In the matter of Thomas Seiler & Ors.

Recklessness amounting to a lack of integrity requires both actual awareness of the relevant risk and an objectively unreasonable decision to take it. The court may infer awareness from the inherent probabilities and how a reasonable professional would have responded, but a purely objective failure to identify a risk is insufficient. Serious errors, negligence, lack of competence or inadequate training do not, without awareness of the risk, establish a lack of integrity. Turning a blind eye involves the additional culpability of deliberately avoiding knowledge of suspected wrongdoing.

The Financial Conduct Authority prohibited three executives of Julius Baer under section 56 of the Financial Services and Markets Act 2000, alleging that they acted recklessly and without integrity in relation to Finder arrangements and foreign exchange transactions involving Yukos and Dmitri Merinson. The applicants referred the decisions to the Tribunal. The references concerned their knowledge of conflict-of-interest and misappropriation risks, the reasonableness of their conduct, the Tribunal’s supervisory jurisdiction, and whether the Authority could rely on a substituted Third FX Transaction not properly identified in the Warning Notices.

1. References allowed unanimously. The Authority failed to prove that any applicant acted recklessly and therefore failed to establish a lack of integrity.
2. Integrity has no strict definition and is assessed factually. The test has subjective and objective elements. The Tribunal must determine what facts each applicant knew, whether the applicant was aware that proceeding would expose the relevant risks, and whether taking that risk was unreasonable in the circumstances as understood by the applicant: see paras [41]–[50].
3. The Authority’s alternative case was rejected. A reasonable person in the applicant’s position might have appreciated a risk, but that cannot replace the requirement that the applicant was actually aware of the risk. Evidence of what a reasonable professional would have understood may support an inference of actual awareness: paras [44]–[49].
4. Turning a blind eye is more culpable than recklessness. It requires deliberate avoidance of facts suspected to be true. The allegation was not pleaded and was not determined: para [48] and paras [800]–[805].
5. The applicants made serious errors and failed to exercise due skill, care and diligence in important respects. However, the Tribunal found that the relevant risks generally did not occur to them, against the background of defective systems, inadequate training, poor management and reliance on compliance personnel and senior colleagues.
6. The references were non-disciplinary references. Under section 133(6) of the Financial Services and Markets Act 2000, the Tribunal’s powers were supervisory. The matters were remitted to the Authority with directions to reconsider the prohibition decisions in light of the Tribunal’s findings: paras [51]–[56] and [908]–[917].
7. It would be irrational for the Authority to prohibit any applicant on the basis that they acted without integrity. The Authority could nevertheless reconsider whether a full or partial prohibition was justified by competence or capability. A prohibition order must protect consumers and the integrity or confidence of the financial system; it must not operate as a substitute disciplinary sanction: paras [911]–[916].
8. The Authority was refused permission to rely on the substituted Third FX Transaction. The Warning Notice had to state clearly the facts and matters relied on as reasons for the proposed prohibition. The Tribunal retained a discretion to permit new matters, but the Authority’s investigative failures, procedural irregularity, prejudice and inadequate evidence outweighed the public-interest considerations: paras [998]–[1023].

The applicants referred the Authority’s prohibition decisions to the Upper Tribunal under section 57 of the Financial Services and Markets Act 2000. The references were heard together because of overlapping issues. The Upper Tribunal allowed all three references and remitted the matters to the Authority with directions.