Financial institutions in receipt of an injunction obtained by the FSA (or more recently the FCA) are in a difficult position in respect of their costs following the Supreme Court judgment in FSA v Sinaloa Gold (2013). The Supreme Court confirmed in this case that the FSA was not obliged to give a cross-undertaking in respect of third party losses as a condition of obtaining a freezing injunction designed to prevent dissipation of the defendant’s assets.
In the underlying proceedings, the FSA alleged various breaches of the Financial Services and Markets Act 2000. The FSA sought, and obtained, a freezing injunction over the defendant’s six accounts, managed by the respondent banks. The freezing injunction inadvertently included an undertaking to cover third party costs and losses (but did not include a cross-undertaking in damages). Realising this inconsistency, the FSA made an application to have the undertaking removed from the injunction.
The respondent banks filed an objection to this application; and the issue proceeded all the way up to the Supreme Court, which unanimously dismissed the banks’ objection and appeal. The Court noted that it may be appropriate for a public body to give a cross-undertaking in respect of costs, but not in relation to third party losses generally (save in specific special circumstances, which were not evident on the facts here).
The Court’s rationale for excluding third party losses from the scope of the FSA’s indemnity is clearly one of pragmatism. It is hard to argue against the view that the FSA, and more importantly its public purse, should not be exposed to potentially open-ended liability towards third parties when acting pursuant to its public law enforcement duties in the interests of the public as a whole. Nevertheless, it is unfortunate that this decision has potentially reduced the level of protection for innocent financial institutions in these circumstances and leaves them with a potential exposure against which they have no protection or recourse.