DPAs were introduced in 2014, under the provisions of the Crime and Courts Act 2013 (2013 Act), and can be used in relation to fraud, bribery and other economic offences (see feature article “Deferred prosecution agreements: moving into the unknown”). Tesco’s DPA is the fourth secured in the UK by the SFO, after Standard Bank, XYZ, and Rolls-Royce, and the first that does not involve bribery-related allegations (see News briefs “Bribery Act 2010: SFO concludes first deferred prosecution agreement”; “Rolls-Royce deferred prosecution agreement: the SFO gains traction”). The SFO continues to reiterate its commitment to address corporate offending by pursuing wrongdoing in the criminal courts, and also by encouraging a culture of self-reporting and co-operation, which can result in a company avoiding prosecution if certain financial and non-financial conditions are met.

The judgment, the DPA, and the statement of facts supporting it are currently the subject of reporting restrictions, which will only be lifted once the trials of three former Tesco executives have been concluded. However, from what little information has been publicised by the SFO, Tesco will avoid criminal prosecution by fulfilling certain non-financial conditions, in addition to paying a financial penalty of almost £129 million and the SFO’s full costs. The SFO has also stated that the DPA relates only to the potential criminal liability of Tesco and does not address whether liability of any sort attaches to Tesco plc or any current or former employee or agent of Tesco plc or Tesco.

The DPA scheme was designed to keep the DPA private until its terms are approved in open court. One interesting factor in the Tesco matter is that, in a break from the norm, Tesco’s DPA was first announced on 28 March 2017, before it had been approved by the court.

The change in approach was because the DPA constituted price-sensitive information for Tesco plc, which it was required to announce to the stock market as soon as possible under the UK Listing Authority’s Disclosure Guidance and Transparency Rules. The announcement seems to have highlighted a tension between the DPA scheme and the need to uphold market integrity where listed securities are concerned.

Separate from, and in addition to, the DPA, the FCA issued the final notice to Tesco plc and Tesco on 28 March 2017, requiring them to pay compensation to investors in certain securities, comprising Tesco plc shares and certain Tesco group bonds specified in the final notice. The final notice contains outline arrangements for the compensation scheme, which is to be administered by a third party. The FCA’s press release indicates that some 10,000 retail and institutional investors may be eligible for compensation under it, with the total compensation payable expected to amount to approximately £85 million plus interest.

The FCA had found that Tesco plc and Tesco had engaged in civil market abuse contrary to section 118(7) of the Financial Services and Markets Act 2000 (FSMA) (section 118(7)). This section prohibited the dissemination of information (in this case, published trading statements and accounting information) which gave, or was likely to give, a false or misleading impression as to a qualifying investment by a person who knew, or could reasonably be expected to have known, that the information was false or misleading. Section 118(7) was repealed when the Market Abuse Regulation (596/2014/EU) entered into force in July 2016, but the events of the Tesco matter predate that. The FCA decided to exercise its powers under section 384(5) of FSMA which allow it to require Tesco plc and Tesco to pay compensation to investors that suffered loss as a result of the civil market abuse.

The FCA’s final notice and Tesco’s own press releases indicate that Tesco agreed to the FCA’s finding of market abuse, and to the establishment of the compensation scheme, as well as to the DPA with the SFO.

The FCA’s final notice breaks new ground. This is the first time that the FCA has used its powers under section 384 of FSMA to require a listed company to pay compensation for market abuse. It is also the first time that the FCA has issued a final notice co-ordinated with a DPA agreed under the 2013 Act. Apart from the co-ordinated timing of the final notice and the announcement of the DPA, the FCA decided not to impose a further civil sanction on Tesco for market abuse, because the FCA recognised that:

Furthermore, Tesco received credit for refraining, at the FCA’s request, from interviewing witnesses or taking statements as well as for voluntarily disclosing material which appeared to Tesco to be significant to the FCA’s enquiries.

Dealing with the fallout from accounting irregularities at a company can be particularly challenging. In the authors’ experience, in these cases criminal and civil consequences may arise from materially the same facts. Investigations typically involve multiple agencies, often not only the SFO and FCA, but also the Financial Reporting Council and sometimes regulators and prosecutors from outside the UK too.

Individuals and their employers (or former employers) may quickly have divergent interests (see feature article “Regulators and disciplinary action: striking a balance”, this issue). These investigations can also take time to resolve; Tesco’s press releases in this matter indicate that this investigation went on for about two and half years. However, in spite of all of this, the Tesco case demonstrates that there is clearly scope in these matters for negotiating a co-ordinated solution with the UK authorities, in particular the SFO and the FCA. This presents a welcome opportunity for businesses willing to recognise the issues and draw a line under the past.

The authors suggest that one particularly welcome aspect of this case is that the FCA was willing to recognise, when determining its own approach, the existence and nature of the DPA, and the fact that under the DPA, Tesco will make a separate and substantial payment. A further civil sanction for market abuse was not imposed here by the FCA, but could not, in our view, have been excluded. The fact that the FCA specifically gave Tesco credit for not taking statements from witnesses is also of interest to those practitioners who advise firms on the conduct of investigations. This seems to be in line with comments made by staff at both the FCA and SFO over the last year or so: these agencies will not necessarily welcome firms carrying out internal investigations in advance of their own.

In the authors’ view, it will often still be appropriate, and necessary in many cases, for firms to carry out internal investigations when problems come to light, but the decision whether to do so, and in particular whether to interview witnesses, is taking on increasing strategic importance. This underlines the need for firms to take legal advice at an early stage if accounting problems arise, particularly in cases that might have a criminal element.

David Pygott is Of Counsel, and Iskander Fernandez is an associate, at CMS Cameron McKenna LLP.