Chapter Three The United Kingdom
B) The Scope of the FSMA
The techniques used by the FSMA in determining the scope of the act are the financial activities and persons involved. Upon these two factors, the protection of the FSMA can essentially be determined.
The principal technique deployed by the FSMA to ensure adherence to the regulatory framework and to the authority is the so-called “General Prohibition”.
Section 19 states that no person should carry on investment business in the UK unless he was authorised so to do by the authority.454 The FSMA considers any breach of the general prohibition to have far-reaching consequences; thus, in addition to establishing a right to sue for a breach for consumers, a person who is in breach of the general prohibition is subject to criminal prosecution.455
The FSMA provides two categories of regulated activities included in the general prohibition: firstly, the activity of a specified kind and related to specified investment; and, secondly, where specified activity is related to property of any
454 Section 19 of the FSMA
455 FSMA s.23
kind.456 The term ‘investment’ used in the FSMA for the purpose of breaching the General Prohibition includes ‘any asset, right, or interest’ in the context of regulated activities,457and financial promotion.458 The FSMA confers to the Treasury the task of spelling out the meaning of investment of specific kinds and requires it to publish orders as to the meaning of ‘investment’. Accordingly, reference to secondary legislation is needed to determine what ‘investment’ includes.
The phrase ‘investment of a specific kind’ is clarified by the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (henceforth the Order).459 The Order lists different types of investments for the purpose of the FSMA,460 including shares (Article 76), options (Article 83), futures (article 84) and bonds (articles 77 and 78).
The Order clearly brings both financial advice and execution as services to the scope of the FSMA by providing details as to the ‘regulated activities’. These activities that are related to the broker, which need to take permissions when According to the Order, the following services are considered ‘investment activities’’
for the purpose of the FSMA: agreeing to carry on a regulated activity (article 64);
arranging (bringing about) deals in investments (article 25(1)); sending dematerialised instructions (article 45(1)); dealing in investments as agent (article 21); dealing in investments as principal (article 14); making arrangements with a view to transactions in investments (article25(2)); managing investments (article 37); and operating a Multilateral Trading Facility (MTF) (article 25 D). Financial advice is included within the definition of ‘investment activities’ by article 53 of the Order covering: advising on investments for an investor or a potential investor (article 53).
456 FSMA ss.22 (1) a and 22(2) b
457 FSMA2000 s.22 (4)
458 FSMA2000 s.21 (14)
459 SI 2001/544 made under FSMA200 s.22 Sch.2
460 FSMA s.22
The previous paragraphs demonstrate that both financial advice and executing customers orders by brokers are within the scope of the FSMA. Execution orders for consumers is recognised as a service related to ‘investment of specified kinds’, that includes securities. Advice subject to the general prohibition includes that on securities, which concerns buying, selling, subscribing to, or underwriting a security or exercising any right conferred by such security to buy, sell, subscribe to, or underwrite a security.461Accordingly, both financial advice and executing customers’
orders are considered within the scope of the FSMA.
Given that both services are within the scope of the FSMA, they are within the parameter of the ‘General Prohibition’. The FSMA clearly establishes a consumer’s right to a cause of action for a breach of the general prohibition. Section 26(1) declares that an agreement reached with a provider in breach of the General Prohibition is firstly, unenforceable, and, secondly, that the victim of a breach of the General Prohibition is entitled to recover the money or the property paid or transferred under the agreement, as well as compensation for any loss ‘sustained as a result of having parted with it’.462 This wording is presumed to be wide enough not only to include loss of interest on the value of the money paid, but also to include losses that were not foreseeable by either party at the time of transaction.463
The FSMA provides similar protection for a consumer who reaches an agreement with an authorised person, but as a result of an inducement by unauthorised persons. This could arise simply because of ‘a contract …entered into as a result of investment advice given by an unauthorised third party’.464 Section 27
461 See Art. 53 of the Order
462 FSMA s. 26 (2) (a) and (b)
463 McMeel and Virgo (n 3) 414
464 FSMA Explanatory Note, para 3
declares that such an agreement is unenforceable and a consumer is entitled, inter alia, to compensation.465
The approach of the FSA with respect to a breach of the General Prohibition has three main characteristics that facilitate its usefulness to ‘private enforcement’.
Firstly, the FSMA does not restrict the right to classes of consumers; accordingly, there is no need for an examination of the entitlement of a consumer to a cause of action. Secondly, the FSMA provides neither exception nor reference to general principles of private law particularly for damages; thus, there is no application for causations or reliance in accordance with the general principles of private law, which may restrict a cause of action. Thirdly, the amount of damages provided for those dealing with a person in breach of the general prohibition is generous to include losses or profits which were not expected at the time of contracting.
These three characteristics illustrate that private enforcement with respect to the General Prohibition is unique in comparison to other cause of actions provided by the FSMA. For example, in case an authorised service provider supplies a service out of the scope of its permission, the FSMA permits, in some cases, consumers to sue according to the tort of breach of statutory duty.466 By accommodating private enforcement of the rule through a tort action, the consumer’s right to sue is undermined because private law may not only make it difficult to enforce, but reduce the amount of compensation, such as contributory negligence.467
465 FSMA s.27
466 FSMA s.20. The FSMA does not details what the prescribed cases are and are left to secondary legislation, namely Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001/2256 (henceforth ROA), reg. 3 and reg.4
467 For further discussion about tort for a breach of statutory duty, see text to n 552.
The claim of the negative impact of the private law principles is well illustrated by the case Re Whiteley Insurance Consultants (WIC).468 WIC was an insurance intermediary which had issued policies that it had no authority from the insurers to issue, or where the insurers did not even exist. From January 2005, insurance intermediaries were required to obtain authorisation from the FSA. WIC went bankrupt a short time after obtaining authorisation as an insurance intermediary, and an action was brought to determine what amounts policyholders were permitted to prove in WIC’s liquidation. The court decided that WIC effectively acted as the insurer – receiving premiums and paying claims - and, hence, was carrying out the insurance policies as principal and was liable to policyholders. Consequently, holders of WIC’s policies issued before January 2005 enjoyed the right to the unenforceability of their contracts, since WIC was not authorised at that time and, therefore, they were entitled to a return of their premium and compensation for any loss sustained as a result of having previously parted with their premiums. In contrast, holders of policies issued after the authorisation as an insurance intermediary of WIC in January 2005 had a tort for a breach of statutory duty according to s.20 and thus their contracts were enforceable. As a result, policyholders received nothing since they did not suffer losses as they enjoyed insurance coverage from WIC during that time.
There is a case to be made as to the WIC judgement. It could be argued that the difference is in the remedy available rather than private law principles that resulted in the outcome of WIC case. While it is a correct and just objection, it misses the principal point. The principal argument in this section is that ‘private enforcement’ of the General Prohibition is treated differently from other rules,
468 Also known as Kingfisher Travel Insurance Services (a firm)) [2008] All ER, [2008] EWHC 1782 (Ch)
including the availability of enforcement. WIC demonstrates the benefit if the availability of unenforceability.469 It could be suggested thus that it is possible to have a cause of action that is not subject to traditional law principles.
To sum up, the FSMA provides for private enforcement for consumers dealing with unauthorised persons. Four elements add to the effectiveness of private enforcement of the General Prohibition: the substantive law: clarity concerning the breach, availability to all consumers, avoidance of the application of general law principles, and generous compensation since there is no reduction to the damages. It is noted also that the FSMA provides two remedies, compensations and unenforceability, which consumers need to choose between.