Clarification on the regulatory position of unregulated introducers

Between 2010 and 2014, two unregulated pension introducers, Avacade Limited (in liquidation) and Alexandra Associates (UK) Limited, and their directors, contacted retail customers (the consumers) and promoted self-invested personal pensions (SIPPs). These discussions resulted in those consumers transferring existing pension funds into SIPPs and then into high-risk and, arguably unsuitable investments, such as tree plantations in Costa Rica and bonds relating to property developments in the US and Brazil.

The FCA accused Avacade of arranging and advising on investments without the necessary regulatory permissions. The FCA also alleged Avacade made false and misleading statements to the consumers that induced them to transfer their pensions into SIPPs and then into alternative investments.

We commented upon the High Court’s first-instance decision in our previous article. In summary, the High Court concluded that Avacade had not made the introductions with a view to independent advice being provided to the consumers. Further, the purpose of the arrangements was for the defendants to make investment commissions. It was held that Avacade had “arranged deals in” and “advised on” specified investments for the purposes of Articles 25(2) and 53 of the Financial Services and Markets Act (Regulated Activities Order) 2001 (RAO) without holding the relevant permissions. As such, they were unable to rely upon any of the RAO’s exceptions. The High Court concluded that the directors had been “stepping over the boundary between information and advice”.

Court of Appeal

Some of the defendants appealed the High Court’s decision, principally in respect of whether Article 25(2) applied. They argued that, as unregulated introducers, they fell outside the regulatory framework. To the extent that the consumers had any complaint, it should be directed towards their regulated financial advisers and/or SIPP trustees.

Article 25(2) RAO provides that a regulated activity includes “making arrangements with a view to a person who participates in the arrangements buying, selling, subscribing or underwriting” certain investments. This is similar to Article 25(1), which deals with an analogous situation where the person makes “arrangements for another person to buy, sell, subscribe or underwrite” certain investments.

The defendants argued that the High Court failed to identify that Article 25(2) required a “direct and instrumental link” between the arrangements and the potential investment activity they were to bring about (i.e. a causation test).

The Court of Appeal held that there were three relevant differences between Articles 25(1) and 25(2):

• Article 25(1) applied to making arrangements “for” the buying and selling of certain investments, whereas Article 25(2) applied to making arrangements “with a view to” that activity
• For Article 25(1) to apply, the buying or selling may be conducted by anyone, whereas Article 25(2) requires the person buying or selling to actually participate in the arrangements and
• Article 26 provides an exception to Article 25(1) for “arrangements which do not or would not bring about the transaction” (i.e. a causation test). That exception is not expressed to apply to Article 25(2). There was no need to introduce any test of causation into Article 25(2) by reference to the language of Article 26 because, by using the words “with a view to”, Article 25(2) made clear that it was “concerned with the purpose of the arrangements”, not whether they in fact brought it about.

The Court of Appeal ruled that, whatever test of causation was adopted, there could be little doubt that the arrangements between the defendants and consumers were with a view to the consumers transferring their pensions into the SIPPs and subsequently making investments through them. This was the dominant purpose for which the defendants’ business model was conceived and implemented. It was irrelevant whether those arrangements had any causative potency.

The Court of Appeal found that the schemes were “an indivisible and seamless set of arrangements, of which entry into the SIPPs was a necessary and critical part because access to pension pots was the essential source of funding for the investments.”

The consumers therefore successfully defended the appeal.

Comment

FCA executive director of enforcement and market oversight, Mark Steward, has said that the:

One reason why Article 25(2) applied in this instance was because the defendants could not rely upon the exception in Article 33 RAO. Article 33 applies principally where an unregulated person introduces somebody to a regulated person “with a view to the provision of independent advice”. In other words, had the defendants introduced the consumers to a financial adviser for the purpose of that advisor assessing whether the investments were appropriate for them, the defendants should have escaped liability. Instead, they introduced them to a SIPP trustee who did not take on the role of adviser.

This case is an important reminder of the risks of introducers (and authorised firms more generally) dealing with consumers who appear to be acting without advice.

Related items:

• The regulatory position of unregulated introducers and financial promotions
• SIPP providers, due diligence and contractual primacy