R. (ABS Financial Planning Ltd.) v. FSCS

The claimants (217 firms) sought judicial review of the Financial Services Compensation Scheme Ltd's decision to impose an interim compensation levy in respect of claims arising from Keydata Investment Services Ltd. The court considered (i) whether the costs of Keydata's claims should have been allocated to the investment intermediation sub-class (D2) or to fund management (D1) under the FEES 6 rules and the COMP rules, and (ii) whether the defendant acted unfairly by failing properly to consult affected firms.

The court held that the FSCS lawfully concluded the Keydata claims arose "in respect of" D2 activities (notably dealing as agent and safeguarding/administration activities) because the marketing brochures and the contractual terms led investors to agree that Keydata would act as agent in purchasing and holding the bonds. The judge rejected the claimants' attempt to parse marketing and subsequent agency acts as distinct, and rejected that Keydata was "managing investments" within Article 37/D1 since it exercised no relevant discretion over portfolio composition. The court also held that the consultation and representations process was adequate and that there was no substantive legal error or Wednesbury unreasonableness in the FSCS decision.

This was a first-instance judicial review brought by 217 companies and partnerships engaged in financial and investment business against the Financial Services Compensation Scheme Ltd (FSCS). The claim challenged an interim levy imposed on firms classified in the D2 investment intermediation sub-class to meet compensation costs arising from the default of Keydata Investment Services Ltd. The claimants contended that the costs should instead have fallen on the D1 fund management sub-class and that FSCS failed properly to consult before imposing the levy.

Background and parties

• Claimants: 217 authorised firms (investment intermediaries).
• Defendant: Financial Services Compensation Scheme Ltd, the scheme manager under Part XV of the Financial Services and Markets Act 2000.
• Interested party: Financial Services Authority (FSA).
• Relief sought: Judicial review of FSCS's decision of 29 March 2010 to impose an interim levy in relation to claims accepted in respect of Keydata.

Legal and regulatory framework

• Statutory and regulatory materials considered included the Financial Services and Markets Act 2000 (notably sections 19, 22, 212–214), Schedule 2 paragraph 6 (managing investments), the Financial Services and Markets Act (Regulated Activities) Order 2001 (Articles 21, 37, 40, 77), the FSA Handbook COMP rules on eligible claims and the FEES 6 chapter governing levy allocation (including FEES 6.3.1, 6.4.6 and FEES 6.5.2–6.5.6).

Issues framed

• Whether FSCS erred in law or was irrational in allocating Keydata-related compensation costs to D2 (investment intermediation) rather than D1 (fund management).
• Whether Keydata's activities giving rise to the claims amounted to "managing investments" (D1) because of alleged discretion or product design roles.
• Whether FSCS breached a procedural duty to consult affected firms adequately before imposing the levy.

Court's reasoning and conclusions

• The court applied established judicial review principles and recognised deference to a specialised regulator on complex, technical questions, citing the need not to substitute the court's view unless the decision was irrational (reference to ex parte South Yorkshire Transport).
• On classification, the judge found it artificial to separate Keydata's marketing activity from the agency and asset-holding arrangements subsequently agreed with investors. The brochures and terms and conditions expressly contemplated Keydata acting as agent in purchasing bonds and arranging for nominee holding. FEES 6 requires allocation by reference to compensation costs "in respect of" activities; thus the claims were properly characterised as arising in respect of D2 activities (dealing as agent, safeguarding/administration and arranging those services).
• On the managing-investments (D1) point, the court held that Keydata lacked the requisite discretion over portfolio composition or ongoing discretionary management; product design, timing discretions and acceptance of applications were preparatory or administrative and did not amount to managing investments under Article 37.
• On consultation, the court found that FSCS engaged in an extensive dialogue with trade bodies, published a position paper, invited representations and gave due consideration to those representations. Even if a duty to consult existed, the process satisfied the Sedley/Gunning principles (consultation at an appropriate stage, adequate reasons, time to respond and conscientious consideration of responses).

Outcome: The claim failed; the FSCS allocation to D2 and the decision to issue the interim levy were upheld.

The claim is dismissed. The court concluded that FSCS was entitled to allocate Keydata-related compensation costs to the D2 investment intermediation sub-class because the claims arose "in respect of" agency and safeguarding/administration activities evidenced by the marketing materials and contractual terms; Keydata was not "managing investments" within D1 because it exercised no relevant discretion over portfolio composition; and the consultation undertaken was adequate. The decision was not irrational or procedurally unfair.