Agree to disagree: FCA versus Lewis Alexander Limited

On 19 February 2019, the Upper Tribunal (the Tribunal) published its decision in Lewis Alexander Limited (LAL) vs the Financial Conduct Authority (FCA).

In this case LAL, a debt management firm, applied to the FCA in March 2015 for permission to carry on the regulated activities of debt adjusting and debt counselling under Part 4A of the Financial Services and Markets Act 2000 (FSMA). In April 2018, the FCA published a Decision Notice detailing why it had decided to refuse the application. Main reasons for this decision are that:

 Over the course of the application, there were several instances where LAL had not demonstrated the level of cooperation that is expected of a regulated firm, and had adopted an uncooperative and/or hostile attitude;

 When asked for information LAL had failed to provide complete and prompt responses, questioning why it was required to provide information in a forceful and argumentative manner;

 LAL had also failed to remedy, in a timely fashion, issues raised during the course of the application, including completing and signing an acknowledgement letter, which is included in the Client Asset Sourcebook in the FCA Handbook of rules, to protect client money in case of a liquidation event;

 LAL had been unable to demonstrate that it can proactively ensure compliance with applicable requirements. For example, LAL was unaware that a number of its communications with customers contained inaccurate information and did not comply with regulatory requirements, until this was pointed out by the FCA;

 LAL had no appropriate non-financial resources in relation to the regulated activities that it sought to carry on, who were able to understand and willingly comply with regulatory requirements;

 The FCA was not satisfied that LAL is a fit and proper person.

In the Decision Notice, the FCA also published excerpts from some correspondence with Richard Johnson (Johnson) (LAL’s sole human resource), wherein he stated that the FCA “and the general establishment around it is corrupt in favour of creditors who have lobbied to get more funds  out of people they think are withholding monies for repayment…”, and that “…the credit industry lobbied parliament to get the [Authority] to enforce rules which are unfair to consumers and only fair to creditors and free to client services…and utilised the fee charging sector to do so!”.

In another response to an FCA request for information, Johnson responded saying the request was “quite ridiculous” and that it was “…purposefully stopping me from being able to carry out my normal working day”. …CONFIRM WHY YOU ARE USING BULLYING LEGAL TACTICS BY PLACING A TIME FOR A RESPONSE ON A CERTAIN DATE.”

Although, under Section 55V of FSMA, the FCA is required to determine an application within 6 months after the application is received (or 12, for incomplete applications), the FCA took over 2 and half years to get to a conclusion.

When the FCA confirmed that the application would be refused, Johnson sent emails accusing the FCA of using “bullying tactics” and stating that “the National Crime Agency and No10 Downing Street have been made aware by me personally about the goings on throughout this entire process of authorisation”. Following these emails, the FCA informed LAL that it did not consider that the points raised advanced the assessment of the application any further and that it did not intend to engage in further correspondence in relation to the case.

LAL was given the opportunity to make representations on the FCA’s proposed course of action, during which Johnson reiterated his concerns about the regulation of the debt management industry, and in particular, in relation to the regulation of advertising. Johnson, nevertheless, failed to demonstrate that he could separate his concerns about the ongoing regulation of the debt management industry from the application and LAL’s ongoing supervisory relationship with the FCA. He was also unable to give adequate assurances that this approach to dealing with the FCA would change once authorised. In May 2018, LAL referred the FCA decision to the Tribunal, which eventually upheld it. The Tribunal unanimously dismissed the reference, concluding that there was no reason to cast any doubt on the reasonableness of the FCA decision, highlighting that the supervision model for small firms means that the FCA relies heavily on the information provided by firms. The Tribunal found that Johnson failed to understand that it was primarily his responsibility to familiarise himself with the regulatory requirements, and to ensure that he could evidence that LAL was able to meet them. For this reason alone, the FCA had sufficient ground to conclude that LAL was not ready, willing and organised to comply with the standards and requirements of the regulatory system.

The judge did however make a number of interesting points:

 The FCA should listen to what a firm has to say if it wished to comply with a requirement in a different manner, and then consider whether what the firm was proposing met the requirement. If it disagreed, and the parties could not agree, then the FCA could use its statutory powers to impose requirements on the firm; if the firm did not agree, it could challenge the requirement through the FCA’s decision- making processes and, ultimately, if it felt strongly enough about the point, in the Tribunal.

 As long as a debate takes place in a professional and appropriate manner, nothing should be held against a firm simply because it pressed its interpretation of the rule.

 If a firm thinks that the regulatory approach taken by the Authority is inappropriate, then that is a matter to be raised with those who have ultimate responsibility for the regulatory structure, namely Parliament and the Government.

The Judge made it clear that these comments were not criticisms of the professional way in which the FCA sought to deal with what turned out to be a very difficult application, and that these observations were being primarily made with the objective of helping the FCA in similar situations in the future. Firms are entitled to disagree with, and criticise, the FCA, if they believe that they have ground to do so. The FCA, nevertheless, did not acknowledge these points in its Final Notice.

In the Tribunal decision, the Judge also noted that, bearing in mind the size of LAL’s business and its lack of complexity, it was difficult to justify the FCA’s delay in progressing the application, and that this was because the FCA did not allocate resources to deal with it at the initial stage. The FCA took over the regulation of £200billion consumer credit market on 1 April 2014 and it was well known that the process of interim authorisation and full authorisation of consumer credit firms was significantly back-logged over 2014/15. People who had operated consumer credit business licensed under the Office of Fair Trading found the adjustment to the FCA’s style of regulation under FSMA to be a substantial sea-change and many found the road to FCA authorisation difficult.

Why is this case important? Because it shows that the FCA can and should be reasonably challenged, especially if it breaches its own rules or gives cause for its credibility to be questioned. Even small firms should not be intimidated from disagreeing with or challenging the FCA’s positions. Individuals involved in regulatory processes should, of course, be familiar with the requirements applicable to them so as to be in a better position to challenge decisions on sensible grounds. This applies regardless the size of the firm.