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Straying into regulated territory – more guidance on investment advice and arranging activities

Duncan Black
19/04/2021

Locations

United Kingdom

Two recent cases have served as a timely reminder that those in the business of marketing financial investments need to take care that they do not find themselves in the position of 'advising' customers in a way that requires them to be authorised under the Financial Services and Markets Act 2000 ("FSMA").

It is clear that the Financial Conduct Authority (the "FCA") is determined actively to police the regulatory perimeter – it was after all a party to proceedings in both of the cases discussed below. Those providing advice on investments on an unauthorised basis can fully expect to suffer the consequences, including facing restraining orders and orders to disgorge profits (including those made from investing the profits received). As the principles applied in these particular cases show, the operation of trading schools is likely to involve regulated activities requiring authorisation and the position of unregulated pension plan and other unregulated introducers is increasingly exposed to scrutiny in the light of Adams.  

The first case, 24HR Trading Academy Ltd v FCA [2021] EWHC 648 (Ch), was heard in the High Court and involved an unauthorised company that had been providing trading 'signals' via social media to fledgling FX traders. The second case, Adams v Options UK Personal Pensions LLP [2021] EWCA Civ 474, was heard in the Court of Appeal and again involved an unregulated entity, in this instance an introducer of self-invested pension plans (each being a "SIPP").

Each Court found, inter alia, that there had been a breach of the general prohibition in section 19 of FSMA, which prohibits persons from carrying out specified regulated activities in the UK unless authorised or exempt. In summary terms, Article 53 of the FSMA (Regulated Activities) Order 2001 (as amended) (the "RAO") describes the specified activity of 'advising' as being, for present purposes, advice given to or for an investor in relation to the sale to him/her of a relevant instrument. While the two cases, Adams in particular, also decided a number of other issues, we focus on the question of what is 'advice'.

  • 4HR Trading

24HR Trading Academy Limited (the "Company") used WhatsApp to send 'trading signals' to its customers relating to FX trading contracts. It also sold educational material on FX trading including market commentary. One of the  issues that the Court had to consider was whether the 'signals' constituted regulated 'advice'. 

The Company issued frequent 'signals' that contained all the details that a recipient would need to buy specific regulated FX products (namely options, spread betting contracts, etc., which are referred to using the umbrella term "CFDs"). It boasted of its success ratio and the 'pips' (changes in the value of a currency) it could generate, thereby indicating that the transactions referenced in the 'signals' would produce good levels of profit. The Company provided information in its training material on how to turn the 'signals' into CFDs, emphasising the lack of “hard work” that would be needed to use the 'signals' to produce a profit. A recipient just needed to “execute the trades” and be “good at following instructions”.

The Court held that, interpreted objectively, the 'signals' were 'advice'. A reasonable recipient of them would conclude that they constituted a recommendation to effect the specific transactions in CFDs referenced in the 'signals'. The Court considered the context in which the 'signals' were made. It found that what the Company said about the 'signals' on its website, including the likely profitability of the underlying transactions and instructions on how to turn the 'signals' into CFDs, meant that…."a reasonable recipient of them would conclude that they constituted a recommendation to effect the specific transactions….". It went on to find that the educational context in which the 'signals' were given did not displace the "clear meaning" of the 'signals' as 'advice'.

This was because:

(i) while the provision of information alone is not sufficient to constitute 'advice'; if the information comes with a comment or value judgment on the relevance of that information to a client's investment decision, then it may be 'advice';

(ii) whether 'advice' is given is a question to be determined objectively. So if a  communication is 'advice', determined objectively, the subjective view of the person making the statement, or an agreement between the maker and the recipient, does not stop it being 'advice'. In this case it meant that disclaimers and warnings made by the Company to its customers did not "stand any realistic chance of displacing the conclusion that the Signals were 'advice'…."); and

(iii) a recommendation as to a course of action is capable of being 'advice'. Where 'advice' of this character is given it does not matter whether the recipient is free to follow or disregard it. It will retain its character of 'advice' even if the recipient can be expected to obtain further advice before proceeding with it.

It is noteworthy that the FCA succeeded in its application for summary judgement.  It was able to obtain relief without the need for a full trial – and although context is always important in deciding whether advice amounts to regulated 'advice', the FCA's enforcement need not turn on an exhaustive analysis of that context. By contrast, the issue of whether the corporate veil could be pierced to make the defendant's sole shareholder and director liable was a matter for trial.

Interestingly, the Court also rejected the view (that some took) that the arranging activity covered by article 25(2) RAO required a "causative link" between the activities and resulting transactions: article 25(2) RAO was engaged irrespective of whether any transactions were actually concluded. The FCA's view accords with that of the Court.

  • Adams

Mr Adams was introduced to Options UK Personal Pensions LLP ("Options") by CLP Brokers ("CLP"), an unregulated introducer. In consequence, Mr Adams set up a SIPP with Options, investing in storage pods that were intended to provide rental income and capital growth. The investment underperformed and Mr Adams claimed against Options, seeking damages and an unwind of the contract. Mr Adams claimed on three grounds, one of which was a novel claim under section 27 FSMA. At first instance, Mr Adams' claim was dismissed on all three grounds but he was granted leave to appeal on the section 27 claim.1

To succeed under section 27, Mr Adams had to show that Options, in the course of a regulated activity, had made an agreement with him as a consequence of something said or done by an unauthorised third party, also in the course of a regulated activity. It was common ground that the establishment of the SIPP was a regulated activity but that the investment in the storage pods was not.2  Contrary to the decision at first instance, the Court of Appeal held, adopting a holistic approach to the issue, that CLP's recommendation that Mr Adams should invest in the storage pods carried with it advice that he transfer out of his existing pension plan and into an Options SIPP, both of which were 'securities' and in relation to both of which it had given unauthorised 'advice'.3 

The Court of Appeal therefore concluded that the activities within the scope of each of Articles 253 and 53 RAO had been carried out such that CLP (an unauthorised third party) had caused an agreement (the Options SIPP) to made between Options and Mr Adams, with the result that section 27 FSMA applied and the agreement was therefore unenforceable. The Court refused, for consumer protection reasons, to exercise its discretion under section 28(3) FSMA to enforce the agreement on just and equitable grounds.

One of the most interesting aspects of the judgment is that the Court found that advice on unregulated investments can potentially be material (or at least relevant) to the question of whether regulated advice (i.e., advice on regulated products) is being given. Similarly, as in this case itself, as the judge put it "if a person praises an unregulated investment which would need to be acquired by means of a particular vehicle, it may very well, depending on the particular facts, be right to see him as advising that the vehicle be adopted". This underscores the necessity of examining each part in a proposed chain of transactions for perimeter issues.

Please contact us if you require further advice on any of the issues considered in this alerter.

1  The other ground on which Mr Adams was granted leave to appeal but on which he was unsuccessful concerned an alleged breach of the FCA's Conduct of Business Rules at COBS 2.1.1R (duty to act honestly, fairly and professionally). The essence of that claim was that Options had, by establishing and administering a SIPP for Adams that was manifestly unsuitable and by failing to implement FCA guidance in connection therewith, breached COBS. The Court of Appeal agreed with the judge at first instance, who had concluded that it was clear from the contractual documentation between Mr Adams and Options that Options was acting on an execution-only basis, that it was not advising Mr Adams, that the investment was high risk and that Mr Adams was responsible for his own investment decisions. Nor could COBS 2.1.1R be read as imposing any duty on Options so to advise. The claim therefore failed.

2  Mr Adams, supported by FCA as intervener (itself relying on its own guidance under PERG 12.3), attempted some nimble footwork in an effort to convince the Court of Appeal that, by an act of conversion of rights when purchasing it, the investment in the storage pods was a "relevant transaction" for the purposes of, inter alia, Article 53 RAO. The argument failed (and the FCA's guidance was found by the Court of Appeal to be wrong) but this was not fatal to Mr Adams' claim for reasons considered elsewhere in this alerter.

3  The Court of Appeal also decided that there was sufficient causality in CLP's actions to conclude that Article 25(1) RAO ('arranging' investments) had additionally been triggered

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