The Tribunal has upheld the FCA's decision to prohibit Arif Hussein from performing any function in relation to a regulated activity. However, although the FCA secured the outcome that it was looking for, this was a bittersweet victory for the regulator.
The Tribunal disagreed with the FCA's analysis that the conduct which prompted the enforcement action justified a prohibition order. Instead, the Tribunal upheld the prohibition order on the basis of Mr Hussein's failure throughout the enforcement process to be candid and truthful. The Tribunal also stated that it found aspects of the FCA's case against Mr Hussein "troubling", including the FCA's apparent failure to pursue senior management.
The Tribunal's judgment raises a number of interesting points of general application.
The FCA Enforcement Division argued in front of the Regulatory Decisions Committee (the "RDC") that Mr Hussein, while a junior derivatives trader at UBS, had taken part in internal chats with another trader who, as well as having responsibility for short-end derivatives trades, was responsible for making LIBOR submissions and that during these chats Mr Hussein communicated his preferences for LIBOR rates by reference to his trading positions. It was asserted that this demonstrated that Mr Hussein was knowingly or recklessly complicit in conduct which he believed was improper and was intended to misrepresent the rate or rates at which UBS believed that it could borrow funds on the interbank market. The FCA Enforcement Division alleged that this conduct displayed a lack of honesty and/or integrity and Mr Hussein was therefore not a fit and proper person to perform functions in relation to a regulated activity and should be prohibited.
At the RDC hearing, Mr Hussein stated that, at the time, he understood that it would be improper for UBS to make LIBOR submissions with the aim of benefiting UBS' trading positions but that his motive for entering into the chats and expressing his preferences was to explore internal opportunities to hedge his trading positions.
The RDC did not agree with the FCA Enforcement Division that Mr Hussein had acted dishonestly but did find that Mr Hussein had closed his mind to the risk that his preferences would be used to influence UBS' LIBOR submissions with a view to benefitting his trading positions and that this constituted him acting recklessly and therefore without integrity. As a result, the RDC concluded that Mr Hussein was not a fit and proper person to perform functions in relation to a regulated activity and prohibited him.
Mr Hussein referred the decision to prohibit him to the Tribunal. In responding to the FCA's Statement of Case, Mr Hussein continued to contend that his motive for entering into the chats and expressing his preferences was to explore internal opportunities to hedge his trading positions but now accepted that the chats had a dual purpose and that his preferences would be taken into account by UBS' LIBOR submitters when determining LIBOR submissions. Mr Hussein also now stated that, at the time, he believed that it was acceptable and regarded as good practice within UBS for trading positions to be taken into account when determining LIBOR submissions.
The FCA responded to Mr Hussein's new description of the purpose of the chats and his contemporaneous understanding of what information LIBOR submitters could legitimately take into account by contending that the difference between what Mr Hussein had previously told the FCA and what he was now saying was so stark that it displayed a further lack of honesty and/or integrity.
The Tribunal accepted the evidence put forward by Mr Hussein in his response to the FCA's Statement of Case and found that while "it was naïve of Mr Hussein to believe that it was acceptable to pass on information as to his trading book in order that it be considered as part of the process and that it was acceptable for the aggregate of the bank's trading positions to be taken into account…[the Tribunal did] not believe that Mr Hussein gave any real thought to such an inconsistency. He saw how the process operated, sanctioned by those who were more senior to him and he was given clear instructions from senior management to share his trading information with the [submitters]". Consequently, the Tribunal's view was that Mr Hussein's conduct did not display a lack of honesty and/or integrity so as to justify a prohibition.
Unfortunately for Mr Hussein, the Tribunal gave short shrift to his explanation as to why his recollection had changed so significantly since the RDC hearing. Mr Hussein told the Tribunal that it was only when he received the decision notice that he remembered the full extent of what he knew at the time. The Tribunal did not accept this; it was prepared to give Mr Hussein the benefit of the doubt that he may not have prepared adequately for his initial interview with the FCA but could not accept that, with the benefit of time and legal support, he could not remember what he claimed to remember now when he responded to the preliminary investigation report and put his case to the RDC.
The Tribunal found it more likely that Mr Hussein decided to abandon his original story once it had been rejected by the RDC and he realised that it was not credible. The Tribunal accepted that if, as it found to be the case, Mr Hussein was now telling the truth then it demonstrated that Mr Hussein had not previously been candid and truthful with the FCA throughout the enforcement process. On the basis of that, as well as the fact that it found Mr Hussein to have given untruthful evidence under oath to the Tribunal by claiming that it was only when he received the decision notice that he remembered the full extent of what he knew at the time, the Tribunal concluded that the decision to prohibit Mr Hussein on the grounds that his conduct had displayed a lack of honesty and/or integrity was one that was reasonably open to the FCA to make. The Tribunal therefore dismissed Mr Hussein's reference.
For the avoidance of doubt, this is not the first case where a person has been prohibited based, at least partially, on their actions during the enforcement process and not the underlying conduct. The Tribunal's ability to take account of a person's actions during the enforcement process is well established (as examples, see the Tribunal decisions relating to David Hobbs and Stephen Allen).
The judgment raises a number of interesting points. Some of these arise from the Tribunal's thoughts on matters which it acknowledges are outside of its jurisdiction and/or reflect its sympathy for Mr Hussein.
The FCA's attitude to pursuing senior management
In the judgment, the Tribunal's frustration that the FCA has not done more to hold senior individuals within UBS accountable for LIBOR manipulation is palpable. While stating that it has "no authority for deciding what cases the [FCA] chooses to make the subject of enforcement proceedings", the Tribunal describes as "troubling" the fact that Mr Hussein "was a relatively junior trader at UBS and he was put under investigation in relation to a limited number of chats which took place over a very short period…against a background of widespread manipulation of LIBOR within UBS for which senior managers bear ultimate responsibility and which, as shown by the Final Notice, was widely condoned".
Of particular concern to the Tribunal was the observation from the FCA's counsel that "…as regards more senior people, one has to remember in relation to UBS that not everybody is in the jurisdiction and when one looks at the Final Notice, the documentation that is referred to as fingering senior people is not extensive. As is the way of these things, the senior people somehow manage to keep their fingerprints off the relevant documents sometimes". The Tribunal expressed its hope that this observation was "not a true reflection of the [FCA's] attitude to pursuing senior management either in this jurisdiction or elsewhere when it is necessary to do so".
These statements from the Tribunal are likely to be a source of frustration to the FCA. Not only did they dominate the immediate media coverage of the Tribunal's decision but they are also inconsistent with the message that the FCA has been trying to send that it is pursuing senior management. The FCA may feel aggrieved that a relatively old case - the appointment of the investigators in relation to Mr Hussein's conduct took place in 2012 - is being used as a basis to comment on its current practices. It would likely prefer to point to the introduction of the Senior Managers and Certification Regime and the recent enforcement action taken against two bank CEOs (Paul Flowers and Jes Staley) to show that it does pursue senior management when appropriate.
The Tribunal's statements are likely to further stiffen the FCA's resolve to demonstrate that it will hold senior management to account.
The Tribunal's willingness to suggest what future action should be taken by the FCA
The judgment makes clear that the Tribunal came to the conclusion to dismiss Mr Hussein's reference reluctantly and only after thinking "long and hard about…[whether there was] any basis on which [it] could properly ask the [FCA] to reconsider its decision". In addition to its frustration that it was a junior trader rather than senior management that had to face enforcement action, the Tribunal stated that although Mr Hussein's decision not to have been truthful cannot be excused it could be seen as "understandable" and that the situation "is a tragedy for Mr Hussein because [the Tribunal does] not believe him to be a thoroughly bad person".
Reflective of its sympathy for Mr Hussein, the Tribunal suggests that the FCA may want to consider revoking the prohibition order after an appropriate period of time as the Tribunal does not consider that Mr Hussein's "serious error of judgment…is one that should bar him from working in the financial services industry indefinitely". Although the Tribunal acknowledges that the question of whether to revoke a prohibition order is entirely in the hands of the FCA and the Tribunal is often not shy to offer opinions on issues that are not strictly within its jurisdiction, the bluntness of the Tribunal's statement in this case is still noteworthy. While any future decision on whether or not to revoke Mr Hussein's prohibition order will be taken by the FCA and depend on the facts and circumstances at the time, Mr Hussein will certainly not be harmed by having in his back pocket a statement from the Tribunal that it does not think that the prohibition order should remain in place indefinitely.
The Tribunal's judgment is a helpful reminder that the wording of final notices and/or Tribunal judgments do matter. Just as the wording of the judgment means that the FCA's victory is a bittersweet one, so the wording of the judgment means that Mr Hussein's defeat is not absolute.
The dangers of not being candid and truthful with the FCA
Ultimately, it was not Mr Hussein's conduct in relation to LIBOR that earnt him a prohibition order but rather his failure to be candid and truthful with the FCA and the Tribunal.
This case provides a real and practical lesson about the dangers of misleading the FCA during the enforcement process. It is not necessary to lie to the FCA in order to mislead it; it can also be misled by a person being, as Mr Hussein was, economical with the truth.
It is easy to see how someone may be tempted to say to the FCA what they think need to in order to avoid enforcement action. This is especially the case before or near the start of an investigation where the person may be interviewed as a witness as part of an investigation into its employer, may not have independent legal advice and may not have had the opportunity to refresh their memory from the documents.
If a person misleads the FCA, even intentionally, all is not immediately lost. For example, the Tribunal stated that had Mr Hussein "been candid and open about [misleading the FCA] in his evidence to the Tribunal and laid all his cards on the table, then the Tribunal may well have considered the situation sympathetically". However, once it has been realised that the FCA has been misled it is important to think carefully about the next steps. Often this will involve proactively providing a clarification to the FCA.
It is important for lawyers to remember that this is not an easy area for clients to navigate. The distinction between not making the FCA's case for it, which is legitimate, and misleading the FCA through omission, which is not legitimate, is not always a clear one.
As behavioural psychologists and economists have found, once a person has committed to a version of events it can be difficult for them to subsequently acknowledge that it is not accurate. It may be difficult to get a client to acknowledge to themselves that they have misled the FCA, let alone acknowledge that fact to their lawyer and/or the FCA.
It is important that anyone being questioned about events that they cannot remember in detail makes this clear when answering questions in an interview. It is completely reasonable and not at all surprising for someone not to be able to recall precisely their historical actions, knowledge or thoughts. This is particularly likely to be the case where the relevant events took place several years ago and, as is often the case with senior management, they formed only one part of a person's responsibility.
It is often not possible for someone to provide detailed answers to questions without the benefit of the documents that they would have been aware of at the time. It will therefore usually be crucial for an individual under investigation to seek from the company access to the relevant contemporaneous documentation. The earlier in the process that the individual can obtain this access, the sooner they can put a robust strategy in place.
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