In R (on the application of Chancery (UK) LLP) –v- the Financial Ombudsman Service and Sir Ian Robinson, the court had to decide:
- Whether Chancery (UK) LLP (Chancery) had given regulated investment advice to Sir Ian Robinson (Sir Ian), when it advised him to invest in a film finance scheme for legitimate tax avoidance purposes;
- Whether the limited liability partnership (LLP) in which he invested, was an unregulated collective investment scheme (CIS); and
- Whether the Financial Ombudsman Service (FOS) was right to accept and decide Sir Ian’s complaint, instead of declining to do so because it would be “more suitable for the … complaint to be dealt with by the Court”, or there were “other compelling reasons why it is inappropriate for the FOS to deal with it”.
The facts: an LLP had been established, and 10 limited partner interests were available to purchase. The LLP would produce films, exploit the commercial rights associated with them, and “thereby [seek] to generate significant profits and revenue streams”. The LLP would be run by people with relevant experience, but every investing member would have to devote at least 10 hours a week to the LLP over a 6-month period. Oh; and the LLP would make a significant loss at first, but that could be set off against tax.
In 2007, Sir Ian invested £450,000 of his own money, and £1.35m he’d borrowed from a bank. In 2008, he invested £500,000 more. Sir Ian also served as the LLP’s chairman from 2009 until 2013.
In March 2011, HMRC accepted Sir Ian’s claim for tax relief on his cash contributions, but “there would be a substantial balance of unclaimed losses he could not set against tax from other sources [and] the contribution made by way of loan would not receive tax relief”.
In May 2012, Sir Ian complained to the FOS that the LLP was a CIS, and that he’d been advised to make an unsuitable investment in it. Chancery denied these allegations. It also argued that: (a) it had given tax (not regulated investment) advice; and (b) the LLP was not a CIS (it wasn’t therefore a regulated investment); so the FOS didn’t have jurisdiction. The FOS disagreed on each point, before making some findings in Sir Ian’s favour. Chancery asked the Court to decide whether the FOS was right, as a matter of law, on these points. If it was, Chancery asked the court to find that the FOS acted irrationally when it decided to determine Sir Ian’s complaint, instead of declining to do this because of its size, complexity, and novelty.
The High Court’s Decisions: Mr Justice Ouseley handed down his judgment on 20 February 2015. On the first question, Ouseley J decided there were two issues: (a) “if the purpose or dominant purpose of the giving and receipt of advice is for tax purposes, [does that mean] it cannot be investment advice[?]”; and (b) did the advice include, “as a matter of fact[,] advice about investment[?]”
Ouseley J dealt with the first issue swiftly: “tax advice may or may not be or include investment advice. There is no necessary sharp distinction requiring advice to be pigeonholed as one or the other, nor could such a distinction be sensibly drawn where there are mixed reasons behind advice … There is no dominant purpose test. To the extent that advice about an investment is investment advice it is [regulated advice]”.
(Although he doesn’t say so expressly), Ouseley J also seems to have found that investment advice was given in this case as a matter of fact: “Even if … the dominant purpose of the advice was tax avoidance, money was invested, repayable loans were taken out, returns were to repay the loans… The advice was to put money into a scheme …The investment does not have to be for a profit in order for advice to be [regulated]; here though there was a clear gain envisaged behind the scheme, in tax advantage and in return”.
Turning to whether there was a CIS, Ouseley J found several issues: there can only be a CIS if (per section 235 of the Financial Services and Markets Act 2000) there are: (a) “arrangements … the purpose or effect of which is to enable persons taking part in the arrangements … to participate in or receive profits or income”; and (b) the participants did not have “day-to-day control over the management of [scheme] property”.
So: (a) did these participants have “day-to-day control”? (b) Was “the purpose or effect” of the scheme, to enable the participants to receive profits or income, rather than just to avoid tax? And (c) when these questions were considered, could the could make them with an eye how things worked in practice, as well as an eye on the scheme’s documents, or was this a “documents only” question?
Simples: “ it was necessary for each member to have day-to-day control in order for an arrangement not to be a CIS  Day to day control was an issue not just to be resolved on the documentation, but also by considering what happened in practice  The statutory language makes the practical operation of the scheme relevant to show its nature … “the purpose or effect” [showed] that the manner in which [the scheme] operated could be relevant  not all participants had day to day control [and Sir Ian] did not either  supervisory oversight [and] the power to exercise day to day control if so minded [do] not suffice  profit included economic benefit and that covered making a loss fox tax purposes  The FOS did not [therefore] err on this aspect of his … decision”.
The final question seems to have had a simple[s] answer too: “The question … is whether the nature of the issues between the complainant and Chancery and the material which is required to resolve them, are such that it was irrational for the FOS to conclude that he could resolve them justly, fairly and reasonably within his jurisdiction. [Chancery’s] submissions simply do not pass that high test … I understand its concern about the large number of claims, pursued at no or very little cost risk to the complainants, leading to sizeable compensation awards on a rough and ready basis, with the facts not analysed properly, in decisions lacking the rigour which a High Court Judge should bring. But so far … the FOS decisions have been carefully considered, drawing on its expertise, and dealing properly with the points which Chancery did make. I would have to hold that its estimation of its ability to carry out its functions was a long way from reality, before I could hold that this decision was irrational. [So,] this application is dismissed”.
Commentary: In some ways, this decision is unsurprising: the FSA, PRA, FCA and FOS have always believed the Courts would be reluctant to replace their decisions with its own, and that confidence has been borne out on this occasion too. (To be fair, it’s not just about these regulators and this decision maker. This is also a fundamental principle of our administrative law.)
Now we know there was a CIS, and there may have been unsuitable advice, it will be interesting to see how the FOS deals with the causation and quantum issues that are likely to arise. Ouseley J doesn’t say how much Sir Ian is claiming – he merely hints that it’s (much) more than the FOS’ £150,000 limit. If the FOS finds that Chancery’s regulated advice was unsuitable, it will have to go on to decide how much of Sir Ian’s loss was caused by that advice (if any), how much was caused by the tax advice, and how much was caused by government and HMRC tax policy changes. At least at first blush, we’d expect the FOS to restrict itself to making an award in respect of the unsuitable regulated advice (if any, and if that’s what it was). But these will be complex questions; and they’ll generate complex answers. They would have been much easier for the FOS to answer, or for the parties to negotiate over, if Ouseley J had been clearer about the nature and extent of the investment advice he thought had been given, instead of merely hinting that it existed before moving on. (See the first passage in bold text above.)
There may be some other interesting issues too: if Sir Ian is unhappy with the FOS’ answers to these questions, he may issue proceedings. If he does, the Court’s answers and reasoning may well be very different to those of the FOS. If they are, that will not necessarily mean that Chancery was right when it sought to argue that the FOS ought to have declined to accept and determine this complaint, but it might. It’s hard to imagine that the FOS is altogether pleased with Ouseley J’s comments. (See the second passage in bold text above). A second high court case might just push it over the edge.