Reach for the StaRs!
In the recent case of Baker Tilly UK Audit LLP and others v Financial Reporting Council  EWCA Civ 406, the appellants challenged the decision of the Financial Reporting Council (FRC) to bring disciplinary proceedings against them on the basis that the Public Interest Test applied was unlawful.
Rules governing disciplinary proceedings
The FRC rules governing when disciplinary proceeding can be brought against accountants and accountancy firms is contained in the FRC Accountancy Scheme (the “Scheme”). Under the Scheme, before proceedings can be brought, the FRC’s Executive Counsel must determine whether a charge of professional misconduct should be prosecuted and deliver a Formal Complaint to the Conduct Committee, giving reasons for his decision.
Before making a Formal Complaint, the Executive Counsel must be satisfied that the following two conditions have been met:
(i)There is a realistic prospect that a Disciplinary Tribunal will make an Adverse Finding against a Member or Member Firm (i.e. it is likely that there has been “Misconduct” as defined by the Scheme) (the “Evidential Test”); AND
(ii)A hearing is desirable in the public interest (the “Public Interest Test”).
Assistance on applying the tests is provided by the Guidance on the delivery of Formal Complaints (the “Guidance”). Paragraphs 10 to 15 of the Guidance apply to the Public Interest Test, with paragraph 12 containing factors favouring a Formal Complaint being made.
Basis of the appeal
The appeal focussed on the wording of the Guidance relating to the Public Interest Test and how this should be applied by the Executive Counsel.
Paragraph 11(2) of the Guidance requires that once the Evidential Test is deemed to be satisfied (as it was here), a Formal Complaint “should usually be delivered to the Board unless contrary public interest factors clearly outweigh those favouring delivery”. In determining that they did not, the Executive Counsel focussed on paragraph 12(1)(f) of the Guidance. This states that a hearing is likely to be in the public interest if the alleged misconduct involved “non-trivial failure… to act with professional competence or due care” (emphasis added).
The appellants argued that “non-trivial failure” could include failures or breaches which are all but trivial. This would be unlawful as the definition of “Misconduct” in the Scheme requires conduct falling “significantly short” of the expected standards and the Courts have previously held that professional misconduct requires more than mere negligence (Re a Solicitor  1 WLR 869). The appellants therefore argued that the decision to make the Formal complaint was unlawful.
The decision and application of the Public Interest Test
The appeal was dismissed, but, interestingly, the judges’ determination on how the Guidance on the Public Interest Test should be applied by the Executive Counsel differed.
Lady Justice King and Lord Justice Sales determined that paragraphs 12(1)(a)-(f) are aggravating factors with additional presumptive effect; beyond the general presumption in paragraph 11(2). They concern matters which indicate that the misconduct alleged is more grave or serious than the basic level of “misconduct” required for the Evidential Test (e.g. dishonesty in 12(1)(a)) and which should be given special weight. Therefore, in relation to “non-trivial failure” under paragraph 12(1)(f), the Executive Counsel needed to show significant failure over and above something which would merely satisfy the basic test of “misconduct”. This is considered to provide a “practical meaning and coherent effect” to the Guidance, on the basis that the more serious the misconduct, the more likely it is to be in the public interest to pursue a complaint. However, it is suggested that it would be beneficial for the FRC to amend and review the Guidance to make the position clearer.
Lady Justice Arden, dissenting on the reasons, concluded that paragraph 12 does not contain aggravating factors, but examples of factors which indicate that disciplinary proceedings would be in the public interest. Paragraph 12(1) sets out types of misconduct which merit a formal complaint, with paragraph 12(1)(f) referring to “gross negligence”. Therefore, the Executive Counsel does not have to show more than ordinary misconduct. He is merely required to weigh or consider the elements of the member’s conduct which led him to determine that the Evidential Test had been satisfied.
All agreed that the Guidance should be interpreted in accordance with the Scheme and, therefore, all references to misconduct are to “Misconduct” as defined by the Scheme.
While this decision helps to clarify the application of the Public Interest Test, it will be interesting to see whether the FRC will accept the suggestion of Lady Justice King and Lord Justice Sales and issue revised guidance.
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