When is an investment scheme a collective investment scheme? Financial Conduct Authority v Capital Alternatives Ltd (2015)
Unregulated collective investment schemes (“UCIS”) are generally regarded as high risk and there are significant restrictions on who can manage them and how, and to whom they can be promoted in the UK. The question of whether an investment scheme constitutes a collective investment scheme (“CIS”), within the meaning of section 235 of the Financial Services and Markets Act 2000, is therefore key. There are three limbs to the definition:
- It is an arrangement with respect to property (of any description, including cash), the purpose or effect of which is to enable the 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
- The investors must not have day-to-day control over the management of the property, whether or not they have the right to be consulted or give directions
- The arrangement has either or both of the following characteristics:
- The investors’ contributions and the profits/income out of which payments are to be made are pooled
- The property is managed as a whole by or on behalf of the operator of the scheme
In this decision, Capital Alternatives & Ors (the “Defendants”) appealed against a decision that four investment schemes constituted a CIS. If the schemes were a CIS, their establishment, operation and winding-up were regulated activities which could not lawfully be carried out by Capital, which was unauthorised. Two types of scheme were in issue:
- The African land scheme – exploitation of a rice farm in Sierra Leone
- The carbon credits schemes – exploitation of forest areas in Australia, Sierra Leone and Brazil
In determining that all four schemes met the definition of a CIS, the Court of Appeal looked at the characteristic features of each scheme and the way in which each scheme was intended to work in practice, particularly in respect of the third limb of the test (whether there has been a pooling of investors’ monies and/or whether investments have been managed centrally). The Court found that, in relation to all four schemes, either there was central management with no provision for management input by or consultation with investors, and/or there was a pooling of income. The only evidence of individual management was segregation of plots in the African land scheme, and this was not sufficient and had been put in place in an attempt to evade the CIS rules.
Whilst the decision does not create new law, it provides helpful guidance as to how the Court will approach an assessment of whether or not a scheme is a CIS. Given that permission to appeal has been refused by the Supreme Court, it is anticipated that the Court of Appeal’s approach will now bring some clarity to this issue. There are a number of other schemes with similar structures which commentators anticipate may now receive attention from the FCA. Meanwhile in the Capital case, the parties will now go back to the High Court to test whether misleading statements were made to investors.
Court of Appeal agrees that individual had been harpooned in London Whale FCA proceedings Financial Conduct Authority v Macris (2015)
The Court of Appeal has found that the FCA breached section 393 of the Financial Services and Markets Act 2000 (“FSMA”), by publishing notices from which it was possible to identify a specific individual, without giving him an opportunity to respond to the assertions made against him, and that it did not matter that the individual had not been expressly named in the notices.
In September 2013, the FCA issued and published a series of notices to JP Morgan Chase Bank NA (“JP Morgan”), containing a financial penalty of almost GBP 138 million as a result of losses (widely referred to as the “London Whale” trades) incurred in a trading portfolio managed by JP Morgan for its parent company. The FCA notices contained criticisms of JP Morgan’s management of a particular trading portfolio within its Chief Investment Office in London and New York. Mr Macris was International Chief Investment Officer in that management structure. Although Mr Macris was not referred to by name in the notices, he maintained that descriptions of JP Morgan’s management structure were sufficiently specific as to identify him. Section 393 of FSMA provides that a third party prejudicially identified in an FCA notice must be given a copy of the notice and a reasonable period within which to make representations to the FCA. The Court of Appeal considered the meaning of “identify” within section 393 and held that an objective test applied, similar to that used in defamation proceedings: are the words used in the “matters” such as would reasonable in the circumstances lead persons acquainted with the claimant/third party, or who operate in his arena of the financial services industry, and therefore would have the requisite specialist knowledge of the relevant circumstances, to believe at the date of the Notice that he is a person prejudicially affected by the matters stated in the Notice. In this case, the external material available (such as a US Senate Report which expressly referred to Mr Macris by name), entitled the first instance judge to conclude that Mr Macris had been identified.
The FCA announced in June that it is seeking to appeal this decision.
FCA handbook can assist in delineating financial advisers’ duty of care: David Anderson v Openwork Ltd (2015)
This recent County Court decision makes clear that the provisions of the FCA Handbook, even if they do not directly apply, can still inform the duty of care that a financial adviser will be held to.
An appointed representative of the IFA network Openwork advised Mr Anderson to purchase an unregulated investment bond in September 2005. Mr Anderson subsequently sued, alleging that Openwork had made negligent misstatements relating to the bond, that the advice given had breached the Conduct of Business (“COB”) rules, and that Openwork had failed to take reasonable steps to ensure that the bond was suitable for his needs. He was partially successful at first instance. Openwork appealed, contending that (on the basis of Green & Rowley v RBS (2013)) there was no need for a common law duty of care to be imposed in circumstances where Parliament had devised a remedy (in this instance, section 150 (now section 138D) of the Financial Services and Markets Act 2000) and that, even if a common law duty of care arose, reference to the COB rules when determining the content of that duty imposed too high a standard. Openwork also argued that there had been no evidence of breach.
In dismissing Openwork’s appeal, the Court found that a common law duty of care did apply, as Openwork had given advice in respect of the bond and the bond was not covered by the COB rules. In contrast, Green & Rowley was primarily concerned with the provision of informat ion in respect of a financial product that was covered by the COB rules. The Court held that it was appropriate to take into account the standards set out in the COB rules when considering the standard of Openwork’s common law duty of care. In any event, the provisions referred to at first instance (“know your client”; ensure the suitability of the product for the client’s needs; and ensure that the client understands the risks associated with the product), were “no more than basic duties which common sense dictates should be applied to any financial advisory situation”. As such, there were no grounds to set aside the first instance judgment.
Privilege over documents created during FCA investigation: Property Alliance Group Ltd v Royal Bank of Scotland plc (2015)
As regulatory investigations in the financial services sector increase, the lines between regulatory and civil proceedings become more blurred and complex to manage. In particular, disputes over the assertion, in civil proceedings, of privilege in documents created in response to regulatory enquiries are growing increasingly common in the UK courts.
In Property Alliance Group Ltd (“PAG”) v Royal Bank of Scotland (“RBS”), PAG alleged that RBS had induced it to enter into interest rate swaps by making misrepresentations about LIBOR. In the course of proceedings, PAG sought disclosure of various documents associated with an earlier FCA investigation into allegations of LIBOR manipulation by RBS, in respect of which RBS had reached a publicised settlement with the FCA. RBS asserted that the documents were privileged and objected to their inspection.
The Court considered RBS’s various assertions of privilege and held:
- The contents of documents that had been produced to/by an internal RBS team set up to deal with the FCA investigation, and over which RBS asserted legal advice privilege, had not been properly specified. It was therefore not possible for the court to reach a proper understanding of the basis on which the claim to legal advice privilege was made. The practical approach was for the court to inspect these documents before coming to a final view – The Judge concluded that without prejudice privilege does apply in respect of communications that were part of genuine settlement discussions with the FCA, analogous to but not the same as the right that applies in civil proceedings (so that it does not for example, prevent the FCA from acting on information received in those discussions). The issuance of a Final Notice did not result in that right being lost. However, the judge held that, because of the way RBS had put its substantive case (it had positively relied in its pleadings on omissions in the FCA’s findings as indicating the limits of its misconduct) it could no longer maintain a claim to privilege in respect of these documents, as the basis of the Final Notice was put in issue by RBS. PAG was therefore entitled to inspect them
- In respect of certain other documents, PAG contended that legal privilege had been lost because they had been shown or handed over to regulators. RBS argued to the contrary on the basis that they were provided to the regulators on a confidential “non-waiver” basis, although this was subject to carve-outs to preserve the right of the regulator to make disclosures in furtherance of its statutory duties. The Judge found that RBS were entitled to maintain privilege on the basis of limited waiver. The fact that the regulator could publish the information made no difference if that had not in fact occurred This decision is welcome confirmation that “without prejudice” privilege does apply to settlement negotiations with the FCA and other regulators, and that the principle of limited waiver can apply to disclosure to regulators. However, issues of privilege and what might be disclosed in respect of the regulatory proceedings in a civil claim, and vice versa, remain complex. It will continue to be important to bear in mind that anything produced in the context of one set of proceedings may be seen in the other when, for example, creating documents.
RBS has been granted permission to appeal the decision, and it will be interesting to see what approach the Court of Appeal now takes.
Duty owed to investor when entering into redress scheme?: Suremime Ltd v Barclays Bank Plc (2015)
The case of Suremime v Barclays Bank is one to watch, as it raises the prospect that claimants may be able to bring claims for compensation against FCA regulated bodies for failure to properly award redress in the context of a past business review into the sale of interest rate hedging products (“IHRPs”). This would be a significant development if it transpires.
In this case, Suremime, which had been sold an IHRP in 2008, sought permission to amend an existing mis-selling claim against Barclays to also plead breach of contract and/or breach of duty of care by Barclays in conducting its IHRP Review and in preparing the offer of redress made to Suremime. Barclays argued that the claims had no merit, as it only owed a duty to the FCA in respect of the execution of the review and redress scheme, and sought summary judgment.
The Court granted Suremime permission to amend its Particulars of Claim to plead the allegations in tort, but not in contract. In doing so, the Court found that the contractual claim was bound to fail, as no consideration passed between Suremime and Barclays in respect of the IHRP Review – Barclays was bound by its agreement with the FCA to conduct the Review, irrespective of any act or omission by Suremime. In relation to the tortious claims, however, it was arguable that there was a lacuna in the law which a tortious right to sue for negligent implementation of the IHRP Review would fill. In particular, if it was found that the IHRP Review had been negligently conducted, those claimants who, in reliance on the review/redress scheme, did not issue proceedings for mis-selling, and whose claims were consequently time-barred, might be left without any remedy in the absence of such a tortious right. Further, although section 138D Financial Services and Markets Act 2000 might provide a statutory right of action if Barclays had failed to apply the specification of the IHRP Review, that right was granted only to private persons and not to corporate entities such as Suremime, leaving a gap in the remedy available. Finally, the Court considered that there was some merit in the argument that the case fell to be considered under White v Jones  principles, as there was a discrepancy between those suffering loss (the customers mis-sold swaps) and the entity with the right to enforce the terms of the redress scheme (the FCA).
The judgment, of course, only granted permission for Suremime’s claim to be pleaded, and it remains to be seen whether a court will ultimately decide that a duty of care was owed to it in respect of the IHRP Review. There have been numerous such schemes in recent years, with payments totalling several billion pounds already made. The outcome of this case may represent a way for those dissatisfied with what they have received to re-open an otherwise time-barred claim.