The Commercial Court has confirmed that private persons can validly assign claims under section 138D Financial Services and Markets Act 2000 ("FSMA") to institutions such as hedge funds or litigation funders.
In Connaught Income Fund Series 1 v Capita Financial Managers Ltd(2014), the Claimant was an unregulated collective investment scheme established as a limited partnership (the "Fund"). The Fund was wound up by order of the High Court in March 2012 when joint liquidators were appointed. The Defendants were operators of the Fund.
The Fund alleged that the Defendants, unlawfully in breach of s.238 and s.241 FSMA, promoted the Fund to investors who subsequently became partners in it. The Fund's cause of action was based on the assignment of claims of over 1,000 retail investors who had subscribed to the Fund prior to its insolvent liquidation. Any recoveries made in the course of the proceedings were to be used in the winding-up, adding to the overall assets available to the Fund's creditors.
The Cause of Action
Under s.138D FSMA, contravention by an authorised person of any FCA or PRA rules is actionable "at the suit of" a private person who suffers loss as a result. A contravention is also actionable by a person who is not a private person if the following three conditions are satisfied (regulation 6(3)(c) FSMA (Rights of Action) Regulations 2001 ("RAR")):
(a) that person is acting in a fiduciary or representative capacity on behalf of the private person;
(b) any remedy would be exclusively for the benefit of the private person; and
(c) that remedy could not be effected through an action brought otherwise than by a fiduciary or representative.
Summary Judgment Hearing
The Claimant made an application for Summary Judgment regarding its entitlement to bring claims based on assignments. For the following reasons, the Defendants argued that the Fund could not bring these claims:
1. the Fund was prevented from bringing the claims under paragraph 5A, Practice Direction 7A of the Civil Procedure Rules ("CPR"), because the underlying causes of action were brought by investors in their personal capacity as opposed to their capacity as partners in the Fund;
2. the assignments were invalid and were being used as a vehicle to avoid the limitations on when FSMA claims can be brought by persons other than private persons under the RAR, cited above; and
3. the Fund's liquidators had acted outside the scope of their statutory powers in accepting assignments on the Fund's behalf.
The Judge granted the Summary Judgment application on the following grounds:
1. CPR PD 7A paragraph 5A should be interpreted broadly and in accordance with the overriding objective. Since paragraph 5A relates to how to bring a claim, it should not be read restrictively;
2. The assignments were valid:
(a) the claims were not being brought by the Fund in a fiduciary or representative capacity;
(b) if Parliament had intended to restrict the right to assign, it would have done so expressly;
(c) assignment may be positively desirable, making it cheaper and easier for private persons to assert their rights; and
3. the Fund already had the power, under the Insolvency Act 1986, to bring the claims itself and, in any event, Schedule 4, paragraph 13 of the same Act enables liquidators to do all other things necessary for winding up and distributing property. The question of whether to pursue the assigned claims was, therefore, one for the liquidators.
This decision highlights the fact that claims that might otherwise have been considered too costly or time consuming for a retail customer (for example) can be assigned to a third party. Authorised persons need to be aware that the scope of this judgment is not limited to liquidators. As such, retail customers may also be able to sell their investments and assign the claims arising out of them to third parties, such as hedge funds or litigation funders, who could collate a number of claims to bring against the authorised person for any contravention under s.138D FSMA.