UNAUTHORISED INVESTMENT SCHEMES AND THE FINANCIAL SERVICES AND MARKETS ACT

The Financial Services and Markets Act 2000 (FSMA) created new obligations on everyone working in banking, insurance and investments. It is a valuable tool for the authorities that regulate the financial sector and gives the Financial Conduct Authority (FCA) considerable powers to enforce these obligations.

One case that has spanned a number of years and left defendants now owing millions has emphasised the need to ensure that anyone operating an investment scheme complies with the provisions of the FSMA.

In the High Court in 2013, the FCA successfully prosecuted the people behind a company called Asset Land Management, claiming they were carrying out a regulated activity without authorisation, contrary to Section 19 of the FSMA. Specifically, Asset Land Management was selling plots of land to investors under what is classed as a collective investment scheme by the FSMA.

Two defendants unsuccessfully appealed to the Court of Appeal and then, again unsuccessfully, to the Supreme Court. This has now left them facing the need to repay £21M.

Authorisation

In its judgement, the Supreme Court confirmed that the defendants had been operating a collective investment scheme and were, therefore, wrong to have operated it without FCA authorisation, as required under the FSMA.

The Supreme Court also gave the go ahead for an interim payment order to be enforced for £21M against defendants and Asset Land Management as part repayment for investors. This order was originally made in the High Court but was stayed pending the Supreme Court’s decision more than three years later. It is a costly way to learn the price that has to be paid for failing to comply with the FSMA.

The Asset Land Management case emphasises the need for anyone in investments to have a working knowledge of the FSMA. If they don’t they need to seek advice from those who do. They then need to make sure their working practices comply with the provisions of the Act.

Breaches of the FSMA can carry prison sentences of up to two years and unlimited fines. It pays, therefore, to know the details of the Act.

Regulated Activities

The FSMA restricts who can carry out certain types of services, or what it calls “regulated activities”; which are defined in Section 22(1) of the Act as “an activity of a specific kind which is carried on by way of business and…relates to an investment of a specific kind’’.

The three components of a regulated activity are that it is a specified activity, carried on by way of business and involving a specified investment. Schedule 2 of the FSMA lists the following as examples of specified activity:

• Dealing in investments
• Arranging deals in investments.
• Deposit taking.
• Safe keeping and administration of assets.
• Managing assets.
• Giving investment advice.
• Establishing collective investment schemes.
• Using a computer-based system for giving investment instructions.

Restrictions

The Act imposes restrictions on who can carry out the activities it covers. Section 19 of FSMA states that no person can carry out regulated activities in the UK unless:

• They are authorised by the Financial Conduct Authority (FCA).
• They are authorised by the Prudential Regulation Authority (PRA).
• They have one of a number of special exemptions that apply to certain organisations.

Carrying out any of the aforementioned specified activities without either the necessary authorisation or an exemption is an offence under Section 23 of the Act. On indictment, such “authorisation offences’’ are punishable with the aforementioned maximum two years in prison, unlimited fines or both.

Defences

There are defences available to someone accused of an authorisation offence.

These include:

• A person being able to show that they took all reasonable precautions and exercised all due diligence to avoid committing the offence. For example, if they made checks and believed they were entitled to carry out the activity.
• The deal was made before a person had time to realise and put right their mistake.
• The person took all reasonable steps to tell the other party of the mistake.

These defences do give a person accused of breaching the FSMA some scope for challenging the allegations. But mounting the most robust defence will require the services of legal representatives capable of utilising all available evidence and applying their incisive working knowledge of the FSMA. And the best protection would be to take informed legal advice before beginning any activity covered by the FSMA.