The FCA, Tesco and the civil market abuse regime
The FCA has issued a final notice in relation to market abuse by Tesco and for the first time exercised its power to require restitution for those affected.
On 28 March 2017 the FCA published a final notice addressed to Tesco plc and its subsidiary Tesco Stores Limited as a result of Tesco plc’s misstated trading update of 29 August 2014. The FCA’s action has two limbs:
- A public statement that both Tesco entities (Tesco) committed market abuse. In view of Tesco Stores Limited’s agreement with the SFO to enter into a Deferred Prosecution Agreement under which it will pay a fine of almost £129m, Tesco’s “exemplary” cooperation, the acceptances of responsibility by Tesco, the compensation scheme set up to recompense investors and the steps taken to prevent future, similar misconduct, the FCA did not impose a further financial penalty on Tesco.
- A statutory scheme under section 384 of the Financial Services and Markets Act 2000 (FSMA) under which Tesco is required by the FCA to pay approximately £85m (plus interest) to investors who purchased and held its shares or listed bonds at an overvalue in the period between the misstatement on 29 August 2014 and its correction on 22 September 2014. This is the first time the FCA has exercised its power under section 384 to require restitution in cases of market abuse. The details of the scheme are set out in an annex to the final notice.
The FCA’s final notice is very short and light on detail. However, these additional points of interest do emerge from it:
- The notice mentions several times that the Tesco plc Board, in publishing the trading update on 29 August 2014, relied on information provided to it by a subsidiary, Tesco Stores Limited, which was not correct. According to the notice, that information did not disclose the fact or risk of the inaccuracy in the figures and those who were aware of the true position did not alert the Tesco plc Board to the inaccuracy. The notice further says that no member of the Tesco plc Board knew, or could reasonably be expected to have known, that the information was false or misleading. Without actually saying so, the notice effectively says that no criticism should be levelled at the Tesco plc Board over this event.
- Nevertheless, the notice states that in the FCA’s view there was knowledge at a sufficiently high level - but below the level of the Tesco plc Board - as to the false and misleading nature of the 29 August 2014 statement such as to constitute the knowledge of Tesco plc itself “within the specific context of, and for the purposes of, market abuse”. Tantalisingly for lawyers, the notice does not reveal any more about the FCA’s thinking in this regard, but this is plainly a reference to the doctrine of identification and - specifically - to the well-known Privy Council decision in Meridian Global Funds Management Asia Ltd v Securities Commission  2 AC 500. In that case Lord Hoffmann found that a special rule for corporate attribution should be fashioned in certain cases when interpreting a substantive rule and that this might not always have to involve the “directing mind and will”. This is a very significant case in setting out the FCA’s view of corporate attribution in the civil market abuse context and so it is unfortunate that the notice goes no further than this oblique reference. This is particularly so given the related context of the Government’s recent Call for Evidence on Corporate Criminal Liability, which seeks views on a number of options for reforming the doctrine of identification, including a possible new corporate offence of failing to prevent economic crime (see a summary of our response to the Government’s Call for Evidence).
- There is some brief description of what underpins the FCA’s description of Tesco’s cooperation as “exemplary”. A notable reference here is this: “Furthermore, [Tesco] refrained, at the FCA’s request, from interviewing witnesses or taking statements”. Apparently not carrying out an internal investigation at the FCA’s request on the occurrence of an event such as this is a benchmark for “exemplary” cooperation in the FCA’s eyes.
- There is no finding of any breach of the Listing or Disclosure Guidance and Transparency Rules, although these would have been applicable.
For more on the Deferred Prosecution Agreement, see our article here.
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