Financial Services Authority v Watkins (t/a Consolidated Land UK)

This is an application brought by the Financial Services Authority for summary judgment. It relates to an alleged land banking scheme, said to have been operated by the defendant. The FSA issued proceedings on 25 May 2010, having sought an interim injunction restraining the defendant who traded under the name Consolidated Land UK from selling land in the course of business. The defendant gave relevant undertakings until trial.

On 28 September 2010 the FSA requested further information from the defendant which he did not produce. On 25 January 2011 Master Bowles made an Unless Order in relation to the provision of that information. The order was not complied with and the defendant has accordingly been debarred from defending the claim. In any event he does not appear today and is not represented, although his solicitors, Saunders Law Partnership LLP remain on the record. The defendant has been served with notice of today’s hearing.

The trial is currently listed for eight days in a five-day window commencing on 28 November 2011. A defence has been filed but there has been no response to this application for summary judgment which was made on 27 April 2011 and which was adjourned by Briggs J on 11 May 2011 to be heard as an application by order. A bankruptcy petition has been presented against the defendant and it is due for a first hearing in the Croydon County Court on 26 July 2011.

The claim is that the defendant’s business was an unauthorised collective investment scheme in that potential purchasers were told that the defendant would seek planning permission for, or would arrange a sale to a developer of, the entire site of which each plot offered for sale formed a part. It is said that the defendant’s modus operandi was a typical land banking scam, involving high pressure telephone sales of small plots of allegedly development land to mainly unsophisticated investors in circumstances where there was never any realistic prospect of obtaining planning permission or of selling the land on for profit. Indeed it has been a plank in the defendant’s case that he never intended to obtain planning permission or sell the land on for profit.

Certain types of financial activities require FSA authorisation or exemption. It is trite that consumers dealing with unauthorised firms do not enjoy the protection that they would enjoy if they were dealing with an authorised firm. Such protection includes access to the Financial Ombudsman and compensation through the Financial Services Compensation Scheme. Importantly, an authorised person has had his honesty and financial acumen checked by an independent body acting in the public interest.

The so-called “general prohibition” is contained in section 19 of the Financial Services and Markets Act 2000. This provides that no person may carry on a regulated activity in the United Kingdom, or purport to do so, unless he is authorised or exempt.

Section 22 of FSMA provides that an activity is a regulated activity if it is (a) carried on by way of a business, and (b) is an activity of a specified kind, and (c) either it relates to an investment of a specified kind, or in relation to some activities, it is carried on in relation to property of any kind.

Regulated activities are specified by the Financial Services and Markets Act 2000 (Regulated Activities) Order, SI 2001/544 as amended by SI 2001/3544. They include establishing, operating or winding up a collective investment scheme, whatever the underlying property: see Articles 4 and 51 of the order.

Section 235 of FSMA prescribes what constitutes a collective investment scheme. As Arden LJ pointed out in FSA v Fradley and Woodward [2006] 2 BCLC 616 at [32], section 235 is drafted in an open textured way at a high level of generality, using words such as “arrangements” and “property of any description” which have a wide meaning.

By section 235(1) the purpose or effect of the arrangements must be to enable those taking part in them to participate in or receive profits or income arising from the acquisition, management or disposal of the property or sums paid out of such profits or income. By section 235(2) the arrangements must be such that the 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. By section 235(3) the arrangements must also have either or both of the following characteristics. The contributions of the participants and the profits or income out of which payments are to be made to them must be pooled, and/or the property must be managed as a whole by or on behalf of the operator of the scheme.

The court has wide powers where satisfied that there has been or it is reasonably likely that there will be a contravention. Under section 380(1) of FSMA the court can restrain a contravention which is reasonably likely to continue. The court also has its general power under section 37 of the Senior Courts Act 1981. By virtue of section 382 of FSMA the court can order restitution, that is to say to pay such sum as the court thinks just having regard to the profits accruing or the loss suffered as a result of the contravention. It also has power to order accounts and information to be provided in order to enable such a figure to be established and calculated.

I have read the evidence of Ms Whitelam, an investigator, Mr Dawes, a barrister, Mr Baum, a solicitor, and Mr Francis, an accountant, all of the FSA’s Enforcement and Financial Crime Division. The defendant has admitted that he is not authorised by the FSA to conduct regulated activities. He has also admitted that he bought land, divided it into plots, and sold it to members of the public by way of business. The evidence shows that the FSA received a number of consumer complaints about high pressure telephone sales. It sent out a large number of questionnaires to investors whom it had identified and received 43 questionnaires back. Of these, 38 respondents said they had been told that the defendant would manage the land by applying for planning permission for marketing and selling the land, or both. The other respondents could not recall or were not sure. There are also 3 recorded telephone calls from other investors to much the same effect as the 38. There is further evidence from 11 of the 38 as to representations made to them to induce them to enter into the scheme. None of this evidence has been substantively answered.

The defendant’s only substantive answer to the claim is therefore what he has said in his defence. He says that he neither sought nor purported to seek planning permission or to arrange any on-sale of the land to a developer. He also says that he expressly forbade his employees or agents from making any representation to the contrary.

However (a) the evidence from investors (investing a total of over £900,000) is in my judgment overwhelming that employees or agents of the defendant made representations as to planning permission and the sale of the site as a whole to developers. So many investors were told the same thing by apparently different sales people that it beggars belief that they had been told not to do so by the defendant. He is anyway (b) responsible under agency principles for what was said by those acting on his behalf in the course of business but in any event, (c) he has not answered the claims and (d) he is now debarred from doing so.

The FSA sought under its compulsory powers to elicit details of the defendant’s brokers in order to corroborate or otherwise his defence but he has not responded with any useful answers to the questions he was asked. For the purposes of section 235 of FSMA the arrangements are what was agreed and understood between the consumer and the operator viewed objectively. Section 235(1) directs attention to the purpose and the effect of the arrangements. In any event, the general prohibition catches activities that purport to be regulated activities as much as activities that are in fact regulated activities.

The arrangements were such that the investors did not have day to day control over the management of the land. I have been shown some of the documentation and even on the face of the documentation that appears to be the case. The property was managed as a whole by or on behalf of the defendant and the expressed purpose of the arrangements was to enable the investors to participate in profits arising from the acquisition, management or disposal of the property. The fact that inquiries show that the land could not, and was not in fact going to be, developed is in my judgment neither here nor there when one is looking at contravention of the general prohibition in section 19 of FSMA.

For all the above reasons I have no doubt that the case is made out that the defendant was operating a collective investment scheme within the definition contained in section 235 of FSMA. That being so, he was clearly in breach of the general prohibition contained in section 19. The FSA has discharged the burden of proof that the defendant has no real prospect of successfully defending the claim and there is no other compelling reason for a trial.

The FSA seeks declaratory, injunctive and monetary relief as well as directions to determine how the FSA should distribute any sums recovered to the investors and I propose to deal with these matters in turn.

The FSA asks for a declaration that the defendant was operating one or more collective investment schemes. There is no bar to making a declaration by way of summary judgment: see Wallersteiner v Moir [1974] 1 WLR 991 at 1030 per Scarman LJ and the note in the White Book at 40.20.3. However there is a rule of practice rather than of law that declarations should rarely be made in the absence of full trial on the evidence: see per Buckley LJ in Wallersteiner v Moir at 1029. Quoting Kekewich J he said, at 1029(B):

“…a declaration by the court was a judicial act, and ought not to be made on admissions of the parties or on consent, but only if the court was satisfied by evidence. If declarations ought not to be made on admissions or by consent, a fortiori they should not be made in default of defence and, a fortissimo, if I may be allowed the expression, not where the declaration is that the defendant in default of defence has acted fraudulently.”

The principles on which the court should act in granting a declaration on an application for summary judgment were considered by Neuberger J in FSA v Rourke (unreported) 19 October 2001. There also the FSA was acting for the public benefit, in that case by pursuing an unauthorised deposit taker under the provisions of the Banking Act 1987. Neuberger J pointed out that in Part 24 cases, in considering whether or not the court is satisfied that the defendant’s case has no prospect of success, the court has to bear in mind that if the action proceeded to a hearing there would be disclosure, exchange of witness statements, and cross-examination. However he said that even bearing those factors in mind he was firmly of the view on the facts of the case that the factual basis for declaration was made out, and he did make such a declaration, having considered all the pros and cons and the exercise of the court’s discretion in some detail at pages 11 to 26 of the transcript that I have.

In principle he decided that in considering whether or not to grant declaratory relief the court should take into account justice to the claimant, justice to the defendant, whether the declaration would serve a useful purpose and whether there are any special reasons tending towards the grant or refusal of declaratory relief.

In the present case I agree with the FSA that there is no special injustice to the defendant in granting the declaratory relief sought. I have carefully examined the observations of Neuberger J in FSA v Rourke at pages 18 to 26 and it seems to me that the risks of an unfair criminal trial potentially affecting Mr Rourke do not apply in this case, in which I have made no findings of fraud. In any event, they (and the human rights issues to which Neuberger J adverted) should not inhibit me from making a declaration on the present facts as they did not prevent him in that case.

I bear in mind that this is a case where the defendant has been debarred from defending because he has failed to provide information relevant to the claim. I also observe the evidence that the FSA on a number of occasions requested the defendant to cease marketing their scheme and disable their website pending investigation but he refused to do so. On 12 March 2010 the bank account in the name of Consolidated Land was emptied by a single payment to a third party. The FSA had to bring these proceedings to stop the business.

On the other hand, it is just to the claimant to grant the declaration. The regulatory objectives of the FSA described in FSMA section 2 are market confidence, public awareness, the protection of consumers and the reduction of financial crime. It acts as a protector of the public interest.

The question is therefore whether the relief would serve a useful purpose. There are, it seems to me, four types of useful purpose in the present case.

First, the making of an appropriate declaration will make the general public more aware of the risk of handing over money to unauthorised persons for the purchase of land in the context of collective investment schemes. Potential investors may therefore become aware of the nature of the defendant’s activities and that those activities are in breach of the law. It may protect the general public, not only against possible future activities of this defendant, but against the activities of other persons operating land banking schemes. It makes it more difficult for unscrupulous people to play down the effect of what they are doing.

Secondly, it will make clear to investors that the defendant, and thus the present scheme, was unauthorised and therefore that they have rights to the return of their money under section 26 of FSMA and that any existing contract is unenforceable against them.

Thirdly, a specific finding of contravention will assist domestic regulators in determining whether or not a particular individual is a fit and proper person to be carrying on regulated activities.

Fourthly, this sort of declaration will assist the FSA in what they are able to notify overseas regulators who may wish to know whether the defendant should be authorised to provide services in other jurisdictions.

Fifthly, the declaration may assist the FSA in potential future claims against third parties who may have been involved in this scheme.

I therefore agree that declaratory relief is appropriate in this case. I also agree that the appropriate declaration would be that the defendant purported to operate a collective investment scheme between 1 March 2007 (his defence dates the first conveyance as February 2007) and 27 May 2007, when the defendant gave undertakings not to sell land in the course of business.

It seems to me that an injunction is appropriate, notwithstanding that the defendant has apparently ceased operating the collective investment scheme since giving undertakings in May 2007. The FSA is on the facts entitled to a final injunction.

I have however expressed concern at the width of the injunction sought which is (in the widest form) against selling land in the course of business. The injunction is in such wide terms that it operates irrespective of whether it is in contravention of section 19 of FSMA. Therefore it is in wider terms than appears to be provided for by section 380. Although it is within the court’s discretion under section 37 of the Senior Courts Act 1981 as a matter of general principle the court ought not to grant injunctive relief, which is necessarily onerous, in a wider form than is strictly necessary. In particular, it ought not to grant injunctive relief against conduct which may not be in contravention of FSMA at all.

I observe the following. First, the defendant voluntarily gave an undertaking in the wider form at the outset and continued it until trial or further order. The FSA’s intention to seek an injunction in this form is plain from its claim form and this present application but the defendant who has been legally represented throughout has never suggested that it is inappropriately wide.

Secondly, I accept that a limited injunction would be more difficult to police. For example, an injunction against contravening acts begs the question of what is a contravening act and could result in satellite committal litigation. The defendant cannot be relied upon to excise contravening elements (such as the promises of collective action for the benefit of consumers) from property sales. After all, he has at all times denied that he was operating a collective investment scheme.

Nevertheless it seems to me that a final injunction prohibiting the defendant from doing acts including legal acts (for example, the injunction in the wider form might in perpetuity stop him working for an estate agency) is too wide. I have said that I am prepared to grant an injunction but I have heard further submissions about limitations on the form of the order and Mr Smith of counsel for the FSA is going to re-draft the order in the terms that have been discussed.

The FSA is in effect seeking an interim payment calculated by reference to the losses suffered by the investors or in the alternative by reference to the profits made by the defendant. This would take into account the fact that some of the investors have obtained title to small areas of land, although the land is apparently unsaleable. Mr Dawes’ evidence refers to 11 investors who have paid £919,655 to the defendant. There are other investors who have also made payments. There is evidence that sums in excess of £11 million passed through Consolidated Land’s bank account. The total gross profit to the defendant for present purposes has been calculated at the difference between the sum of £919,655 and the cost to the defendant of purchasing the land. All assumptions have been made in favour of the defendant for this purpose and the figure that is produced is a total of £676,421.30. Again, this leaves out of account other investors. It also treats Mr Watkins as not having made any profits where the position as to what has happened to the land is opaque.

I take into account CPR 25.71(c) which requires the court when ordering an interim payment to be satisfied that if the claim went to trial the defendant would be ordered to pay a substantial sum to the FSA. As to that I note the provisions of section 382 of FSMA. In summary this provides that I may order the defendant to pay to the FSA such sum as appears to the court to be just having regard to the profits appearing to have accrued to the defendant and to the extent of the loss or other adverse effects suffered by the investors.

I have seen evidence as to the effect of this scheme on the investors, certainly as to 12 of the investors, some of whom at least were led to believe that it was a government backed scheme and all of whom thought that their money was safe and that they would see immediate returns. I note that some mentally frail and unsophisticated consumers were targeted by telephone. I take into account the closing of the Consolidated Land bank account and the disappearance of its money while investigations were being made.

In all the circumstances of this case, some of which I have explained at length during the course of submissions, I do not think it would be just to give the defendant credit for the cost of the land in the circumstances and it certainly would not be just to make every assumption in favour of the defendant in calculating profits, particularly bearing in mind the scale of the payments that went through Consolidated Land’s bank account.

I am therefore satisfied that the FSA would be entitled to recover at least £919,655 under section 382. Apart from the 11 investors, as I have said, there are many more with further losses. I am therefore prepared to make an order for an interim payment in that sum and I have so said and I have also given directions about the steps that should be taken about how that sum should be distributed.