On 30 June 2020, the High Court found in favour of the FCA's claim that Avacade Limited (in liquidation) (Avacade), Alexandra Associates (UK) Limited trading as Avacade Future Solutions (AA), Craig Lummis, Lee Lummis and Raymond Fox engaged in arranging and promoting investments without FCA authorisation in contravention of s.19 and s.21 of Financial Services and Markets Act 2000 (FSMA) and of making false and misleading statements in contravention of s.397 of FSMA and s.89 of the Financial Services Act 2012 (the FS Act).
Avacade, AA and the three directors sought to appeal the substantive judgment on multiple grounds. However, on 4 August 2021, the Court of Appeal rejected their arguments.
The judgment is part of a developing body of case law regarding high-risk investments held in self-invested personal pensions (SIPPs) and serves as a cautionary tale for unregulated introducers.
The Regulatory Framework
Under the general prohibition in s.19 of FSMA, a person may not carry on a regulated activity in the UK, or purport to do so, unless they are either an authorised person or an exempt person. Generally, an activity is a regulated activity if it is an activity of a specified kind that is carried on by way of business and relates to an investment of a specified kind, unless otherwise specified (s.22, FSMA). Specified activities include arranging (bringing about deals) in investments (article 25(1) FSMA (Regulated Activities) Order 2001 (SI 2001/544) (RAO)) and making arrangements with a view to transactions in investments (article 25(2) RAO).
Pursuant to s.21 of FSMA, a person who is not authorised must not, in the course of business, communicate an invitation or inducement to engage in investment activity unless the promotion has been approved by an authorised person or it is exempt.
The making of statements in the promotion of financial services that are false or misleading is prohibited by s.89 FS Act, but, before 1 April 2013, the equivalent prohibitions were set out in section 397 of FSMA.
The FCA is empowered by s.382 of FSMA to apply to the court for a restitution order against persons contravening the regulatory regime.
Relevant Facts
Between 2010 and 2014, Avacade cold called consumers who had existing pensions with a view to offering a free report on their current pension position. Off the back of these reports, Avacade sought to facilitate the transfer of individuals' existing pensions into SIPPs. Within those SIPPs, and at the direction of Avacade, the affected consumers purchased unregulated investments which included alternative investments such as HotPods (office space available for rent), tree plantations and Brazilian property developments.
The investments in these unregulated products were made by the SIPP providers on an "execution only" basis (i.e. without any advice from an advisor). By early 2015, AA purchased from Avacade its list of consumers whose pension transfers were not completed. AA operated a similar model to Avacade offering property development bonds as investments. During the relevant period, Craig and Lee Lummins had been directors of both Avacade and AA, whereas Raymond Fox ceased to be a director when AA began its operations.
Concerned that they had been directing consumers towards unregulated investments from which they could earn the most commission, the FCA opened up a formal investigation in 2014 and commenced civil proceedings against Avacade, AA and the three directors in 2017.
The Proceedings
Applicability of article 25 RAO
In the first instance, the High Court identified five steps taken by Avacade (including the initial contact to obtain information about individuals' pension arrangements, completing application forms concerning SIPP transfers and investments and processing application forms) which qualified as “arrangements” within article 25(2) of the RAO.
Avacade, AA and the three directors, on appeal, challenged the Trial Judge's application of article 25(2). They argued that, because the general prohibition carries with it criminal consequences, "making arrangements" under article 25(2) should have a narrow interpretation. Further, they argued that "making arrangements" in article 25(1) should be interpreted in the same manner as in article 25(2). In other words, it required a direct and instrumental link by way of causation between the arrangements.
The Court of Appeal rejected all of the grounds of appeal on article 25, confirming that:
- "Making arrangements" under article 25(2) should not have a narrow construction. Instead what is required is "simply a fair reading of the ordinary meaning of the words in the light of the overall purpose of the section in its statutory framework" (the purpose of the statutory framework being the protection of consumers).
- "Making arrangements" in article 25(1) should not be interpreted in the same manner as in article 25(2). This is because the word "arrangement" has a different purpose in each section, indicated by the fact that article 25(1) applied to making arrangements "for" the buying and selling of securities, whereas article 25(2) applied to making arrangements "with a view to" that activity.
- Article 26 provided an exception to article 25(1) but not article 25(2). Under article 25(2), it is the intent of the arrangement that is decisive, not the outcome. Therefore, there is no need to introduce a causation test.
- The transaction should be viewed as "a single braided stream of advice" noting the "importance of standing back and looking at the conduct of the unregulated activity holistically”. The Court of Appeal affirmed the High Court's finding that all of the steps that Avacade, AA and the three directors took were with a view to the transfer of pensions into the SIPPs and to the subsequent investments in the products.
Exclusions
The defendants also attempted to rely on the exclusions set out under articles 29 and 33 RAO.
Article 33 excludes certain types of introductions from the scope of article 25, if the introduction in question is made "with a view to the provision of independent advice or the independent exercise of discretion in relation to investments generally or in relation to any class of investments to which the arrangements relate".
The defendants submitted that because consumers had the option to take advice from an independent financial adviser and the SIPP administrators had discretion to refuse consumer's investments, this meant the defendants fell within the scope of this exclusion.
The Court of Appeal affirmed that the availability of advice did not change the primary purpose of the introductions - which was to “bring about a situation in which the desired investments would be made and the commissions earned”.
Under article 29, an unauthorised person arranging deals with or through authorised persons where they do not receive a pecuniary reward for doing so is excluded. The defendants tried to rely on this exclusion on the basis that they did not receive any pecuniary reward in relation to the regulated activities and only received commission from the unregulated investments.
The Court disagreed, noting that "the arrangements of Avacade and AA in this case must be looked at as an indivisible and seamless whole, being with a view to both entry into the SIPP and the product investments."
Comment
Cases such as this further chip away at the parameters in which unregulated introducers can operate without falling foul of the regulator and is a further example of clamping down on abusive pension transfers.
The efforts of the defendants in this case were clearly designed to bypass the protections provided to consumers by the regulatory system and the outcome in this case is to be welcomed. However, introducers are also utilised by some regulated firms operating honestly and professionally. Those firms will need to consider how their introducers operate and whether their models can be sustained in light of this and other court decisions.