Financial Services Authority v Fradley & Woodward

The Court of Appeal considered whether the combined tipping service run by 147 and the bet-placement service run by Top Bet Placement Services (TBPS) amounted to a "collective investment scheme" within the meaning of section 235 of the Financial Services and Markets Act 2000 (FSMA) and whether the general prohibition in section 19 (and related restriction in section 21) was contravened. The court emphasised the statutory elements: arrangements in relation to property, participants lacking day-to-day control of management (section 235(2)) and pooling or collective management (section 235(3)).

The court held that the question whether 147 and TBPS operated a single set of arrangements constituting a CIS raised disputed facts which could not be resolved on summary judgment and allowed Mr Fradley’s appeal to the extent of permitting that issue to go to trial. The court agreed with the judge that the scheme satisfied the pooling/collective-management requirement in section 235(3) for the earlier period, but found that whether participants had day-to-day control depended on the factual operation of the arrangements.

The court dismissed the Financial Services Authority’s (FSA) challenge to the judge’s refusal to find breaches in the later periods, concluded that certain documentation and client rights suggested day-to-day control in those periods, and held that post-move to Ireland activities (bank account, accommodation address and communications) could amount to carrying on business in the United Kingdom for FSMA purposes.

Background and parties

The FSA sought summary judgment and declarations that between specified dates Mr Fradley carried on investment business in the United Kingdom without authorisation contrary to section 19 FSMA and that Mr Woodward was knowingly concerned in that contravention. The FSA alleged a collective investment scheme in which members paid "betting banks", received tips from 147 and (in many cases) appointed TBPS to place bets on their behalf. The Chancery Division judge gave declarations for an earlier period but refused to find breaches in some later periods. Both sides appealed to the Court of Appeal.

Nature of the claim/application

• The FSA sought declarations of contravention of sections 19 and 21 FSMA, injunctive and ancillary orders and remitted questions of restitution and other remedies.

Issues framed by the court

1. Whether the tipping service of 147 and the placement service of TBPS together constituted a single set of "arrangements" amounting to a collective investment scheme under section 235 FSMA.
2. If so, whether participants lacked "day-to-day control" of the management of their contributions within section 235(2).
3. Whether the regime ceased to apply after Mr Fradley moved to Ireland — i.e. whether material activities were still being carried on in the United Kingdom.

Court’s reasoning and disposition

The court observed that section 235 is open textured and that many questions depend on findings of fact; on a summary judgment application a respondent need only show a real prospect of success at trial. The court concluded that the existence of a single joint scheme (147 together with TBPS) could not be determined without fuller factual investigation and therefore allowed Mr Fradley to take that issue to trial. The court accepted that money paid into TBPS could constitute "property" and that winnings were "profits" for section 235(1). It held that pooling in a single account satisfied section 235(3)(a) even where client monies were held on trust and separately identifiable for internal accounting. The court held that, if the scheme were a CIS, the evidence showed that in the later periods documentation gave participants day-to-day control and therefore there was no triable issue for those periods; it therefore dismissed the FSA’s appeal on that point. The court also held that maintaining a UK bank account, accommodation address and continuing communications with UK clients could be sufficient to constitute carrying on business in the United Kingdom under FSMA.

The court invited the parties to address costs and encouraged alternative dispute resolution.

Appeal allowed in part. The Court of Appeal allowed Mr Fradley’s appeal to the extent that the existence of a single collective investment scheme operated jointly by 147 and TBPS in the earlier period raised triable issues of fact and could not be determined on summary judgment; the court dismissed the FSA’s appeal concerning the later periods, concluding that the documentation and client rights in those periods indicated participants retained day-to-day control so the scheme did not satisfy section 235(2) for those periods. The court also held that post-move to Ireland activities (UK bank account, accommodation address and communications) could amount to carrying on business in the United Kingdom under FSMA.

Appeal from the High Court of Justice, Chancery Division (Mr John Martin QC). The judge’s first-instance judgment is reported at [2005] BCLC 479. Permission to appeal to the Court of Appeal was granted; the Court of Appeal delivered judgment at [2005] EWCA Civ 1183.