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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Financial Services Authority v Fradley & Woodward [2005] EWCA Civ 1183 (23 November 2005)
URL: http://www.bailii.org/ew/cases/EWCA/Civ/2005/1183.html
Cite as: [2005] EWCA Civ 1183, [2006] 2 BCLC 616
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COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM The High Court of Justice
Chancery Division
(Mr John Martin QC)
Strand, London, WC2A 2LL |
||
B e f o r e :
LADY JUSTICE ARDEN
and
MR JUSTICE COLLINS
____________________
| Financial Services Authority |
Appellant/ Respondent |
|
| - and - |
||
| Fradley & Woodward |
Respondents/Appellant |
____________________
Smith Bernal WordWave Limited
190 Fleet Street, London EC4A 2AG
Tel No: 020 7421 4040 Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr Sean Fradley in person
____________________
Crown Copyright ©
- These are appeals with the leave of the judge from two orders dated 21 October 2004 of Mr John Martin QC sitting as a deputy judge of the High Court of Justice, Chancery Division. The first order contains a declaration that between 19 August 2002 and 12 February 2003 Mr Fradley carried on an investment business in the United Kingdom without authorisation contrary to section 19 of the Financial Services Markets Act 2000 ("FSMA"). The second order contains a declaration that between those dates Mr Woodward was knowingly concerned in that contravention by Mr Fradley and a company called 147 Racing Limited ("147"). The judge also made certain consequential orders, including orders restraining Mr Fradley and Mr Woodward from disposing of their assets and from acting in further breach of section 19, and remitted the question of restitution and other remedies for further consideration.
- In his judgment ([2005] BCLC 479), the judge declined to hold that there were also breaches of section 19 of FSMA between 9 March 2003 and 21 August 2003. The Financial Services Authority ("the FSA") appeals against that refusal and Mr Fradley appeals against the judge's holding that there was a breach of section 19 of FSMA in the earlier period. In fact, as explained below, the judge subdivided the relevant periods into five periods, which are set out in paragraph 11 below.
- It may be helpful to start with a very brief (but not comprehensive) explanation of the legislative scheme under which these issues arise. The FSMA is a portmanteau statute dealing with all kinds of investment activity, not just activities in traditional investments such as securities. The former system of self-regulation in specific areas has been abolished. Instead, the demanding function of regulating the numerous and disparate activities that take place in the financial services industry in the United Kingdom is now vested in the FSA pursuant to FSMA. Under section 2(2) of FSMA, the regulatory objectives of the FSA are market confidence, public awareness, the protection of investors and the reduction of financial crime. In discharging its functions the FSA has to have regard to a number of factors, including the principle that the burden placed on a person should be proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction. To enable the FSA to regulate the many different types of activity in the financial services industry, section 19 of FSMA (set out below) imposes a general prohibition on the carrying on of regulated activities (as defined in section 22 of the FSMA, which is set out below) without authorisation or exemption. Regulated activities include the operation of a "collective investment scheme", referred to below as a "CIS". This concept is defined in section 235 of FSMA (set out below), which needs to be examined in detail. At the heart of the concept, however, is the requirement for the sharing of profit or income by participants who do not have day-to-day control over the management of the property. A paradigm example of a CIS would be a unit trust, but the definition applies in many more situations than that. The general prohibition in section 19 on unauthorised investment activity is buttressed by a number of other prohibitions, including a prohibition on the promotion of invitations to engage in financial activity unless authorised (section 21, set out below). Finally, the FSA is empowered to seek injunctions to restrain anticipated breaches of the basic prohibition in section 19, and also orders for the disgorging of profits by persons who have contravened FSMA and the payment by them of compensation to persons who have been adversely affected by their contraventions (sections 380 and 382 of FSMA).
- Now that I have summarised the statutory scheme above, the convenient course is to set out all the sections of FSMA relevant to this appeal in one place:-
- The general prohibition in section 19 of FSMA applies to every activity which is a "regulated activity." The meaning of "regulated activity" is dealt with in section 22 of FSMA. Section 22 requires that the activity is carried on by way of business. It is not in doubt here that that requirement is satisfied. Schedule 2 to FSMA supplements the meaning of regulated activity in section 22 of FSMA and controlled activity for the purposes of section 21. Paragraph 8 of Schedule 2, which makes the operation of a CIS a regulated activity (or, by virtue of section 21 (11) a controlled activity), provides as follows:
- Under section 22(1)(b), an activity can also be a regulated activity if it relates to property of any kind and it is specified for the purposes of that subparagraph. Article 4(2) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2000/544) provides that (among other activities) the following activities are specified for that purpose:
- In this case, the FSA applied for summary judgment on its claim that Mr Fradley and Mr Woodward had contravened sections 19 and 21 of FSMA by operating a CIS without authorisation or exemption and communicating an invitation or inducement to engage in investment activity. It alleged that Mr Fradley through his firm, Top Bet Placement Services ("TBPS"), and Mr Woodward, through 147, were jointly involved in a CIS. FSA's case was that under the CIS they jointly provided a betting service which involved collecting money from the public and placing bets on their behalf on horse races.
- Mr Woodward was a director and the company secretary of 147 until October 2002, when he resigned, although he continued to be involved with 147 thereafter. 147 was wound up in January 2004. Mr Woodward is a respondent to the FSA's appeal but he did not attend the hearing of the appeal. Mr Fradley is not represented but he made submissions on his own behalf on the hearing of this appeal. Miss Rebecca Stubbs represents the FSA on both appeals, as she did before Mr John Martin QC.
- The judge described the scheme as follows;-
- It can be seen from that paragraph of the judge's judgment that both 147 and TBPS were involved. They had different roles. 147 provided the tips and TBPS performed the task of placing those tips with bookmakers. Sometimes it would require skill to find bookmakers prepared to accept the bets at the right odds.
- The judge divided the life of the scheme into five periods as follows:-
- Members of 147 were encouraged to use the services of TBPS to place bets on their behalf in the first period. In the case of members of 147 wishing to use the services of TBPS, TBPS simply placed bets on the instructions of 147 and the members of 147 had nothing to do other than to complete the necessary documentation and pay their money to TBPS. This can be seen from the initial mail package which was used in the first period which explains that "if placing bets and calling the line each day poses a problem, we can even arrange to have your bets placed for you with the company called TBPS… If you allow TBPS to act as your agent, each month you will be sent a statement of all bets placed on your behalf, always staking 1/20 of your betting bank on each advice given. You can then elect to receive your winnings for that month or instruct TBPS to compound your winnings…TBPS will automatically place all club bets on your behalf as we simply instruct them as to when we have a bet."
- In the second period, however, although Mr Fradley may not initially have known this, the services of TBPS were effectively mandatory for all members of 147. Thus, under the mail shot sent to them, members were required to include with their completed application form to join 147, a completed application form for membership of TBPS and payment to TBPS of their "investment". The mail shot stated:
- As the documentation described above shows, the critical difference between the two periods is that in the second period the documentation required members of the public participating in the scheme to use the services of TBPS. By the end of this period the FSA became concerned about the betting services being offered by 147 and TBPS. Discussions took place between the solicitors for TBPS, Speechly Bircham, and the FSA. Mr Fradley took advice from Counsel as to whether the scheme was a CIS (I refer to this advice in more detail below). There is a dispute of fact as to whether the scheme was in fact suspended in the third period while these discussions took place, but the judge rightly held that he could not resolve that dispute on a summary application, and neither party appeal against that ruling.
- The discussions with the FSA (to which I refer in more detail below) led to the use of new documentation in the fourth period and (on the evidence before the judge) in the fifth period. Existing clients were asked to agree to the new terms. Letters were sent out which permitted clients to place their own bets if they wished, but clients who were members of 147 were provided with a form of mandate, to be returned to TBPS.
- In April 2003 Mr Fradley moved to Cork. 147 and TBPS continued to provide a placement service for members of 147 who chose to appoint TBPS to place bets for them. On 21 August 2003, the FSA obtained an injunction restraining 147 and Mr Fradley from trading further.
- According to the FSA, over the period when the betting services of 147 and TBPS were offered in conjunction with each other, some £1.415m was invested, £425,000 was lost on bets and TBPS received fees totalling over £145,000. The FSA's case is that insufficient money remains to repay the members' betting banks. These figures are disputed by Mr Fradley. He contends that the sum of £90,000 now remains out of the funds provided by members of 147, after the deduction of lost bets placed on clients' instructions, the repayment of deposits, the payment of commission and the distribution of profits. However, for the purposes of this appeal nothing turns on these figures.
- The judge found that both respondents contravened section 19 of FSMA in the first and second periods. The judge held that "some at least of the participants in the scheme" in each of the first and second periods "had given day-to-day control of the contributions to TBPS" (judgment, paragraph 26).
- The judge held that the scheme operated by Mr Fradley constituted arrangements with respect to "property" for the purposes of section 235(1) since the arrangements involved members of the public paying money to him for the purposes of arrangements under which they were to receive profits from the placing of bets. The judge rejected the argument that the property had to be something different from the contributions of money made by the members of the public. He held that winnings were profits and that the requirements of section 235(1) were accordingly fulfilled.
- The judge held that the scheme would not fall outside section 235(2) unless all participants of the scheme had day-to-day control. In reaching this conclusion he followed the decision of Laddie J in The Russell- Cooke Trust Company v Elliott, 16 July 2001, unreported, (a case on the statutory predecessor of section 235, namely section 75 of the Financial Services Act 1986) at paragraph 26. On this basis the judge held that the requirements of section 235(2) were satisfied in the first and second periods.
- As to the fourth and fifth periods, the judge held that on the face of it the documentation provided for the participants to have day-to-day control of their contributions. He noted that there was an issue as to whether the scheme was operated in accordance with its terms because of the pre-printing of the name of 147, but he could not resolve that and accordingly he held that the scheme was not a CIS in those periods.
- The judge then turned to section 235(3). He held that both the requirements of this subsection were met. All the contributions were held in a single account through all the periods that the scheme was operating. It did not make any difference to this conclusion that in the fourth and fifth periods the bank account was held on trust for the participants according to their contributions although this might improve their positions in an insolvency. He held that the property was pooled and collectively managed rather than separately held and separately managed.
- Accordingly the judge held that the scheme satisfied the requirements of a CIS in the first and second periods but not in the third, fourth and fifth periods.
- The judge rejected an argument that the scheme was within the "common accounts" exception in paragraph 6 of the schedule to the Financial Services and Markets Act 2000 (Collective Investment Scheme) Order 2001. There has been no argument on that point on this appeal.
- The judge also considered the effect of section 21 of FSMA. He noted that units in a CIS were controlled investments for this purpose by virtue of article 4, and paragraph 19 of schedule 1 to the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. The judge held that section 21 was not contravened because the invitation had, by virtue of section 21 (8) (b), to be an invitation to exercise a right conferred by a unit in a CIS, which was not the situation in the present case.
- The judge also dealt with the question whether Mr Woodward had been knowingly concerned in the contravention of section 19 by Mr Fradley. The judge held that he had been so concerned. It is unnecessary for me to explain his reasoning on this point as there is no appeal from his conclusion on it.
- Mr Fradley's case on his appeal is that 147 is independent of TBPS. 147 provided essentially a horse race tipping service. TBPS would place the recommended bets. Mr Fradley would receive an application for the services of TBPS from a person who had already become a member of 147. Mr Fradley would not act for him until he received his approval to TBPS's terms and conditions. He sent these out to the client, and in the fourth and fifth periods. He also sent a form of mandate in which he completed the name of the agent as 147 because the client had approached him as a member of 147 and thus it was obvious that he wished to use 147 as his agent for selecting bets. He (Mr Fradley) would then act upon instructions given on the client's behalf by 147.
- In January 2003 Mr Fradley took advice from Counsel, who advised that provided that the agent was an independent third party the condition as to day-to-day control in section 235 (2) of FSMA would be satisfied. Accordingly the scheme would not fall within the definition of a CIS in section 235.
- Mr Fradley informed this Court that he did not at first see the mailshots which 147 was using but he saw them as time went on. He received a commission on bets placed and a monthly fee from the client. Before the FSA's investigation in early 2003 took place, those commissions were shared with 147, but that practice was abandoned in March 2003.
- Mr Fradley submits that by a letter dated 31 March 2003 the FSA gave its agreement that the scheme outlined in Counsel's advice would not be a CIS. He further submits that the FSA did not make any complaint about the way he held client monies or the wording of the mailshots. Mr Fradley submits that the FSA expressed their satisfaction with the arrangements as revised in accordance with Counsel's advice. In addition, Mr Fradley's evidence is that clients were given a telephone number which they could ring to find out what bets were being placed that day on their behalf by 147. They could thus always cancel the bets if they wished and so, on his submission, they must have retained control. While the FSA disputes that there was any such telephone number made available to clients, as this is an appeal from summary judgment I propose to treat this as a matter which Mr Fradley could prove if there were a trial.
- Miss Stubbs submits that those individuals who used the TBPS did not have day-to-day control over the management of the scheme. 147 instructed TBPS as to the bets which should be placed; the members were told they could simply relax because their money was in the hands of 147 and TBPS. Members did not even know in advance where their bets were to be placed. They could only find out after the event. Since TBPS placed bets on behalf of members of 147 by simply following the instructions of 147, Miss Stubbs submits that, if any one member of 147 use the services of TBPS, the scheme was a collective investment scheme within the meaning of section 235 of FSMA.
- This is one of the first occasions on which this court has had to consider section 235 of FSMA, that is, the meaning of "collective investment scheme". As noted, we have had to do this without assistance from a legally qualified representative for Mr Fradley. It is appropriate to make some preliminary observations. First, section 235 is drafted in an open-textured way in that it is drafted at a high level of generality and it uses words, such as "arrangements" and "property of any description", which have a wide meaning. Secondly, the application of section 235 depends on the specific facts of the case, and in the event of a dispute those facts will have to be determined by a court of law on the evidence before it. Once those facts are found, then it is unlikely that an appellate court will set those findings aside unless the judge was plainly wrong. On well-established authority, the hearing of an appeal after a trial is not an opportunity for a full rehearing. Thirdly, since contravention of the general prohibition in section 19 may result in the commission of criminal offences, section 235 must not be interpreted so as to include matters which are not fairly within it.
- The word "arrangements" has been considered in other statutory contexts. No formality is required. In some contexts communications may amount to "arrangements" even if they are not legally binding (see for example Re Duckwari plc [1999] Ch 235, 260). I need not decide whether that is the case in section 235. In my judgment, the judge was correct to say that "property of any description" in section 235(1) could include amounts paid to TBPS by persons joining in the scheme. There is no requirement for those monies to be invested in some investment. Likewise, the winnings were "profits" for the purpose of section 235(1). Accordingly it is immaterial that the scheme involves bets, and that the bets give rise to contracts which are null and void by virtue of section 18 of the Gaming Act 1845.
- As this is an appeal against a judgment by way of summary judgment, Mr. Fradley need only show that he has a real prospect of success, that is, that he has some chance of success at trial. He does not, therefore have to show that he would probably succeed at trial.
- The following are the main issues to be resolved on this appeal:
- Mr Fradley's appeal must succeed if he has a real prospect of success at trial on issue (a) or (b) above with respect to the first and second periods, unless the question can be disposed of on this appeal, for example because it involves a question of law. Likewise, if issues (a) and (b) on this appeal are resolved in favour of the FSA with respect to the fourth and fifth periods, the FSA's appeal must succeed. Those issues will not be resolved in the FSA's favour if Mr Fradley has a real prospect of success at trial on issue (c).
- As to issue (a) it is convenient to refer to a single set of "arrangements" as a single scheme. There is no doubt that the expression "operator" in section 235 includes two or more operators acting as operators of a single scheme: the singular in a statute includes the plural. Likewise there is no logical reason why, if there are two operators, they should have to be responsible for the entire operation of the scheme. It is enough that they are responsible for separate parts of the entire scheme. But, where two services are offered together, it does not necessarily follow that there was only one set of arrangements. The scheme offered by the mailshots could have been simply a scheme for a tipping service offered by 147, containing a recommendation or a requirement by 147 to use TBPS, an independent bet placement service, with the result that members became clients of TPBS individually and without the umbrella of a single set of arrangements for section 235 purposes. In the same way, property developers offering members of the public the opportunity to invest in small parts of a single property, which (under the scheme) they would manage as a single property on behalf of all the investors, might suggest or even require the investors to use a particular firm of solicitors. But the solicitors would not necessarily be operators of the scheme. They could simply be independent agents who would take on the investors as clients in the usual way. So, too, here Mr Fradley did not regard himself as obliged to take on 147 members as clients. He required them to sign his terms and conditions and it follows that if they had not done so TBPS would have refused to accept them as clients.
- The distinction described above is in effect accepted by the FSA. In paragraph 61 of their skeleton argument before the judge, the FSA submit "… it cannot be said that 147 is the sole operator of the Scheme, and that TBPS is merely the agent of 147". The FSA goes on to say: "TBPS paid 147, rather than 147 remunerating Mr Fradley for the services provided."
- The last point refers to the fact that in the first and second periods there were commission sharing arrangements. TBPS's management fee of £15 per month was also shared between them. However, as Mr Fradley submits before us, commission sharing is a normal commercial arrangement and does not of itself mean that the parties are to be treated as other than principal and agent, or agent and sub-agent.
- Issue (a) has arisen in an unsatisfactory way. Before the judge, Mr Fradley and Mr Woodward were represented by the same solicitors and counsel. They had filed a joint defence in the action. No point was then taken on behalf of Mr Fradley that the arrangements were not a joint scheme. On the contrary, the outline written submissions of both the defendants, that is Mr Fradley and Mr Woodward, stated at paragraph 5: "The Defendants operated a scheme which allowed individuals to place bets on horse races."
- But Mr Fradley now appears on his own behalf. His case is that 147 and TBPS were not operating any arrangements or scheme together because 147 and TBPS were separate companies, owned and controlled independently of each other. In my judgment the absence of cross-ownership or common control does not show that the arrangements were not a joint scheme: the operators of a single scheme can be independent entities. Moreover, the mailshots refer to both services as I have explained above. They were on the face of it complementary services. The availability of TBPS's bet placement service was a selling point.
- On the other hand, Mr Fradley's case as he explained it orally to us is that he was not involved in the drafting or publication of the mailshots, although he was, after the initial mailing, aware that the services of 147 and of TBPS would be offered and marketed together.
- In truth, the argument on issue (a) has developed in a Topsy-like fashion. I do not mean that as any criticism of Mr Fradley but the issue with which I am now dealing became apparent only at a late stage. The point is not taken in Mr Fradley's extensive skeleton argument filed for this appeal. Although I raised the point in argument with Ms. Stubbs, Mr Fradley did not take it in his submissions on the appeal. Indeed he only took it when he saw the draft judgment on its being circulated to the parties in the usual way. However, as the application before the judge was a summary judgment, this Court in my judgment should not seek to shut a new point out on the grounds that it was not taken below. Mr Fradley's submission cannot be said to have no foundation because, when Speechly Bircham were instructed, they were instructed by Mr Fradley on his own and not together with Mr Woodward as one would expect if they were running a joint scheme. It is also right to state that the question whether there was a CIS could have a significant adverse effect on Mr Fradley personally. If the scheme is a CIS, the FSA will be entitled to pursue against Mr Fradley personally the extensive remedies conferred by sections 380 and 382 of FSMA. I have referred to these at the end of paragraph 3 above.
- In my judgment, having now heard this point fully argued by Mr Fradley I do not consider that the Court can determine whether 147 and TBPS were the operators of a joint scheme until all the facts as to the nature of the arrangements between Mr Woodward and Mr Fradley are fully investigated. It may be that at the end of the day it will be shown that the FSA's allegation is correct. But it cannot in my judgment be said that Mr Fradley has no real prospect of success. Accordingly on this issue I would allow the appeal against the judge's order. I would permit Mr Fradley to take to trial the issue whether 147 and TBPS together operated a single set of arrangements constituting a CIS.
- I turn next to issue (b) above. This issue has been fully argued and it is not suggested that it raises any issue of fact. I proceed to state my conclusions on this and issue (c) on the basis that Mr Fradley loses at trial on issue (a). I do so without expressing any view as to the merits of issue (a).
- As to whether the scheme operated by Mr Fradley and 147 was a CIS in the first and second periods, the critical question is whether, vis-à-vis the operators of the CIS, the participants retained day-to-day control over the management of their funds for the purposes of section 235(2). If they retained such control, it would not matter if they appointed their own agent to exercise that control, but that agent could not be an operator of the scheme for otherwise section 235(2) would apply. As to the first period, it is clear that some participants at least appointed 147 as their agent for the purpose of deciding which bets to place. As Laddie J held in The Russell – Cooke Trust Company v Elliott, a scheme will be a CIS even if not all the participants in it have transferred day-to-day control of the management of their monies to the operators of the scheme. This is because the fact that some of them have relinquished day-to-day control to the operators of the scheme means that section 235(2) is satisfied as regards them. That is sufficient for the purposes of this case: it does not matter that the scheme was not a CIS as regards any participant who retained day-to-day control of the management of his monies. Given that the use of 147 was mandatory in the second period, it was inevitable that the scheme was a CIS in that period for all participants. It would not be enough that a member could seek to amend the documentation. Until he did so or revoked the appointment of TBPS, his agent was TBPS and TBPS had day-to-day control of his funds.
- Miss Stubbs submits that there was also no real prospect of showing that the condition in section 235(2) was satisfied in the fourth and fifth periods and that the judge should have so held. There is one preliminary point of law here on which I agree with the judge. In the fourth and fifth periods, clients' monies were paid into a separate bank account and were held on trust for them. TBPS's bankers also provided a service which enabled the account of each client with TBPS to be separately identified, but the monies remained in a single bank account. The existence of the trust did not prevent section 235(3)(a) from applying. Clients' monies were "pooled", that is, aggregated, even if the clients obtained a proprietary right to them once paid into TBPS account. The reason for the trust was not so that the scheme would cease to be a CIS, but so that the position of participants would be enhanced if TBPS went into insolvent liquidation.
- That leaves the question whether in the fourth and fifth periods the clients had day-to-day control over the management of their contributions for the purposes of section 235(2). (Under section 235(3), it is sufficient that either paragraph (a) or paragraph (b) is satisfied, so it is not necessary to consider paragraph (b) in this case). The position in these periods is more complicated because of the discussions between Mr Fradley, his solicitors, Speechly Bircham, and the FSA. But counsel's advice to Mr Fradley was that the clients would have to appoint an agent who was outside the scheme if section 235(2) was to be avoided. If the scheme was a joint scheme operated by 147 and TBPS together, this did not happen in cases where the client was a member of 147. The evidence shows that in March 2003 a Mr Chris Barber received documentation from Mr Fradley, including a form of mandate for the appointment of his agent in which the name of 147 had already been inserted. Furthermore, Mr Fradley in the course of his submissions in this court described his practice, which I have summarised above, of inserting the name of 147 in the client's mandate before sending it to the client for signature if the client was a member of 147. I note that Speechly Bircham wrote to the FSA on 25 February 2003 assuring the FSA that if the client appointed 147 as his agent that would be a matter of which over Mr Fradley would have no control.
- In his letter dated 23 June 2003 to the FSA, Mr Fradley admitted that there had been no real change in the way the business was conducted after taking counsel's advice, except that there was no longer a fee-sharing arrangement with 147. If 147 and TBPS were in fact joint operators of the scheme, the requirement that the client's agent should be separate and independent of the scheme was not, in reality, met. Mr Fradley would not then be in a position to complain that he was led to believe that the position was different from what it turned out to be. It has not been necessary to go into all the communications between the FSA and Speechly Bircham. The form of mandate placed before counsel had the space for the name of the nominated agent of the client left blank. Counsel amended this form of mandate to delete the reference to the nominated agent altogether and his amended form was sent by Speechly Bircham to the FSA on 21 March 2003 as the form which TBPS intended to use. In those circumstances the FSA was led to believe that the agent would be independent. Although the FSA wrote to Speechly Bircham on 31 March 2003 stating that the scheme as outlined by Counsel would not constitute a CIS, it made it clear that it considered that the scheme had previously constituted a CIS and that:
- In the circumstances, it is not necessary to consider how regularly a client must actually exercise control for his control to constitute "day-to-day control" for the purposes of section 235(2). For the reasons given above, and subject to the remaining issues considered below, I consider that, if the scheme was a CIS, the judge should have found that there was no triable issue as regards the fourth and fifth periods. For this purpose, the position of Mr Woodward does not differ from that of Mr Fradley. It is not suggested that any further relevant facts could be proved if there was a trial.
- I turn now to issue (c) above on the basis already stated, that Mr Fradley loses at trial on issue (a). Does the position change when Mr Fradley moved his operations to Ireland in April 2003? Mr Fradley contends that he ceased to be subject to the restrictions in the FSA once he moved to Ireland. Miss Stubbs, however, submits that he continued to carry on business in the United Kingdom because he continued to maintain in the jurisdiction a bank account and an accommodation address. Many of the investors were resident in the United Kingdom. There is a dispute of fact as to whether Mr Fradley used bookmakers here when placing bets here although the FSA contends that that is shown by a schedule prepared by the FSA from the records of TBPS. Miss Stubbs submits that the carrying on of any activity within the scheme would be enough to bring the scheme within FSMA. Again, this is an issue of law which can be determined on the limited facts not in dispute.
- The FSMA does not contain an exhaustive description of what constitutes the carrying on of business within the United Kingdom. All that section 418 (set out above) provides is that the requirement is to be satisfied in certain specific cases if it would not otherwise be so satisfied. This case is not within those cases. Accordingly, the Court is left with the question whether the activities described above (so far as not disputed), of themselves, constituted the carrying on of business in the United Kingdom. FSMA does not require that the entirety of a business activity be carried on in the United Kingdom. If it did, it would be open to obvious abuse.
- In my judgment, it is sufficient if the activities in question which took place in this jurisdiction were a significant part of the business activity of running the CIS (if any) constituted by the betting services offered by 147 and TBPS. In this case, the communications with clients and prospective clients, and the maintenance of a bank account and an accommodation address, all of which took place in the United Kingdom, were all business activities. In my judgment they were of sufficient regularity and substance to constitute the carrying on of business here even after Mr Fradley moved his own office to Ireland in April 2003 and gave instructions by post or internet from there. I leave open the question whether the requirement for carrying on business within the jurisdiction can be satisfied in any other case.
- That leaves the remaining point raised in argument by Mr Fradley, that is that the activity of the CIS was not that of investment but of gambling. The difficulty for Mr Fradley that FSMA does not simply regulate investment activity in the usual sense. It contains very widely cast provisions which do not depend on the activity being a conventional investment activity. Once the provisions of FSMA are fulfilled, there is no further requirement that the activity should be for the purposes of traditional investment.
- That leaves the point arising under section 21. The judge ruled in favour of Mr Fradley on the basis of section 21(8)(b) but it is clear that the judge did not consider section 21(8)(a). Under that provision, once an activity is a controlled activity, then section 21(8)(a) is satisfied whenever a party enters into an agreement to perform that activity. In the present case that occurred when, for example, Mr Barber entered into an agreement to participate in the scheme. Thus, if the scheme was a CIS, Mr Fradley contravened section 21 when he invited members of 147 to enter into agreement to use TBPS, since the performance by TBPS of its services would constitute the performance of a controlled activity.
- Before concluding, I would record that Mr Fradley made a number of complaints about the way the FSA conducted its investigation. The FSA has not had an opportunity in putting in evidence on these points although Miss Stubbs has made some submissions on them. They do not have to be adjudicated upon on this appeal and accordingly it is unnecessary to comment on Mr Fradley's contentions.
- For the reasons given above, I would allow Mr Fradley's appeal, and dismiss the FSA appeal, in each case to the extent indicated above.
- As to costs, and permission to appeal to the House of Lords, subject to Ward LJ and Collins J, I would direct the parties to lodge submissions in writing on costs, with which the Court will deal on paper. I would also direct Counsel for the FSA to draw up a minute of order to be agreed, if possible, with Mr Fradley and lodged with the Court. I would also strongly encourage the parties to seek to resolve their remaining disputes by alternative dispute resolution, and draw their attention to the Court of Appeal Mediation Scheme, details of which can be obtained from the Civil Appeal Office.
- I agree.
- I also agree.
Lady Justice Arden:
The statutory framework
"19. The general prohibition
(1) No person may carry on a regulated activity in the United Kingdom, or purport to do so; unless he is-
(a) an authorised person; or
(b) an exempt person.
(2) The prohibition is referred to in this Act as the general prohibition.
21. Restrictions on financial promotion
(1) A person ("A") must not, in the course of business, communicate an invitation or inducement to engage in investment activity.
(2) But subsection (1) does not apply if-
(a) A is an authorised person; or
(b) the content of the communication is approved for the purposes of this section by an authorised person.
(3) In the case of a communication originating outside the United Kingdom, subsection (1) applies only if the communication is capable of having an effect in the United Kingdom.
(4) The Treasury may be by order specify circumstances in which a person it to be regarded for the purposes of subsection (1) as-
acting in the course of business;
not acting in the course of business.
(5) The Treasury may by order specify circumstances (which may include compliance with financial promotion rules) in which subsection (1) does not apply.
(6) An order under subsection (5) may, in particular, provide that subsection (1) does not apply in relation to communications-
of a specified description;
originating in a specified country or territory outside the United Kingdom.
originating in a country or territory which falls within a specified description of a country or territory outside the United Kingdom; or
originating outside the United Kingdom.
(7) The Treasury may by order repeal subsection (3).
(8) "Engaging in investment activity" means
(a) entering or offering to enter into an agreement the making or performance of which by either party constitutes a controlled activity; or
(b) exercising any rights conferred by a controlled investment to acquire, dispose of, underwrite or convert a controlled investment.
(9) An investment is a controlled activity if
(a) it is an activity of a specified kind or one which falls within a specified class of activity; and
(b) it relates to an investment of a specified kind, or to one which falls within a specified class of investment.
(10) An investment is a controlled investment if it is an investment of a specified kind or one which falls within a specified class of investment.
(11) Schedule 2 (except paragraph 26) applies for the purposes of subsections (9) and (10) with references to section 22 being read as references to those subsections.
(12) Nothing in Schedule 2, as applied by subsection (11), limits the powers conferred by subsections (9) or (10).
(13) "Communicate" includes causing a communication to be made.
(14) Investment includes any asset, right or interest.
(15) "Specified" means specified in any order made by the Treasury.
22. The classes of activity and categories of investment
(1) An activity is a regulated activity for the purposes of this Act if is an activity of a specified kind which is carried on by the way of business and-
(a) relates to an investment of a specified kind; or
(b) in the case of an activity of a kind which is also specified for the purposes of this paragraph, is carried on in relation to property of any kind.
(2) Schedule 2 makes provision supplementing this section.
(3) Nothing in Schedule 2 limits the powers conferred by subsection (1).
(4) "Investment" includes any asset, right or interest.
(5) "Specified" means specified in an order made by the Treasury…"
235. Collective investment schemes
(1) In this Part "collective investment scheme" means any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income.
(2) The arrangements must be such that the persons who are to participate ("participants") do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions.
(3) The arrangements must also have either or both of the following characteristics-
(a) the contributions of the participants and the profits or income out of which payments are to be made to them are pooled;
(b) the property is managed as a whole by or on behalf of the operator of the scheme.
(4) If the arrangements provide for such pooling as is mentioned in subsection (3)(a) in relation to separate parts of the property, the arrangements are not to be regarded as constituting a single collective investment scheme unless the participants are entitled to exchange rights in one part for rights in another.
(5) The Treasury may by order provide that arrangements do not amount to a collective investment scheme –
(a) in specified circumstances; or
(b) if the arrangements fall within a specified category of arrangements.
418. Carrying on regulated activities in the United Kingdom
(1) In the four cases described in this section, a person who-
(a) is carrying on a regulated activity, but
(b) would not otherwise be regarded as carrying it on in the United Kingdom,
is, for the purposes of this Act, to be regarded as carrying it on in the United Kingdom.
(2) The first case is where-
(a) his registered office (or if he does not have a registered office his head office) is in the United Kingdom;
(b) he is entitled to exercise rights under a single market directive as a UK firm; and
(c) he is carrying on in another EEA State a regulated activity to which that directive applies.
(3) The second case is where-
(a) his registered office (or if he does not have a registered office his head office) is in the United Kingdom;
(b) he is the manager of a scheme which is entitled to enjoy the rights conferred by an instrument which is a relevant Community instrument for the purposes of section 264; and
(c) persons in another EEA State are invited to become participants in the scheme.
(4) The third case is where-
(a) his registered office (or if he does not have a registered office his head office) is in the United Kingdom
(b) the day-to-day management of the carrying on of the regulated activity is the responsibility of-
(i) his registered office (or head office); or
(ii) another establishment maintained by him in the United Kingdom.
(5) The fourth case is where-
(a) his head office is not in the United Kingdom; but
(b) the activity is carried on from an establishment maintained by him in the United Kingdom.
(6) For the purposes of subsections (2) to (5) it is irrelevant where the person with whom the activity is carried on is situated. "
"Establishing collective investment schemes
8. Establishing, operating or winding up a collective investment scheme, including acting as-
(a) trustee of a unit trust scheme;
(b) depositary of a collective investment scheme other than a unit trust scheme; or
(c) sole director of a body incorporated by virtue of regulation under section 262."
"51 Establishing a collective investment scheme
(1) The following are specified kinds of activity –
(a) establishing, operating or winding up a collective investment scheme…"
Background
"5. The scheme, which came into existence in the late summer of 2002, involved the use of unsolicited mailshots, sent to members of the public by 147 but taking the form of an invitation from Peter Ebdon and John Parrott (each of whom is a well-known snooker player) to participate in a scheme to make money on horse race betting by utilising information not generally available to the public. The scheme was characterised as "investing in horse racing". Investors in the scheme would provide a minimum sum of £500, known as a "betting bank", and were told that they stood a realistic chance of increasing their betting bank by a factor of 10 each year. Membership cost £97 a month, rising to £447 a month after twelve months. The mailshot included an application form for membership of 147, which contained a standing order mandate in favour of 147; and a form appointing TBPS the member's agent for the purpose of placing bets. It was not initially compulsory to use TBPS for bet placement: members would receive confidential information and could place bets themselves, but they were encouraged in the mailshot to use TBPS's services. Once accepted into the scheme, members were sent an acceptance letter; and if they had applied to use TBPS's services, they were also sent TBPS's terms and conditions. Those terms and conditions provided (among other things) that the member's betting bank would be held in TBPS's client account, out of which payments could only be made for the purpose of payments to bookmakers, repayment to the members, or payment to TBPS's management fee and "placement levy"; and that clients' accounts would be updated daily and computerised accounts issued monthly."
19 August 2002 to October 2002 ("the first period")
October 2002 to 12 February 2003 ("the second period")
12 February 2003 to 9 March 2003 ("the third period")
9 March 2003 to 4 April 2003 ("the fourth period")
4 April 2003 to 21 August 2003 ("the fifth period").
"Our associated bets placement company [TBPS] does it all for you following our instructions…and our "no effort" and placement service ensures that all bets go on exactly as planned with no personal involvement or fuss. You just sit back and enjoy the thrill of seeing the system work and making profits…it's totally automated…"
The judgment of Mr John Martin QC
The issues on the appeals
i) did the tipping service offered by 147 and the bet placement service offered by TBPS collectively constitute a single set of "arrangements", operated by 147 and TBPS together, for the purposes of section 235 of FSMA?ii) if the answer to (a) is yes, did the participants in those arrangements have day-to-day control over the management of their property for the purposes of section 235 of FSMA?
iii) if the answer to (b) is no, did the arrangements cease to be subject to FSMA when Mr Fradley moved out of the jurisdiction in April 2003?
"The view the FSA has now reached is dependent on indications in the documentation which you have kindly supplied that participants in the scheme will have day-to-day control over the management of their money. Should this not, in fact, prove to be the case, so that the scheme in fact operates outside the strict parameters proposed, the FSA reserves the right to consider taking civil and/or criminal proceedings against your client."
The reservation of the right to bring proceedings if further information was received was repeated in a letter dated 4 April 2003 stating that the FSA did not intend to pursue its then existing inquiries.
Disposition
Collins J
Ward LJ