Financial Services Authority v Fradley & Woodward

For the purposes of section 235 of the Financial Services Markets Act 2000, whether complementary services constitute one collective investment scheme depends on the full facts of the arrangements between their providers. Separate ownership and complementary marketing are not conclusive.

Participants retain day-to-day control only if their agent is independent of the scheme’s operators. A scheme may be a collective investment scheme in respect of participants who have transferred control to its operators, despite other participants retaining control. Client money may be pooled although held on trust. A business remains carried on in the United Kingdom where significant, regular and substantive scheme activities occur here, notwithstanding that an operator has moved abroad.

The FSA obtained summary judgment alleging that Mr Fradley, through Top Bet Placement Services, and Mr Woodward, through 147 Racing Ltd, operated an unauthorised collective investment scheme involving horse-race betting. The scheme provided betting tips and, for members who used the placement service, placed bets using their betting banks.

The deputy judge declared breaches of section 19 of the Financial Services Markets Act 2000 during the first two of five periods, but declined to find breaches during later periods. His judgment is reported at [2005] BCLC 479.

Mr Fradley appealed against the declarations. The FSA appealed against the refusal to find further breaches. The central issues were whether 147 and TBPS operated a single set of arrangements, whether participants had day-to-day control, and whether moving operations to Ireland removed the activity from the United Kingdom.

Disposition

The court unanimously allowed Mr Fradley’s appeal against the summary judgment and dismissed the FSA’s appeal, in each case to the extent indicated. Arden LJ gave the judgment; Ward LJ and Collins J agreed.

1. Whether 147 and TBPS jointly operated one set of arrangements was a material issue of fact. The providers could be independent entities and yet operate parts of one scheme. Conversely, the recommendation or requirement to use TBPS did not necessarily make it an operator of 147’s scheme. Mr Fradley had a real prospect of establishing at trial that there was no joint scheme. The declarations based on summary judgment could therefore not stand, and that issue was remitted for trial.

2. If a joint scheme were established, money paid to TBPS was property for section 235(1) of the Financial Services Markets Act 2000, and betting winnings were profits. The fact that betting contracts might be void did not alter that conclusion. For section 235(2), day-to-day control was assessed as against the scheme operators. Control exercised through an agent was sufficient only where the agent was not an operator. A scheme could be a CIS in respect of participants who had surrendered control, even though others retained it.

3. On that legal basis, the first and second periods would satisfy section 235(2) if the alleged joint scheme were proved. In the fourth and fifth periods, a mandate pre-populated with 147 as agent would likewise fail to preserve independent control. The client funds were pooled under section 235(3)(a), despite being held in trust and separately identifiable within one bank account.

4. Moving Mr Fradley’s office to Ireland did not prevent activity being carried on in the United Kingdom. Client communications, a United Kingdom bank account and an accommodation address formed a sufficiently regular and substantial part of the business. If the scheme was a CIS, invitations to enter agreements for TBPS to perform the controlled activity also contravened section 21(8)(a).

• Court of Appeal (Civil Division) — [2005] EWCA Civ 1183. Allowed Mr Fradley’s appeal against summary judgment and dismissed the FSA’s appeal, to the extent indicated; the issue whether there was a joint scheme was left for trial.
• High Court, Chancery Division — Mr John Martin QC, sitting as a deputy High Court judge, [2005] BCLC 479. Declared that section 19 of the Financial Services Markets Act 2000 had been contravened in the first and second periods, but declined to find breaches in the later periods.