Financial Services Authority v Martin & Anor

The Court of Appeal considered the construction and application of section 380(2) of the Financial Services and Markets Act 2000 (FSMA) and its interaction with transitional provisions treating contraventions of section 3 of the Financial Services Act 1986 as "relevant requirements". The court held that the statutory test in s.380(2) requires (i) a relevant contravention and (ii) that there are steps which could be taken for remedying the contravention; those preconditions mirror the remedial test formerly in s.61(1) of the 1986 Act. The court concluded that orders under s.380(2) may include payments to compensate or mitigate loss where such steps are directed to remedying or mitigating the contravention.

On construction of the Transitional Provisions Order (SI 2001 No.3083), the court rejected the appellants' argument that Regulation 2(4) prevented the making of an order under s.380(2) against a person "knowingly concerned" in a pre-commencement contravention unless that person himself had entered into a transaction; the phrase "the person concerned" in regulation 2(4) was read as referring to the contravener whose contravention involved entry into a transaction. Finally, the court found no error in making an order against the firm of solicitors despite the practical effect of imposing liability on a partner who was not knowingly concerned, because any such order did not vitiate the judge's discretionary exercise in making an order against the firm.

This was an appeal from an order of HH Judge Alton (Chancery Division) dated 10 January 2005. The Financial Services Authority (FSA) sought a remedial order under s.380(2) FSMA arising from conduct by a third party, Mr Wilkinson, who while carrying on investment business in 2000-01 contravened s.3 of the Financial Services Act 1986 by dealing in investments without authorisation. The FSA alleged that Mr Martin and his firm had been "knowingly concerned" in those contraventions and sought orders requiring them to pay sums for distribution to affected investors.

Nature of the application: remedial order under s.380(2) FSMA (the FSA did not rely on s.382), seeking monetary payments for distribution to investors who suffered loss or paid an excess price.

Procedural posture: proceedings commenced 10 June 2003; summary judgment application heard by HH Judge Alton who found Mr Wilkinson contravened s.3 FSA 1986 and that Mr Martin had been knowingly concerned; she made declarations and ordered payment of two sums (£101,391 final and £258,000 interim) to the FSA under s.380(2); Mr Martin and the firm appealed.

Issues framed:

• Whether s.380(2) FSMA permits the court to make restitutionary or monetary orders (as opposed to only corrective injunctions) against persons knowingly concerned in a contravention;
• Whether the payments ordered could be regarded as steps to "remedy" or "mitigate" a contravention of s.3 FSA 1986; and
• Whether Regulation 2(4) of the Transitional Provisions Order precluded making such orders against persons knowingly concerned unless they themselves had entered into a transaction.

Court's reasoning: The Chancellor (with Longmore LJ and Lloyd LJ concurring) treated the preconditions of s.380(2) as analogous to those formerly in s.61(1) FSA 1986: a contravention and steps capable of remedying it. The court rejected a rigid separation between corrective and restitutionary powers and held that monetary payments that reimburse investors or mitigate their loss fall within "steps...to remedy" or the power to "mitigate" a contravention (s.380(5)). On regulation 2(4) of the Transitional Provisions Order the court concluded the phrase "the person concerned" is best read as referring to the contravener (Mr Wilkinson) whose contravention must have involved entry into a transaction for s.380(2) to be used in relation to that contravention; that construction avoids anomalous removal of powers previously exercisable under the 1986 Act and preserves the transitional purpose. Finally, the order against the firm was not vitiated by the fact that it affected a partner who was not knowingly concerned, because the judge lawfully exercised her discretion to make an order against the firm.

Result: the appeals were dismissed and the High Court order upheld.

Appeal dismissed. The court held that s.380(2) FSMA may be used to require persons knowingly concerned in a contravention to take steps which include monetary payments that reimburse or mitigate loss where those payments properly remedy or mitigate the contravention. Regulation 2(4) of the Transitional Provisions Order does not preclude orders under s.380(2) against persons knowingly concerned in pre-commencement contraventions so long as the underlying contravention by the primary contravener involved entry into a transaction. The judge did not err in making an order against the firm despite the practical effect on a partner who was not knowingly concerned.

Appeal from the order of HH Judge Alton sitting as a High Court judge (Chancery Division), order made 10 January 2005 in HC03C02126; permission to appeal granted by Jacob LJ; heard in the Court of Appeal, judgment [2005] EWCA Civ 1422 (25 November 2005).