The regulatory position of unregulated introducers and financial promotions
Financial Conduct Authority v Avacade Ltd (in liquidation) and others [30.06.20]
Between 2010 and 2014, two unregulated pension introducers, Avacade Limited (in liquidation) and Alexandra Associates (UK) Limited (AA) trading as Avacade Future Solutions, were contacting retail customers, providing free pension reports and promoting self-invested personal pensions (SIPPs) which resulted in retail customers transferring existing pension funds into SIPPs and then into alternative high-risk investments, such as tree plantations and Brazilian property developments. More than 2000 retail customers transferred around £91.8 million from their pensions into SIPPs and, of that sum, approximately £68 million was invested in unsuitably high-risk and speculative investments where the underlying product subsequently failed or is in liquidation. Avacade and AA earned commissions of £10.8 million from these investments.
In November 2017, the FCA commenced civil proceedings against Avacade and AA, as well as the three directors of Avacade, alleging:
- The defendants had made misleading statements to the retail customer
- The defendants had carried out regulated activities without authorisation or exemption
- The defendants had communicated financial promotions without the required authorisation or approval
- The three directors were knowingly concerned in the breaches for the purposes of obtaining restitution orders against them.
The directors argued they were exempt from FCA regulations because they simply introduced retail customers to FCA regulated SIPP companies, who facilitated transfers into the various investments after approving, and in some cases advising upon, the investments.
High Court judgment
The Court concluded that Avacade had not made the introductions with a view to independent advice being provided by regulated SIPP providers and that the purpose of the arrangements was to make commissions. Johnson DJ found that the directors had been “stepping over the boundary between information and advice”.
The Court found in favour of the FCA and determined that Avacade and AA’s activities were unlawful as they had, without the necessary authorisations, engaged in the regulated activities of arranging and advising on investments, made unapproved financial promotions and made false or misleading statements to retail customers. The individual defendants were held to be "knowingly concerned" with the infringements and benefited from those infringements.
A hearing is due to take place concerning investors’ losses and levels of compensation payable by AA and the directors. The hearing will also determine whether AA and the three directors are banned from participating in unregulated activities in the UK. The directors are however considering an appeal on the basis that Johnson DJ interpreted the law differently to the High Court in the recent decision in Adams v Carey [18.05.20], insofar as that decision comments upon the role of unregulated introducers. In Adams, the High Court decided that an execution-only SIPP provider was not liable for an investor’s choice to invest in high-risk and illiquid investments.
The cases can arguably be distinguished - Avacade’s activities were causative of the investment being made, whereas the investor in Adams came to the SIPP provider having already decided to make the investment. The appeal could result in further clarity as to the differences and restrictions between information and advice insofar as financial services providers rely upon introducers.
The Court closely adopted the wording in the FCA’s Perimeter Guidance Manual and the Regulated Activities Order (RAO) in its approach to the perimeter issues under consideration (i.e. activities which fall within the scope of sections 19 and 21 Financial Services and Markets Act 2000 and which require FCA authorisation). The Court also undertook a useful analysis of the application of the RAO and case law relating to the regulated activity of arranging investments and financial promotions. The decision in Avacade will assist practitioners when applying the guidance on perimeter issues and the application of section 21 FSMA.
Future decisions may clarify the interrelationship between Adams and Avacade, specifically the extent to which unregulated introducers may find themselves exposed to regulatory actions when undertaking financial promotions.
On 20 July 2020, HM Treasury published two Consultation Papers, the first setting out proposals to expand the UK’s financial promotions regime to cryptoassets and the second with proposals to increase the FCA’s oversight of promotions issued by unauthorised firms. The consultation periods close on 25 October 2020, after which the Government will set out its policy options. We hope HM Treasury will also utilise the opportunity to clarify the regulatory framework and restrictions on unregulated introducers undertaking financial promotions.
Related item: SIPP providers, due diligence and contractual primacy