Financial Services Authority v Fradley & Woodward
| Jurisdiction | England & Wales |
| Judge | Lady Justice Arden |
| Judgment Date | 23 November 2005 |
| Neutral Citation | [2005] EWCA Civ 1183 |
| Docket Number | Case No: A3/2004/2373 |
| Court | Court of Appeal (Civil Division) |
| Date | 23 November 2005 |
[2005] EWCA Civ 1183
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM The High Court of Justice
Chancery Division
(Mr John Martin QC)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Ward
Lady Justice Arden and
Mr Justice Collins
Case No: A3/2004/2373
Rebecca Stubbs (instructed by The Financial Services Authority) for the Appellant/Respondent
Mr Sean Fradley in person
These are appeals with the leave of the judge from two orders dated 21 October 2004 of Mr John Martin QC sitting as a deputy judge of the High Court of Justice, Chancery Division. The first order contains a declaration that between 19 August 2002 and 12 February 2003 Mr Fradley carried on an investment business in the United Kingdom without authorisation contrary to section 19 of the Financial Services Markets Act 2000 (" FSMA") . The second order contains a declaration that between those dates Mr Woodward was knowingly concerned in that contravention by Mr Fradley and a company called 147 Racing Limited ("147") . The judge also made certain consequential orders, including orders restraining Mr Fradley and Mr Woodward from disposing of their assets and from acting in further breach of section 19, and remitted the question of restitution and other remedies for further consideration.
In his judgment ( [2005] BCLC 479) , the judge declined to hold that there were also breaches of section 19 of FSMA between 9 March 2003 and 21 August 2003. The Financial Services Authority ("the FSA") appeals against that refusal and Mr Fradley appeals against the judge's holding that there was a breach of section 19 of FSMA in the earlier period. In fact, as explained below, the judge subdivided the relevant periods into five periods, which are set out in paragraph 11 below.
It may be helpful to start with a very brief (but not comprehensive) explanation of the legislative scheme under which these issues arise. The FSMA is a portmanteau statute dealing with all kinds of investment activity, not just activities in traditional investments such as securities. The former system of self-regulation in specific areas has been abolished. Instead, the demanding function of regulating the numerous and disparate activities that take place in the financial services industry in the United Kingdom is now vested in the FSA pursuant to FSMA. Under section 2(2) of FSMA, the regulatory objectives of the FSA are market confidence, public awareness, the protection of investors and the reduction of financial crime. In discharging its functions the FSA has to have regard to a number of factors, including the principle that the burden placed on a person should be proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction. To enable the FSA to regulate the many different types of activity in the financial services industry, section 19 of FSMA (set out below) imposes a general prohibition on the carrying on of regulated activities (as defined in section 22 of the FSMA, which is set out below) without authorisation or exemption. Regulated activities include the operation of a "collective investment scheme", referred to below as a "CIS". This concept is defined in section 235 of FSMA (set out below) , which needs to be examined in detail. At the heart of the concept, however, is the requirement for the sharing of profit or income by participants who do not have day-to-day control over the management of the property. A paradigm example of a CIS would be a unit trust, but the definition applies in many more situations than that. The general prohibition in section 19 on unauthorised investment activity is buttressed by a number of other prohibitions, including a prohibition on the promotion of invitations to engage in financial activity unless authorised (section 21, set out below) . Finally, the FSA is empowered to seek injunctions to restrain anticipated breaches of the basic prohibition in section 19, and also orders for the disgorging of profits by persons who have contravened FSMA and the payment by them of compensation to persons who have been adversely affected by their contraventions (sections 380 and 382 of FSMA).
The statutory framework
Now that I have summarised the statutory scheme above, the convenient course is to set out all the sections of FSMA relevant to this appeal in one place:-
"19. The general prohibition
(1) No person may carry on a regulated activity in the United Kingdom, or purport to do so; unless he is-
(a) an authorised person; or
(b) an exempt person.
(2) The prohibition is referred to in this Act as the general prohibition.
21. Restrictions on financial promotion
(1) A person ("A") must not, in the course of business, communicate an invitation or inducement to engage in investment activity.
(2) But subsection (1) does not apply if-
(a) A is an authorised person; or
(b) the content of the communication is approved for the purposes of this section by an authorised person.
(3) In the case of a communication originating outside the United Kingdom, subsection (1) applies only if the communication is capable of having an effect in the United Kingdom.
(4) The Treasury may be by order specify circumstances in which a person it to be regarded for the purposes of subsection (1) as-
acting in the course of business;
not acting in the course of business.
(5) The Treasury may by order specify circumstances (which may include compliance with financial promotion rules) in which subsection (1) does not apply.
(6) An order under subsection (5) may, in particular, provide that subsection (1) does not apply in relation to communications-
of a specified description;
originating in a specified country or territory outside the United Kingdom.
originating in a country or territory which falls within a specified description of a country or territory outside the United Kingdom; or
originating outside the United Kingdom.
(7) The Treasury may by order repeal subsection (3) .
(8) "Engaging in investment activity" means
(a) entering or offering to enter into an agreement the making or performance of which by either party constitutes a controlled activity; or
(b) exercising any rights conferred by a controlled investment to acquire, dispose of, underwrite or convert a controlled investment.
(9) An investment is a controlled activity if
(a) it is an activity of a specified kind or one which falls within a specified class of activity; and
(b) it relates to an investment of a specified kind, or to one which falls within a specified class of investment.
(10) An investment is a controlled investment if it is an investment of a specified kind or one which falls within a specified class of investment.
(11) Schedule 2 (except paragraph 26) applies for the purposes of subsections (9) and (10) with references to section 22 being read as references to those subsections.
(12) Nothing in Schedule 2, as applied by subsection (11) , limits the powers conferred by subsections ( 9) or (10).
(13) "Communicate" includes causing a communication to be made.
(14) Investment includes any asset, right or interest.
(15) "Specified" means specified in any order made by the Treasury.
22. The classes of activity and categories of investment
(1) An activity is a regulated activity for the purposes of this Act if is an activity of a specified kind which is carried on by the way of business and-
(a) relates to an investment of a specified kind; or
(b) in the case of an activity of a kind which is also specified for the purposes of this paragraph, is carried on in relation to property of any kind.
(2) Schedule 2 makes provision supplementing this section.
(3) Nothing in Schedule 2 limits the powers conferred by subsection (1) .
(4) "Investment" includes any asset, right or interest.
(5) "Specified" means specified in an order made by the Treasury…"
235. Collective investment schemes
(1) In this Part "collective investment scheme" means any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income.
(2) The arrangements must be such that the persons who are to participate ("participants") do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions.
(3) The arrangements must also have either or both of the following characteristics-
(a) the contributions of the participants and the profits or income out of which payments are to be made to them are pooled;
(b) the property is managed as a whole by or on behalf of the operator of the scheme.
(4) If the arrangements provide for such pooling as is mentioned in subsection (3) (a) in relation to separate parts of the property, the arrangements are not to be regarded as constituting a single collective investment scheme unless the participants are entitled to exchange rights in one part for rights in another.
(5) The Treasury may by order provide that arrangements do not amount to a collective investment scheme –
(a) in specified circumstances; or
(b) if the arrangements fall within a specified category of arrangements.
418. Carrying on regulated activities in the United Kingdom
(1) In the four cases described in this section, a person who-
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