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The Financial Services Authority v Amro International and Goodman Jones LLP (interested party)

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The Financial Services Authority v Amro International and Goodman Jones LLP (interested party)

Written by Calum Haswell

Thursday, 11 March 2010

[2010] EWCA Civ 123, [2010] All ER (D) 260 (Feb) FINANCIAL SERVICES - FINANCIAL SERVICES AUTHORITY (FSA) – POWERS – POWER TO CARRY OUT INVESTIGATIONS TO ASSIST OVERSEAS REGULATOR – AMERICAN REGULATORY BODY REQUESTING ASSISTANCE IN OBTAINING DOCUMENTS FROM ACCOUNTANCY FIRM IN LONDON RELATING TO CLAIM BEING BROUGHT IN USA – FSA USING STATUTORY POWERS TO APPOINT INSPECTORS TO OBTAIN DOCUMENTS – DECISION OF FSA QUASHED ON JUDICIAL REVIEW – WHETHER FSA UNDER DUTY TO INVESTIGATE INFORMATION PROVIDED BY OVERSEAS REGULATOR – WHETHER REGULATOR'S REQUEST REQUIRED TO COMPLY WITH INTERNATIONAL STANDARDS FOR FSA TO ACCEDE TO IT – WHETHER FSA REQUIRED TO GIVE NOTICE – WHETHER INVESTIGATORS CONFINED BY TERMS OF APPOINTMENT – WHETHER DECISION OF INVESTIGATOR COULD BE IMPUGNED – WHETHER NOTICE TOO UNSPECIFIC SO THAT EXTENT OF REQUIREMENT BEYOND FSA'S STATUTORY POWERS – FINANCIAL SERVICES AND MARKETS ACT 2000, SS 169, 171 AND 172

The first and second claimants were financing companies for which Rhino Advisors (Rhino), a company incorporated in New York, acted as investment adviser. In 2002, the Securities and Exchange Commission (SEC), the financial regulatory body in the United States of America, following an investigation into alleged fraudulent activity, took action against Rhino. As part of the process, in an attempt to gain discovery of documents, the SEC wrote to the first defendant Financial Services Authority (FSA) asking for assistance in producing documents from a London firm of accountants, the interested party. The powers that the FSA could exercise when it decided to cooperate with a foreign regulator included those conferred by ss 169 and 354(4) of the Financial Services and Markets Act 2000. By virtue of s 169(1)(b) of the Act the investigators appointed by the FSA had the powers conferred by s 172(4) of the Act and therefore in turn had the powers conferred by s 171 of the Act. Section 170 imposed a duty on the FSA, save in specified circumstances, to give written notice of an investigator's appointment to the person who was the subject of the investigation. Both the US and the United Kingdom regulators were parties to Memoranda of Understanding (MOU) relating to international cooperation. The FSA acceded to the SEC's request and appointed investigators. In 2009, the Administrative Court allowed the claimants' claim for judicial review of that decision. The court held, inter alia, that in the circumstances, the FSA should have decided that it was not necessary or proportionate for the wide scope of discovery that had been sought to be agreed to. The FSA appealed.
The issues arising on appeal were: (i) when considering whether to exercise the powers conferred by s 169(1) of the Act, was the FSA under a duty to investigate the information provided by the overseas regulator prior to appointing investigators; (ii) whether if the SEC's request did not comply with the requirements of the MOU's, it open to the FSA to accede to it; (iii) when investigators were appointed under s 169, was the FSA subject to the notice requirement in s 170(2); (iv) whether the investigators had been confined by the terms of their appointment to seek documents relevant to the issues pleaded in the New York proceedings; (v) whether and in what circumstances the exercise of an investigator's powers under s 171(1) could be challenged; (vi) whether the requirement for the production of 'specified documents' was within the meaning of s 171(2).
The appeal would be allowed.

(1)   In deciding to exercise its powers under s 169 of the Act in order to assist an overseas regulator in its investigations, it was not incumbent on the FSA to examine the regulator's request critically and all the more wrong for a court to do so. The FSA were not required to satisfy itself of the correctness of what there were being asked to investigate or the basis upon which the investigation had been asked for (see [40] of the judgment).

(2)   It was of the greatest importance that national financial regulators cooperated, particularly where there were suspicions or allegations of financial fraud or other misconduct. Financial enterprises and financial transactions were increasingly international, and the desirability of such cooperation was reflected by the Act in ss 169, and 354. There was no good reason why parliament should have required the FSA to second-guess a foreign regulator as to its own laws and procedures, or to the genuineness or validity of its requirement for information or documents (see [38] and [39] of the judgment).
In the instant case, there was no error of law or principle in the FSA's decision to appoint investigators. It would be surprising if the Act did not permit the FSA to accord full faith and credit to a foreign regulator, particularly one as important as, and of the reputation of, the SEC. That was not to say that the FSA was bound to comply with the SEC's request. The FSA had to and did in fact consider the request when deciding whether to exercise its discretion under s 169 of the Act. (see [39]-[41] of the judgment). (3)   The requirements set out in the MOU's were not found in the Act and the requirements to be satisfied by the FSA and its investigators when deciding whether to act in support of an overseas regulator were those contained in the statute and not elsewhere. It was therefore immaterial whether the SEC's request had complied with the MOU's (see [43] of the judgment).

(4) Section 170 of the Act applied to investigators appointed under s 168(3) or (5) but not to those appointed under s 169. In the instant case as the investigators had been appointed under s 169 the lack of compliance with s 170 was immaterial (see [44] of the judgment).

(5) The investigators had been confined to the terms of their appointment. They had been appointed to assist the SEC with its ongoing civil action. The SEC had stated that the documents sought would be helpful to it in that action and had given sensible reasons for that statement. The FSA were exercising an investigatory power, not a power of discovery and it was not for the national courts to consider whether the scope of the New York action might or might not be enlarged following disclosure of the documents sought (see [46]-[48] of the judgment)

(6) The appropriate test to be applied by investigators when considering whether to exercise their powers under s 171 was whether the questions to be answered or the provision of the information sought under subsection (1) or the production of documents under subsection (2), was relevant to the purposes of the investigation. That was a relatively low hurdle. Subject to the question of proportionality, the court could not impugn the investigator's decision unless it was satisfied that the investigator had unreasonably concluded, in subsection (2), that the production of documents was relevant. Where documents were sought that were relevant to allegations or suspicions of financial malpractice or crime, the requirements of proportionality would be easily satisfied (see [52] and [54] of the judgment).
In the instant case, the requirement for the production of documents was justified under s 171(3) (see [54] of the judgment).

(7) The power conferred by s 171 would normally be exercised when the FSA was not in a position to plead specific allegations. The power was an adjunct to an investigation. An investigation would be unnecessarily and inappropriately hindered if investigators were restricted to obtaining specified documents. What was important was that the person on whom the requirement was made could identify the documents he had to produce (see [57] of the judgment).
The requirement for 'specified documents' was lawful under s 171 (see [59] of the judgment).