Financial Services Law: Unenforceable Contracts under FSMA, Slides of Law

Download Financial Services Law: Unenforceable Contracts under FSMA and more Slides Law in PDF only on Docsity! KEY POINTS –– This article discusses a series of powerful statutory provisions that enable contracts to be struck down for non-compliance with FSMA and only enforced in the court’s discretion by reference to what is just and equitable. –– The arguments could deal a knock-out blow in a dispute and so are essential reading for commercial litigators. For non-contentious lawyers, the issues raised are also worth considering since they underline the importance of FSMA and the article touches on some suggested ways to pre-empt possible challenges. Author Oliver Assersohn Financial services law as a sword: cutting down contracts The article sets out how contracts can be rendered unenforceable by reason of a breach of the Financial Services and Markets Act (2000) (FSMA) and highlights an important – and perhaps underused – avenue of attack to be considered by commercial litigators dealing with cases in the financial services sector. The article also identifies possible issues for those responsible for drafting and advising on agreements potentially related to regulated activities. ACTING WITHOUT PERMISSION AND UNENFORCEABILITY OF CONTRACT nThe general prohibition S.19 FSMA states: ‘19.— The general prohibition. (1) No person may carry on a regulated activity in the United Kingdom, or purport to do so, unless he is: (a) an authorised person; or (b) an exempt person. (2) The prohibition is referred to in this Act as the general prohibition.’ There are serious consequences for a breach of the general prohibition and a person who contravenes it is guilty of a criminal offence and liable to a fine and/ or a maximum of two years in prison (s.23 FSMA). S.400 FSMA provides that company officers can also be guilty of an offence by the body corporate if the offence is committed with their consent or connivance or is attributable to any neglect on the part of the company officer. A company – and the company’s officers – are therefore likely to view extremely seriously a suggestion that there has been a breach of the general prohibition. S.23(3) of FSMA provides that in ‘… proceedings for an authorisation offence it is a defence for the accused to show that he took all reasonable precautions and exercised all due diligence to avoid committing the offence’. Whether or not a person is carrying on a “regulated activity” can be a complex issue and is a specialist area of the law. Financial services regulatory lawyers are frequently asked to advise on whether or not some form of authorisation is required (eg whether or not a particular service constitutes “advice”, whether a property investment scheme by a syndicate constitutes a collective investment scheme etc). Putting exempt persons to one side for a moment (eg appointed representatives), the central issue in determining whether or not authorisation is needed is usually whether or not the activities were regulated activities within the meaning of The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the RAO). This is because: a regulated activity is a specified kind of activity that relates to a specified investment or property of any kind and is carried on by way of business in the UK (s.22 FSMA); the RAO sets out specified kinds of activity that are regulated activities (eg accepting deposits, arranging deals in investments, advising on investments, establishing, operating or winding up a collective investment scheme). For the general commercial practitioner the fact that the issue of authorisation is a potentially difficult one is important to bear in mind because it is entirely possible for a person to have considered the issue with or without lawyers and wrongly concluded that they did not need to be authorised or exempt. Effect on agreements S.26 and s.27 FSMA provide: ‘26.– Agreements made by unauthorised persons. (1) An agreement made by a person in the course of carrying on a regulated activity in contravention of the general prohibition is unenforceable against the other party. (2) The other party is entitled to recover– (a) any money or other property paid or transferred by him under the agreement; and (b) compensation for any loss sustained by him as a result of having parted with it. (3) “Agreement” means an agreement– (a) made after this section comes into force; and (b) the making or performance of which constitutes, or is part of, the regulated activity in question. (4) This section does not apply if the regulated activity is accepting deposits. … 27.– Agreements made through unauthorised persons. (1) This section applies to an agreement that– 416 July/August 2017 Butterworths Journal of International Banking and Financial Law FI N A N CI A L SE RV IC ES L AW A S A S W O RD : C U TT IN G D O W N C O N TR A CT S Feature (a) is made by an authorised person (“the provider”) in the course of carrying on a regulated activity, (b) is not made in contravention of the general prohibition, (c) if it relates to a credit-related regulated activity, is not made in contravention of section 20, and (d) is made in consequence of something said or done by another person (“the third party”) in the course of– (i) a regulated activity carried on by the third party in contravention of the general prohibition, or (ii) a credit-related regulated activity carried on by the third party in contravention of section 20. … (1A) An agreement to which this section applies is unenforceable against the other party. (2) The other party is entitled to recover– (a) any money or other property paid or transferred by him under the agreement; and (b) compensation for any loss sustained by him as a result of having parted with it. … (4) This section does not apply if the regulated activity is accepting deposits. …’ S. 26 FSMA applies to agreements made by the unauthorised person (for example, a person enters into an agreement to provide advice in breach of the general prohibition for which they receive commission). S. 27 applies to agreements made through unauthorised persons (for example (and building on the example used in respect of s.26 FSMA) a person enters an agreement to provide advice in breach of the general prohibition as a result of which that person agrees with a properly regulated entity to buy or sell shares). S.27 FSMA might be particularly useful to a potential claimant if (say) in the example given above the person providing advice had very limited means and no insurance but their advice had caused the client to place trades with the authorised entity and suffer very significant losses on the stock market. In that scenario there might be scope to argue that the agreement with the authorised entity was unenforceable and the investor was entitled to recover money transferred under the agreement and compensation. As one would expect there is a check on the power of these provisions. The consequence of an agreement made by an unauthorised person (s.26 FSMA) or through an unauthorised person (s.27 FSMA) is set out in s.28 FSMA: ‘28.– Agreements made unenforceable by section 26 or 27 [: general cases] (1) This section applies to an agreement which is unenforceable because of section 26 or 27 [, other than an agreement entered into in the course of carrying on a credit-related regulated activity] (2) The amount of compensation recoverable as a result of that section is– (a) the amount agreed by the parties; or (b) on the application of either party, the amount determined by the court. (3) If the court is satisfied that it is just and equitable in the circumstances of the case, it may allow– (a) the agreement to be enforced; or (b) money and property paid or transferred under the agreement to be retained. (4) In considering whether to allow the agreement to be enforced or (as the case may be) the money or property paid or transferred under the agreement to be retained the court must– (a) if the case arises as a result of section 26, have regard to the issue mentioned in subsection (5); or (b) if the case arises as a result of section 27, have regard to the issue mentioned in subsection (6). (5) The issue is whether the person carrying on the regulated activity concerned reasonably believed that he was not contravening the general prohibition by making the agreement. (6) The issue is whether the provider knew that the third party was (in carrying on the regulated activity) contravening the general prohibition. (7) If the person against whom the agreement is unenforceable– (a) elects not to perform the agreement, or (b) as a result of this section, recovers money paid or other property transferred by him under the agreement, he must repay any money and return any other property received by him under the agreement. (8) If property transferred under the agreement has passed to a third party, a reference in section 26 or 27 or this section to that property is to be read as a reference to its value at the time of its transfer under the agreement. (9) The commission of an authorisation offence does not make the agreement concerned illegal or invalid to any greater extent than is provided by section 26 or 27.’ As set out in the relevant sections, the court is given discretion to uphold the agreement by reference to what is “ just and equitable”. In making that decision the court has to have regard to “the issue”, which broadly speaking relates to knowledge of the breach of the general prohibition. Even if the contract in question is unenforceable, s.28(7) provides that 417 FIN A N CIA L SERVICES LAW A S A SW O RD : CU TTIN G D O W N CO N TR A CTS Feature Butterworths Journal of International Banking and Financial Law July/August 2017