe there had been a conflict of interest as there was no “real and substantial interest”, but merely a theoretical interest (as per the judgement in Dominion International Group plc (no 2) [1996] 1 BCLC 572). However, the FCA ruled that her interest was very real and it was substantial.

8. Whilst the FCA ruled that Ms Burns did not act deliberately or dishonestly, it came to the conclusion that she closed her mind to the issue of conflict, and in doing so acted recklessly.

9. It concluded that Ms Burns breached Statement of Principle 1 by failing to disclose her conflicts of interest to the Mutual Societies on a number of occasions.

10. Further, it was ruled that she breached Statement of Principle 1 by attempting to use her fiduciary position as a NED at the Mutual Societies to benefit herself.

Sanction

1. The sanction imposed by the FCA was severe:  a prohibition order was imposed along with a financial penalty, amounting to £154,800.

2. Given that the FCA concluded that the conduct took place before and after 6 March 2010, the FCA had to take into account two different penalty regimes, the “new” regime and the “old” regime.  The financial penalty awarded under the old regime was £75,000, taking into account a number of factors, including deterrence, the seriousness of the breaches, the extent to which the breach was deliberate or reckless and the fact that Ms Burns is an individual, not a corporation.

3. The calculation of financial penalty under the new regime was somewhat complex, including a calculation of the level of seriousness of the breach (deemed to be level 4, with a seriousness percentage of 30%).  This calculation took into account a number of alleged failures and their consequences, and led to a figure of £19,950 being produced as a fine (30% of Ms Burns’ earnings over the relevant period).

4. The FCA then opined that an adjustment for deterrence was required, given the seriousness of the wrongdoing.

5. A factor of 4 was applied, under the “adjustment for deterrence” criteria, leaving a figure under the new regime of £79,800.  The total penalty was therefore £154,800, which, along with the prohibition order, was significant for Ms Burns as an individual.

Appeal

1. Ms Burns subsequently appealed to the Upper Tribunal, which took a very different approach.  Although it upheld the prohibition order, it reduced the financial payable to £20,000, a substantial reduction from the FCA’s original decision.

2. The Upper Tribunal’s decision was relatively critical of the original decision of the FCA.

3. It rejected a number of the FCA’s findings, and narrowed the scope of the misconduct to specific breaches of APER on 24, 25 and 26 February 2009 in respect of her tenure as a NED at MGM, and to a breach on 5 November 2010 in her role as a NED at Teachers.

4. The findings of wrongdoing on specific dates differ from the FCA’s allegations spanning the full period of her roles at MGM and Teachers, being approximately two years.

5. In evaluating sanction, the Upper Tribunal ruled that the FCA did not make a realistic assessment of the positon in light of the fact that six out of its ten allegations failed, and of the four that succeeded, three were upheld only to a limited extent.

6. Upper Tribunal disagree with original decision and reduce financial penalty

7. In the circumstances, the Upper Tribunal found itself in “wholesale disagreement with the Authority’s assessment of the level of seriousness of the proven breaches and accordingly with the level of financial penalty arrived at by the Authority”. Although it could not, as requested, limit the length of the imposed prohibition order, it found that the financial penalty of £154,800 was “wholly excessive”.

8. It concluded that the appropriate level of penalty was £20,000, which reflects the “limited extent to which the allegations against Ms Burns were upheld, and contains a discount in recognition of the burden upon her and the prejudice suffered through facing substantial allegations which we concluded were unfounded”.

9. The Upper Tribunal also invited Ms Burns to make an application for costs.

The message

1. This decision by the Upper Tribunal reinforces the message that sanction should be commensurate with the actual misconduct found, as opposed to the misconduct alleged and not found, or partially found.

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