When is “Advice” not “Advice”? Almost never it would seem!
May 11, 2021 by Clare Curtis
The FCA perimeter guidance (“PERG”) has long been a source of revenue for lawyers and consultants alike with many hours spent on the Regulated Activities Order (“RAO”) and understanding the scope of what’s in and what’s out. Much of the focus for those who are tasked with reviewing PERG do so in order to ensure that their clients remain unregulated which ultimately can lead to some obscure structures and limitations being put in place to try and avoid the need to be regulated. This has perhaps led the regulator to start to look a little more closely to those who have categorised themselves as unregulated to see if their activities really do fall outside the perimeter guidance.
This focus can clearly be seen in two recent cases where the definition of “advice” and more specifically regulatory advice, has been reviewed and the outcomes provide for some interesting reading.
Brief details of the two cases:
24 hr Trading
24HR Trading Academy Limited (“24hr Trading”) used WhatsApp to send ‘trading signals’ to its customers relating to FX trading contracts and sold educational material on FX trading which included market commentary.
24hr Trading frequently issued ‘signals’ regarding regulated FX products/CFD’s. These communications contained all the details required to trade in these products and talked openly about its successes and the ‘pips’ (changes in the value of a currency) it could generate. This indicated to the recipients that by followed these signals they were likely to make a good level of profit.
The Court were asked by the Financial Conduct Authority ‘FCA’ to consider if the trading ‘signals’ constituted regulated ‘advice’ under the RAO.
This case is a little more complicated and was originally rejected by the Courts but later upheld in the Court of Appeal.
Mr Adams was introduced to Options UK Personal Pensions LLP (“Options”) by CLP Brokers (“CLP”), an unregulated introducer. Following this introduction Mr Adams sold out of his Friends Provident Life Policy to put money into a SIPP provided by Options through which he invested in storage pods that were intended to provide rental income and capital growth. The investment underperformed and Mr Adams filed a claim against Options, seeking damages and to unwind the contract. The ultimate decision regarding the enforceability of this contract centred around whether the introducer, CLP, should have been regulated to provide advice or to arrange the transaction.
What was the outcome from these cases?
The Court held that, interpreted objectively, the ‘signals’ sent out by 24hr Trading did indeed constitute ‘advice’. The Courts determined that a reasonable recipient of these signals would conclude that they constituted a recommendation to affect a specific transaction in the Contract For Difference ‘CFD’ referenced in the ‘signals’. It went on to find that the educational context in which the ‘signals’ were given did not displace the “clear meaning” of the ‘signals’ as ‘advice’.
The reasons given provide some interesting guidelines for firms working out where the line in the sand is drawn when it comes to providing what is classified as advice under the RAO. Firstly the Court confirmed that the provision of information alone is not sufficient to constitute ‘advice’. If however that information comes with a comment or value judgment on the relevance of that information to a client’s investment decision, then it may well be ‘advice’. They also stated that advice is something to be determined objectively no matter what disclaimers are added to the communication and is not subject to whether the recipient is free to follow or disregard the advice. The Court also held that the activity of Arranging under Article 25 of the RAO was also relevant irrespective of whether any transactions were actually concluded.
The first thing to note is that the underlying investment being recommend by CLP was ultimately in an unregulated product but through a regulated investment vehicle. Mr Adams claimed under S27 of FSMA that Options, in the course of a regulated activity, had made an agreement with him as a consequence of something said or done by an unauthorised third party, and that he had therefore been given Advice under Article 25 of RAO and the transaction had been Arranged under Article 53 of the RAO. As CLP were unregulated Mr Adams contested that the contract was unenforceable as it was entered in to through an unregulated introducer who was providing regulated activities. Options and CLP had also entered into a contractual relationship whereby CLP were paid a commission for these introductions. The contract specifically stated that no advice was to be given.
The Court of Appeal held, adopting a holistic approach to the issue, that CLP’s recommendation that Mr Adams should invest in the storage pods carried with it advice that he transfer out of his existing pension plan and into an Options SIPP, both of which were ‘securities’ and in relation to both of which it had given unauthorised ‘advice’.
The Court of Appeal concluded that the activities within the scope of each of Articles 25and 53 RAO had been carried out such that CLP (an unauthorised third party) had caused an agreement (the Options SIPP) to be made between Options and Mr Adams, with the result that section 27 FSMA applied, and the agreement was therefore unenforceable. This judgement underscored the necessity of examining each part in a proposed chain of transactions when considering perimeter issues.
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