Article written by Ciara Davies, solicitor in our Funds and Financial Regulation team. This article was first published by Lexis®PSL on 31 August 2021.
On 4 August 2021, the Court of Appeal handed down its judgment in the case of FCA v Avacade Ltd & others. The Court of Appeal, found Avacade Ltd (Avacade) unsuccessful on all its grounds of appeal (rejecting certain arguments on procedural grounds).
Following on from the Court of Appeal’s judgment in Russell Adams v Options SIPP UK LLP (originally known as Adams v Carey) (Adams), this decision sounds further caution to unregulated introducers and regulated firms that choose to do business with them.
A recap of the background
The dispute, first heard in the High Court in August 2020, centres around the FCA’s assertion that Avacade had advised and/or arranged investments without the appropriate regulatory authorisation, in breach of the general prohibition set out in section 19 of the Financial Services and Markets Act 2000 (FSMA).
Avacade had contacted consumers with existing occupational and personal pensions by means of telephone. A report was subsequently provided to these consumers on their current pension position. The result was that many of the contacted consumers were convinced to transfer their existing pension into self-invested personal pension schemes (SIPPs).
The affected consumers were directed to purchase certain unregulated investments, which included direct investment in commercial office space, crops and forestry. The FCA’s concern was that Avacade was funnelling customers towards transferring their existing pension to a SIPP and subsequently making unregulated investments.
Arranging under Article 25 RAO
Avacade was given permission to appeal on specific grounds including challenging the findings and reasoning of the Trial Judge on the application of article 25(2) arranging. Avacade’s arguments in support of its challenge included that:
- Because criminal consequences arise from contravention of the General Prohibition, where there is any ambiguity, the High Court should have adopted a narrow interpretation of 'making arrangements' under article 25(2); and
- 'Making arrangements' had the same meaning in article 25(2) as it did in 25(1) and therefore it required a direct and instrumental link by way of causation between the arrangements and, by analogy with article 26 there must be a notional causative link of 'bringing about the transactions'.
The Court of Appeal rejected these arguments outright:
- The Court of Appeal agreeing with the High Court found that it is not appropriate to adopt a narrow construction of 'making arrangements' under article 25(2) on the grounds that criminal sanctions can be imposed. All that is required is a fair reading of the ordinary meaning of the words 'making arrangements' in light of the overall purpose of the legislation.
- Article 25(1) and 25(2) should not be interpreted in the same way. Popplewell LJ held that article 25(1) applies to making arrangements 'for' the buying and selling of securities, whereas article 25(2) can be distinguished because it applies to making arrangements 'with a view to' that activity.
- Article 26 only provides an exception to article 25(1) – it does not apply to article 25(2) and there is no need to introduce a causation test to 25(2) because by using the words 'with a view to', it is clear that article 25(2) is only concerned with the purpose of the arrangements. A person may have a relevant transaction as an end in view even where the arrangements do no more than create or facilitate a situation which provides the opportunity for it to take place. To summarise the point, Lord Popplewell expressed rather pithily that:
'You cannot make the proverbial horse drink, but taking it to water involves making arrangements with a view to it drinking'.
In any event, whatever causation is adopted, the Court of Appeal had little doubt that the arrangements were with a view to the transfer of pensions into the SIPP and with a view to the subsequent investments in the products.
- Entry into the SIPP was a necessary and critical part of a transaction that was an indivisible and seamless set of arrangements as a whole. Approving the dicta in the Adams, Popplewell LJ concurred that the transaction should be seen as a 'single braided stream of advice' and that it was important to look at 'the conduct of the unregulated entity holistically'.
Article 29 RAO
- Avacade was refused permission to advance its proposed ground that article 29 RAO had been incorrectly construed by the High Court. However, the Court of Appeal did comment that it would have rejected Avacade’s argument that it received no pecuniary advantage when consumers entered into the SIPP. Taking the transaction as a whole, commission received as a result of subsequent investment into the unregulated products was inextricably linked to the entry into the SIPP.
Conclusion
The key question is where this leaves things in terms of what role can be played by an unregulated introducer.
In the same vein as its decision in Adams, the Court of Appeal’s decision continues to prioritise consumer protection in the context of the regulatory perimeter, however, we would argue that greater certainty is needed in this area which only legislation can provide.
It of course remains an option for Avacade to appeal to the Supreme Court. Those of you who have followed Adams will be aware that Options Pensions has sought permission to appeal the Court of Appeal’s ruling in that case to the Supreme Court.
Greater clarity is required about the obligations on unregulated introducers and firms that accept business from them. Whether this is provided by a final Supreme Court decision or parliamentary intervention remains to be seen.