Davidson & Tatham (Cost Decision), Court of Appeal - United Kingdom Financial Services and Markets Tribunals, October 11, 2006, [2006] UKFSM FSM040

Resolution Date:October 11, 2006
Issuing Organization:United Kingdom Financial Services and Markets Tribunals
Actores:Davidson & Tatham (Cost Decision)

COSTS whether the disputed decision of the Authority was unreasonable yes whether the Authority acted vexatiously, frivolously or unreasonably in connection with the proceedings no FSMA 2000 Sch 13 para 13(1) and (2) THE FINANCIAL SERVICES AND MARKETS TRIBUNAL PAUL DAVIDSON First Applicant ASHLEY TATHAM Second Applicant - and - THE FINANCIAL SERVICES AUTHORITY Respondent Tribunal : DR A N BRICE (Chairman) MR C A CHAPMAN MR J PARSLOE Sitting in London on 7 September 2006 The First Applicant in person Dr Michael von Pommern-Peglow and Sir Nicholas Bonsor Bart for the Second Applicant Javan Herberg of Counsel, instructed by the Financial Services Authority, for the Authority ©CROWN COPYRIGHT 2006 2 DECISION The applications

1. On 19 June 2006 Mr Paul Davidson (Mr Davidson) and Mr Ashley Tatham (Mr Tatham) each applied for a costs order against the Financial Services Authority (the Authority). Each sought an order that the Authority should pay the costs incurred by him in connection with his proceedings before the Tribunal. Each had previously referred to the Tribunal a decision notice issued by the Authority on 23 October 2003 and the Tribunal had determined the proceedings in their favour. The legislation

2. The legislation which governs the award of costs by the Tribunal is found in paragraph 13 of Schedule 13 of the Financial Services and Markets Act 2000 (the 2000 Act) and in Rule 21 of the Financial Services and Markets Tribunal Rules 2001 SI 2001 No 2476 (the Rules).

3. Paragraph 13 of Schedule 13 of the 2000 Act provides: "13(1) If the Tribunal considers that a party to any proceedings on a reference has acted vexatiously, frivolously or unreasonably it may order that party to pay to another party to the proceedings the whole or part of the costs or expenses incurred by the other party in connection with the proceedings. (2) If, in any proceedings on a reference, the Tribunal considers that a decision of the Authority which is the subject of the reference was unreasonable it may order the Authority to pay to another party to the proceedings the whole or part of the costs or expenses incurred by the other party in connection with the proceedings."

4. Rule 21(3) provides that where the Tribunal makes a costs order it may either (a) fix the amount or (b) direct that the costs should be assessed on such basis as it should specify by a costs official (of the Court). The directions

5. On 11 July 2006 a directions hearing was held when it was directed: (1) that the applications for costs orders be considered at a hearing to take place as soon as possible ... (2) that the matters to be considered at the hearing are: (a) whether the Tribunal considers that the decisions of the Authority which were the subject of the references were unreasonable within the meaning of paragraph 13(2) of Schedule 13 of ... the 2000 Act; or (b) whether the Tribunal considers that the Authority acted vexatiously, frivolously or unreasonably in connection with the proceedings within the meaning of paragraph 13(1) of Schedule 13 of the 2000 Act; 3 (3) that if either question is answered in favour of one or both Applicants then the amount fixed by the Tribunal under Rule 21(3)(a) ... or, alternatively, a decision whether the costs should be assessed by a costs official under Rule 21(3)(b), shall be determined at a later date. ... (5) that by consent no oral evidence shall be admitted at the hearing mentioned in Direction (1)".

6. The hearing of the applications for costs orders was held on 7 September 2006 and was restricted to the matters mentioned in Direction (2). The documents

7. Four bundles of documents were produced at the hearing. One bundle contained the documents which were before the Authority's Regulatory Decisions Committee when they took the decisions which were the subject of the references. These documents had not been before the Tribunal previously. The facts

8. In finding the facts relevant to these applications we first describe the process of decision-making by the Authority and the review of that process which was carried out in

2005. We then consider in some detail the way in which the Authority's Regulatory Decisions Committee, in a series of five separate meetings, made the decision to issue the decision notice which was referred to us. We finally summarise our own findings and decision on the references. The Authority's process of decision-making

9. Section 1 of the 2000 Act gives the Authority all the functions conferred on it by or under the Act. The Authority is a company limited by guarantee not having a share capital. Article 24 of its Articles of Association provides that it shall have a Governing Body or Board. The Chairman and the members of the Board are appointed by the Treasury.

10. The way in which some decisions are to be taken by the Authority is also regulated by the 2000 Act. Relevant to these references is Part XXVI (sections 387 to 396) which deals with notices. Briefly, the provisions are that the Authority must first give a warning notice stating the action which it proposes to take and inviting representations; later it may give a decision notice which may be referred to the Tribunal; if the decision notice is not referred to the Tribunal, the Authority may then give a final notice.

11. Section 395 contains provisions about the Authority's procedures in relation to warning notices and decision notices. Section 395(1) provides that the Authority must determine the procedure that it proposes to follow in relation to the giving of warning notices and decision notices and section 395(2) provides that the procedure must be designed to secure, among other things, that the decision which gives rise to the obligation to give any such notice is taken by a person not directly involved in establishing the evidence on which that decision is based. 4

12. In order to comply with the requirements of section 395(1) the Authority sets out its decision-making procedures in a part of its Handbook (DEC). The requirements of section 395(2) are met .by the establishment of the Regulatory Decisions Committee (the Committee). The Committee is a Committee of the Authority's Board and its members are appointed by the Board. It consists of a Chairman, one or more Deputy Chairmen and other members. Apart from the Chairman, none of the other members is an employee of the Authority and the Committee operates outside the Authority's management structure. However, the Committee takes decisions on behalf of the Authority and so the decisions are those of the Authority. The 2005 review

13. In July 2005 the Authority published a report and recommendations following an enforcement process review. The review had been commissioned by the Authority because the enforcement process had been criticized by the Tribunal in January 2005 in Legal and General Assurance Society Limited v Financial Services Authority Tribunal Decision No. 011 and because "it was evident that many affected by enforcement actions had doubts about the fairness of the process". The report made forty-four recommendations. One was that, before a case was referred to the decision-makers there should be a thorough legal review by lawyers in the Authority's Enforcement Division who were not part of the investigation team. (At the time such a review was not current practice). The report also recommended the creation of a small, dedicated legal function to assist the Committee in its decision making so that the Committee would not have to look to the Enforcement Division for legal advice and support and so that confidential communications between the Enforcement Division and the Committee should cease. Yet a third recommendation was that all oral and written communications between the Enforcement Division and the Committee would be disclosed so that those subject to enforcement action would be completely clear about the case they had to meet. Another recommendation was that the practice under which the Enforcement case team had direct access to the Committee after the conclusion of the representations meeting without the firm or individual being present would end.

14. The enforcement process review was mentioned in the "Enforcement annual performance account 2005/06" published by the Authority. It stated that all forty-four of the recommendations had been accepted by the Authority's Board and that two of the key principles driving the recommendations were that there should be sufficient checks and controls during the investigation phase to help deliver balance and fairness and that there should be transparency for those subject to enforcement action about the case they had to answer and the evidence on which it was based. Mr Herberg informed us at the hearing that case review papers are now disclosed, before the hearing of the Regulatory Decisions Committee, to the persons to whom a warning notice or decision notice might be sent. Consideration by the Committee

15. On 21 May 2003 the proposal to issue a warning notice to Mr Davidson and Mr Tatham first came before the Committee. The Committee had before them an investigation report, a case review paper, a draft warning notice and copies of responses by or on behalf of Mr Davidson and Mr Tatham. The investigation report 5

16. The investigation report was signed on 12 May 2003 and it was lengthy (52 pages long). It first summarized the statutory and regulatory background by setting out the relevant provisions of the 2000 Act (but not the Code of Market Conduct) and the Principles as set out in the Handbook. It then summarized the investigation which had begun on 21 March 2002. The persons mentioned in the draft warning notice had been informed of the investigation and its scope on the same date (21 March 2002). (Mr Davidson's solicitors replied on 11 April 2002 setting out his case.) Preliminary Findings Letters were sent to Mr Davidson and Mr Tatham and others on 5 February 2003 and Mr Davidson and...

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