Markos Markou v The Financial Conduct Authority

In financial services regulation, recklessness requires subjective awareness of a risk and an objectively unreasonable decision to take it, assessed in light of available safeguards. The risk need not materialise. A senior manager who knowingly permits a regulated firm to trade without required professional indemnity insurance may act recklessly and lack integrity, even where no claim or fraud occurs. A firm and its managers must adhere to the systems and controls adopted for that business. Compliance is not measured against a lower industry norm, and absolute policy requirements cannot be relaxed because the business is small or the breach caused no proven loss. An appellate court may interfere with Upper Tribunal findings where no properly instructed tribunal could have reached them.

Mr Markou, the chief executive and sole director of a mortgage-broking company, was prohibited from performing regulated functions and fined £25,000 by the FCA after it found that he had recklessly failed to oversee mortgage-fraud controls, supervise advisers and prevent trading without professional indemnity insurance.

On his reference, the Upper Tribunal allowed the challenge, finding no recklessness or lack of integrity and imposing no sanction: [2023] UKUT 00101 (TCC). The FCA appealed on five grounds concerning the jurisdiction of the reference, recklessness, misleading evidence, systems and controls, and supervision. The central issues were whether the Upper Tribunal had applied the correct legal tests and whether its findings and conclusions were rational.

Disposition. The Court of Appeal, in the judgment of Lady Justice Andrews with which Lord Justice Newey and Sir Julian Flaux agreed, allowed the appeal on Grounds 1, 2 and 3 and in part on Ground 4. It dismissed the remaining aspects of Ground 4 and Ground 5.

1. Jurisdiction. Under section 133 of the Financial Services and Markets Act 2000, a matter falls within the reference where it has a real and sufficient connection with the procedural or substantive subject matter of the process culminating in the decision notice. The connection must be real and significant, not fanciful or tenuous. Applying FCA v Bluecrest Capital Management (UK) LLP [2024] EWCA Civ 1125, the further allegations concerning trading without professional indemnity insurance were sufficiently connected. Ground 1 therefore succeeded.
2. Recklessness and integrity. The applicable test has subjective and objective elements, as explained in Potter v Canada Square Operations Ltd [2021] EWCA Civ 339, applying R v G [2003] UKHL 50. The person must appreciate the risk and act unreasonably in taking it. The risk need not eventuate, although its occurrence and the inadequacy of safeguards are relevant. The Upper Tribunal’s finding that Mr Markou did not know that the company was uninsured until 10 July 2017 was unsupported and contradicted by the evidence. He knew of the absence of insurance from 12 May, encouraged the continuation of existing regulated business and took inadequate steps to prevent new business. That conduct was reckless and demonstrated a lack of integrity. The absence of an uninsured claim or actual fraud was irrelevant.
3. Systems and controls. Compliance had to be assessed against the policies and controls adopted for the company, not against lesser industry practice. Absolute requirements to obtain specified documents and review every file could not be relaxed by proportionality, the size of the business or the absence of proven fraud. Partial adherence was not implementation. The Upper Tribunal therefore erred on those matters. It was nevertheless entitled to accept rational findings concerning evaluative questions about inconsistencies and the adequacy of training and supervision.
4. Orders. The Court remade the decision without remitting it to the Upper Tribunal. The reference was dismissed in respect of withdrawal of approval for the relevant controlled functions and the prohibition order. The financial penalty was remitted to the FCA with a direction to impose the lesser penalty of £10,000.

• Court of Appeal (Civil Division). Allowed the FCA’s appeal on Grounds 1, 2 and 3 and in part on Ground 4; dismissed the remaining aspects of Ground 4 and Ground 5; remade the decision and directed a £10,000 penalty.
• Upper Tribunal (Tax and Chancery Chamber). In [2023] UKUT 00101 (TCC), allowed the reference, rejected findings of recklessness and lack of integrity, imposed no sanction, and remitted limited matters to the FCA for reconsideration.
• FCA Decision Notice. The FCA withdrew Mr Markou’s approval, prohibited him from performing functions in relation to regulated activity and imposed a £25,000 penalty.