The Financial Services Authority (FSA) imposes a strict regulatory regime on persons operating in the financial services area by way of business and this includes the licensing of ‘deposit takers’. Recently, three men were charged with taking money from clients to provide loans for businesses that were unable to secure funding from banks.

The men argued that the ‘deposits’ were actually loans to them and that their activity was not therefore subject to regulation.

Although the three used documentation which stressed the personal friendship with the depositor and stated specifically that they were not operating a regulated business, the court had no hesitation in concluding that the men, who had received sums from 293 people in deals ranging between £2,000 and £1.6 million, were receiving deposits by way of business. The depositors were offered returns on their investments that were much higher than the market rate.

The bad news for the depositors is that whilst the business should have been regulated by the FSA, it was not and so their deposits are not protected by the FSA’s compensation scheme.

The three men now face charges for fraud, conspiracy to defraud and money laundering.

If you are offered a ‘special opportunity’ or an investment offering well above average rates of return, you should be on your guard. Also, if you wish to take money from others for investment purposes, it is important to make sure that you comply with the law, obtaining any necessary registrations, the appropriate regulations are followed and the right paperwork is in place.

Whilst the coalition Government has announced that it intends to redistribute responsibility for the supervision of financial services, the overall intention is to make supervision tighter and more effective.