Judgment in Financial Conduct Authority -v- Avacade Limited (In Liquidation) is handed down

• United Kingdom

• Financial services disputes and investigations
• Litigation and dispute management

31-07-2020

Following the high profile judgments in Berkeley Burke SIPP Administration Ltd -v-Financial Ombudsman Service Limited and Adams -v- Options SIPP UK LLP (formerly Carey Pensions UK LLP) the Court has now handed down its judgment in Financial Conduct Authority v Avacade Limited (In Liquidation) & Others [2020] EWHC 1673 (Ch) (“the Avacade case”). The judgment in the Avacade case further considers the role of unregulated introducers in the Self-Invested Personal Pension (“SIPP”) industry, and the application of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“RAO”). The analysis of the RAO, in particular Articles 25 and 53, builds on HHJ Dight’s determination in Adams and will be of wider application to the regulated financial services sector.

The background

The Avacade case concerns a number of relationships and dealings between: (1) Avacade, related companies and its directors (collectively “Avacade”); and (2) a number of intermediaries, SIPP providers, and investment providers.

In brief, generally (noting there is some variance in the approach taken in each relationship) Avacade sought to facilitate the transfer of individuals’ existing pensions into SIPPs, with a view to making investments via those SIPPs in a specific set of investments. The lengthy judgment provides the full detail as to Avacade’s business practices and relevant relationships.

Avacade’s role in introducing individuals to SIPP providers involved, amongst other things: cold calling prospective customers offering to provide a free pension report; liaising with existing pensions providers to obtain key information; discussing with customers their circumstances and retirement plans as part of a ‘pre-report’ call; setting out in some detail to customers the options available to them in respect of their pension transfer; and discussing investment options.

Avacade was not authorised to advise individuals or to arrange investments.  The FCA was concerned that Avacade was ‘funnelling’ customers towards the transfer of their existing pension to a SIPP, and subsequently to make an unregulated investment. Often Avacade received commission once the underlying investment was made. The FCA considered that the actions of Avacade amounted to advising and/or arranging investments without the necessary authorisation. That would be a breach of the general prohibition in s.19 of the Financial Services and Markets Act 2000 (“FSMA”), and a criminal offence. The FCA brought the claim against Avacade on the basis that Avacade had arranged, contrary to Article 25 of the RAO, and advised, contrary to Article 53 of the RAO, in relation to the transfer to the SIPPs and subsequent investments, and issued unauthorised financial promotions in breach of s.21 of FSMA.

The application of the RAO

The Court was required to consider in detail whether the actions of Avacade constituted regulated activities under the RAO. It was common ground that Avacade was not authorised and did not have the relevant permissions, so if its actions amounted to a regulated activity then there must have been a  breach of the general prohibition. The consideration focussed on Articles 25 and 53, but the Defendants sought to rely on the exemptions in Articles 27 (“Enabling parties to communicate”), 29 (“Arranging deals with or through authorised persons”) and 33 (“Introducing”); their case in essence was that they were simply information gatherers and passed that information to FCA regulated entities.

Arranging – Article 25

Deputy Judge Adam Johnson QC (“DJ Johnson”) considered both Article 25(1) and 25(2), and found that 25(2) was intended to have a wider effect than 25(1). He held that whilst 25(1) required the act to be directly causative of a transaction (supporting HHJ Dight’s findings in Adams), Article (25)(2) set out “a more inchoate form of activity, which is not necessarily causative of the transaction… but which nonetheless helps it to happen”.

In considering the Defendants’ attempts to rely on Article 27, DJ Johnson found that the guidance in PERG 2.8.6A(2) was correct, i.e. that where a party made arrangements that went beyond providing the means of communication, and added further value, the benefit of the exemption under Article 27 would be lost. DJ Johnson held that on the facts that was clearly the case.

As to Articles 29 and 33, DJ Johnson held that a purposive approach to interpretation must be taken, which reflects the protection that the Articles in question sought to provide – being the protection against non-authorised (and therefore unqualified) persons seeking to obtain a reward from the making of an arrangement.

Article 29 operates as an exemption to Article 25, if: (a) the transaction is made with or through an authorised person; (b) the transaction is being entered into on advice provided by an authorised person, or it is clear that no advice is being sought from the person conducting the arranging; and (c) the arranger is not receiving any pecuniary reward from any person other than the client. Therefore, crucially, the benefit of the exemption under Article 29 is lost if the arranging party receives a reward or pecuniary advantage, for which he does not account to the consumer. Given Avacade received commission in respect of the underlying investments, DJ Johnson held that Article 29 could not apply. DJ Johnson rejected Avacade’s argument that the arrangement related to the SIPP, and the reward received flowed from the investment. Again, DJ Johnson took a purposive approach and found that the SIPP and the underlying investment could not be so easily separated, and, given Avacade’s approach to dealing with the SIPP and the investments together, the ultimate consequences which flowed from the arrangement of the SIPP (i.e. the commission derived from the investment) could not be considered separately. Those monies flowed from the arrangement of the SIPP. Accordingly, he held that Article 29 did not apply.

Similarly, Art 33 provides an exemption to Art 25, for introductions with a view to the provision of independent advice or exercise of discretion in relation to the investments. There must therefore be demonstrable advice or discretion before the exemption is engaged. In most cases Avacade did not refer customers to Independent Financial Advisers, and so sought to argue that the SIPP providers’ decisions as to whether to onboard members and accept the underlying investments was an exercise of independent discretion. DJ Johnson rejected that argument, focussing on the requirement that the introduction be ‘with a view to’ obtaining advice or exercising discretion i.e. that it must be the primary purpose. Any exercise of discretion or advice provided was an aside, and was not the primary purpose of Avacade’s introduction. Avacade’s reliance on Art 33 was rejected.

Advising - Article 53

The FCA contended that the steps taken by Avacade in the various phone calls and in preparing the pension report amounted to advice. The parties agreed that an objective test as to whether advice had been provided should be applied, as per Thornbridge v Barclays [2015] EWHC 3430 (QB).

On that assessment DJ Johnson found that it was clear that Avacade’s conduct and detailed sales scripts went beyond the mere provision of information, and amounted to a recommendation of a course of action/advice. DJ Johnson considered what the actual outcome and intentions of Avacade were, finding that despite the assertions and statements that Avacade was not advising, the nature of the phone calls and actions taken by Avacade meant that it was “impossible” not to conclude that they had provided advice.

The Defendant sought to argue that under Art 53, advice must be given in respect of a specific investment or product, and that given at the time Avacade ‘advised’ the SIPP did not exist, it could not have advised in respect of that product. DJ Johnson rejected that contention, finding that where “a particular SIPP is in mind”, that was sufficient. Key to that finding was that Avacade worked for the majority of the relevant period with one default SIPP provider, and product, that being, in effect, the ‘particular investment’ and that the overall Avacade structure was geared towards a particular SIPP.

Other issues

The Court was also required to consider:

• s.21 of FSMA, being the prohibition on financial promotions – the Court had ‘no doubt’ that Avacade’s website and materials were intended to promote financial activity;
• whether Avacade made false or misleading statements contrary to s.89 of the Financial Services Act 2012. DJ Johnson rejected the FCA’s primary case here, as result of the manner in which it was advanced, but did find that Avacade’s statements that customers had to obtain independent advice to transfer their pensions into SIPPs, and that the investments recommended had proven track records and/or were low risk, were false and misleading;
• whether Avacade and its directors were ‘knowingly concerned’ for the purposes of s.382 of FSMA. DJ Johnson found that there must be, and was, active involvement in the contravention. DJ Johnson rejected Avacade’s submissions that they did not know what they were doing was wrong, and so could not be ‘knowingly concerned’.

Conclusion

The FCA’s involvement in the Berkeley Burke and Adams claims, and in now bringing the Avacade case make clear that the FCA is looking to  tackle unregulated introducers which operate and operated in the SIPP market where it considers they have gone beyond a mere introductory role. The Court’s focus in the Avacade claim was to look at the purpose of the rules and legislation in question, alongside the reality of what had actually happened.  The detail with which the Court analysed the relevant Articles of the RAO (and some potentially conflicting authorities) demonstrates the complexity for those trying to navigate their way through these issues.  The judgment therefore builds on the helpful clarity provided in Adams to provide all firms with a little more certainty as to the parameters of the RAO and the consequences of a perimeter breach.