The Financial Conduct Authority v Avacade Ltd & Ors

The Financial Services and Markets Act 2000 (“FSMA”) contains a regime under which, in order for persons to conduct certain types of activity in relation to financial services, they require authorisation. Section 19 of FSMA prohibits persons who are not authorised or exempt from engaging in the stipulated activities. Such activities are said to be within the regulated perimeter, and breaches of the general prohibition in section 19 are therefore referred to as perimeter breaches. Prescribed activities for which authorisation is required are set out in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001/544 (the “RAO”).

Separately, section 21 of FSMA contains restrictions on “financial promotion.” Broadly speaking, no-one who is unauthorised can make financial promotions in relation to a prescribed investment activity unless the promotion has been approved by an authorised person. Relevant forms of investment activity are defined in a further Order, the Financial Services and Markets Act (Financial Promotions) Order 2005 (the “FPO”).

Finally, section 397 of FSMA, and the later Financial Services Act 2012 (“FSA”) section 89, contain prohibitions on the making of statements in the promotion of financial services which are false or misleading.

Between 2010 and 2014, the First Defendant, Avacade Ltd (“Avacade”) provided a service under which consumers who had existing pensions were contacted by telephone and provided with a report on their present pension position, and with options as to alternatives they might pursue. A good many of them transferred their existing pension funds into self-invested personal pensions (“SIPPs”), and within those SIPPs purchased investments which included assets such as Melina trees in Costa Rica, teak trees in Malaysia, and bonds relating to property developments in the USA known as the InvestUS and the “REIUSA” bond. Many of the investments in the Melina tree, teak tree and similar products were made on an “execution only” basis, that is to say, without any advice from an IFA, although before investing in either of the bond products, investors were referred to an IFA, Cherish Wealth Management

Information about clients who transferred into SIPPs, and who invested in the products made available by Avacade, is contained in an important document provided by Avacade’s solicitors to the FCA in May 2015. This has become known as the “Avacade Client Schedule”. The FCA have taken the same data and converted it into a “Consumer Analysis Spreadsheet”. These documents contain much useful detail about Avacade’s clients and their investments. They show that overall, some 1,943 clients transferred some £86m of pension funds into SIPPs, of which almost £68m was invested in products from which Avacade made commissions.

During the period of Avacade’s activity, the Third Defendant, Mr Craig Lummis, the Fourth Defendant and Craig’s son, Mr Lee Lummis, and the Fifth Defendant, Mr Raymond Fox, were all directors of Avacade (without intending any disrespect, and

There is some uncertainty about when precisely Avacade’s operations came to an end, but certainly by early 2015 the Second Defendant, Alexandra Associates (“AA”) was in operation. By that time, there had been a falling out with Mr Fox, and he was no longer involved. Moreover, a modified business model had been developed. Although this still involved many consumers transferring their pension funds into SIPPs, there were no “execution only” transactions. Assets such as Melina or teak trees were not made available as investment options, and neither were the InvestUS or REIUSA bonds. Instead, a new bond was offered, this time relating to property development in Brazil, called the “Paraíba” bond. Before investing in the Paraíba bond, consumers were referred to a different IFA, BlackStar Wealth Management A Ltd (“BlackStar”), which was the appointed representative of BlackStar Wealth

After exchanges of correspondence about Avacade’s business model in late 2011/early 2012, and again in Spring 2013, the FCA opened up a formal investigation into Avacade’s operations in June 2014, and into AA’s operations in December 2014. Later, in 2016, BlackStar was also subject to an intervention by the FCA, which included a Skilled Persons Review conducted by ATEB Business Solutions Ltd (“ATEB”), a firm of compliance consultants. They produced a detailed report (“the ATEB Report”).

It is common ground that none of the Defendants was authorised (see Part III and Part 4A of FSMA), or otherwise exempt, at the relevant times. In those circumstances, the FCA’s position is that, in conducting the activities summarised above, Avacade and AA (I will refer to them together as “the Corporate Defendants”):

Section 382 of FSMA empowers the Court in certain circumstances to make restitution orders against persons who have contravened a “relevant requirement” under the Act, or who have been “knowingly concerned” in such contraventions.

As to the position of the Defendants:

It follows that at trial, I heard submissions only on behalf of the Represented Defendants, i.e. AA and Mr Lee Lummis. That said, in terms of available defences to the FCA’s main allegations, it seems to me there is no material difference between the position of the Represented Defendants and that of either Craig Lummis or Mr Fox. Indeed, Craig, Lee and AA served a joint Defence, and the Witness Statement for trial served by Craig was largely identical to that served by Lee. Mr Fox served a separate Defence and his own Witness Statement, but in substance raised no material points beyond those affecting the Represented Defendants, and indeed accepted (Defence at para. 1.2) that his position was very largely dependent on that of Avacade. Mr Fox of course was concerned only with the Avacade, and not the AA, period of activity. There are some differences between the Individual Defendants in terms of the roles they played, which are relied on by them in response to the FCA’s case that they were “knowingly concerned” in the relevant contraventions. Where relevant, I will draw out those differences below.

I will need to say more about the detail later, but the essential points made by the Defendants may be summarised as follows:

On behalf of the FCA, I heard live evidence at trial from the following factual witnesses:

The FCA also served factual witness statements on behalf of a number of other investors, namely Mr Shaun King, Mr Steven Kemp, Mr Barry Thompson, and Mr Marcus Lynch (all of whom invested via Avacade), and Mr Alan Bolland (who invested via AA). In the event, these individuals were not required to give live evidence and be cross-examined, in light of an agreement reached between the parties as to how the evidence should be dealt with. This was to the effect that (1) where a transcript exists of telephone calls with those witnesses, that is the best evidence of what was said to them; (2) if no transcript is available, but a script is available (I deal with the question of scripts below), it is likely that the script was followed as to any warnings or disclaimers given; and (3) as to the characterisation by a witness of any call as containing “advice”, that characterisation is not determinative.

As to the Defendants, the following witnesses served witness statements and gave live factual evidence at trial:

In addition, and as already noted, although they did not appear at trial, witness statements had earlier been served both by Craig Lummis and by Mr Fox. The FCA’s position was that it did not need to rely on any admissions made in those witness statements in order to make out its case, and so did not invite the Court to rely on them against their makers. However, the FCA proposed that insofar as the contents of those statements assisted their makers (or indeed any other Defendant), they be treated as having been adduced in evidence, subject to the proviso that the Court bears in mind, when assessing the weight to be attached to them, that the FCA had not been able to cross-examine either Craig or Mr Fox. That seems to me a perfectly fair proposal, and no objection was raised about it on behalf of the Represented Defendants, and so I propose to adopt it.

In addition to the factual evidence, each represented party relied on expert evidence in the fields of financial services and pensions. The FCA relied on the evidence of Mr Rory Percival, whose background includes having worked for the Financial Services Authority (and later the FCA) between 2006 and 2016, mostly as a supervisor of advisory firms. AA, Craig and Lee Lummis submitted a report from Mr Simon Fettroll, a director of Cartlidge Morland, at a firm of financial advisers, and this was relied on at trial by the Represented Defendants. The experts co-operated in producing a very helpful joint statement dated 27 November 2019. I am grateful to both experts for their evidence which showed careful consideration of the issues they were asked to address.

After the trial had concluded, I received further submissions in writing on behalf of the Represented Defendants as to the form of certain amendments they proposed (see below at [206] and [368]), and which in the event the FCA consented to on terms as to costs which I take to be uncontroversial. I will deal below with the particular points to which the amendments give rise. Later, after indicating to the parties that I planned to circulate a draft Judgment, the FCA drew attention to the decision of HH Judge Dight CBE in Adams v. Options SIPP UK LLP [2020] EWHC 1229 (Ch), handed down on 18 May 2020. In light of that decision, the Represented Defendants requested permission to serve further written submissions, and I acceded to that request. The FCA’s position was that the Adams decision did not cause them to change any of the submissions they had already made.

Before moving on to deal with the background, I should express my gratitude to the counsel and solicitors on both sides who appeared before me at trial. As I indicated in Court, but as I think is appropriate also to record in this Judgment, I hope my admiration for Mr Vineall QC and his team will not appear diminished if I express particular thanks to the team acting for the Represented Defendants. They came on board at short notice in a complex case, but represented their clients with considerable skill and vigour, and were able to make an immediate contribution which was most impressive. Moreover, their involvement provided real assistance to the Court in isolating the key areas of dispute, in a manner which promoted the fairness and efficiency of the proceedings overall. I am most grateful to them.

A great deal of detailed evidence was served concerning the business operations of Avacade and AA respectively, including in particular the very detailed Witness Statement of Mr Richards and the Witness Statements of Craig and Lee Lummis. In the final analysis, however, very little of the factual background was contested, and the real battleground between the parties was in the proper legal characterisation of facts which were very largely common ground.

In the following two sections I will seek to cover the background to, and key features of, both Avacade’s and AA’s business operations. The relevant history is a long one, and some detail is required.

Although Avacade is the First Defendant, the story begins with the Second Defendant, AA. AA was originally set up by Craig Lummis in February 2007. At the time it dealt exclusively with mortgages and life cover. Lee Lummis joined the business during 2007.

AA’s operations were badly affected by the 2008 financial crisis. Consequently, Craig and Lee began to look for other opportunities. At the end of 2009, Craig was approached by a company called Multiple Income Partners (“MIP”). MIP had an investment product called Mosaic Caribe, or sometimes the Cascade Investment, and as Lee described it in his evidence, MIP were looking to “network” that product to IFAs. In practice this meant appointing Business Development Managers (“BDMs”) to help them bring Mosaic Caribe to the attention of IFAs, who might then recommend it to their clients.

Craig Lummis was acquainted with Mr Fox. They had both previously worked for Royal London Insurance. Mr Fox had his own business at the time, RGF Associates. Craig, Lee and Mr Fox, who between them had contacts among the community of IFAs, saw an opportunity and so Avacade was incorporated with a view to becoming a BDM for the Mosaic Caribe product.

Craig and Lee each took a 35% shareholding in Avacade. Mr Fox took the remaining 30%. His slightly smaller shareholding reflected the fact that, at the time, he was still involved with his own company.

In a document headed “DIRECTOR JOB DESCRIPTIONS – January 2010 to August

A company organisational chart for Avacade at the date of October 2013 shows Craig Lummis at the head of the structure as Managing Director, with both Lee Lummis and Mr Fox reporting directly into him.

Returning to the chronology, Lee’s evidence is that all the training, documents, brochures and material on the Mosaic Caribe product were supplied to Avacade by MIP. He says that MIP very much led the way. Avacade’s role was to engage the interest of IFAs, for example by inviting them to training events and seminars run by the team from MIP.

As to the Mosaic Caribe product itself, no brochure is available, but it is described by Lee in his written evidence. He says that the Mosaic Caribe was a US-based company, whose business involved buying whole-of-life insurance policies from policyholders who were ill or terminally ill to help them fund healthcare costs. Lee says (emphasis added):

“These policies could then be fractionalised into multiple ownership and the ownership fraction registered with the insurance company who (sic.) regulated by the appropriate authorities in that jurisdiction. It was explained by MIP and the Mosaic (sic.) presented the policy as a safe and secure investment as investor had direct ownership of the policy. It was not a fund-based life settlement product.”

This latter point is significant. At the time there was a view among market participants that investments which involved direct ownership of assets rather than (for example) an interest in a managed fund, fell outside the regulated perimeter. This was to become a feature of Avacade’s own business.

This early model, involving Avacade acting as a BDM for MIP, did not prove very successful for Avacade. Avacade was not able to generate much interest amongst

In any event, as I understand it, Avacade was not itself during this early period offering information about the Mosaic Caribe product to consumers who were then transferring their existing pension funds into SIPPs. Avacade’s role was limited to engaging the interest of IFAs in the product. The idea of using a SIPP as a source of funds with which to acquire investments, and of engaging directly with consumers, came from another source, namely TailorMade.

TailorMade were an IFA, run by (amongst others) an individual called Rob Shaw. As Lee points out, at the time Avacade first encountered them, which seems to have been at some point in 2010, TailorMade were FCA registered and authorised. Like Craig and Ray Fox, Rob Shaw had also worked at Royal London.

TailorMade operated a different model to MIP. Although TailorMade itself was a “fully FCA regulated IFA offering financial advice on pension transfers”, including the transfer of consumers’ existing pension pots into SIPPs, Lee also describes TailorMade as having a “hotel investment (Harlequin and Cyprus property scheme)”, and he says there was “a non-regulated company offering investment (purportedly without advice) which got paid the commissions.”

In order to generate interest, TailorMade used the services of introducers. According to Lee, these were from all backgrounds and were not regulated by the FCA. The role of such introducers was not (as with MIP) to “network” a product to IFAs, but instead to source and introduce consumers to TailorMade itself. The model then seems to have involved such consumers taking advice on their pension arrangements from TailorMade, and if that resulted in them transferring their existing pension funds into a SIPP, then information being provided by a separate company – but still, according to Lee, linked in some way with TailorMade – about the hotel investment. That investment, if made, would generate a commission for the separate company.

This structure therefore had the following key features: (1) consumers were sourced by introducers who were themselves not FCA registered or regulated; (2) consumers were given advice about moving their existing pensions pots into SIPPs; (3) if they decided to do so, then information – but it seems not advice – was provided to those same consumers about investments; and (4) if investments were made, those responsible for providing the information about them were paid a commission.

The division, within this structure, between the giving of advice in relation to the pension transfer, and the fact that no advice was thought to be needed in relation to the investments themselves, seems to have reflected the same understanding referred to above, namely that where the investments took the form of a direct ownership interest in a given asset, they fell outside the regulated perimeter and so information could safely be provided about them by persons who were not authorised.

At trial, Lee relied on this history as part of his case. The TailorMade business model was a prototype for what eventually became Avacade’s own business model. Lee says that Avacade was doing no more or less than following a structure endorsed by an FCA regulated entity, i.e. TailorMade. As he puts it in his Statement:

“At no point was it ever discussed that training non-regulated introducers to discuss pensions could lead to inadvertent financial advice.”

Lee also relies on what he says he was told at the time about the role of the SIPP administrator. As part of the training offered by TailorMade, Lee attended a session with Montpelier. He says that the role of the regulated SIPP administrator in this training “was described as a trustee who had the ultimate control over what types of investment were allowable within the SIPPs.”

During the course of 2010, TailorMade sought to persuade Avacade to become one of TailorMade’s introducers – i.e., to be involved in the business of sourcing consumers to be referred to TailorMade as part of the business model described above.

It seems that Avacade management had more ambitious plans, however. They were obviously attracted by the TailorMade model, but saw that the real potential was not in effecting introductions (and earning a fee for doing so), but in earning the commissions which would come from consumers making investments, once their existing pension funds were released and made available in a SIPP.

Thus, during the course of 2010, while discussions were ongoing with TailorMade with a view to Avacade becoming an introducer, and while separately Avacade was working (unsuccessfully) as a BDM for MIP and seeking to “network” Mosaic Caribe to IFAs, Avacade management were looking into the development of a new investment product. This seems to have been inspired by the same idea, underlying the TailorMade business model, that investors could safely be provided by nonauthorised persons with information about acquiring a direct ownership in commercial property through a SIPP.

The new product came to be known as Hotpods, and the commercial property in question was office space.

Hotpods came about through further contacts of Craig Lummis and Ray Fox. They had a connection with a property development company called Harley Scott, which was associated with two individuals, Mr Michael Talbot and Mr Toby Whittaker.

In cross-examination Lee said that as far as he could recollect, the return on investment identified in relation to Hotpods was 15% per annum. He said that Guardian SIPP approved the Hotpods product for investors to hold in Guardian administered SIPPs, and Avacade took comfort from that, given what they understood about Guardian’s role as a regulated SIPP trustee. As to Avacade itself, it was to earn a commission, calculated by reference to amounts actually invested in Hotpods. The agreed rate of commission was 20%. This was no doubt an attractive proposition for the management of Avacade.

To return to the narrative, at some point in late 2010 or early 2011, Avacade decided to become an introducer for TailorMade. However, according to Lee’s evidence, the management of Avacade did not rate the TailorMade hotel investment. In any event, as is clear from the narrative above, by this time they were associated with Hotpods, from which they themselves hoped to earn commissions.

The upshot is that although Avacade became an introducer to TailorMade, they were only an introducer for what Lee describes as “fully advised pensions to SIPPs advice.”

This meant, as Lee describes it in his evidence, that consumers would be referred on to TailorMade for advice on their pension position only (including the possibility of a transfer of any existing pension funds into a SIPP), and would then be “passed back” to Avacade “to make their own investment decisions on our products.”

Lee summarises the position as follows:

“[Avacade’s] business model was to source … people who wanted a pension review by an independent financial adviser (TailorMade), who could then be introduced to the investments that we acted as introducers for.

The majority of [Avacade’s] first clients went through this TailorMade business model and received full advice on their pension transfer from TailorMade.”

It is then clear from Lee’s evidence that a concerted effort was made by Avacade during the Spring of 2011 to identify further investment products from which they could earn commissions.

One of these was Mosaic Caribe, with which they were associated already, but as a BDM for MIP. In early 2011, Avacade entered into its own direct relationship with the provider of the Mosaic Caribe product. This took the form of a “UK Introducer Licensing Agreement” with Mosaic Caribe of the BVI signed in about April 2011. This meant that Avacade was no longer simply a BDM for MIP, but an introducer in its own right. Clause 1.2 of that agreement provided as follows:

“The introducer [Avacade] is authorised to solicit and supervise the solicitation and procurement of applications for Caribe products.”

The agreement provided for payment of a base commission of at least 8%, plus a quarterly volume bonus.

During the same period, in the Spring of 2011, agreements were also entered into with other, entirely new product providers.

The first of these was Sustain Investments Ltd. Avacade signed an agreement with them on 24 March 2011. Sustain’s products were made available under the name, “Sustainable AgroEnergy”. They were approved by a SIPP company called Berkeley Burke for inclusion in their SIPPs (I will come back to Berkeley Burke below). These products were based on “green oil” from the seeds of crops. Sustainable Agro Energy was said to have pioneered “Jatropha” as a source of green oil. A brochure produced in the present action states it had almost 1,250,000 hectares of land and options across Cambodia, the Philippines and Thailand. Three different types of investment were offered, namely “Green Oil Leases”, “Agroforestry Leases” and the “Capital Builder Programme.” Returns from the first two types were said to be 5% fixed for the first year, 12% fixed for the second year, and “around 20% variable” thereafter.

Under the contract with Sustain Investments, Avacade was entitled to commission of 13% on Green Oil/Agroforestry leases, and 18% on Capital Builder Leases. Those commissions subsequently increased to 15% and 20% respectively.

The next agreement was with Ethical Forestry Ltd, an English company with its registered office in Bournemouth. It also operated a call centre in Bournemouth under the name, “Richmond Solutions.” I will need to say more about Richmond Solutions below. In any event, Ethical offered a number of investment products based on Melina trees in Costa Rica. An Ethical Forestry brochure refers to a number of different options, the standard product being described under the heading “Melina Investments”, and involving a 12-year investment in 600 trees which “are nurtured from saplings within our nurseries and then field planted … the thinning harvests – in years 4, 8, 10 and the final harvest in year 12 – produce valuable timber which is sold to local and global timber markets on your behalf and the proceeds sent to you…”. Variants included the “Melina Accumulator”, and the “Income and Wealth Generator”.

Avacade had a contract with Ethical Forestry Limited dated 4 April 2011, under which it was entitled to commission of 15% on any sale, save where the sale resulted from business introduced from Ethical Forestry or Richmond Solutions, on which 10% would be paid.

Yet a further new product was known as Global Plantations. Global Plantations offered investments in teak in either Malaysia or Sri Lanka. A brochure has been produced focusing on the Malaysian Plantation at Boonrich, which suggests that teak trees would be harvested at age 25. Lee in his witness statement said that the longterm nature of this investment meant it provided a different option for potential investors to the Ethical Forestry investment, which operated over a shorter term.

An Avacade document for Global Plantations refers to land in Sri Lanka. Avacade had a contract with Global Plantations Ltd dated 6 April 2011, under which Avacade was entitled to commission of 15% on any sale. However, emails between Avacade and Global Plantations suggest that commission was in fact paid at 20%.

What is clear, therefore, is that by the end of April 2011, Avacade had a stable of investment products available from which it intended to earn commissions. The main ones were the three new additions, namely Sustainable AgroEnergy, Ethical Forestry and Global Plantations. It seems that Mosaic Caribe and Hotpods were still available at this time, but the new additions became the main point of focus as time went on.

That is not the end of the road, however. There were yet further important developments during the course of 2011, which would influence the shape of the Avacade model, properly so-called.

One of these I have mentioned briefly already. On 3 March 2011 Avacade signed an agreement with a new SIPP administrator, Berkeley Burke (the agreement was a “Non-regulated Introducer Agreement” and the counterparty was “Berkeley Burke

In execution only cases, the SIPP administrator charged a set-up fee and an annual management fee, and the introducer (such as Avacade) made money from commissions, when consumers chose to invest in their products. As Lee expressed it in cross-examination:

“… by introducing clients to a SIPP administrator, that gave them the opportunity to choose investments that they could then invest in. If they chose to invest in Avacade products that attracted a commission to us commercially, we’d have received a commission for that.”

In due course, this was to become a main feature of the Avacade model, through a relationship they developed with another SIPP administrator, Liberty SIPP, which also permitted referrals on an “execution only” basis.

A further development concerned the relationship with TailorMade. At some point, according to Lee in his evidence, the feeling developed that TailorMade had administration problems and were favouring their own cases. Consequently, Avacade management sought out other IFAs. Avacade thus began to refer cases to Walter Begley Financial Management and, in early 2011, to another IFA, 1Stop FS.

The new relationship with 1Stop FS was to have lasting significance, because their model of doing business again had certain novel features, which in due course Avacade was to emulate.

Lee in his evidence described 1Stop at the time (early 2011) as an IFA who were setting up an operation similar to TailorMade but who promised better service. The process was to produce for investors what Lee describes as an “initial factual nonadvised report”, which would “go on to list their options which included taking advice from 1Stop.” According to Lee, they did this “essentially to filter out clients who did not want advice or whose pension was too small”, before they signed up to their terms of business. This may have been linked to the growing prominence of the execution only model, pioneered by Berkeley Burke; but in any event, a feature of the 1Stop model was that although consumers would be given the option of taking advice on their pensions transfer, that did not have to happen in all cases. The “initial factual non-advised report” was used as a vehicle for determining whether they wanted advice or not. If they did, then they signed up to 1Stop’s terms of business and were given advice on their pension transfer (but not, it seems, on investments); and if they did not, then another option was transfer into a SIPP on an execution only basis.

Under this model, therefore, the promise of a free pension report was used as a hook to engage the interest of consumers. Consumers were contacted and asked to complete a so-called Letter of Authority (“LoA”), which could then be sent on to their existing pension providers, for the purpose of authorising the release of the information needed to produce the report. This structure was again to become a part of the Avacade business model. In practice, because 1Stop were a small company and did not have access to a large administration team, Avacade took charge of making the initial contact with consumers and having them complete a LoA, although the

In due course, Avacade came to offer the same service itself: an initial, “non-advised” report, which in fact was based on the 1Stop template. Lee in his evidence said:

“We were told by 1Stop FS that this report was not financial advice and this was how it was presented by them to clients.”

In the event, the relationship with 1Stop was relatively short lived. As Lee describes it, this was the result of 1Stop’s own business plan changing. This too came to involve offering investments to consumers, via a non-regulated company, in line with the TailorMade business model. That made them much less attractive to Avacade.

By mid-2011, however, Avacade was developing a new relationship with yet a further SIPP provider, Liberty SIPP. What was significant about them was that, like Berkeley Burke, they allowed “execution only” pension to SIPP transfers. This made access to an IFA like 1Stop less critical. In mid-2011, Liberty were looking to recruit new non-regulated introducers, like Avacade. Lee describes the position in his witness statement:

“Execution-only was described to be a pension transfer that does not require financial advice.

Liberty SIPP was one of the only companies in the SIPP market which allowed occupational pensions to be transferred without financial advice and as they saw fit – we had no say in their processes or any other SIPP provider’s processes and IFAs processes for that matter. In subsequent meetings with John Fox, when we queried why Liberty SIPP allowed occupational pensions to be transferred without financial advice, he stated that he would carry on allowing this until the FCA told him to stop at that juncture (sic.) he has not been told by the FCA that he should not do it … .”

Avacade signed terms of business with Liberty SIPP in September 2011. Liberty SIPP approved the Sustainable AgroEnergy, Ethical Forestry and Global Plantations investments for inclusion in their SIPPs.

Also significant to Lee’s position is the fact that, as it was explained to Avacade, Liberty exercised ultimate control over which investments were allowed within their SIPPs. As Lee expresses it:

“Liberty SIPP were regulated by the FCA and explained that they (like all

SIPP administrators) decided which investments were allowable within the SIPP and that investments must pass their internal approval and due diligence process.”

The relationship with Liberty SIPP as it developed in late 2011 represented a watershed moment in the life of Avacade as a business. This was a time of real opportunity. There were agreements in place with a number of investment providers. Avacade’s management had learned valuable lessons from its previous experience dealing with TailorMade and more recently 1Stop, and plainly saw potential in a model which involved existing pension funds being transferred into a SIPP and then used to purchase the investment products from which Avacade itself would earn commissions.

Moreover, the “execution only” model was particularly attractive. As Mr Fox explained in his Witness Statement:

“I confirm that during the course of Avacade’s operations Avacade changed its model to execution only SIPPs as the process of advice via the IFA proved very slow. By August 2011 Avacade was working with the regulated execution only SIPP Administrator Liberty.”

It seems to me that all this accumulated experience came together in the latter half of 2011, and crystallised into a structure that one might fairly describe as “the Avacade model”. One of the product providers, Ethical Forestry, plainly saw potential in it as well, because they offered to help. As Craig Lummis explained in interview with the FCA:

“Once the guys at Ethical understood our business model -- we had a very small outbound call centre within our office which, to be honest with you, we were struggling. None of us, meaning none of the directors, had been involved in that kind of working environment before, call centre type; it seemed to be a breed amongst themselves. We run a small team of, from memory, about six people initially and we brought in a telesales manager and we didn't really get -- I won't say we didn't get on with him. We employed him but he kind of knew every trick in the book for getting round things and everything else. So at that point a proposition was put to us by Ethical Forestry that they had just moved offices. They said, ‘We've got substantial capacity to be able to set up a call centre within that building’ and for like a commission sacrifice they said they would set up a call centre for us, in effect.”

Lee Lummis summarised the position at this stage in his Witness Statement as follows:

“After signing the Liberty SIPP Terms of Business and Liberty promoting their execution only SIPP transfer process to introducers, we struck a deal with Ethical Forestry where they would open a call centre at their Bournemouth offices to generate letters of authority (LOA) for pension reports.

The first LOAs started to be generated in November 2011. At this time, we had introducer agreements with IFAs, including TailorMade, 1Stop Financial Services, Generation Financial Services and the Pension

Specialist. We were producing a non-advised pension report … and if the client opted for financial advice, they had a range of options available to them. If they opted for an execution only transfer, then they could choose Liberty SIPP if they wished.

From January 2012, the call centre began to ramp up production of LOAs.”

I will summarise the components of the Avacade business model shortly, but before doing so it is useful to complete some further, relevant parts of the chronology, and to identify one further component of the model in its very final form (the involvement of Cherish) which is relevant to the analysis below.

The Defendants rely on an exchange of correspondence with the FSA which occurred in late 2011 and early 2012. This began with a letter from Toby Good of the FSA dated 29 December 2011, in which Mr Good said that the FSA had information suggesting that Avacade might be acting in breach of sections 19 and 21 of FSMA. As regards section 19, the concern was expressed more specifically in relation to possible infringements of Art 25(2) and 53 of the RAO. The letter said:

“... Based on the information reported to the FSA and in our possession, it appears to the FSA that you may be advising on and arranging deals in investments. It also appears to us that any agents purporting to act on behalf of your company may also be advising on and arranging deals in investments.

It also appears to the FSA that your website www.avacadeinvestments.com and any of your promotional literature in respect of the pensions and investment services you or your agents offer, may constitute financial promotions and, so far as we are aware, there is nothing to suggest that the website or any of the promotional literature have been approved by an FSA authorised person...”.

While the FSA reserved its right to take future action, the letter concluded as follows:

“To avoid any breach of FSMA, whether ongoing or future, you are strongly advised to seek legal advice on your position under FSMA and to take any necessary steps to bring your activities into line with the requirements of FSMA.

We do not intend to pursue this matter further with your company at the current time. We will consider this matter closed with this warning letter in respect of your activities.”

Lee replied on 25 January 2012. That reply said that Avacade was an introducer for three investments, namely Sustainable AgroEnergy, Ethical Forestry and Global Plantations, and made the point that none of them was a collective investment scheme. This was a reference to the fact that they all involved direct ownership of assets, and so were thought to fall outside the regulated perimeter. As to the idea that Avacade was advising, the letter stated:

“Avacade do not offer pension advice of any sort. Through marketing and or data acquisition we offer clients a pension review with a qualified IFA and pass the client across. We are conduit [sic] for financial advice and offer no pension advice or solutions ourselves. Any information presented verbally or in writing to clients that may be pension related is fact based only.

Any clients that invest in the products we offer sign terms of business and a disclaimer confirming that no financial or investment advice has been provided by Avacade Ltd.”

Lee’s evidence is that, before sending his reply, he took legal advice from Natasha Peacock at Regulatory Legal Solicitors. They produced a report to Avacade in March 2012. Privilege has not been waived in connection with that Report and it has not been produced. As Lee accepts in his evidence, during the time it was under preparation, between January and March 2012, the Avacade business model was in any event changing “ … from only being able to introduce cases to a SIPP administrator via an IFA to an execution only option with the SIPP administrator and doing more cases ourselves rather than via Introducers.”

It was clear by March 2012 that the Sustainable AgroEnergy product had failed. By about that time, Avacade had been informed of certain irregularities concerning the sub-leasing of land in Cambodia. An Action Group for investors was later formed,

In about June 2012, Avacade entered into a relationship with a new IFA. This was Cherish, which as I have already mentioned above was the appointed representative of Shah. At the time, Mr Lee Hewitt, who gave evidence before me, was a director of, and shareholder in, both companies. His relationship with Shah went back to 2007, but he had become a member and director of Cherish in December 2011.

Mr Hewitt’s evidence in his witness statement was that Cherish were available to provide pensions transfer advice or “full IFA advice”, if consumers opted for it. Lee Lummis said much the same thing. By this I understood them to mean that Cherish would be available to provide advice both on pensions transfers and on investments, if the result of the inquiries made by Avacade was that that what the customer wanted – in the same way that, according to Lee’s evidence, 1Stop had been available to provide advice (although on pension transfers only) if consumers opted for it.

Moreover, rather like the structure which had earlier operated with 1Stop, Lee’s evidence is that Cherish appointed Avacade as an administration company to handle the pension information which would form part of Avacade’s free pension report. Cherish rented a spare office from Avacade and had an IFA permanently based on site, called Heather Brown. In addition, they paid the salary of one of Avacade’s members of staff, Charlotte France, who was sub-contracted to Cherish to assist them with administration. As 1Stop had done, Cherish also provided stationery (the LoA and covering letter) which was used to communicate with consumers’ pension companies, in order to acquire the information needed for Avacade to produce a pension report.

There is, however, another aspect of Cherish’s role which I must draw out. That is because, at the same time that Avacade took on Cherish as a new IFA, it also entered into an arrangement in relation to another investment product. Unlike the existing products (by this stage essentially Ethical Forestry and Global Plantations), this did not involve the acquisition of a direct interest in an asset by the consumer. Instead, it was a corporate bond. It therefore fell within the regulatory net, and advice was needed before a consumer could acquire it.

As to this bond, the Avacade client schedule in fact refers to a single product, named Re-Invest USA (or “REIUSA”). But there seems to have been an earlier variant of that product, known as InvestUS. No documentation is available in relation to the first variant, but a “Memorandum of Understanding” has been produced dated 23 April 2013, which apparently relates to the second. The “Memorandum of Understanding” is between Avacade and an entity referred to as “Project Kudos”. It refers to the existing “InvestUS product” being replaced by a new 5 year “US Property Bond”.

One of the people standing behind Project Kudos was an individual known as Steve Wright, a former policeman. As Mr Hewitt confirmed when cross-examined, Mr

I will come back to the role played by Cherish below, but for now it is sufficient to draw attention to the following exchange during the course of Mr Hewitt’s crossexamination, when he was asked about the coincidence of timing which led to Cherish being introduced to Avacade at the same time as the bond was made available as an investment product:

“Q. In terms of your introduction to Avacade in respect of the InvestUS product, were you introduced to them along with the product itself?

A.

The initial introduction was to discuss an agreement for independent financial advice which did actually coincide with the investment as well. But my introduction was on the basis that I was asked to speak to a company who were looking for an independent financial advisor as an option for clients.”

Against that background, I can now summarise the main steps in the Avacade business model. It seems to me this was largely in place from the second half of 2011 onwards, although Cherish played a role (and the InvestUS/REIUSA products were available) only from mid-2012 onwards. As can be seen, and as already noted, the model borrowed aspects of the models used in earlier phases, in particular by TailorMade and 1Stop. The majority of transfers on the Avacade Client Schedule occurred in the period from 19 August 2011 until late 2014.

(1) Initial contact: Most frequently, the process was initiated by personnel in the Ethical/Richmond Solutions call centre contacting consumers with a view to them commissioning a free pension report. According to the Avacade Client Schedule, that was so in some 1574 of the 1943 entries in the Schedule. Lee accepted in crossexamination that Richmond Solutions called consumers “on behalf of Avacade” and that consumers “would believe they were getting called from Avacade.” In other instances Avacade staff themselves made the initial contact.

If the consumer contacted elected to proceed, then they would be sent an LoA together with a signature pack. In doing so I think it clear they were acting in Avacade’s name and on its behalf. The typical arrangement involved documents being provided by a courier company called “QuickDox”, who would attend the consumer’s address with materials to be signed and sent back through the same courier to Avacade’s offices. The signature pack included Avacade’s Terms & Conditions, which I will come back to. They are important because they contain

An example is provided by the case of one consumer, Mr Thompson. On 13 September 2013 he signed an LoA, a “Data Permissions Form”, and a further document entitled “Introducer Details and no Advice Confirmation.” The LOA was on the letterhead of Cherish.

(2) Welcome Call: The next step was a so-called “Welcome Call”, made by Avacade agents to consumers to confirm the receipt of their pensions information and, if necessary, to clarify any unclear points or obtain missing information. No recordings or transcripts are available, but a standard form script has been produced which, importantly for the Defendants’ case, again states that Avacade will not provide financial advice to consumers.

(3) Contact with pension funds: It was then necessary for contact to be made with consumers’ pension funds. This was done using a covering letter and the LoA. As noted, after about June 2012 these documents were on Cherish’s stationery, but the evidence is clear that they were sent out by Avacade staff. Although Mr Hewitt originally said in his Witness Statement that Heather Brown of Cherish, and Charlotte France (seconded to Cherish by Avacade) dealt with such matters, he accepted in evidence that it was Avacade personnel who physically sent documents out. Moreover, Craig Lummis’ interview included the following exchange:

“GAYTON: Would Cherish actually send out the letters themselves to the pension companies or would Avacade do that on their behalf?

CL: Avacade did it.

(4) Pre-Report Call: After a draft pension report had been produced internally by Avacade, it contacted consumers again, to ask them a series of questions about issues affecting their pension provision and retirement plans. There are no transcripts, but a call script is available. The FCA’s case is that the Pre-Report Call was used by Avacade as an opportunity to ask consumers a series of leading questions, which were designed either individually or cumulatively to push consumers in the direction of choosing the option of transferring into a SIPP and of selecting one or other of the investments made available by Avacade. Thus, says the FCA, there was a particular focus on consumers being encouraged to set themselves high targets for their pension income, to take a lump-sum of tax-free cash, and to think about leaving their pension fund to dependants.

The Defendants’ position is that such exchanges involved posing entirely legitimate questions and/or merely providing information.

I will come back to this issue below.

(5) Pension Report: The Avacade Pension Report followed the pattern established by the earlier 1Stop report. A number of versions have been disclosed, and it is clear that

(6) Report Call: The options identified in the Pension Report were then discussed in a further call with an Avacade agent, referred to as the Report Call. A script is available and a number of transcripts have also been produced. Importantly for the Defendants’ case, the script required agents at the outset to say that Avacade was not regulated by the FCA and could not provide financial advice. Thus, they say, it must have been clear to consumers that they were not being given advice, but only information.

The FCA’s case also relies on the Report Call, however. They say that the Call was intended to, and did, funnel consumers in the direction of choosing to transfer into a SIPP. They say (broadly) that this effect was achieved by focusing in the Report Call on the factors already emphasised in the Pre-Report Call (high target income; taking cash free cash immediately; ability to leave pension funds to dependants), and by emphasising the benefits of drawdown as opposed to the option of purchasing an annuity (I will say more about this below). The FCA say the script asked leading questions which were biased in favour of the SIPP option. The Report Call is a key part of the FCA’s case that Avacade strayed into the realm of giving advice, and I will need to return to it below.

If the consumer made the decision to transfer into a SIPP, then arrangements were made for a courier to attend with forms for the consumer to sign. The forms were completed by Avacade in advance. Arrangements would also be made for the next step in the process, the “Investment Call”.

(7) Attendance by Courier: The Defendants’ position is that the courier would attend only after at least 24 to 48 hours, but it is common ground that the practice was for the courier to wait for the documents to be signed immediately by the consumer and returned.

(8) Advice: At this stage, I should flag a more controversial point. An important part of Lee’s case at trial was that many consumers did elect to take advice from an IFA, presumably at about this stage of the process, as one of the options mentioned in the Report Call. After about June 2012 Cherish was available for this purpose. In cross-examination, Lee Lummis said there were many hundreds of such investors, and many of them eventually chose not to transfer into a SIPP or to invest in the Avacade products. Again, I will need to revert to this point below.

(9) Investment Call: Assuming, however, that the consumer’s decision after the Report Call was to transfer into a SIPP, there then followed a further call with an Avacade agent, this time to discuss the investments which might be made with the funds transferred into the consumer’s SIPP.

Two scripts are available: an early one from about March 2012, which focuses on the Sustainable AgroEnergy investment product; and a later one which is focused on the Global Plantations investment, and which probably dates from about October 2013. Both are reasonably explicit about the nature of the call. In the first one the agent is told to say:

“My role is to help you decide on the most appropriate investment products for your needs.”

And in the second, although the script contains much less detail, the agent is told to say:

“The purpose of this call is to take you through the investments we offer and arrange collection of the application forms from you.” 110. The script goes on:

“You wanted to achieve a yearly pension of £xxxxxx. In order to achieve that you need a fund value of £xxxxxx. As I mentioned on our last call, Avacade have a portfolio of investment products that will help you achieve this.”

The agent was then required to take the consumer through something called the “investment calculator”. The script contains limited detail, but it is clear this was an important part of the process and a number of examples are available which I will come back to below.

If the decision was to invest in (say) Ethical Forestry, on an execution only basis, then steps would be taken after the Investment Call to supply paperwork for signature to the investor which was then returned to Avacade, who would then co-ordinate with the product provider and SIPP administrator.

In periods after June 2012, the investment options included the InvestUS, and later the REIUSA, bond. There was some dispute about how much information Avacade provided in relation to these bonds, but it seems clear that at least basic information was provided and that the discussion went as far as consideration of the amount that might be invested. Again, I will come back to this below. At any rate, as already mentioned, these products were not available on an execution only basis, and so a further step was required involving Cherish.

(10) Cherish: The role of Cherish in relation to the InvestUS and REIUSA bonds was a particular point of contention at trial. The Defendants’ case is that Cherish provided independent financial advice as to the suitability of the two bonds. The FCA say they

On 18 January 2013, the FSA issued an Alert headed: “Advising on pension transfers with a view to investing pension monies into unregulated products through a SIPP.” The particular concern expressed was about the conduct of some IFAs at the time in assuming that where a transfer into a SIPP was being made by a consumer with a view to investing in unregulated products, it was sufficient for advice to be given only on the suitability of the SIPP. The FSA expressed a view that that was incorrect, and that the provision of suitable advice would generally also require consideration of the proposed investments as well. Thus the Alert said: “You cannot separate out the unregulated elements from the regulated elements.”

Shortly after this, on 24 January 2013, Toby Good of the FSA wrote again to Avacade. His letter said that the FSA had continued to receive reports from members of the public and financial advisers about the activities of Avacade. In summary, Mr

At this point, according to Lee’s evidence, Avacade instructed Mr Richard Byrne of The Byrne Practice, who was known to and had worked with Lee Hewitt of Cherish. Mr Byrne was instructed to complete a further compliance report and to reply to the FSA. Again, however, there has been no waiver of privilege in relation to Mr Byrne’s report, and so it has not been produced in these proceedings. In his evidence, however, Lee relied on the fact that Mr Byrne had reviewed Avacade’s scripts, pension reports, website copy, process maps, investment material and a selection of call recordings in preparing his report.

Mr Byrne sent a response to the FSA on behalf of Avacade on 4 March 2013. This was essentially a request for further information about, and particulars of, the concerns expressed by the FSA. The letter made the point that Avacade was determined to investigate and, if appropriate, take relevant remedial steps, but was hampered by the lack of detail in the FSA’s letter, including as to any specific complaints raised by members of the public or IFAs.

Mr Good responded on 12 March 2013. The essential point made in his letter was that the FSA was unable to provide specific information, because details of particular complaints or sources of information received were confidential. He went on to say that Avacade should be well aware of its own activities, and that it was Avacade’s responsibility to ensure that it acted in a compliant manner.

Mr Good wrote again on 26 April 2013. By that stage, the responsibilities of the FSA have been migrated to the FCA. Mr Good’s letter raised a particular concern about possible breaches of section 21 of FSMA (financial promotions), and in light of that and the matters raised in earlier correspondence asked for detailed information to be provided by 14 May 2013 in relation to a number of matters, including “(1) a full explanation of your clients’ business … (3) a full explanation of the role of your clients’ activities in respect of the SIPPs as promoted by your clients to consumers … [and] (4) details of all authorised IFA firms with whom your clients work and to whom your clients introduce consumers for the provision of financial advice and for the arrangements of investments.”

In a response dated 20 May 2013, The Byrne Practice said that they had completed a desk-based review of Avacade’s systems processes and scripts. As to the FCA’s two letters, the approach in the response was again to ask for more particulars and information. As to the specific queries raised by the FCA, the response said that although Avacade had no desire to be obstructive, “… it is unclear on what basis you are making requests for information and/or raising questions.” The letter concluded by saying: “It is our client’s genuine desire to have a constructive dialogue with the FCA and in this respect we look forward to your response.”

As one can see, the correspondence by this stage had reached something of a stalemate. In the event, no response was received and, as the Defendants have pointed out, they were first informed of the FCA’s then ongoing investigation into the businesses of Avacade and AA only in January 2015, although in the meantime Mr Richards had been formally appointed to investigate Avacade in June 2014 and to investigate AA in December 2014.

I will come back to the possible implications of this below.

On or about 16 January 2014, an event of some considerable significance occurred. Liberty SIPP informed Avacade that Liberty would be suspending all transfers and investment. This followed an FCA visit to Liberty SIPP on 14 January 2014.

This had immediate and serious consequences. As Lee expresses it in his Witness Statement, Liberty SIPP began to close down lines of communication, not answering calls, emails or requests for information. When pressed in correspondence, the response from Liberty SIPP was that their actions were prompted by recent changes to regulatory guidelines, and the change in the FCA’s stance to non-standard investments. At the time, Lee estimates that Avacade had 500 plus SIPP applications in the pipeline at various stages of transfer.

These events coincided with other developments in the market aimed at the regulation of non-mainstream investments. In February 2014, the first instance decision in FCA v. Capital Alternatives was handed down, which had a significant impact on business in this area. That case found that a rice farming scheme, and various carbon credit schemes, were “collective investment schemes” as defined in section 235 FSMA (the first instance decision was later upheld on appeal). On 28 April 2014, the FCA published a further Alert on pension transfers into SIPPs with a view to investment into unregulated products.

The stress caused by the parting of the ways with Liberty SIPP had an effect on the relationship between Craig and Lee on the one hand, and Mr Fox on the other. Mr Fox resigned from Avacade in April 2014; Kerry Bell was made redundant at the same time.

Lee’s evidence is that ultimately the decision was made that the future lay in a business model that was exclusively based on financial advice and work with IFAs. By this, I understood him to mean a model under which investors would receive advice both in relation to pension transfers and investments. In May and June 2014, Avacade wrote both to Global Plantations and Ethical Forestry to advise them that Avacade was terminating any new introductions into their schemes (although according to the Avacade Client Schedule, outstanding cases continued to be completed for some time after that.)

For their new venture, Craig and Lee resurrected AA, the company which Craig had originally established as a mortgage business in 2007. AA had been dormant, but was still on the Register of Companies. The trading name “Avacade Future Solutions” was chosen following a consultation with the remaining staff. AA purchased from Avacade its list of consumers who had not yet completed a pension review and transferred their pensions.

A further “DIRECTOR JOB DESCRIPTIONS” document provided by AA to the FCA gives the following description of the roles played by Lee and Craig:

Mr Byrne was given the job of sourcing a new SIPP administrator, and in due course Guinness Mahon was identified. Although they allowed execution only transactions, unlike Liberty SIPP that was only in limited circumstances and was not their standard business model.

Craig and Lee also decided to turn to a new investment product. This was the Paraíba bond. A brochure for this product describes it in the following way:

“The Paraiba Projects Secured Fixed-Rate Bond was launched in September 2014 with the objective of accelerating building projects in the north east of Brazil, meeting the demand for middle-class and executive housing in the state of Paraiba…

Over the three-year period, investors will receive annual returns of 11% of the amount invested, paid on the anniversary of the bond issue…”.

There was also a “Brazil Investors Handbook”, which could be downloaded by investors who clicked on a link in an email or from the AA website, when that was launched.

AA entered into a contract with NE Brazil Investment Ltd on 22 January 2015. This company seems to have been associated with Paraiba Projects PLC, which issued the bond. Recital D expressed the purpose of the agreement as follows:

“AA conducts pension reviews for individuals. Some of those pension reviews result in an individual wishing to switch their pension. Where an individual wishes to switch their pension, AA shall, if appropriate, make that Individual aware of the Product. In addition, AA shall seek to raise cash funding for NEB product.”

AA was appointed “exclusive distribution channel for the Product” (clause 2.1), and under clause 3.1 was entitled to a Fee, defined as 20% of any monies invested by an individual. This was later increased to 25%, as Lee accepted in cross-examination.

By clause 4, AA undertook to:

“(a)

use all reasonable endeavours to promote the distribution and sale of the Products;

(b)

employ a sufficient number of suitably qualified personnel to undertake the provision of pension reviews … “

A new IFA was also identified for the new business. This was BlackStar. This in fact refers to a company called BlackStar Wealth Management A Ltd, which was the appointed representative of Blackstar Wealth Management Ltd. BlackStar was run by a Mr Alan Charlesworth. According to Lee in his evidence, in an early meeting Mr Charlesworth put himself forward as an expert on bonds, and research showed BlackStar operating as “security trustee” for a range of other investments. Lee in his evidence said that BlackStar agreed to approve the literature and brochure for the Paraiba bond, and to advise on the bond, as well as acting as “security trustee”.

Lee’s evidence was BlackStar wished to appoint AA as an introducer and to perform an administration function for BlackStar. He said the BlackStar had its own process for introducers and a “document checklist.” As I understood it, Lee’s main point was that, as with aspects of the earlier Avacade model, what became the AA model of doing business was effectively endorsed and supported by an FCA authorised entity, and that in implementing the model and supporting BlackStar, AA relied on that fact.

Lee in his Witness Statement referred to the expected volume of business via this model:

“Alan [Charlesworth] said that from his experience and existing introductions, generally he advised on average putting around 50-60% of the fund into alternative investments (such as a bond) and the remainder into a selection of regulated funds that they would select.”

AA entered into a contract with BlackStar dated 4 December 2014, stated to be for the purpose of AA introducing and referring clients. According to Lee’s evidence, BlackStar supplied letterheads, letter content and training to Avacade. Lee said in his Witness Statement:

“BlackStar… advised that the way a client from X introducer ended up in X investments and a client from Y introducer ended up in Y investments was because the client came to BlackStar with existing knowledge of the investment and this is the one that was then advised by the IFA.

I understand that a telephone call occurred between Richard Byrne and Alan Charlesworth about approving the content of this call as a financial promotion, but that Alan insisted this was unnecessary as long as it was a factual discussion that repeated the information that was contained in the brochure.”

In their Defence, AA, Craig and Lee said that for performing their administration role,

The schedules produced in relation to AA show that it also received commissions on the Global Plantations, Ethical Forestry and Paraiba bond products. Thus, there seems to have been a period when AA’s activities overlapped with those of Avacade, or in which AA took over responsibility for the completion of transactions which Avacade had initiated.

The new AA model, however, although sharing some features with the Avacade business model, had some important differences.

As I read the evidence, the basic components of this were common ground between the parties. In any event, I accept Mr Richards’ evidence as to what the model comprised, which was not challenged.

(1) Initial Contact: This seems to have operated in a similar way. Consumers who expressed an interest as a result of an initial call from Avacade were provided with an LoA and Data Sharing Form for completion on BlackStar headed paper. They were also sent an AA “signature pack” which enclosed AA’s Terms of Business and an “Important Investment Information & Disclaimer”, in very similar terms to those earlier used by Avacade.

At least by mid-2015, the practice also seems to have involved clients being sent a “BlackStar Wealth Management Client Agreement” for signature at the same time. This included the following language:

“We conduct research of the whole market, the products and alternatives, and provide you with a full advice and recommendation service. In order for us to do this we must assess your suitability for particular products and services and this is achieved by you providing us with certain information about your financial and personal circumstances.”

Some investors were provided with the “signature pack” electronically, and asked to sign it electronically.

(2) Pre-Report Call and Pension Report: These operated in much the same way as under the Avacade Model, although with some modifications. In particular there was

(3) Report Call: Again this was very similar to the Avacade Model, but with some differences. One was that, as a consequence of the March 2014 budget reforms, much of the discussion around annuities and drawdowns was swept away. A second was that, as appears to be common ground between the parties, the AA model involved all consumers who wished to proceed being referred to BlackStar. Although the possibility remained for clients to opt for an execution only transaction, according to

AA’s agent would also complete a “Risk Questionnaire” during this call.

(4) Fact Find and Appointment Calls: These may have been two separate calls, although that is not material for present purposes. Whether they were or not, they were both conducted by AA personnel. The “Fact Find” was based around a Financial Questionnaire, which included questions about income, assets, liabilities and retirement planning. The Appointment Call was to set up an appointment with BlackStar. According to the script, this was said to be with “a senior member of the IFA team, normally Ian Hillas.”

Importantly, the Appointment Call script includes the following:

“BlackStar will also have a discussion about the Paraiba Bond which we discussed on the last call. Did you receive the brochure in the post?”

This makes it clear that part of AA’s role was to introduce consumers to the Paraiba bond, and the structure seems to have involved that being mentioned on one of the prior calls (either the Report Call or the Fact Find). The AA agent was invited to give a recap, which included the following:

“This bond is used to finance infrastructure on a residential housing site in North East Brazil. It pays 11% return every year for three years and is issued by a UK plc, Paraiba Projects. The developer is a UK developer, based in Birmingham, James Laurence developments, with a previous successful track record in Brazil. This investment is classed as high risk investment but the IFA will only recommend it as a % of your portfolio if they deem it to be suitable and in line with your risk profile … .”

(5) Investment call: The FCA alleges in its Particulars of Claim that an Investment Call was made prior to any discussion with BlackStar. On the face of it, this is denied by the Defendants in their pleaded case, but Lee in his Witness Statement accepted that a call was held to provide limited information about the Paraiba bond along the lines of the information contained in the Paraiba brochure. One transcript of such a call is available which I will say more about later.

(6) BlackStar contact: This took the form of a telephone conversation with Ian Hillas. Although he had an FPC qualification, according to the ATEB Report Mr Hillas was not a CF30 and had never been a qualified adviser. The ATEB Report also indicates that the purpose of the call with Mr Hillas was for him to validate the information already given to AA, although the documentation inspected by ATEB (which included file notes) showed that in fact he validated the risk profile only, captured by means of the “Risk Questionnaire” completed by Avacade, and not the “Fact Find.” This is consistent with Mr Hillas’ call script.

(7) Post-BlackStar call: Although it seems to be common ground that at least on occasion there were further calls with AA personnel after the call with Mr Hillas, there is some controversy about how those calls are properly to be characterised and what the purpose of them was. The Defendants in their Defence say that “any calls following the initial contact with BlackStar were done as part of an expected client service role.” The FCA’s case is that, at least on some occasions, this call was used as an opportunity to inquire whether BlackStar had supported the allocation of funds into Paraiba that had earlier been discussed with AA, and if not, to assess whether steps might be taken to increase the recommended amount.

(8) BlackStar Reports: BlackStar produced a “Financial Planning Report” for consumers. A number of examples have been produced for consumers who were advised to invest in the Paraiba bond. The proper characterisation of the contents of such reports is a matter of some importance and controversy, and again is an issue I will need to come back to. I think it fair to say, however, that the Reports had a focus on the Paraiba bond. The main features are illustrated by the example of one consumer, Mr Bolland.

The Report included a section on “objectives”. This was set out in bullet points including: “To receive advice on the suitability of investing in Paraiba Projects plc. corporate bonds through your pension”. It then said:

“Paraiba Projects plc are raising capital through a corporate bond issue of £12,000,000. These funds will then be used to construct the infrastructure of a condominium development of residential property in Paraiba state in Brazil.

You have asked me to advise you with regards to whether this is an investment, which would be appropriate for you personally and if your current pension structure could acquire such an investment.”

Separately, in setting out an explanation of the Paraiba bond, the Report said:

“You have been introduced to Blackstar Wealth Management Ltd by Avacade Investment Solutions, after having already decided that you interested (sic.) in investing in Paraiba Projects plc. corporate bonds.”

The Report contained a suggestion as to how funds might be allocated were it not for the “secured bond”, and set out a possible portfolio, which in Mr Bolland’s case would have included 11% in property and 3% in fixed interest investments. There were then sections on “Knowledge and Experience” and “Tolerance and Capacity for

In setting out an explanation of the Paraiba bond, the Report then said:

“You have been introduced to Blackstar Wealth Management Ltd by Avacade Investment Solutions, after having already decided that you interested (sic.) in investing in Paraiba Projects plc. corporate bonds.”

The overall recommendation then stated:

“A SIPP is a suitable vehicle for your current investment purposes and will also give you the maximum flexibility to shape your benefits at retirement.

Guinness Mahon are a leading SIPP provider and I can recommend their Indigo SIPP contract as being suitable for your needs…

I recommend that you invest £25,000 in Paraíba Projects plc corporate bonds and put the balance of your funds into a more diversified spread of regulated investment funds.

You have stated that investing in Paraiba Projects is a major objective and that you fully understand the risks associated with this investment as outlined in the report …”.

One can see from this example that, consistently with what Craig and Lee had been told by Alan Charlesworth, the typical outcome involved a percentage of the investor’s funds being recommended for inclusion in an alternative, or NonMainstream Investment (“NMI”), i.e., the Paraiba bond, and the remainder in a spread of other regulated investment funds.

As the FCA have pointed out, and as I accept, the ATEB report makes clear that the percentage of the overall fund suggested by BlackStar for investments in NMIs was the product of a calculation used by BlackStar. This was derived from scores attributed to the consumer’s attitude to risk (“ATR”); their experience and knowledge; and their pension as a percentage of their net asset value (“NAV”). An example is given by ATEB of a novice investor with an ATR factor of 50% where their pension represented 60% of their NAV. This investor would be recommended to invest 40% of their pension in the alternative or NMI. For investors referred by Avacade, therefore, such an investor would be advised to invest 40% of their pension into the Paraiba Bond.

According to Lee’s evidence, the first cases using this new model took a few weeks to come through, but when they did they came very far below the average of 50-60% of monies invested into the Paraiba bond that Alan Charlesworth had indicated was standard. As Lee put it, “The problem for Avacade Future Solutions was that … our only source of revenue was the bond commission.” In light of this, a variation was explored, under which the percentage of funds not recommended by BlackStar for the Paraiba bond would be invested not in a spread of other regulated funds, but instead placed with a Discretionary Fund Manager, Beaufort Securities. The background is somewhat obscure, but the idea seems to have been that that alternative structure would generate further commissions. In the event, however, there was a falling out between AA and BlackStar about the treatment of commissions under the arrangement with Beaufort, and that led to the relationship with BlackStar becoming fractured. It finally came to an end in June 2016, as a result of the intervention by the FCA which eventually resulted in the ATEB Report.

Pausing there, it is convenient to record the total figures for investments and commissions, derived from the Avacade Client Schedule and the information available relating to AA. These are summarised in Appendix 6 to the FCA’s Written Closing as follows:

As to the split of commissions between Avacade and AA, according to the FCA’s calculations in another document served as part of their Written Closing these were as follows:

None of these figures was expressly challenged, although I note that the total given for AA commissions in [167(ii)] above includes a different sum for commissions payable on the Paraiba bond (£308,862) than that at [166(vii)] above (£226,250). I also note that the figures given are, as I understand it, totals stretching back to early periods of Avacade’s life, before the point at which it seems to me that the Avacade model (described above) crystallised, in the latter part of 2011. In any event, whatever the detail, the figures are obviously very large, and I am content to proceed on the basis that they are substantially correct.

I have mentioned above that the Sustainable AgroEnergy products failed. I note in passing here that according to a letter to investors dated 16 May 2017, the SFO has launched a criminal investigation into the Ethical investments. The English companies associated with those investments are now in liquidation or have been dissolved. As I understand it, Global Plantations has also been dissolved, although it is unclear what impact that may have on the investments it promoted. It also appears that the original InvestUS investment ran into difficulties in mid-2015, such that although interest continued to be paid, capital could not be returned, at that point at least.

Section 19 FSMA provides as follows:

“(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.

The prohibition is referred to in this Act as the general prohibition.” 171. Section 22 FSMA provides that:

“(1)

An activity is a regulated activity for the purposes of this Act if it is an activity of a specified kind which is carried on by 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…

(5)

‘Specified’ means specified in an order made by the Treasury.”

The relevant Order specifying regulated activities is the RAO, which I have already mentioned above.

It follows that a perimeter breach will occur if a person carries out an activity specified in the RAO by way of business, but without authorisation.

I have already noted that the main activities in question here, which Avacade and AA are said by the FCA to have carried out by way of business, are (a) that in Article 25(2) of the RAO (making arrangements with a view to a person who participates in the arrangements buying or selling investments of a specified kind), and (b) that in RAO Art 53 (advising on the buying or selling of investments of a specified kind). (I will deal separately below with the specific activity described in RAO 53E (advising on pensions), which is relevant only to AA and not Avacade: see at [354]-[355]).

I describe later the material issues which separate the parties in relation to these two main types of activity, but first it is useful to deal with some threshold questions which were either common ground or at least not vigorously disputed.

To begin with, both Article 25(2) and Article 53 bite if (inter alia) the relevant activity (making arrangements or advising, as the case may be) is in relation to the buying or selling of securities.

Thus, Art. 25 provides relevantly as follows (emphasis added):

And Art 53 RAO (as in force from 31 October 2004 to 16 March 2016) provides (emphasis added):

Did Avacade’s and AA’s activities involve consumers buying and selling securities?

A good starting point is to note, as the FCA pointed out in their Opening, that what the clients of Avacade and AA typically did can be broken down into the following steps:

In putting forward their case, the FCA relied on steps (ii), (iii) and (iv). That is because:

Thus, a person who acquires rights under a SIPP (step 2 above), or who disposes of existing rights under a SIPP (step 3) in exchange for new ones (step 4), is involved in the buying or selling of securities, even if the new investments acquired (at step 4) involve direct ownership of assets (as with, for example, the Ethical Forestry or Global Plantations investments) and are therefore not themselves “securities”. The same result follows, obviously, if the investment acquired at stage 4 is itself a “security” (e.g., a bond).

This approach is supported by the analysis in the FCA’s Perimeter Guidance Manual (“PERG”). This forms part of the FCA Handbook, and sets out the FCA’s view on matters relevant to the definition of the regulated perimeter.

PERG 12.3 reads as follows:

“… the circumstances in which rights under a personal pension scheme may be bought or sold include:

when the member first joins the scheme and acquires all the rights that the scheme provides to its members (since he has bought those rights); …

where the member or his agent instructs the operator to buy assets of any kind either from existing cash holdings or from the proceeds of selling existing assets (since, in switching the assets, the member is converting his rights from an entitlement to benefits from the performance of certain assets to an entitlement to benefits from the performance of other assets - the former rights are sold and the latter are bought) …’

I agree with the summary in PERG 12.3. Essentially the same logic underpinned the decision of the Upper Tribunal in Burns v. FCA [2018] UKUT 0248 (TCC), in which it determined that where a firm advises on a particular SIPP and on investments to be held within the SIPP, the advice on the investments is regulated activity even if the investments themselves are not regulated products. That is because the purchase of the investments cannot be looked at in isolation: the purchase necessarily involves the acquisition and exercise of rights within the SIPP, and therefore the buying and selling of securities. The two are indistinguishable: see Burns at [260].

Three further points may be noted:

Before moving on, I should deal with two other preliminary matters. The first is whether it is proper to regard the activities of Avacade and AA as having been carried on by way of business. Leaving aside Art 53E RAO, the test for acting “by way of business” is defined in the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 (“the Business Order”). By Art 3 of the Business Order, a person is not be regarded as carrying on the activity under Art 25 RAO (making arrangements) or Art 53 (advising on investments) unless he “carries on the business” of one or more such activities.

Mr Berkley QC did not feel able to make any concession on these points in this case, but it seems to me that the point is beyond any serious doubt. If I conclude that Avacade or AA were making arrangements (Art 25(2)) or advising (Art 53), they were doing so for the purposes of their business: the matters relied on as constituting making arrangements and advising were obviously a part of their business model, designed to generate income in the form of commissions. The real question is whether such matters, in truth, are properly characterised as regulated activities or not.

The second point concerns section 23 of FSMA. This provides that a person who contravenes the general prohibition in section 19 (see above) is guilty of an offence and liable on conviction to a fine or imprisonment. But then section 23(3) states that in proceedings for an authorisation offence, it is a defence for a person “to show that he took all reasonable precautions and exercised all due diligence to avoid committing the offence.”

Mr Berkley QC for the Represented Defendants sought to rely on this provision. He said that “authorisation offence” is defined as “an offence under this section” (s.23), and that arguably includes proceedings for civil liability. He submitted that it is unlikely that a statutory defence would be available solely for a criminal prosecution and not in proceedings to determine whether the general prohibition (which carries the criminal sanction) has been contravened.

I do not accept Mr Berkley QC’s submission. The short point is that the defence is only available in “proceedings for an authorisation offence.” These are not such proceedings. They are not criminal proceedings, and no offence as such is alleged. Instead, they are proceedings (in effect) for declarations that there have been breaches of the general prohibition, and that because of that, civil relief in the form of an injunction under section 380 FSMA and/or a restitution order under section 382 FSMA should be granted. In FCA v Capital Alternatives [2018] 3 WLUK 623 at [1331-1332], HHJ McCahill QC held that section 23 does not apply to a civil claim and does not afford a defence to a claim under s.380 or s. 382. I agree with that conclusion, which seems to me unavoidable given the language of the section. As I note below, however, it also seems to me that the reasonableness or otherwise of the Defendants’ behaviour, including as to any precautions taken or due diligence conducted, may be relevant to the issue of the quantum of any restitution order made: see at [471].

At the present stage of the analysis in these proceedings, however, the issue is simply whether acts constituting breaches of the general prohibition have occurred. I now turn to address that question, by reference to the issues of substance which separate the parties. It is convenient to deal first with Art 25(2) and its various exceptions, and then separately with Art 53 and Art 53E.

RAO Art 25(2): Making arrangements

I have already referred to Art 25 above, but it is useful to set out again the key parts again. Art 25 is headed, “Arranging deals in investments”, and Art 25(2) prescribes the following as a regulated activity requiring authorisation:

“(2)

Making arrangements with a view to a person who participates in the arrangements buying, selling, subscribing for or underwriting investments falling within paragraph (1) (a) [i.e., a security] … (whether as principal or agent) is also a specified kind of activity.”

Art 25 forms part of a set of provisions, including various exceptions, which it seems to me it is useful to consider together. I will therefore set out those provisions which in one way or another are said to be relevant to this case.

Art 26 RAO has the heading, “Arrangements not causing a deal” and states:

“There are excluded from articles 25(1), 25A(1), 25B(1), 25C(1) and 25E(1) arrangements which do not or would not bring about the transaction to which the arrangements relate.”

Art 27 RAO is headed “Enabling parties to communicate”, and provides:

“A person does not carry on an activity of the kind specified by article 25(2) … merely by providing means by which one party to a transaction (or potential transaction) is able to communicate with other such parties.”

Perhaps the two most significant exceptions relied on by the Defendants are those in Arts 29 and 30.

Art 29 is headed, “Arranging deals with or through authorised persons”, and states:

“(1)

There are excluded from articles 25(1) and (2)…arrangements made by a person (‘A’) who is not an authorised person for or with a view to a transaction which is or is to be entered into by a person (‘the client’) with or through an authorised person if—

(a)

the transaction is or is to be entered into on advice to the client by an authorised person; or

(b)

it is clear, in all the circumstances, that the client, in his capacity as an investor… is not seeking and has not sought advice from A as to the merits of the client's entering into the transaction (or, if the client has sought such advice, A has declined to give it but has recommended that the client seek such advice from an authorised person).

(2)

But the exclusion in paragraph (1) does not apply if–

(a)

the transaction relates, or would relate, to a contract of insurance; or

(b)

A receives from any person other than the client any pecuniary reward or other advantage, for which he does not account to the client, arising out of his making the arrangements.

(3)

This article is subject to article 4(4) and (4B).”

Art 33 RAO has the heading, “Introducing” and provides relevantly:

“There are excluded from articles 25(2) … arrangements where— (a) they are arrangements under which persons (“clients”) will be introduced to another person;

(b)

the person to whom introductions are to be made is—

(i)

an authorised person; … and

(c)

the introduction is made with a view to the provision of independent advice or the independent exercise of discretion in relation to investments generally or in relation to any class of investments to which the arrangements relate …”

The FCA’s position on these provisions is straightforward: they say it is clear, looking at the Avacade business model and the AA business model, that they involved Avacade and AA respectively, “[m]aking arrangements with a view to a person who participates in the arrangements buying [or] selling … [securities].”

The Defendants disagree. They rely on a number of points, in summary as follows.

First, they challenge the central proposition that the activities of Avacade or AA involved “[m]aking arrangements,” within the meaning of that phrase in Art 25. In making that submission at trial, the Represented Defendants relied on the guidance on Art 25 given by Mr Jonathan Crow QC (Sitting as a Deputy High Court Judge) In re The Inertia Partnership LLP [2007] EWHC 539 (Ch) [2007] Bus LR 879, and by Holroyde J in a later case, Watersheds v DaCosta [2009] EWHC 1299 (QB). Although they accept that the concept of “making arrangements” is wide, the Represented Defendants said that these cases recognise there are limits to its operation, and particularly that it is not apt to cover the position of someone who in substance is really no more than an introducer and provider of information, who has no real influence over the eventual outcome. They say in particular that the ultimate decision to invest, made by consumers, was too remote from what Avacade or AA did to support the view that overall those parties were involved in “making arrangements.”

Second, they make a related point, which is that the substance of Avacade’s and AA’s involvement is more accurately captured by the language of Art 27, namely they were “ … merely providing means by which one party to a transaction (or potential transaction) is able to communicate with other such parties.” Consequently, the Defendants say that the activities carried on by Avacade and AA are expressly excluded from the scope of Art 25(2).

Third, the Defendants rely on the exception in Art 29, “Arranging deals with or through authorised persons.” Here, they have to deal with a threshold difficulty, which is that as they acknowledge, the exclusion in Art 29(1) does not apply in a case where the relevant party (here Avacade or AA) receives “from any person other than the client any pecuniary award or other advantage … arising out of his making the arrangements.” The issue here is that Avacade and AA did receive a pecuniary reward, in the form of commissions. But the Represented Defendants argued that the commissions were paid in respect of the investments chosen by the consumers, and were therefore a function of the investment decision (Step 2 using the terminology above at [186]), and did not arise out of any arrangements (even if there were any) which led to the decision to transfer into a SIPP (Step 1). Thus, they say, the Art 29 exception is available, at least in relation to the transfer aspect (Step 1), which can and should be divorced from the investment aspect (Step 2).

The Represented Defendants then argue that the Art 29 exception should be available in relation to the transfers into SIPPs because: (1) each transfer was a “transaction with or through an authorised person”, namely the various SIPP providers, all of whom were authorised by the FCA; and (2) in all such cases, either transfer advice was given by an IFA (and so Art 29(1)(a) applies), or alternatively in the case of execution only transfers, it was clear in all the circumstances that the consumers were not seeking and had not sought advice from Avacade, who indeed were explicit at all times in saying that they did not give advice (and so Art 29(1)(b) applies).

Fourth, the Defendants rely on Art 33. This is the provision headed “Introducing”. At trial, the Represented Defendants argued that, properly characterised, the activities undertaken by Avacade and AA involved introductions to authorised persons with a view either to “the provision of independent advice or the independent exercise of discretion in relation to investments generally or in relation to any class of investments to which the arrangements relate.” As to this, the Represented Defendants said that (1) Cherish and BlackStar gave “independent advice”, and so the exclusion is engaged in those cases where they advised on the bond investments (InvestUS, REIUSA and Paraiba), and (2) in the other, execution only cases where funds were transferred into (mainly) Liberty SIPP and invested in, for example, the Ethical Forestry Product, there was an “independent exercise of discretion” by the SIPP provider in accepting the investments, and so the exclusion is engaged in execution only cases as well. (I should say that this latter point was not originally pleaded, but by proposed amendments formulated after the trial which the FCA consented to subject to the usual order as to costs, the Represented Defendants put it in issue. The point was argued during trial and I will therefore deal with it below).

At the heart of this part of the case is the question of the proper construction of Art 25(2) RAO and of the various exceptions thereto.

There is some guidance in the authorities, but this is largely concerned with Art 25, and as I understand it there has been no substantive judicial guidance given on Arts 29 or 33 in particular, which are the main exclusions relied on in this case.

It is helpful to start with the authorities on Art 25.

Central to Art 25 (both Art 25(1) and Art 25(2)) is the concept of “making arrangements.” In In re The Inertia Partnership LLP [2007] EWHC 539 (Ch), [2007] Bus LR 879, a case on Art 25(1), Mr Jonathan Crow QC (Sitting as a Deputy Judge of the High Court) thought that this wording was potentially very broad. He said at [39] (emphasis added):

“The critical words in article 25 are these: ‘making arrangements for another person … to buy, sell [or] subscribe for” shares. The exception under article 26 applies to ‘arrangements which do not or would not bring about the transaction to which the arrangements relate’. In my judgment, the correct analysis of these provisions is as follows: (1) the word ‘arrangements’ is, depending on the context, capable of having an extremely wide meaning, embracing matters which do not give rise to legally enforceable rights; (2) in articles 25 and 26, the word ‘arrangements’ is used in contradistinction to the word ‘transaction’; (3) in article 26, the word ‘transaction’ is plainly a reference to the purchase, sale etc of shares contemplated by article 25; (4) as such, a person may make ‘arrangements’ within article 25 even if his actions do not involve or facilitate the execution of each step necessary for entering into and completing the transaction (ie the purchase, sale etc of the shares); (5) the availability of the exception in article 26 is essentially a question of fact: as a matter of causation, did the arrangements bring about the transaction (ie the purchase, sale etc of the shares)?”

Based on that analysis, the Learned Deputy in that case concluded that in one instance where The Inertia Partnership had merely introduced one company (Vivadi) which was seeking to raise finance to another company (Porterland) which claimed to have access to a network of potential investors, it was not “making arrangements” and therefore not conducting a regulated activity (see at [40]); but that in other instances where The Inertia Partnership had gone further and provided administration services (i.e., had agreed to collect in subscription monies paid by investors for shares in two further companies), it was (see at [41-42]).

Both Art 25(1) and Art 25(2) were considered by Holroyde J in a later case, Watersheds v DaCosta [2009] EWHC 1299 (QB). The context there was a claim by a company which had agreed to provide advice to the Defendant in relation to its efforts to raise finance. The agreement provided for payment of a success fee, including a minimum fee of approximately £58,000. Only limited finance was raised in the form of a bank loan, but the Claimant nonetheless claimed payment of the minimum fee. Amongst other arguments, the Defendants said that the agreement was unenforceable because it arose out of the conduct of regulated activity (“making arrangements” under Art 25) which the Defendant had not been authorised to carry out.

The argument was obviously an unattractive one, and was rejected by the Judge. On

Holroyde J. said he was fortified in his conclusion by the following statement in the Perimeter Guidance Manual, at PERG 2.7.7BG, which states:

“The activity of arranging (bringing about) deals in investments is aimed at arrangements that would have the direct effect that a particular transaction is concluded (that is, arrangements that bring it about).”

Mr Berkley QC placed reliance on the approach adopted by Holroyde J. He submitted that, although Holroyde J.’s analysis above was expressed in relation to Art 25(1), the same logic must apply in determining whether a party has engaged in “making arrangements” under Art 25(2). Like the Claimant in Watersheds v. Da Costa, Mr Berkley QC submitted that the corporate Defendants in this case were ultimately powerless to bring about any eventual outcome: that was a matter between the consumers and the SIPP providers and the investment providers, and was too remote from Avacade or AA for their actions to amount to “making arrangements.”

As to Art 25(2), Holroyde J. likewise thought that the Claimant’s activities did not fall within that Article, and so were not regulated activities. That was because (1) he construed that Article as not applying to activities which involved providing support or assistance to one party to a potential transaction only, as opposed to both parties, and (2) he thought that the Claimant’s activities were in any event caught by the exclusion in Art 27 (“Enabling parties to communicate”). He said the following at [68]-[70] (emphasis added):

“68.

In relation to article 25(2), PERG 27.7.7B, which I have quoted in part above, continues in these terms:

‘The activity of making arrangements with a view to transactions in investments is aimed at cases where it may be said that the transaction is 'brought about' directly by the parties. This is where this happens in a context set up by a third party specifically with a view to the conclusion by others of transactions through the use of that third party's facilities. This will catch the activities of persons such as exchanges, clearing houses and service companies (for example, persons who provide communication facilities for the routing of orders or the negotiation of transactions). A person may be carrying on this regulated activity even if he is only providing part of the facilities necessary before a transaction is brought about.’

69.

Had it not been for that guidance, with its emphasis on the provision of facilities for others as opposed to assisting one party, I would have been inclined to think that article 25(2) did apply to Watersheds' activity in seeking to assist the company to raise equity finance. As it is, I am persuaded that it does not.

70.

Even if I am wrong about that, I accept Mr Watson-Gandy's submission that article 25(2) would in any event be excluded by article 27. By agreeing to co-ordinate discussions Watersheds were in my view merely providing the means by which the company and a potential investor would be able to communicate.”

In SimplySure Ltd v Personal Touch Financial Services Ltd [2016] EWCA Civ 461, [2016] Bus LR 1049, Art 25 was considered by the Court of Appeal. For present purposes, the key issue was whether the activity of a person who interviewed a client to complete part of a standard “fact find” form was a regulated activity. The Court of Appeal, affirming the decision of the first instance Judge, held that it was. Sir Stanley Burnton (who gave the only substantive judgment) stated at [26] (emphasis added):

“The purpose of the completion of the first part of the fact-find was for the client to buy PMI [private medical insurance], and arranging for an unauthorised person to visit or to interview the client was an arrangement within article 25(1) of the Order, and indeed also within article 25(2) since it was an arrangement with a view to the client, who participates in the interview, buying PMI. The wording and therefore scope of article 25 are deliberately wide. I am encouraged in this conclusion by the consideration that SimplySure put the unauthorised person in a position in which he could advise the client. Furthermore, the questions above the rubric were not limited to the name and address of the client and his or her date of birth: the answer to the question as to whether any existing PMI cover was ‘Moratorium/Full Medical/Switch’ required a degree of specialist knowledge. My conclusion is consistent with the FSA Guidance in PERG

5.6.2

and PERG 5.6.4 … which I would approve as a correct explanation of the effect of article 25(1) and (2).”

Although not directly concerned with the present provisions, it is relevant to note that in another context within FSMA Lord Sumption has recently noted that “’Arrangements’ is a broad and untechnical word”: see FCA v. Asset Land [2016] UKSC 17, [2016] Bus LR 524, at [91].

In Adams v. Options SIPP [2020] EWHC 1229 (Ch), the claim was by an investor who had transferred pension funds on an execution only basis into a SIPP administered by the Defendant, following contact with an unregulated introducer,

The Claimant’s primary case at trial was that the agreement entered into with the Defendant SIPP administrator was unenforceable under FSMA section 27, but in seeking to establish that proposition he argued that the actions of the introducer, CLP, infringed both Art 25 RAO and Art 53. His pleaded case on Art 25 was based on Art 25(1). That was rejected by HHJ Dight CBE. After referring to Re Inertia Partnership, Watersheds v. Da Costa and SimplySure, at [113] Judge Dight said that RAO Arts 25(1) and 26 “contemplate the need for a causal link between the act or acts of arranging and the transaction itself”, and that for those purposes a simple “but for” analysis would not suffice; instead, the phrase “bring about” in Art 26 “suggests that the arrangements have to be a positive or effective cause.”

Applying that test, he went on at [118] to conclude that on the evidence, the test was not satisfied: the steps carried out by CLP (which included filling out an application form for the SIPP) did not qualify as “arrangements” for Art 25(1) purposes because they were essentially administrative and were too far down “the chain of causation.”

The Judge then said, at [123]-[124], that the Claimant’s alternative case based on Art 25(2), which had been developed only during the course of trial, was not sufficiently pleaded. But he went on (at [124]) to say that in any event:

“ … ‘arrangements’ should be construed in the same way as in Article 25(1) and a mere introduction would not suffice and the steps taken ‘with a view’ to a transaction would have to be capable of satisfying a notional causation test.”

Pausing there, it seems to me that these authorities are not without difficulty. In particular, and with due respect, I find it difficult to square the conclusion in

Watersheds v. DaCosta, that providing assistance to one party only does not involve

“making arrangements” under Art 25(2), with the conclusion in SimplySure, that assisting one party to complete a “fact find” questionnaire did qualify as “making arrangements” under the same Article.

I also have difficulty with Mr Berkley QC’s submission that the issue of what constitutes “making arrangements” under Art 25(2) should be approached on the same basis as under Art 25(1). There is plainly a potential overlap, but if activity falls within Art 25(2) only when the party performing it has the power to determine the overall outcome, that would seem to give Art 25(2) only a very narrow scope, and on the face of it, it seems intended to be broader in scope than Art 25(1).

In my view, it is also useful and appropriate to bear in mind that Art 25 is one among a group of provisions, including the exceptions in Arts 26, 27, 29 and 33, which are interlocking and are intended to operate together. It therefore seems correct to me, in this case, to seek to read them together, in a manner which is consistent.

Bearing those points in mind, together with the existing authorities, in my view the proper approach is as follows.

To begin with, there is the question of the inter-relationship of Arts 25(1) and 25(2).

On this first point, I therefore conclude, contrary to Mr Berkley QC’s submission, that the question of what constitutes “making arrangements” under Art 25(2) does have to be approached differently to the question of what constitutes “making arrangements” under Art 25(1). Given what seems to me the intended breadth of Art 25(2), and given also the conclusion expressed in SimplySure about the act of completing a “fact find” questionnaire qualifying as an “arrangement” under Art 25(2), I am also not persuaded that I should confine Art 25(2) only to those cases where the arrangements involve providing assistance to both parties. Art 25(2) itself speaks of “[m]aking arrangements with a view to a person … buying, selling, subscribing (etc.)”. Apart from other factors, the reference to “person” in the singular seems to me to suggest that qualifying “arrangements” may be directed towards assisting one party only, and the contrary view would exclude from Art 25(2) many matters of obvious interest and concern.

What, then, of Arts 27, 29 and 33? Art 27 is there to deal with the consequence, which flows from the above analysis, that the concept of “making arrangements” for the purposes of Art 25(2) is very broad. If the idea of “making arrangements” for the purpose of Art 25(2) is not confined to activities which “bring about” a transaction, then potentially the net is cast very wide, and widely enough in principle to capture means of communication. But such matters are not obviously of a type to engage this particular regulatory framework, and so it is right to exclude them. In my view Art 27 is no more complicated than that, and so I agree with the FCA’s view as expressed in PERG 2.8.6A(2), as follows:

“Under article 27, simply providing the means by which parties to a transaction (or possible transaction) are able to communicate with each other is excluded from arrangements made with a view to persons entering into certain transactions (see PERG 2.8.6G (2)) only. This will ensure that persons such as Internet service providers or telecommunications networks are excluded if all they do is provide communication facilities (and these would otherwise be considered to be arrangements made with a view to the participants entering into transactions). If a person makes arrangements that go beyond providing the means of communication, and add value to what is provided, he will lose the benefit of this exclusion.”

Articles 29 and 33 are more difficult. I approach them as follows:

In light of the above, it seems to me that the following main questions arise. I will address them below, first in relation to the Avacade model, and secondly in relation to the AA model. Although I separate them out here for the purposes of analysis, in truth they overlap with one another, as will be apparent in what follows:

Dealing then first with the position of Avacade, and concentrating on the Avacade Model as it seems to have operated from late 2011 onwards (see above at [92]-[114]), the following points seem to me to be significant.

I start with the background to, and genesis of, the Avacade model. I think the history is important:

If, as seems clear, the real prize for Avacade was an investment into one of the products from which it could earn a commission, the attraction of sourcing consumers who would agree to transfer their existing pension pots into a SIPP is again obvious:

That idea seems to have been central to the TailorMade model, at least as Lee describes it in his evidence, and it seems it also came to characterise the 1Stop business model, at least from the point in time when (according to Lee) 1Stop also came to be interested in the pension transfer aspect as part of an overall process which would involve commissions being made on investments by a non-regulated company (see [71] above).

At any rate, looked at in this light, it again seems to me obvious that the attraction of offering an initial, “non-advised” pension report (the innovation which came from

There was a further attraction as well. Although I accept Lee’s evidence that in earlier periods, Avacade’s work with TailorMade had involved it routinely referring consumers to TailorMade for advice on their pension transfers, Lee’s own evidence is that this changed with the advent of the 1Stop model and the pensions report, part of the purpose of which was to “filter out clients who did not want advice or whose pension was too small.” Under this model, although clients were given the option of taking advice, it seems they were not required to.

When the idea of the “initial factual non-advised report” was added to the innovation of the execution only transfer, the core features of the Avacade model were complete. To quote again from Lee’s written evidence:

“The first LOAs started to be generated in November 2011. At this time … We were producing a non-advised pension report … and if the client opted for financial advice, they had a range of options available to them. If they opted for an execution only transfer, then they could choose Liberty SIPP if they wished.”

By late 2011, the platform was set for a period of heavy activity by Avacade:

Viewed against that background, it seems to me inescapable that the structures put in place by Avacade from late 2011 onwards were both “arrangements”, and moreover were “arrangements with a view to a view to the consumers who participated in them buying or selling securities” (Art 25(2)).

Equally, they were not in my judgment arrangements amounting to no more than an introduction with a view to the provision of independent advice or the independent exercise of discretion.

I express those conclusions for the following reasons.

First, the following steps identified at [92] to [114] above to my mind all qualify as “arrangements” within Art 25(2), namely:

It is possible that a number of these steps would in fact also qualify as “arrangements” within the narrower specification of Art 25(1), in the sense that they are sufficiently important that they serve to “bring about” the relevant transaction (for example, the filling out and processing of application forms). But unquestionably to my mind they all fall within what seems to me to be the much broader scope of Art 25(2), because they were all undertaken “with a view” to a transaction coming about (i.e., for the purpose of encouraging it or assisting it to happen, whether or not directly a cause of it happening). The preparation of the Pension Report, for example, and the discussions with consumers which both preceded and followed it, were all undertaken for the purpose of seeking to bring about a situation in which existing pension funds would be liberated and made available for the purchase of new investment products.

I should say that to my mind it makes no difference to this analysis that the initial calls were in many cases made by Richmond Solutions, i.e., by staff at the Ethical Forestry call centre. This is for two reasons. First, whether or not these initial steps were conducted by persons acting on Avacade’s behalf, it is entirely clear that the later steps (including the later telephone calls) certainly were. Second, on the evidence it is clear that those calling from the Richmond Solutions call centre were authorised to do so on Avacade’s behalf: as noted above, Lee accepted during crossexamination that Richmond Solutions called consumers “on behalf of Avacade” and that consumers “would believe they were getting called from Avacade”.

For similar reasons, it seems to me that in periods from June 2012 onwards, it makes no difference to the analysis that contact with the pension funds was via a covering letter and LOA on Cherish letterhead. First, even if these initial steps are properly characterised as having been undertaken by Cherish, and therefore not arrangements with which Avacade was concerned, the fact remains that the later steps were certainly conducted by Avacade. Second, on proper analysis, they were not undertaken by Cherish. Both Mr Hewitt’s evidence in cross-examination, and Craig Lummis’ evidence in interview, was to the effect that Avacade personnel were involved in the processing of the covering letters and LoAs. And as Mr Hewitt accepted when cross-examined, the correspondence in Cherish’s name was sent before consumers could be said to be clients of Cherish: that only ever happened later, if and when clients were referred to Cherish, after the Report Call. In the circumstances, it seems to me that these early steps in the process qualify as an “arrangement” by Avacade, irrespective of whose stationery was used.

Second, I do not think that the Art 27 exception is relevant in this case. On any view, Avacade’s activities involved a great deal more than simply providing a means of communication. I am not persuaded that Holroyde J.’s obiter view expressed in the Watersheds case (see above at [216]), that in co-ordinating discussions Watersheds were merely providing a means of communication, compels any different conclusion. Whatever the position in that case, it seems to me clear that here, the activities of Avacade went well beyond the mere provision of means of communication. They were themselves integral to the overall process by which SIPP transfers took place and investments came to be made.

Third, I agree with the view that it is not possible, in assessing the availability of the exclusion in Art 29, to treat as distinct the pensions transfer aspect and the investment decision. Again, that seems to me to follow from an understanding of the purpose of the various steps in the chain, even back to the very initial steps. To amplify:

Although they are not directly relevant, I am fortified in taking that view by a number of decisions in which the Courts have rejected attempts to divide up transactions into discrete elements, or to separate out regulated from unregulated activities when in substance they are the same thing – see for example Walker v Inter-Alliance Group plc [2007] EWHC 1858 (Ch), per Henderson J. at [29]; Emptage v FSCS [2013] EWCA Civ 729 at [15-20]; and R (on the application of TenetConnect) v FOS [2018] EWHC 459 (Admin) at [58-59].

I note in any event that, as the FCA pointed out in their Written Closing, Avacade received payments from Berkeley Burke (a SIPP provider) of £750 per client, in respect of a number of clients referred on an execution only basis. I think even Mr Berkley QC would be forced to accept that these are examples of a pecuniary reward or advantage “arising out of” the arrangements for the SIPP transfer, in a manner which excludes the operation of Art 29 on any view.

Fourth, I am satisfied that the arrangements above were not an introduction “with a view to the provision of independent advice or the independent exercise of discretion”, etc., so as to bring them within the exclusion in Art 33.

The words, “with a view to”, as I have already noted, to my mind demand an assessment of the purpose of the activities. What were they for? Or to put it another way, what end result were they intended to achieve?

Here, whichever one looks at it, it seems to me that the real purpose of the arrangements described was to seek to bring about a situation in which the desired investments would be made and the commissions earned. That is certainly true of the arrangements looked at as a whole, but it is also true, it seems to me, of any of the individual steps looked at alone, if the overall context is borne in mind. It seems to me correct that it should be. I proceed on the basis that the test is an objective one, and if so, it must be correct that the context in which any individual step takes place must inform its overall characterisation. Indeed, it is difficult to see how one could properly assess the true purpose of any individual step without looking at the overall matrix within which it occurs.

Take one of the initial steps in the process, for example, namely the collection of data from existing pension providers by means of the sending of the LoAs. What is that step “with a view to”? Looked at in context, and bearing in mind Avacade’s own commercial interests as a business, it seems to me fair to say it is “with a view” to bringing about a situation in which existing pension funds are liberated and then invested in products from which Avacade might make a commission. It is true to say that that step in itself does not and could not bring about the desired overall outcome, and it is also true to say that there were many further steps to be taken and that at any

I think the same logic can be applied to all the other steps I have identified as

“arrangements”. They were undertaken by Avacade because it had the same overall end-point in mind. Had that not been an available end-point, the actions would not have been undertaken. Thus, it seems to me, they were all undertaken “with a view” to it happening. Moreover, since they all had the same overall purpose, it seems to me artificial to separate them; it is much more natural to look at them as a whole.

I am fortified in that view by the scale of the Avacade enterprise. There are a number of indicators.

For example, the Memorandum of Understanding signed with Project Kudos in relation to the REIUSA product in April 2013 said that Avacade was planning to sell £15m of that investment over the next financial year.

There is also the volume of calls made from the Richmond Resources Call Centre The matter was addressed by Lee Lummis in interview:

“GAYTON: And how many people were in that call centre at Richmond Solutions?

LL: I think at the very peak they said there was 40 plus, I think…”.

In an Avacade board meeting on 11 September 2013, a target figure for the Richmond Solutions Call Centre of 700 LoAs per month was discussed. The minute reads as follows:

“CL & RF attended a meeting at Richmond office to discuss the strategy for increasing the current average of 700 LOAs per month.”

An issue developed between the parties during trial as to whether there was some form of understanding between Ethical and Avacade that, in return for Ethical making the Call Centre facility available, Avacade would ensure that the lion’s share of investments by those who chose to transfer would be in Ethical Products. Although Lee in his evidence said that the high proportion of investments into Ethical came about naturally, because its promise of relatively short term returns made it attractive, it seems to me likely there was some form of loose understanding that a certain volume of business would be funnelled in the direction of Ethical. As the FCA pointed out in their Closing, when pressed Lee accepted that Ethical had said something about the desired number of investments “preceding opening the Call Centre”, and further:

The relevance of these points in the present context is in informing the proper characterisation of the “arrangements” which existed from late 2011 onwards. Both for Ethical and for Avacade, the structures they put in place were there to support their businesses. Those businesses made money out of selling investments, and they were interested in the number of LOAs generated not as an end in itself, but because of the relationship between that number and the ultimate conversion rate into actual investments from which they could profit. That gives one a very clear indication as to the purpose for which the LoAs were produced, and likewise data collected in and Pension Reports produced; those steps were all taken “with a view to” investments being acquired and therefore commissions paid.

What of the point made by the Defendants that certain parts of the Avacade “arrangements” involved the possibility (or in some instances, the requirement) for advice to be taken from an IFA, or involved the independent exercise of discretion by SIPP administrators?

I will deal with the AA/BlackStar period below, but in the period of Avacade’s activities, these points seem to arise in the following three ways:

Do any of these points take the “arrangements” I have described out of Art 25(2) and into the body of the exclusion in Art 33?

I think not. Taking them in turn, I say that for the following reasons.

(1) Advice Option: To begin with, the point that in some (perhaps even many) cases, referrals may have been made for “full IFA advice”, even if taken at face value, does not to my mind alter the character of the Avacade “arrangements” when looked at objectively, and does not demand a different answer to the question, “What was the purpose of the arrangements?”, or “What were they put in place with a view to achieving?”

The true purpose is illustrated by the cases on the Avacade Client Schedule, and in particular by the significance in financial terms for Avacade of the commissions generated from those cases. As already noted above, total commissions generated from the cases on the Avacade Client Schedule come to around £10.6m (see above at [167]). Lee accepted in cross-examination that this represented the vast majority of Avacade’s income, rather than clients referred for full IFA advice. This is borne out by the banking analysis, which shows that Avacade received just £10,859 from Cherish. Fees from “full IFA referrals” to Cherish were minimal.

Moreover, looking at the cases in the Avacade Client Schedule, and as the FCA pointed out in their submissions:

To my mind, these points illustrate very clearly the true purpose of the Avacade “arrangements.” They were put in place with a view to encouraging a transfer of existing funds into a SIPP, to provide an available pool of funds and a vehicle for the acquisition of investments from which Avacade could earn commissions.

In order to achieve that overall objective, a structure was put in place which allowed for the possibility that certain consumers might wish to take advice from an IFA, but the fact that that option was made available was incidental to the true objective of the “arrangements” looked at as a whole. Likewise, the fact that some (or perhaps even many) consumers may have chosen to take advice, or even (having done so) may have chosen to opt out of the structure entirely, seems to me incidental to its proper characterisation. The process allowed for some filtering or wastage. The fact remains that it was devised and put in place not in order to effect introductions to IFAs, as a means in itself of generating income (which it seems to me is the real focus of Art. 33). Instead it was put in place with a view to achieving a very different result altogether as its desired outcome and end-point.

(2) Cherish: Next there is the question of the referrals made to Cherish in relation to the InvestUS and REIUSA bonds. Does the fact that those referrals were made alter the true characterisation of the “arrangements”, at least in those cases where consumers invested in the two relevant bonds?

I think not, for two main reasons. First, I think the same point made already above in relation to “the arrangements” as a whole continues to apply. They were not put in place with a view to encouraging a referral to Cherish for the purposes of it giving independent advice. They existed with a view to a different overall objective. Moreover, even if one were to carve out that part of the “arrangements” relating solely to the referral to Cherish (one might say, for example, that any individual steps taken to provide documentation or information to Cherish were “arrangements with a view to the provision of independent advice”, at least when looked at in isolation), that would not mean that Avacade did not have in place other arrangements which were

“with a view to” a different outcome. The preparation and presentation of the Pension Report, for example, would still on this analysis have been undertaken “with a view to” facilitating a transfer of existing pension funds into a SIPP, and the eventual acquisition of investments from which Avacade would make a commission.

Second and in any event, I do not consider that the service provided by Cherish in relation to the InvestUS or REIUSA bonds properly qualified as “independent advice”, within the meaning of that phrase in Art 33. The issue of the role played by Cherish was a matter of particular concern for Lee at trial, and proved controversial. The critical matters, however, seem to me to be either common ground or entirely clear on the basis of Mr Hewitt’s evidence:

Coming back to the language of RAO, Art 33, in my judgment these features of

(3) Role of SIPP Providers: Finally under this heading I must deal with Mr Berkley QC’s submission that the role played by SIPP trustees involved them engaging in an “independent exercise of discretion in relation to investments generally or in relation to any class of investments to which the investments relate.” This submission is relevant particularly to the execution only cases, in which on any view, there was never any “independent advice”; indeed, the whole point of the execution only model was that advice was not needed.

Mr Berkley QC’s argument was effectively that the decision by a SIPP trustee to give effect to an instruction to invest in a particular product was more than an automatic, rubber-stamping exercise. Such trustees had their own discretion to exercise in determining whether to give effect to the instruction. In doing so, as authorised persons, they owed their own obligations towards consumers under the FCA’s regulatory framework. Avacade’s management assumed at the time that the SIPP administrators and trustees were acting as required by that framework, and indeed were entitled to do so and to take at face value the legitimacy of a structure which had the endorsement of an authorised person and which the FCA was allowing to continue.

In developing his submissions, Mr Berkley QC relied on R (Berkeley Burke SIPP Administration Ltd) v. Financial Ombudsman Service Ltd [2018] EWHC 2878 (Admin). In that case Jacobs J. dismissed a claim for judicial review of a decision of the Financial Ombudsman Service (“FOS”), in which the FOS had upheld a complaint against Berkeley Burke (the same SIPP administration company which features in this

On the application before him Jacobs J. held that the Ombudsman’s approach, which effectively involved the execution only terms agreed with the customer being enhanced by the operation of the FCA’s Principles, did not involve any error of law. In exercising his jurisdiction to determine whether the authorised person had acted fairly and reasonably in all the circumstances, the Ombudsman was entitled to conclude that Berkeley Burke had failed to do so having regard to the Principles, notwithstanding the apparently limited scope of the agreement with the customer.

Mr Berkley QC says that the same logic should apply here, and that if it is right to say that the SIPP administrators and trustees were required not merely to rubber-stamp directions given to them by consumers, but instead owed broader regulatory obligations under the FCA Principles which required them to “look carefully” at the investments in question, that means they were required to “undertake an independent exercise of discretion … “, within the meaning of that term in Art. 33.

In my view, that is stretching the logic of the Berkeley Burke decision further than it can reasonably be said to go:

I must now deal with the position of AA, as it relates to Art 25(2) RAO and the exceptions thereto.

In many ways, this is the same as, or very similar to, the position of Avacade.

To begin with, and in line with the FCA’s submissions, I have no doubt that at least the following steps in the AA business model described above involved the making of arrangements, for the purposes of Art 25(2):

Once again, not all of such steps would necessarily have been causative of a transaction actually being concluded, but in my judgment that is not the test under Art 25(2) (cf Art 25(1)). The point is that they did all have the effect of contributing to, or encouraging, the conclusion of a transaction.

For the reasons already given above, I do not think the exception in Art 27 RAO has any relevance here. It is obvious when one considers the above steps that AA, like Avacade, was doing a great deal more than merely providing a means by which parties could communicate with each other.

Likewise, I am not persuaded that the exception in Art 29 RAO applies. It is available only in cases where the arranger does not receive from any person other than his client “ … any pecuniary reward or other advantage … arising out of his making the arrangements”. Here, AA did receive a pecuniary reward or advantage. I say that for two reasons:

The more substantive point concerns Art 33, and whether AA’s activity can properly be characterised as amounting to no more than an introduction to an authorised person (BlackStar), “ … made with a view to the provision of independent advice or the independent exercise of discretion in relation to investments generally or in relation to any class of investments to which the arrangements relate.”

My conclusion is that this exception is not available in the case of AA either, just as it was not available in the case of Avacade. That is essentially for two reasons.

First, and leaving aside for the moment any question about the quality or scope of the advice to be provided, I am not persuaded that the arrangements I am concerned with, when looked at objectively, were put in place “with a view to” independent advice being provided. AA’s business was not making money out of referring consumers to IFAs for advice, in return for payment of a fee. Their business was making money in the form of commissions, out of consumers deciding to transfer their existing pensions into SIPPs and then buying an AA-related investment – the Paraiba bond. If one asks, “what was the purpose of the arrangements, looked at as a whole?”, I think it clear that their purpose was the furtherance of that objective. To take an example, when AA prepared a Pension Report, it was not “with a view to” introducing the relevant consumer to BlackStar for independent advice; it was “with a view to” the consumer making a SIPP transfer and investing in Paraiba.

To put it another way, the referral to BlackStar only took place because it carried with it the potential for investment by the consumer in the Paraiba bond. It did not have the provision of advice, or the independent exercise of discretion, by an authorised person, as its intended or desired end-point, but instead other events, namely the SIPP transfer and the investment decision. They were the reason the arrangements were put in place.

I think these points are obvious from the nature of AA’s business model, which in terms of its core objectives was just the same as the Avacade business model. They are well illustrated by matters summarised above at [165] above, namely the disappointment expressed by AA when the percentage of consumers’ funds recommended for allocation to the Paraiba bond proved lower than expected.

Second and in any event, there is the question of the quality and scope of the advice given by BlackStar. In their Written Opening, the FCA described BlackStar as AA’s “patsy”, a phrase which Lee took great exception to. I do not agree with that description, if it is intended to convey the sense that BlackStar was not truly independent of AA, but instead in its pocket and performing a service which was no more than a sham designed to produce a pre-ordained outcome. That much seems to follow from the fact that in practice, the percentage of consumers’ funds approved for investment in the Paraiba bond proved to be below that anticipated.

I do however think that the service performed by BlackStar was too narrowly focused and too formulaic to engage the exception in Art 33. In that sense I agree it was flawed and inadequate. I say that for the following reasons:

I have set out above my view of the proper construction of Art 33. To my mind, the service performed by BlackStar was not adequate to engage the exception:

The evidence is clear that the risk I mention was a real one. This is apparent from the transcript of a call between one particular AA client, Mr Goddard, and an AA representative, apparently Mr Loynes. During the Investment Call, Mr Goddard said he wanted to put 100% of his pension fund into the Paraiba investment. Mr Loynes said that he would make a note for BlackStar to that effect but added:

“Make sure you have that conversation with them as well… The reason I’m saying that it has to be driven by yourself so if this is something that you really want to put all of your pension pot in to make sure they are fully aware of it.”

After Mr Goddard had spoken to BlackStar, he was contacted by another AA employee, Martin Bower. A transcript is available. It seems that Mr Bower had been provided with a draft of BlackStar’s proposed report or had otherwise been provided with information about it because he said to Mr Goddard “they’ve recommended … less than a quarter of your fund to go in.” Mr Bower asked Mr Goddard if he wanted AA to go back to BlackStar and speak to them on his behalf, and Mr Goddard said he was happy with that because “theoretically I can’t lose.” The Avacade Client Schedule shows that Mr Goddard eventually invested £33,000 in Paraiba out of his pension of £105,000, which suggests that BlackStar recommended a slightly higher allocation after AA’s intervention.

Finally, I should say for the sake of completeness, that to the extent it is relied on in relation to the AA model in addition to the Avacade model, I reject Mr Berkley QC’s argument that the relevant SIPP provider, Guinness Mahon, was involved in the independent exercise of a discretion, in the sense in which that phrase is used in Art 33. That is for the reasons already developed above at [280].

RAO Art 53: Advising on Investments

Art 53 RAO (as in force from 31 October 2004 to 16 March 2016) provided as follows (emphasis added):

“Advising a person is a specified kind of activity if the advice is—

(a)

given to the person in his capacity as an investor or potential investor, or in his capacity as agent for an investor or a potential investor; and

(b)

advice on the merits of his doing any of the following (whether as principal or agent)—

(i)

buying, selling, subscribing for or underwriting a particular investment which is a security or a relevant investment, or

(ii)

exercising any right conferred by such an investment to buy, sell, subscribe for or underwrite such an investment.”

One can see again that, as with Art 25(2) RAO, Art 53 is only engaged where the advice given is as to the merits of buying or selling securities. In the context of this case, that means advice as to the merits of customers transferring into a SIPP, or deploying funds within a SIPP in the acquisition of new investments. For the reasons already given above, those steps all involve the buying or selling of securities.

The critical question under this heading is whether “advice” was given.

The FCA’s pleaded case on this topic rests largely on the content of three of the key telephone calls made to investors, namely the Pre-Report call, the Report Call and the Investment Call. The pleaded case against Avacade is summarised in paragraph 77 of the Particulars of Claim as follows:

“77.

The statements of Avacade’s agents in telephone calls to investors amounted to advice in that:

77.1

They included elements of opinion and/or value judgments as to the relative merits of the options presented to investors so as to give the statements the force of recommendations.

77.2

The information provided was on a selected, rather than balanced basis, so as to emphasise the benefits of a transfer to a SIPP and/or the investments promoted by Avacade. Again, this amounted to advice and/or recommendations to investors.

77.3

The statements were not limited to purely factual statements, but included explicit or implicit advice and/or recommendations as to a transfer to a SIPP and/or the investments promoted by Avacade.”

The same assertions are then made in paragraph 144 as regards AA, based on the scripts for the equivalent calls by AA agents or employees.

The Defendants’ pleaded cases deny the FCA’s characterisation of the relevant calls in paragraph 77. In essence, the Defendants’ position is that Avacade and AA were introducers only; that they did no more than provide information and options to clients; and the information provided was provided in a fair and balanced way.

At trial, there was a measure of agreement between the FCA and the Represented Defendants as to the nature of the exercise for the Court to conduct. It is effectively a qualitative assessment of the content of the various calls, in order to assess whether anything in them can fairly be characterised as advice.

More precisely, as to the nature of the legal test to be applied, again there was a measure of agreement. Both the FCA and the Represented Parties were agreed that the test is an objective one (and see in any event Thornbridge v Barclays [2015] EWHC 3430 (QB) at [38] per HHJ Moulder QC, as she then was); and in seeking to define the essential characteristics of “advice”, they both directed me to PERG 8.28 and to a number of authorities in which the guidance in PERG 8.28 has effectively been endorsed.

The FCA’s basic submission was that PERG 8.28 provides a sensible and workable distinction between mere information on the one hand, and advice on the other. At its core is the distinction in PERG 8.28.1G:

“In the FCA's view, advice requires an element of opinion on the part of the adviser. In effect, it is a recommendation as to a course of action. Information, on the other hand, involves statements of fact or figures.”

The Represented Defendants made specific reference to PERG 8.28.4G(3):

“In the FCA’s opinion … such information may take on the nature of advice if the circumstances in which it is provided give it the force of a recommendation. For example … (3) a person may provide information on a selected, rather than balanced, basis which would tend to influence the decision of the recipient.”

As to the relevant authorities, both the FCA and the Represented Defendants placed reliance on what was said by HHJ Havelock-Allan QC in Rubenstein v HSBC [2011] EWHC 2304 (QB); [2011] 2 CLC 459 at [79]-[85], and referred in particular to his comments in the following passage as to the distinction between giving investment advice and providing information:

“81… In both instances information is provided, and in both instances the client has a choice as to what he decides to do with that information. The key to the giving of advice is that the information is either accompanied by a comment or value judgment on the relevance of that information to the client's investment decision, or is itself the product of a process of selection involving a value judgment so that the information will tend to influence the decision of the recipient. In both these scenarios the information acquires the character of a recommendation.”

A similar approach was adopted by Teare J in Zaki v Credit Suisse [2011] EWHC 2422 (Comm), [2011] 2 CLC 523, and by Mr Tim Kerr QC sitting as a Deputy High Court Judge in Crestsign v NatWest [2014] EWHC 3043 (Ch).

In making his submissions on behalf of the Represented Defendants, Mr Berkley QC emphasised the following points:

In order to analyse this issue properly, it is necessary to say something more about the Pre-Report Call, the Report Call, and the Investment Call.

An examination of the Avacade script for the Pre-Report Call shows that it was focused on a number of themes. These were important in setting the context for the later calls, because the same themes were used in the Report Call to inform discussion about consumers’ choices in terms of pension provision, and then in the Investment Call in discussing the consumers’ investment choices.

The available script shows that the themes were:

Against that background, and against the background of the Pension Report which had provided been to the consumer in the meantime, the Avacade Report Call script then covered the following points:

As already noted above, there are two versions of the Investment Call Script. The first is undated. It has the following features:

The other example of the script is headed “Pre-Investment Hand Script.” It dates from March 2012. The following points are worth noting:

A number of copies of the investment calculator document have been produced, including one from Mr Kemp, suggesting a total investment amount of £228,010 into three investments, yielding total income of £780,046 (minus fees); and a further one for Ms Humphrey suggesting an “investable amount” of £15,837 which, invested into Ethical Forestry’s 12 year investment, would generate a “Total Cash Return” of £36,300.

A number of transcripts of Investment Calls have been produced and are illuminating. To take an example, an undated transcript of a call between Mr Astell (of Avacade) and a Ms Kruck (a consumer) contains some important features:

Those are the various calls, but before turning to look at AA, it is relevant to note Avacade’s Terms of Business.

I have been referred to two versions. In the case of Mr Thompson, he signed an early version on 13 September 2013 which included the following (emphasis added):

“Avacade is an alternative investment distribution company formed in January 2010 with the aim of becoming a market leader in the UK alternative investment market. Avacade specialise in promoting a range of investment products designed to provide exceptional financial returns.

We take a creative look at new investments, steering away from underperforming traditional assets such as equities, and identifying the investment opportunities of the future. Only those that offer security, quality and excellent returns on investment make it into our portfolio.

Many of our clients choose to invest in our products through a Self-Invested Personal Pension (SIPP) following completion of an Avacade Free Pension Summary. This is completed in house by our team and consists of a pension summary together with up to date relevant pension market information which you may find useful. This does not constitute financial advice or a recommendation in any way.

We recommend our clients to seek financial advice and we can refer clients to an Independent Financial Advisor (IFA) who can offer this. Please note Avacade act as an introducer only to the IFAs and are not associated to the advice given…. “

The terms go on as follows (emphasis added):

“Avacade is not regulated by the Financial Services Authority (FSA). We provide an information only service with regards to our investment products and do not offer Financial Advice. We recommend that our clients always speak to an IFA before completing a pension transfer or investment.

As we are not regulated by the FSA the investment products we distribute are not covered by the Financial Services Compensation Scheme (FSCS).”

It seems that in around late 2013, a longer version of the Terms of Business came into circulation. The following points are relevant:

Accompanying these longer Terms of Business was an “Important Investment Information & Disclaimer”, containing a large number of disclaimers to the effect that Avacade was not regulated by the FCA; that “information provided is purely for informational purposes”; that in entering into any investment the consumer was not relying on advice from Avacade; that Avacade recommended financial advice be taken before investing; and that the investments “could be considered high risk speculative investments.”

The position of AA is similar, but not identical.

It seems that a Welcome Call and a Pre-Report Call took place in the same way as with Avacade, but the FCA has not been provided with any scripts or transcripts.

After the Pension Report was provided, there was a Report Call. A script is available. As already noted above, this had less emphasis on annuities, in light of the changes brought into effect in April 2015. In other ways, however, the overall approach was much the same as under the Avacade model.

Thus, the script began with a disclaimer: “ … Avacade offer information only and do not give financial advice as we are not regulated by the FCA.”

The script then moved on to familiar themes. There was an initial discussion of the need to have a pension fund large enough to meet the investor’s objectives as to income. This was followed by a comment that traditional pension schemes give investors little control over where their funds are invested, and the discussion then moved into the topic of alternative investments: “Many alternative investments have a successful proven history and are seen as an attractive option away from the instability of the stock market.”

After mentioning stock market volatility, the script then moved onto the available options. Options 1 to 4 remained the same as under the Avacade script:

A new, fifth option was then mentioned, which was to transfer the pension to a Qualifying Recognised Overseas Pension Scheme. As I understand it, there are no recorded instances of AA clients transferring into a QROPS.

The client was then asked which option was preferred, and if the preference expressed was for a SIPP, then further information was to be provided, including the suggestion that a SIPP allows investors to choose “alternative investments, products not normally allowed in standard pensions.” The script continued: “We are bringing a number of new investments to market which work great within a SIPP. The first is a property bond investment that offers a fixed return of 11% per annum over its 3 year term with your investment back at the end of that term.”

The available script contains reference to the possibility of an execution only SIPP transfer to a Guinness Mahon SIPP, but it is common ground that that was not part of the AA model. Under the heading, “Report Call – Step 3”, however, which was “IFA APPOINTMENT BOOKING”, it says: “Your SIPP will be set up by Indigo SIPP and they are backed by a company called Guinness Mahon which is part of the PAN Group, a very well respected and award winning corporation.”

Thereafter, as noted above, the further steps in the AA process included a Fact Find Call and an Appointment Call. The script for the latter said: “BlackStar will also have a discussion about the Paraiba bond which we discussed on the last call.” The recap to be provided in relation to the bond said: “The developer is a UK developer, based in Birmingham, James Laurence developments, with a previous successful track record in Brazil.”

As to the AA Investment Call, no script is available, but I have already mentioned above (see at [295]) the transcript of an Investment Call between AA (Mr Loynes) and Mr Goddard, which resulted in Mr Goddard wishing to put 100% of his pension pot into Paraiba. The transcript of the call shows Mr Loynes setting out the “pros and cons” of the Paraiba bond. He pointed to the fact that the bond would be regarded as a high risk product, but then referred to the “advantages” of it, which included the fact that it paid fixed contractual interest and was “highly unlikely” to fail.

I do not understand the Avacade investment calculator to have been used by AA. It seems that instead, as mentioned above, the percentage of the available funds to be allocated to the Paraiba bond was determined by BlackStar using their own formula.

Finally, AA’s Terms of Business, provided as part of the client signature pack, contained the following provisions at clause 2 (emphasis added):

“2.1

AA provides the Services which comprise the compilation of a fact based pension review and referrals for financial services to nominated independent financial advisors (IFA).

2.2

The provision of these Services may include some or all of the following activities:

(a)

If requested by you AA will assist you in the completion of any forms, authorities, requests or consents…

(b)

If you wish to transfer your pension AA will introduce you to either an

IFA or a pension provider…

2.3

For the avoidance of any doubt:

(a)

AA does not provide any form of financial advice. Should you require financial advice, you should speak to your solicitor, independent financial advisor and/or accountant (whichever is appropriate).

(b)

AA is not regulated by the FCA and the investments distributed by AA are not eligible for compensation under the FSCS (Financial Services Compensation Scheme).

(c)

AA strongly recommends that all clients consult with an investment professional (solicitor, independent financial advisor and/or accountant) prior to making any decision to establish a new pension, transferring existing pension, or investing in an unregulated investment product.”

Looking first at the position of Avacade, it seems to me that the process reflected in the Pre-Report Call, the Report Call, and the Investment Call, certainly went somewhere beyond the mere provision of information.

The process involved the identification, by reference to a number of predetermined themes, of the customer’s objectives. It is entirely obvious, I think, that the themes in the Pre-Report Call, which were then developed in the Report Call, were identified with a view to engaging interest in the idea of a transfer into a SIPP, accompanied by the acquisition of investments which, over time, might generate an enhanced pension fund.

The process then involved discussion of the various options (annuity versus drawdown, and the four main options in relation to the existing pension fund) by reference to the consumer’s stated objectives. The conclusion of the whole process, as the narrative above makes clear, was the identification in the Investment Call of various investment options and a proposed split of the transferred fund between different investment products by reference to the “investment calculator.”

I find it impossible to resist the conclusion that this process involved the expression of opinions or recommendations at the very least at two stages: first, at the conclusion of

It seems to me that the process, at the very least at these two points, involved just the kind of comment or value judgment on the relevance of the information supplied which HHJ Havelock-Allen had in mind in Rubenstein v HSBC; or alternatively, the information supplied was “itself the product of a process of selection involving a value judgment”, so that it would tend to influence the decision of the recipient.

In my judgment, such matters take this case beyond that examined by HHJ Dight CBE in Adams v. Options SIPP: the evidence there was that no advice had been given in respect of the SIPP transfer, as opposed to the proposed investment (see at [125][126]). In the present case, the evidence is to the contrary: there was advice on the SIPP transfer, as well as on the investments.

Turning then to the position of AA, I think the position is similar, but not identical.

I reach the same conclusion that advice was given in the Report Call, essentially for the same reasons given above. The consumer was exposed to a funnelling process which, by means of development of a series of themes and through the asking of strategically placed questions, drew him or her into thinking that a SIPP was the best of the available options to take.

As to the Investment Call, I think there is little doubt that the exchanges between Mr Loynes and Mr Goddard summarised above involved stepping over the boundary between information and advice. I say that given the character of the exchanges, and even though Mr Loynes seems not to have had recourse to the investment calculator. As to whether this was a more widespread phenomenon, I think the evidence is unclear, in the absence of a script. Mr Richards refers only to this transcript in describing the AA Investment Call. In those circumstances, although I am prepared to conclude that advice was given in this particular instance, I am not persuaded that the evidence enables me to go further than that, and to say that it was routinely given at the Investment Call stage.

Nonetheless, looking at the issue in the round, my conclusion is that on the face of it, there is a strong argument for saying that both Avacade and AA gave advice, in the respects I have identified. Two questions remain, however: is that conclusion affected by the context, including the Terms of Business and the disclaimers; and was the advice given as to the merits of “buying [or] selling a particular investment which is a security”?

As to the first point, it seems to me that the question is really whether, in context, one should regard the messages contained in the various calls as part of Avacade’s sales pitch, rather than as part of an exercise in the giving of advice. It was in this context

HHJ Moulder rejected the claim. At [70], in a passage relied on by Mr Berkley QC, she said the following:

“ … I bear in mind the dicta of Gloster J in Springwell cited above that the giving of advice is not sufficient to establish a duty of care. The court has to decide whether the ‘advice’ went beyond the ‘normal recommendations given in the daily interactions between an institutions salesforce and a purchaser of its products.’. Mr Burgess is a salesman. His job is to sell derivatives and he makes his money by selling derivatives. He does not make money by providing advice in return for a fee. It is an integral part of the sales process in my view that he should have a dialogue with the customer and in the course of that dialogue may express opinions to the customer but those expressions of opinion have to be viewed in the context of the entire dealing. This expression of opinion is in my view the expression of a salesman selling his product not an adviser providing advice … .”

Likewise here, Mr Berkley QC invites the conclusion that the expressions of opinion by the Avacade and AA agents were merely the expressions of a salesman selling his product. His argument is reinforced by the context: the Terms & Conditions and the various disclaimers made it clear that Avacade and AA were not taking on an advisory role; that makes it even clearer that the opinions given were part of a sales pitch, and not advice, when properly examined. The basis of the parties’ relationship was expressly and clearly that neither Avacade nor and AA were giving advice; they said many times that that was not their role, and gave other warnings consistent with the idea that they were assuming no responsibility for any opinions or views that might be expressed.

I take a different view:

Finally, as to whether the advice was in relation to a particular investment, as noted Mr Berkley QC sought to rely on PERG 12.3. He referred me to the following passage, in the answer to Q19 (my emphasis in answer below):

“Q19. For advice to be regulated, it needs to relate to the merits of buying or selling a particular investment. When do rights under a personal pension scheme become 'particular' rights and so particular investments?

It is the rights under a personal pension scheme that must be a particular investment. This means that the rights must arise under a particular personal pension scheme. So, provided the rights on which advice is given relate to rights conferred, or to be conferred, by a particular scheme, they will be particular rights and advice on the merits of buying or selling them is likely to be regulated. This is the case, whatever the nature of the rights or of the underlying assets or prospective underlying assets. Conversely, if there is no particular personal pension scheme, there cannot be any particular rights… A person may be asked to advise a client on the merits of his acquiring a commercial property for holding it under a SIPP in circumstances where the client has an existing SIPP of which the adviser may or may not be aware. Provided the adviser has not been asked to, and it is reasonable for him to believe that he would not be expected to, advise his client on the merits of his holding the property under the particular SIPP, the advice may remain generic as respects rights under a personal pension scheme and so would not be subject to regulation.”

Based on this, Mr Berkley QC’s argument was that so far as the early stages of the Avacade and AA models were concerned, involving what he called canvassing and investment calls, the relevant SIPPs would not have been in existence at that point. Mr Berkley QC referred again to Adams v. Options SIPP, in which HHJ Dight CBE on the facts concluded that even if there had been a recommendation in respect of the SIPP, it had in substance been no more than a recommendation of the Defendant SIPP provider, and not of any of their specific products (see at [126]). Mr Berkley QC also submitted that any “advice” given was generic only.

I cannot agree with these submissions:

Art 53E RAO: Advising on Pensions

Finally, for completeness, I should mention Art 53E RAO, which came into force on 6 April 2015. This sets out a new regulated activity of advising on the conversion or transfer of pension benefits. It creates a regulated activity where advice is given to a member of a pension scheme on the merits of them transferring their pension, where that member has “subsisting rights in respect of any safeguarded benefits”.

For the purposes of this action, it was accepted that this provision could only ever be relevant to a relatively small number of consumers who transferred out of defined benefit pension schemes following contact by AA (it has no relevance to the actions of Avacade), and that it would only have significance if I determined the Art 53 point against the FCA. Since I have resolved it in the FCA’s favour, I need say nothing further about Art 53E.

In addition to the general prohibition, s.21 FSMA contains a restriction on the making of financial promotions:

“(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.

…

(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…”

Some preliminary points are necessary before considering the parties’ positions. 358. First, there was some discussion at the trial before me as to the precise type of “investment activity” in issue here: i.e., what form of “investment activity” did the FCA say that Avacade and AA had promoted? As can be seen from s.21(8) above, activity will only qualify as “engaging in investment activity” if (broadly) it involves entering into or offering to enter into certain types of contract which involve a “controlled activity”, or exercising certain rights conferred by a “controlled investment.” “Controlled activities” and “controlled investments” for the purpose of s.21 FSMA are defined by the FPO (see above at [2]). As I understood the FCA’s position, it relies on the “controlled activities” in Schedule 1, para. 3 of the FPO, namely, “Buying [or] selling … securities …”. In other words, this part of the FCA’s case relies on the same analysis already explained above in relation to (1) the transfer of existing pension funds into a SIPP, and (2) the deployment of funds within the SIPP in the acquisition of investments.

Second, there was agreement between the FCA and the Represented Defendants as to the proper approach to the interpretation of the phrase, “communicate an invitation or inducement” in section 21. Although the word “invitation” suggests that passive involvement in a relevant activity might be caught, it was common ground that something active is needed, involving persuasion or incitement. Both the FCA and the Represented Defendants referred me to PERG 8. PERG 8.4.3G states:

“The FCA recognises that the matter cannot be without doubt. However, it is the FCA view that the context in which the expressions ‘invitation’ or ‘inducement’ are used clearly suggests that the purpose of section 21 is to regulate communications which have a promotional element. This is because they are used as restrictions on the making of financial promotions which are intended to have a similar effect to restrictions on advertising and unsolicited personal communications in earlier legislation. Such communications may be distinguished from those which seek merely to inform or educate about the mechanics or risks of investment…”.

And PERG 8.4.4G states:

“The FCA considers that it is appropriate to apply an objective test to decide whether a communication is an invitation or an inducement. In the FCA's view, the essential elements of an invitation or an inducement under section 21 are that it must both have the purpose or intent of leading a person to engage in investment activity or to engage in claims management activity, and be promotional in nature. So it must seek, on its face, to persuade or incite the recipient to engage in investment activity or to engage in claims management activity. The objective test may be summarised as follows. Would a reasonable observer, taking account of all the circumstances at the time the communication was made:

(1)

consider that the communicator intended the communication to persuade or incite the recipient to engage in investment activity or to engage in claims management activity, or that that was its purpose; and

(2)

regard the communication as seeking to persuade or incite the recipient to engage in investment activity.

It follows that a communication which does not have any element of persuasion or incitement will not be an invitation or inducement under section 21.”

These provisions seem to me to reflect the proper construction of section 21, and I propose therefore to adopt the approach they set out.

Third, in addition to the exception to section 21(1) which applies by virtue of section 21(2) (i.e., when the content of the relevant communication has been approved by an authorised person), the FPO contains certain other exceptions, including Art 15(1). This provides that if the requirements set out in Art 15(2) are met, then the financial promotion restriction section 21 is disapplied in the case of:

“… any communication which is made with a view to or for the purposes of introducing the recipient to –

(a)

an authorised person who carries on the controlled activity to which the communication relates ....

The requirements in Art 15(2) (so far as relevant) are that:

“(a)

[…];

(a)

A [the person effecting the introduction] does not receive from any person other than the recipient any pecuniary reward or other advantage arising out of his making the introduction; and

(b)

it is clear in all the circumstances that the recipient, in his capacity as an investor, is not seeking and has not sought advice from A as to the merits of the recipient engaging in investment activity (or, if the client has sought such advice, A has declined to give it, but has recommended that the recipient seek such advice from an authorised person).”

Against the background, it is possible to summarise the parties’ respective positions under this heading.

As to the FCA:

The Defendants’ position overall is that they only ever provided information and options to investors, and did not engage in promotion, save to the extent of making available materials which were approved by authorised persons.

To similar effect, the more detailed points made at trial on behalf of the Represented Defendants were as follows:

Mr Berkley QC said that in any event he could rely on the exception in FPO para. 15(1), at least in relation to transfers into SIPPs. He said that the requirements of

I note Mr Berkley QC’s point that both the “Paraiba Brochure” and the accompanying Offering Memorandum were approved by BlackStar, but these are not part of the FCA’s complaint. That relates only to the communications identified above, and as to those I have no real doubt that (1) Avacade’s website; (2) AA’s website; (3) the “Brazil Investors Handbook”, which could be accessed via the AA website; and (4) the Report and Investment Calls, all contained content that was promotional in the sense of being intended to persuade or incite. On examination, it also seems to me clear that they were intended to promote investment activity, i.e., the sale and purchase of securities (in context, the acquisition and exercise of rights under a SIPP).

Mr Richards gives evidence in his statement about the websites, and exhibits a number of “website captures”. Some extracts give a sufficient flavour.

As to the Avacade website:

As to the AA website:

These are just some extracts, but nonetheless the characterisation is plain. I do not think it is possible to characterise them otherwise than as promotional, and moreover as seeking to promote the buying or selling of securities. That is because, whichever investments are being referred to, and whether they themselves qualify as securities or not, the overall picture seeks to encourage investment by means of a transfer into a SIPP. Looked at in terms of the business models of both Avacade and AA, that is not at all surprising. Consistent with that, the form of remuneration for Avacade agents included commission for “SIPP sales” and “Investment sales”, with uplifts for high

“conversion” rates. There are many other indicators, including the contract with Ethical Forestry which at clause 2.01 provided that Avacade was to “ … maintain adequate contacts and sales personnel and to develop and promote the sale of the Products actively.”

For similar reasons, I cannot agree with the submission that the Brazil Investors Handbook only related generally to Brazil, and was not sufficiently specific to qualify as an invitation or inducement to the buying or selling of securities (i.e., in context, interests in a SIPP):

I have commented on the Report Call and the Investment Call above, both in relation to Avacade and AA. For the reasons already given there, it seems to me there was a substantial element of salesmanship involved both in the structure and content of these calls. It is entirely fair, I think, to characterise them as involving an invitation or inducement both to transfer existing pension funds into a SIPP and to use those funds to acquire investments.

I do not consider that these conclusions are affected by Mr Berkley QC’s argument that there can have been no relevant promotion of the asset-based investments (the Ethical Forestry and other tree-based products in particular), because these are not themselves securities. Consistent with the analysis above at [179]-[185], it seems to me clear that in structural terms, the acquisition of investments using funds within a SIPP must itself involve the buying or selling of securities. A transfer into a SIPP (Step 1) involves the acquisition of new rights, and therefore the buying or selling of securities; and likewise the acquisition of investments within the SIPP (Step 2) involves the exercise of rights (or the relinquishment of one set of rights in return for new ones), and therefore the buying or selling of securities. The purchase of the investments does not stand alone; it is indivisible from what has to happen within the SIPP to allow the purchase to occur. This structure was a critical part of both the Avacade and AA business models, and is reflected in the materials above which I have already determined are promotional in nature.

To put it another way, when Avacade sought to promote, say, the sale of an Ethical Forestry Product, its basic pitch was to promote that sale through the medium of a SIPP. Its whole infrastructure was geared around identifying consumers with pension pots that might be transferred into a SIPP, thus providing an available fund from which the investments could be acquired. When Avacade promoted sale of an investment, it was also promoting the acquisition of, and the subsequent exercise of, the rights the SIPP conferred.

Finally under this heading, there is the question of reliance on the exception in para.

In addition to the prohibition on financial promotions, the FCA relies on prohibitions against statements made in the promotion of financial services which are false and/or misleading.

Prior to 31 March 2013, this prohibition was set out in s.397 FSMA:

“(1)

This subsection applies to a person who–

(a)

makes a statement, promise or forecast which he knows to be misleading, false or deceptive in a material particular;

(b)

dishonestly conceals any material facts whether in connection with a statement, promise or forecast made by him or otherwise; or

(c)

recklessly makes (dishonestly or otherwise) a statement, promise or forecast which is misleading, false or deceptive in a material particular.

(2)

A person to whom subsection (1) applies is guilty of an offence if he makes the statement, promise or forecast or conceals the facts for the purpose of inducing, or is reckless as to whether it may induce, another person (whether or not the person to whom the statement, promise or forecast is made)–

(a)

to enter or offer to enter into, or to refrain from entering or offering to enter into, a relevant agreement; or

(b)

to exercise, or refrain from exercising, any rights conferred by a relevant investment.…

(9)

‘Relevant agreement’ means an agreement–

(a)

the entering into or performance of which by either party constitutes an activity of a specified kind or one which falls within a specified class of activity; and

(b)

which relates to a relevant investment.

(10)

‘Relevant investment’ means an investment of a specified kind or one which falls within a prescribed class of investment.”

By the Financial Services and Markets Act 2000 (Misleading Statements and Practices) Order 2001, relevant agreements and specified investments are defined by reference to the FPO and therefore include the “controlled activities” already referred to above at [359], i.e. “Buying [or] selling … securities”, which in context means the transfer of existing pension funds into a SIPP and the deployment of funds in the acquisition of investments.

Since 1 April 2013, s.397 FSMA has been replaced by s.89 of the Financial Services Act 2012 (“FSA 2012”):

“(1)

Subsection (2) applies to a person (‘P’) who—

(a)

makes a statement which P knows to be false or misleading in a material respect,

(b)

makes a statement which is false or misleading in a material respect, being reckless as to whether it is, or

(c)

dishonestly conceals any material facts whether in connection with a statement made by P or otherwise.

(2)

P commits an offence if P makes the statement or conceals the facts with the intention of inducing, or is reckless as to whether making it or concealing them may induce, another person (whether or not the person to whom the statement is made)—

(a)

to enter into or offer to enter into, or to refrain from entering or offering to enter into, a relevant agreement, or

(b)

to exercise, or refrain from exercising, any rights conferred by a relevant investment.”

By s.93 FSA 2012, relevant agreements and investments are again defined by reference to an order made by the Treasury, which was provided in the Financial Services Act 2012 (Misleading Statements and Impressions) Order 2013. This, again, cross-refers to controlled activities and controlled investments in the FPO.

The FSA’s pleaded case is that Avacade breached both s.397 FSMA and s.89 FSA 2012 during the course of its operating existence, and that AA breached s.89 FSA, in both cases by making false or misleading statements knowingly or recklessly. There is substantial overlap in the statements relied on: the 3 relied on in relation to AA are a subset of the 8 relied on in relation to Avacade. It will therefore be convenient to analyse them together below.

Before doing so, however, I should make some observations about the proper approach to be applied in conducting the analysis.

A number of points are in the mix.

One important point, emphasised by Mr McGarry during his submissions and accepted by Mr Vineall QC, is that the FCA have advanced no case based on alleged concealment of facts or information (FSMA s. 397(1)(b) and FSA s. 89(1)(c)). Thus, what is required is proof of some positive statement, not an alleged omission.

A second point concerns the proper technique for the allocation of legal responsibility for statements made to consumers. That point arises in particular as regards statements made by Avacade’s employees. As already noted above, they operated by means of a series of scripts. Who is legally responsible for statements made by such employees if they go off script? Yet a further point is that the FCA’s case is obviously dependent on a finding of knowledge or recklessness. That begs the question: whose state of mind is relevant for the purposes of that test?

In his oral closing statement, Mr Vineall QC proposed a checklist of six questions, designed to address these and other issues, as follows:

As I understood it, the Represented Defendants were also content with this overall framework. Moreover, the parties were agreed:

As to the remaining questions, I also see the overall logic of Mr Vineall QC’s framework, but it seems to me it has consequences for my approach to this part of the case which it is appropriate to flag now, before looking at the individual complaints relied on.

My point is essentially about the interrelationship between, on the one hand (1) the question of Avacade and AA being vicariously liable for statements made by employees who go off script, and on the other, (2) the question of whose state of mind is relevant in the context of determining knowledge or recklessness.

As to point (1), vicarious liability, having looked carefully at the statements by employees relied on by the FCA in their pleaded case and in the evidence of Mr Richards, it seems to me that in the vast majority of cases (if not in all of them), the statements made by employees represent an elaboration on, or amplification of, themes which appear from the scripts. That is natural enough. It is no doubt difficult and rather artificial to follow a script slavishly. It is to be expected that employees would extemporise with their own additions and language, and that statements will have been made which to that extent are off script. Equally, it seems to me that such statements are statements for which Avacade and AA could in principle be regarded as vicariously liable under normal principles, if a case were advanced that they were made wrongfully by the employees concerned. I say that because none of statements relied on seem to me to go so far off script that it would be wrong in principle to regard them as having been made while acting in the ordinary course of the employee’s employment. They were all part of the overall sales and promotional role which to my mind was the principal role performed by those who engaged by telephone with consumers.

To give an example, the FCA’s case is that the Avacade Report Call script contained the following language concerning the risk arising from stock-market volatility:

“Discuss these figures [of investment returns in the pension reports] – focus on stock market volatility – lack of control – danger of huge sudden market reductions caused by external influences (BP oil spill, 9/11, etc.).” 396. Assuming that the Avacade Report Call Script did contain this language, one can see in the transcript of the call with one Avacade customer, Mr Thomson, how that same theme came to be developed by Avacade’s agent or employee:

“ … we are talking about worse case scenario, but let’s just say for instance, you know, the stock market was to crash … well you do have that risk unfortunately, you may not be paid out … .”

That statement was criticised, on the footing that it suggests the possibility of a complete loss, which could not be true for any individual investing through a personal pension, which would typically be invested in 100 or more individual shareholdings. Assuming that is so, what is important for present purposes is that the statement goes further than the script, which is directed at volatility risk and not at the risk of a complete loss. I think it correct to say, though, that applying the test in Mohamud, this is in principle the sort of statement which one might expect Avacade to be vicariously liable for, if making it amounted to a legal wrong. Although off script, it is not so far off script as to fall outside the ordinary course of employment. On the contrary, it is a good example of an employee extemporising on one of the themes he has been told about, but perhaps rather over egging the pudding.

The difficulty I have, though, is in characterising the statement as wrongful. That is because of the way the FCA puts its case, which in determining whether any given statement was wrongful (i.e., known to be false or misleading or made recklessly) directs attention not to the state of mind of the Avacade employees who actually spoke to consumers, but instead to the states of mind of those who were said to be Avacade’s controlling mind and will – i.e., its directors.

In my view, the consequence is that where an employee has extemporised and has gone beyond the confines of the script, as in the above example, the FCA’s case on knowledge or recklessness cannot be made out. That is not because the statements cannot be in law be attributed to Avacade, but because of the way the case is put. It has not been pleaded or argued that any of Avacade’s employees themselves had a dishonest or reckless state of mind, and that their dishonesty or recklessness is to be attributed to Avacade and AA; instead it is said that Avacade and AA had the relevant states of mind, thanks to the actions of their directors. Knowledge or recklessness is asserted on a top-down, rather than a bottom up, basis.

That being so, I am not satisfied that Avacade (through its directors) can be said to have had the requisite state of mind (knowledge or recklessness) in relation to statements made by employees which go beyond the confines of the scripts. They did not know about them when they were made, and so cannot have done so.

In expressing that conclusion, I bear in mind the evidence that Avacade (and I assume also AA) had a call monitoring system, under which calls were reviewed and feedback given, and any problematic calls identified. What is not at all clear to me on the evidence, however, is that the particular instances relevant here (including the one mentioned immediately above) were reviewed at the time, and elevated to a level which involved them being seen and effectively approved by the Avacade or AA directors.

I think the result is that, properly understood, this part of the FCA’s case has to be looked at with the approved scripts as the primary focus. The substance of what is alleged is that the directors of Avacade and AA, at the time they authorised statements to be made to consumers along the lines contained in the scripts, knew that such statements were misleading, false or deceptive, or were reckless as to whether that was the case.

Before coming to the specific points, I should say that I have no difficulty with the concept that each of the directors of Avacade (Craig, Lee and Mr Fox), and each of the two directors of AA (Craig and Lee) should be equated with the directing mind and will of those two companies. In other words, I think the knowledge of the directors – either individually or collectively – can be attributed to the companies for the purposes of s.397 FSMA and s. 89 FSA 2012. I have already referred above to the descriptions given to the FCA of the roles played by the Individual Defendants (see [27] and [130]). I analyse the broader picture below (see at [462]-[468]), in the context of addressing the question whether they were “knowingly concerned” in any infringements by Avacade and AA. These were both small companies run in each case by a tight group of senior people, who shared information regularly and operated together. In my view, the Individual Defendants were each of them sufficiently senior and influential for their respective states of mind to be attributable either to Avacade or AA.

As to whether the directors had knowledge of the call scripts, the evidence is that within Avacade they were primarily Mr Fox’s responsibility, but Craig also said in interview that all three key individuals were aware of what was happening in relation to them. Lee accepted in interview that during the AA period, he reviewed call scripts prepared by Martin Bower, who by then was sales director, including from the point of view of ensuring their compatibility with AA’s IT systems. He must have been aware of what they contained.

Against the background of those general points, I come on to the particular complaints relied on by the FCA. A number of the originally pleaded points were abandoned during trial. Those that remain to be dealt with are as follows.

(1) Non-increase in income in DB pension schemes. This complaint is made in relation to Avacade only. The allegation in POC para. 83.2 is that Avacade was in breach:

“By stating to investors in defined benefit pension schemes that their income would not increase, when in fact defined benefit schemes usually include index linked increases.”

I reject this complaint. That is essentially because I am not persuaded that the requirement of knowledge or recklessness on the part of the Individual Defendants is sufficiently made out.

Mr Richards in his evidence, in support of the contention that the statement was made, concedes that it was not in the Avacade call scripts, but refers to some instances in the transcripts. The FCA’s Written Closing relies on two extracts, the first from a call to

I am prepared to accept that some consumers with defined benefit schemes were told that there would be no increase in income, and that that was wrong in the sense (agreed between the experts) that income from a defined benefit scheme is usually index-linked. But I am not persuaded that I have been shown a sufficiently clear pattern of such references for me to be able to conclude that they fell within the scope of the statements which the directors of Avacade had approved (as opposed to the elaboration on approved themes by Avacade’s employees), and in respect of which it can therefore be shown that some or all of those directors had the required state of mind.

(2) Linkage of tax-free cash and taking an income. The allegation in POC para. 83.3 is in relation to Avacade only, and is that it was in breach:

“By stating to investors that they would have to, or would usually have to, start taking an income from their pension schemes if they were to release tax free cash from those schemes. Since 2005 it has been possible to release tax free cash without taking any income at the same time.”

The source for this was the scripts. The following appears in the script for the PreReport Call:

“Usually, once you have taken your tax free lump sum, you have to take your income at the same time and this could possibly greatly reduce the amount you get from your pension as an income.”

Statements to similar effect appear in certain of the transcripts, as identified in the FCA’s Written Closing.

I likewise reject this complaint. Although it is clear that Avacade had authorised the making of statements along the lines of that relied on, I am not persuaded that a sufficiently clear case has been made out that such statements were in fact misleading.

The experts are agreed that the statement was in fact accurate in relation to Defined Benefit Schemes: they do not permit a lump sum to be taken separately from income benefits. There was some disagreement between them (although in truth not much) about the position of Defined Contribution Schemes. The Defendants’ expert, Mr Fettroll, said the statement was also true for “a significant number of DC pension schemes.” The evidence of the FCA’s expert, Mr Percival, was that it was “likely that many DC pension schemes, particularly older ones that pre-dated 2006, did not have the option to take the tax free lump sum and not take an income.” But he thought that even in such cases, one option would be for the investor to switch to a new DC scheme, which allowed one to take a tax-free lump sum without taking income.

In light of Mr Percival’s evidence, I think that if the approved statement had been to the effect that taking a tax-free lump sum would always trigger the need to take income, rather than usually, it would have been misleading. But the language of the approved statement is more qualified. It is only that the one usually follows from the other. I am not satisfied, on the basis of the evidence, and in particular the expert evidence, that a sufficiently clear case has been made out that that was misleading. I think Mr McGarry was right to point out that the position is more nuanced, and the evidence rather too equivocal on this point.

I do not think that overall view is changed by the fact that, in one of the transcripts, namely that relating to Mr Thompson, the point was put more bluntly by Avacade’s employee, Mr Penn, when he said: “Okay, so with the annuity option, if you took your tax free cash and then they would just force you to take your income at the same time…”. It seems to me that that goes further than the authorised script, and so even though it was inaccurate and misleading, I am not able to link it with a relevant state of mind on the part of anyone corresponding to the controlling mind and will of Avacade. Mr Penn was not such a person, and I have not been invited to make any findings about his state of mind.

(3) Linkage of personal pensions and annuities vs SIPPs and drawdown. POC para.

The FCA also relies on the same point as against AA (POC para. 147.1).

The FCA says that the linkage alleged is made plain by the Avacade Report Call script (see above), which in describing the four available options pushes the customer in the direction of choosing transfer into a SIPP by (1) emphasising the benefits of drawdown versus taking an annuity, and then (2) linking drawdown with SIPPs. It is said the linkage is made plain by that part of the script which reads as follows:

“One of the main things that will have a major influence on which option will achieve what you’re looking for, is on the way you decide to turn your pension fund into a pension income… .”

Again, I do not consider this complaint to be made out. My principal difficulty is in identifying the particular statement relied on, remembering that both FSMA s. 387 and in FSA 2012 s. 89 are engaged only where a “statement” is made. The complaint here, however, is not in relation to a statement as such, but rather more in relation to the impression sought to be created during the Report Call. I accept that in principle a statement, for the purposes of the section, may be made implicitly as well as explicitly; but here I am not persuaded that the language set out immediately above is sufficiently clear as to amount to an explicit statement that there is a necessary link between personal pensions and annuities and between drawdown and SIPPs.

Neither do I consider that a sufficiently clear implicit statement emerges from consideration of the other parts of the Report Call script. Although I agree that the objective sought to be advanced by the script was to funnel consumers in the direction of choosing a SIPP, and that it was weighted in favour of achieving that objective, I

I do not understand that wording to be inaccurate or misleading (at any rate, no complaint has been made about it). Although it is true that the impression it creates is that the drawdown option may be subject to greater restrictions in the case of a typical personal pension (as opposed to a SIPP), on its face it expressly acknowledges that drawdown may well be an option under such schemes if the relevant requirements are met.

That being so, I do not think it correct to read the Report Call script as making a necessary link between personal pensions and annuities, and between drawdown and SIPPs. At any rate, I cannot detect a sufficiently clear statement (whether explicit or implicit) to that effect.

(4) Requirement for paid advice. The allegation is that Avacade (POC para. 83.5) misled investors:

“By stating that investors would have to obtain advice from an independent financial advisor and pay for the same in order to transfer their pensions into personal pension schemes other than SIPPs, whereas it was stated that advice was not necessary for a transfer into a SIPP. Advice was not required for either type of transfer at the relevant time.”

I am satisfied that statements to this effect were made by Avacade employees, and were sanctioned by the Call Scripts. I have already noted above that the Avacade Report Call Script contained the following statement:

“One point of interest, if you wanted to transfer your current funds into a personal or stakeholder pension, you will need professional advice, you cannot do it on your own, so you would have to pay someone like an IFA out of your own pocket to do this.”

A similar point was reiterated later in the script:

“IF THE CLIENT CHOOSES A PERSONAL PENSION

To transfer into a new personal pension would need the input of an IFA…

…

IF THE CLIENT CHOOSES A STAKEHOLDER PENSION

To transfer into a stakeholder pension would need the input of an IFA … .”

As the FCA pointed out in their Written Closing, there are a number of examples in the call transcripts of statements being made to investors in line with the direction in the scripts.

The experts are essentially agreed that such statements, if made to investors, were false and misleading. Mr Percival summarises the position as follows:

“PPs and SIPPs are fundamentally the same in terms of what options are available other than SIPPs having much wider investment options. The same options around switching are available and there is no requirement for advice in either scenario. The only scenario where advice is mandated is, from April 2015, for a pension transfer from safeguarded benefits valued at £30,000 or more and then the advice requirement applies irrespective of whether the transfer is to a PP or a SIPP. There was no advice requirement prior to April 2015.”

I understood Mr Fettroll in his evidence to be in agreement with that basic proposition.

In light of that, I have no hesitation in concluding that the statements corresponding to that relied on by the FCA were made and were false and misleading. Given that such statements were authorised by (at least) the Report Call script, I conclude also that the directors of Avacade would have been aware of them, and that their states of mind are relevant to determining the state of Avacade’s knowledge. Further, given both that the true position (that there was no advice requirement) must have been easily ascertainable, and that no other satisfactory explanation has been put forward by any of the Individual Defendants, I also conclude that the statements were made recklessly.

I therefore uphold the FCA’s complaint on this ground.

(5) Personal Pensions and equities vs alternative investments. Two statements continue to be relied upon which it is said were designed to diminish the attractiveness of stock market investments, and to make the products offered by Avacade look more stable and attractive:

The FCA also relies on the same statements as against AA (POC para. 147.3 and para. 147.4).

It is appropriate to take these statements in turn.

First, as to that at POC para. 83.7 and para. 147.3:

Next, there is the complaint made POC para. 83.8 and para. 147.4. I have dealt with the substance of this already above. The gravamen of the complaint is that statements were made to investors that by investing in equities they stood to lose all their money “instantly.”

It is clear that such statements were made. I have referred already above to what Mr Thompson was told. In cross-examining Mr Fettroll, Mr Vineall QC drew attention to two further instances where consumers had been told they were at risk of losing their money instantly, both involving the same Avacade employee, Mr Reece Archer. I am also satisfied that, to the extent they gave the impression that investors would be left with nothing at all, these statements were misleading: the experts are agreed that market volatility can certainly result on the valuation of pension funds fluctuating, sometimes very significantly, but given the structure of most funds, the likelihood of any given pension pot being immediately and permanently reduced to nil is very limited.

Such statements do not feature in the Call scripts, however. Moreover, in the circumstances I am not persuaded that a sufficiently clear pattern has been shown for me to conclude that they must have been authorised by the Avacade and/or AA directors at some stage (as opposed to being an addition or amplification of an approved script made by an employee). Thus, although I accept that such statements were made and that they were misleading, I cannot conclude that they were made with the requisite state of mind on the part of those persons whose states of mind are said to be relevant. I therefore reject the FCA’s complaint on this ground.

(6) Statements on the investments offered by Avacade. The FCA says that Avacade was in breach -

With one exception, the individual statements relied on by the FCA as justifying these summaries, as set out in their Written Closing at paragraph 449, all seem to me to be statements concerning the investments offered by Avacade rather than statements concerning the investment providers themselves. The one exception is a statement in a call to a Mr Belfon, referred to also in Mr Richards’ Witness Statement, where he was told that the investment providers were “sustainable reputable companies.” That seems to me to go further than the statements endorsed by the approved scripts, which were concerned with investments rather than the investment providers. I infer that the statement made to Mr Belfon was in the nature of an amplification or development of the approved script, made by an individual employee, and that therefore no liability can attach to it because no case is advanced that any individual employee or agent made false or misleading statements knowingly or recklessly.

I therefore focus on the remaining statements, and the summary contained in POC paragraph 83.9. In closing the case for the FCA, Mr Vineall QC focused in particular on the statement that the investments were low risk, which he said was especially egregious and indeed unforgivable. As I understand it, his criticisms were directed particularly to the “tree-based” products, i.e. Ethical and Global Plantations.

I am satisfied both that statements to that effect were made, and that they derived from an approved script or scripts. I say that for the following reasons:

It is common ground between the experts that the Avacade investments were not low risk, and could not fairly be described as such. The Defendants’ expert, Mr Fettroll, said in his Report at paragraph 7.89:

“If the statements referred to in paragraph 83.9 of the Particulars of Claim with regards to the investments being relatively low risk were stated, then it is my opinion that this would be misleading and would materially influence an investor into choosing the investment.”

I have already accepted that the statements were made, and I accept Mr Fettrol’s evidence that they were misleading. In my view, that was clearly so. For all the reasons given by Mr Percival (see above), it is clear that they were not low risk. They were certainly higher risk than equities. As also noted above, Mr Fettrol effectively agreed with Mr Percival’s view of the overall risks (see [435(v)]). Mr Fettrol said in his Report at paragraph 7.70: “Stating that alternative investments are low (or lower) risk could be correct for certain alternative investments, but I do not think this is the case here, for the investments promoted by Avacade.” Even Lee, when pressed in cross-examination, said he did not consider the Ethical investments to be low risk (although he did not go as far as accepting they were high risk).

I also think the statements were made at least recklessly. As to this, it is puzzling that they came to be made at all, but an explanation of sorts was given by Lee Lummis during the course of his cross-examination. Lee said, when asked about the Ethical investments:

“By definition with it not being covered by the FSCS, it would be deemed to be high risk. But from a conceptual point of view of purchasing trees that would then grow in a stable environment, given the projections, that would put forward what happened to timber prices, then it could be – it could be from a conceptual point of view. It seemed to be less risky than, you know, maybe investing in commodities that could go up or down to Bitcoin or anything like that.”

This explanation seems to reflect that in the transcript references above. The logic seems to have been that the standard designation of the investments as high risk could effectively be ignored, because it arose automatically as a result of them being unregulated and without reference to their underlying characteristics. Looking at

To my mind, however, this exhibits just the same vice already mentioned above, i.e. a focus on price volatility without reference to an appropriate overall assessment of risks to the investors. In authorising such statements by means of the Call Scripts, I think that the directors of Avacade were at least reckless. Their broad justification for the Avacade business model is that it involved them giving only information to investors, from which investors themselves could make a choice; but in describing the Avacade investments as “low risk” they were giving incomplete or partial information in the expectation that investors would act on it. In my opinion, it was reckless to allow a statement to be made in that form: the risk of it being inadequate must have been obvious, and in the circumstances I have no hesitation in saying that was an unreasonable risk to take.

S.382 FSMA provides jurisdiction to the Court to make restitution orders against a party that has acted in contravention of “relevant requirements” in FSMA and against parties “knowingly concerned” in such contraventions:

“(1)

The court may, on the application of the appropriate regulator or the Secretary of State, make an order under subsection (2) if it is satisfied that a person has contravened a relevant requirement, or been knowingly concerned in the contravention of such a requirement, and–

(a)

that profits have accrued to him as a result of the contravention; or

(b)

that one or more persons have suffered loss or been otherwise adversely affected as a result of the contravention.

(2)

The court may order the person concerned to pay to the regulator concerned such sum as appears to the court to be just having regard–

(a)

in a case within paragraph (a) of subsection (1), to the profits appearing to the court to have accrued;

(b)

in a case within paragraph (b) of that subsection, to the extent of the loss or other adverse effect;

(c)

in a case within both of those paragraphs, to the profits appearing to the court to have accrued and to the extent of the loss or other adverse effect.” “Relevant Requirements”

As to the meaning of “Relevant requirements”, these are defined by s.382(9) FSMA:

“(9)

‘Relevant requirement’–

(a)

in relation to an application by the appropriate regulator, means a requirement–

(i)

which is imposed by or under this Act…

[(iv) which is imposed by Part 7 of the Financial Services Act 2012 (offences relating to financial services) and whose contravention constitutes an offence under that Part;] ’

It follows that the meaning of “relevant requirements” is a broad one. In FCA v Capital Alternatives [2018] 3 WLUK 623, HHJ McCahill QC considered the position at [789-796]. As pointed out by the FCA, the Judge cited with apparent approval passages from the Encyclopaedia of Financial Services (loose leaf), to the effect that s. 382 is intended to apply to “any breach of the regulatory regime” including prohibitions, whether they amount to criminal offences or regulatory infractions (see paras 2A-009; 2A-976 of the Encyclopaedia).

On that basis, the following matters relied on in this case are all “relevant requirements” for the purpose of s.382: contraventions of s.19 FSMA (the general prohibition against carrying on regulated activities without being authorised or exempt); s.21 FSMA (restrictions on financial promotions); and s.397 FSMA.

Further, s.89 FSA 2012 falls within Part 7 of the FSA 2012 such that, with effect from 1 April 2014 it is a “relevant requirement”. The FCA accepts that there is a gap of a year, between 1 April 2013 and 1 April 2014 during which contraventions of s. 89 FSA 2012 were not “relevant requirements.”

I did not understand any of the propositions above to be disputed by the Defendants, or at any rate by the Represented Defendants. In any event, it seems to me that they are correct and so I will adopt them.

The more controversial question goes to the issue of “knowing concern.” Here again, however, there seemed to me to be a broad measure of agreement between the FCA and at least the Represented Parties as to the correct test to be applied.

Both the FCA and the Represented Defendants referred me again to the decision of HHJ McCahill in FCA v Capital Alternatives [2018] 3 WLUK 623, where he reviewed the relevant authorities and gave useful guidance at [797]-[810]. He said:

“797.

S.382 FSMA gives the Court jurisdiction to grant restitution orders against those ‘knowingly concerned’ in a contravention of a ‘relevant requirement’, in addition to the primary contraveners.

798.

In SIB v Pantell (No.2) [1993] Ch 256 at 264D-E, at first instance, Browne- Wilkinson VC stated of ‘knowingly concerned’:

‘The most obvious example of a person ‘knowingly concerned’ in a contravention will be a person who is the moving light behind a company which is carrying on investment business in an unlawful manner. Professor Gower in his report, which was the basis on which the Act was introduced, specifically pointed out the mischief of directors hiding behind the corporate veil of companies... If, as is often the case, the company is not worth powder and shot, it is obviously just to enable the Court, as part of the statutory remedy of quasi-rescission, to order the individual who is running that company in an unlawful manner to recoup those who have paid money to the company under an unlawful transaction.’

799.

The learned Judge there identified the most obvious example of a person who is ‘knowingly concerned’ in a contravention, namely the ‘moving light’ behind a company which has contravened a relevant requirement, but, in my judgment, the matter is not limited to those who are the moving lights behind the contravening entity. Each case must be considered on its own unique facts.

800.

In the Court of Appeal in the same case and the same report (at 283G), Steyn LJ held that proof of actual knowledge is essential but not enough. Mere passive knowledge is not sufficient and actual ‘involvement in the contravention must be established’.

801.

The concept of ‘involvement’ is a broad one, covering those who pull the strings at a directorial and/or managerial level (this would include the ‘moving lights’ in the contravening entity) and could, in an appropriate case, include those who are involved at a lower level, depending on their knowledge and participation in the contravention.

802.

In SIB v Scandex Capital Management [1998] 1 WLR 712, the Court of Appeal, at 720F-H, confirmed that the relevant knowledge is knowledge of the facts on which the contravention depends, and that it is immaterial as to whether or not the individual knows that such facts constitute a relevant contravention. This is because the individual is presumed to know what the law is, and ignorance of the law is no defence.

803.

To the same effect, in FSA v Fradley [2004] EWHC 3008 (Ch); [2005] 1 BCLC 479 at [38-40], the Deputy Judge held that:

‘it is merely necessary for the FSA to establish that [the Defendant] was concerned in the operation of the scheme and knew of the elements ... that made the scheme a collective investment scheme... .‘”

804.

None of the authorities relies on the formal position of whether an individual is a de jure director or not, or even whether the individual might be said to be a de facto or shadow director of the contravening entity …

805.

Batts Combe Quarry Limited v. Ford [1943] Ch 51 is authority … for the proposition that the word ‘concerned’ has a broad meaning …

806.

Putting it slightly differently, the word ‘concerned’ can cover a great many activities, including those that are behind the scenes. Therefore, it can capture both ‘front office’ and ‘back office’ functions performed with the necessary knowledge, because, in a sales operation, both parts of the business are required for sales to be effected.”

I will adopt that summary of the legal position, which was not in dispute between the parties before me, and which in any event strikes me as entirely correct.

The position of the FCA is simple: they say it is obvious in light of the evidence, in particular of the roles the Individual Defendants played, that they were “knowingly concerned” in contraventions of the regulatory framework by Avacade and (in the cases of Craig and Lee), AA.

All three of the Individual Defendants, Craig, Lee and Mr Fox, deny being “knowingly concerned” in contraventions by Avacade. Craig and Lee rely on the same denial in connection with the activities of AA (Mr Fox of course was not involved in AA’s business, and so no restitution order is sought against him in

Craig and Lee in their evidence adopt the same basic formulation. They each say:

“I further deny that I was knowingly concerned in any activities of the first and or second defendant which contravened any relevant regulatory provisions or requirements.”

This seems to me to chime with two particular submissions made by Mr Berkley QC at trial on Lee’s behalf, both of which were essentially to the effect that Lee did not actually realise at the time that he was doing anything wrong:

As regards Lee in particular, Mr Berkley QC drew attention to the fact that he was junior in age to either Craig or Mr Fox, who were the individuals in the Avacade business with a background in financial services. The implication was that Lee could be expected to have placed reliance on them given their seniority.

As to Mr Fox, in summary he relies on what he says was his limited role in Avacade, reflected in his limited shareholding:

“My appointment as sales director of Avacade does not make me knowingly concerned in the contraventions alleged against Avacade given the actual role and activity of the Third and Fourth Defendants, as directors and 70% shareholders, had effective control of Avacade.”

I have no real hesitation in concluding that all three Individual Defendants were “knowingly concerned” in the infringement of “relevant requirements” by Avacade, and that Craig and Lee were both “knowingly concerned” in the infringement of “relevant requirements” by AA.

As to Avacade:

Another strong indicator of persons being “knowingly concerned” is financial remuneration for their involvement in a business. Again, Mr Richards gives evidence about this. He says, and I accept, that a review of the bank account statements for Avacade and AA shows the Individual Defendants receiving the following sums:

In his Defence, Mr Fox effectively admitted the FCA’s pleaded case on remuneration. Craig and Lee neither admitted nor denied the sums they received, and said in response to a Part 18 Request for Information that they would require time themselves to search and locate some “8 years of bank records.”

In the circumstances, and while accepting there may be some debate around the precise sums received, I am prepared to accept and hold that the Individual Defendants did receive substantial sums, in the region of those identified in Mr Richards’ evidence. For present purposes, it seems to me that conclusion is again consistent with an overall finding that they were each “knowingly concerned” in the activities of Avacade which amount to the infringement of “relevant requirements.”

In my view, the same logic applies, and the same conclusions may be drawn, as regards the involvement of Craig and Lee in the business of AA:

In short, it seems to me that the evidence of knowing involvement in what Avacade and AA were doing – i.e., knowledge of the business models of the two companies, and active involvement of the relevant Defendants in the operation of those models – is overwhelmingly clear.

What of the specific points relied on by Mr Fox, and by Mr Berkley QC?

As to Mr Fox, I am unimpressed by his point that he was only a minority (30%) shareholder in Avacade and the sales director.

As to the points made by Mr Berkley QC, summarised at [459] above, and indeed the related points made by Lee and indeed Craig in their evidence, I am afraid they all seem to me to be based on the same misconception:

For the sake of completeness, I should add that in the case of Lee, the conclusions above are not in my view affected by Mr Berkley QC’s submission that he was junior in age to Craig and Mr Fox. That is true, but he was still an integral part of the structure of both Avacade and AA, and was involved not only in their operation but also in their development. He was therefore knowingly concerned in their activities.

In summary I conclude as follows:

I will need to hear from counsel in relation to the appropriate orders flowing from this judgment, and in relation to other consequential matters.