In this civil fraud case the Court of Appeal upheld the original judgment of the High Court, that the defendants had breached financial regulations and owed restitution to the consumers from whom they had profited.

Avacade Ltd, and subsequently the related company Alexandria Associates Ltd, operated a scheme which involved contacting individuals by telephone and offering a free report on the strength of their current pension arrangements. When provided, the report included advice to transfer the pension into a self-invested personal pension (‘SIPP‘), to be managed by a provider chosen by Avacade.

Once the transfer had taken place, Avacade advised the consumer on how to invest the funds from within the SIPP. Whenever a consumer invested in one of its recommended products, Avacade secretly received commission from the investment. The product which received most investment was melina trees in Costa Rica, in which £43 million of investment resulted in the defendants — these being the directors of Avacade and AA — earning £5 million in commission.

An investigation by The Financial Conduct Authority (‘FCA‘) led to the initial trial in the High Court in 2020. The defendants were ruled to have contravened multiple sections of the Financial Services and Markets Act 2000, which places prohibitions on regulated activity by unauthorised persons (s. 19), on unauthorised persons “communicating an invitation or inducement to engage in investment activity” (s. 21), and on “making a statement which is false or misleading…with the intention of inducing” someone into an agreement (s. 397). That none of the defendants possessed any relevant authorisation significantly increased their liability under the Act.

The appeal heard by the Court of Appeal in 2021 concerned the applicability of section 19 of the Act, the other charges not being disputed. Thus the hearing focused on whether any steps in the Avacade scheme constituted “regulated activity” as defined by the Regulated Activities Order 2001 and which, as unauthorised persons, the defendants were forbidden from conducting. In the initial trial the judge had identified four steps — (1) transfer out of the consumer’s existing pension; (2) transfer into the new SIPP; (3) divesting cash from within the new SIPP; (4) purchase of one or more of the recommended investment products — and ruled that (2), (3) and (4) constituted regulated activity.

A key development came when, after the Court of Appeal had heard the case but before delivering its judgment, the same Court ruled on a similar case involving investment from within SIPPs, this being Adams v Options UK Personal Pensions LLP [2021] EWCA Civ 474. The defendants raised new grounds of appeal, submitting that the judgment in Adams entailed that (3) and (4) did not constitute regulated activity, as they involved changes merely in the underlying assets of a pension scheme rather than in the actual rights of the pension holder.

The FCA conceded that this was the case, and the Court agreed. Nevertheless the Court ruled that at step (2) Avacade had conducted regulated activity by “making arrangements with a view to a person who participates in the arrangements buying, selling, subscribing for or underwriting investments” (Article 25(2)). Lord Justice Popplewell emphasised that all steps in the process formed part of an overarching whole; hence step (2) should not be viewed without regard for the ultimate aim Avacade had when arranging for the consumer to enter a new SIPP, which was to receive commission when the consumer invested in one of the recommended products. The original order of the High Court, that the defendants pay restitution equal to the total commission they received, was upheld.

The judgements at each stage indicate a tendency to prioritise the interests of consumers over financial institutions, especially where the court suspects unfair treatment. Popplewell LJ emphasised that there are extensive rules and guidelines including statute law, the PRIN duties in the FCA handbook, and the Conduct of Business Sourcebook all tailored towards protection of the consumer, and with a special degree of protection afforded towards pension savings given the vulnerability associated with this type of investment. The result of this case highlights how important it is for firms to be familiar with financial regulations, and for unauthorised entities to understand the strict constraints within which they are permitted to operate.

Link: Financial Conduct Authority (FCA) v Avacade Ltd & Ors [2020] EWHC 26 (Ch) (08 January 2020)

Link: The Financial Conduct Authority v Avacade Ltd & Ors [2020] EWHC 1673 (Ch) (30 June 2020)

Link: The Financial Conduct Authority v Avacade Ltd & Ors [2020] EWHC 2175 (Ch) (07 August 2020)

Link: The Financial Conduct Authority v Avacade Ltd & Ors [2021] EWCA Civ 1206 (04 August 2021)

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