Skip to main content

Unlawful financial promotions: how strict is the liability?

The implications of FCA v Skinner and others

Imagine this. You are a director of the company that is raising share capital from a number of private individuals. You know enough about financial services regulation to know that promotional material relating to the share offering will be regarded as a "financial promotion".

You know also that your company should not be communicating a financial promotion unless either the promotion has been approved by an authorised person (i.e. a firm that has permission to carry on regulated financial services business under the Financial Services and Markets Act 2000 (FSMA) or the arrangements fall within certain exemptions.  Maybe you even know that breaching this restriction is a criminal offence under section 21 FSMA.  So you arrange for a firm you believe to be authorised to approve your promotion.  It turns out that you are wrong. The firm was not authorised.

You will perhaps not be surprised to learn that your company has committed the relevant offence under section 21. This is what lawyers call a "strict liability" offence where there is no mental element – if you performed the unlawful act, you are guilty whatever your motivations or state of knowledge.  

You might expect, however, that your own, innocent, involvement would not be the subject of sanction.

You ask your lawyer.  She tells you that, as you yourself did not breach the financial promotion requirement, you could be liable to an action taken by the Financial Conduct Authority (FCA) under section 382 FSMA but only if you are a person was "knowingly concerned" in the breach of "a relevant requirement".  One of these relevant requirements is the requirement not to breach the section 21 restriction.  She explains that the FCA can take action where the breach has caused loss to somebody, or the person involved has profited as a result of the breach.  The FCA can seek an order for the court to provide "restitution" in such sum as it sees fit.

Being told this you breathe a sigh of relief.  Whilst your company (which breached the requirement) might be subject to sanction under section 382, you should not be affected personally since you did not knowingly concern yourself in any breach – on the contrary you tried to arrange it so that your company would be compliant with the law.

Following the decision in FCA v Skinner and others[1], you would be wrong to relax.

In that case, something like the circumstances described above applied. The director(s) arranged for an information memorandum relating to an equity raise to be approved by a firm of accountants. The accountants were persuaded to sign a letter approving the information memorandum for the purposes of section 21 FSMA.  However, the accountants were not an authorised firm and so their approval did not have the effect of making the information memorandum into a communication that could be communicated without breach of section 21.

There were in that case, questions about the real state of belief of the directors concerned (or at least one of them) but the judge (Kelyn Bacon QC, sitting as a deputy judge of the High Court) found that these were not relvant to whether section 382 applied.  If in fact the promotion had been made and had not been duly approved under section 21, the directors were "knowingly concerned" in the breach of section 21 even if the directors had genuinely believed that the information memorandum had been duly approved under section 21.  As a result they could be (and were) required to provide restitution to investors who have suffered from their involvement in the equity raise.

The judge accepted the FCA's case, that the knowledge required for the "knowingly concerned" test in section 382 FSMA to apply in relation to a breach of section 21 extends only to knowledge of the acts that constitute the offence under s. 21(1), namely the communication of an invitation or inducement to engage in investment activity.  The knowledge or belief of an individual as to whether potential exemptions are applicable is not relevant.  This analysis puts a great deal of emphasis on the structure of the offence. 

The structure of section 21 FSMA is as follows. Subsection (1) defines an offence of communicating a financial promotion.  Subsection (2) states that subsection (1) does not apply if the person in question is an authorised person or the financial promotion is approved by an authorised person.

If section 21 had been drafted differently so that the two sentences that make up section 21 were combined into a single sentence along the lines "it is unlawful for a person who is not an authorised person to communicate financial promotion that has not been approved by an authorised person" then the directors' belief about the status of the firm would be relevant as knowledge about whether the offence was committed. But because the "unless" part of the sentence had been separated out into a separate subsection, it was considered to have been relegated to being considered as an exemption to the offence, rather than an integral part of the definition of offence (despite the fact that to subsections were linked by the conjunctive word "But").  It followed that all the defendant needed to know to have the requisite knowledge to be liable under section 382, was that a financial promotion was being communicated. A mistaken belief that subsection (1) did not apply as a result of the exemption subsection (2) was not relevant. 

Section. 21(2) is not the only situation in which the prohibition in s. 21(1) is disapplied; in addition, there are numerous exemptions prescribed by statutory instrument. These include exemptions for promotions to certified high net worth individuals and sophisticated investors. The judge in this case was clear that the defendant's state of knowledge the applicability of such exemptions also was irrelevant.

The implications of this case are wide.

Anyone who is "knowingly concerned" in the communication of a financial promotion is at risk if it turns out that that financial promotion was unlawful because an exemption that was thought to be applicable did not apply. 

However, the principle goes much wider than this because the "relevant requirements" that can be the subject of restitution orders under section 382 FSMA include almost any requirement (including the breach of any offence) created by or under the FSMA and under selected other legislation relating to financial services. The logic of FCA v Skinner is that for all of these requirements, one can be "knowingly concerned" in a breach even if one considered on reasonable grounds that the activity was lawful as a result of the application of an exemption.

For example, there is a prohibition in section 85 FSMA against offering transferable securities to the public in the United Kingdom unless an approved prospectus has been made available to the public before the offer is made.  The section 85 offence is subject to numerous exemptions set out in section 86.  These include such circumstances as where the offer is directed at qualified investors only or is directed at fewer than 150 persons, as well as various financial thresholds.  Arguably somebody involved in offering the securities to the public who (falsely) believed an approved prospectus had been made available to the public would not be "knowingly concerned" in this breach of a regulatory requirement since the "unless" statement here is baked into the section 85 offence. However someone involved in offering the securities to the public who believed that this was lawful because the offer fell into one or more of the numerous exemptions to the section 85 offence set out in section 86 FSMA would not be so lucky if he turned out to be wrong in this beleif. On the logic of FCA v Skinner his belief about the applicability of an exemption would not be relevant.

To a certain extent, therefore section 382 FSMA may be considered to give rise to strict liability for breach of a very wide number of requirements.

The risks should not be overstated. Section 382 will only apply to someone who has been concerned with the breach only where there has been a loss to persons as a result of the breach or that person has group profits from the breach. Even where this is the case, the court has discretion as to what restitution to order, and no doubt where the court considers that a person has acted reasonably and properly it may choose not to order compensation, or full compensation. Nevertheless, the prospect of quasi strict liability for involvement in what may genuinely have been believed to be lawful actions that turn out to have breached some rule under financial services legislation can be a disquieting one.

Directors, brokers and others (including perhaps solicitors and accountants involved in transactions) will, if they reflect on this case, impose even greater requirements on the due diligence they undertake, and the warranties and indemnities that they seek when becoming involved in transactions that may form within the net of financial services regulation.

FCA v Skinner was decided in a particular context (and it is worthwhile recording that the defendants in this case were not legally represented and offered no argument in relation to the key point of law discussed in this article).  It is possible that it will be overturned or distinguished if the same issue arises again. Meanwhile, however, those who are involved in transactions where financial services regulation may be applicable should take very seriously their potential liability.
[1] Neutral Citation Number: [2020] EWHC 1097 (Ch)

Sign up to our email digest

Click to subscribe or manage your email preferences.


Related Work Areas

Financial Services