The Financial Services Authority v Watkins

The Financial Services Authority obtained summary judgment against the defendant for operating an unauthorised collective investment scheme contrary to the general prohibition in section 19 of the Financial Services and Markets Act 2000 (FSMA). The court held that the arrangements satisfied the statutory definition of a collective investment scheme under section 235 FSMA because investors were induced to participate in profits from acquisition, management or disposal of land, lacked day to day control and the property was managed as a whole on behalf of investors. The defendant was debarred from defending the claim for failure to provide ordered information and did not substantively answer the FSA's evidence.

As relief the court granted a declaration that the defendant purported to operate one or more collective investment schemes for the period indicated, made a final injunction in appropriate terms (with refinements to the draft sought), and ordered an interim monetary payment of £919,655 under section 382 FSMA, with directions for distribution to investors. The court relied on FSMA sections 19, 22, 235, 380 and 382 and its ancillary power under section 37 of the Senior Courts Act 1981.

Background and parties:

• The claim was brought by the Financial Services Authority (FSA) against Mr Watkins trading as Consolidated Land UK, alleging a land banking scheme in which small plots were sold to investors on the basis that the operator would apply for planning permission or arrange sales of whole sites to developers.
• The FSA sought summary judgment, declaratory and injunctive relief and a monetary remedy. The defendant had been subject to an Unless Order for failing to supply information and was debarred from defending the claim; he did not attend the hearing.

Key facts and evidence:

• The FSA relied on consumer complaints, questionnaires (43 returned, 38 of which said they had been told planning permission or sale of the whole site would be pursued) and recorded telephone calls. The FSA identified payments by investors (at least 11 investors paying a total of £919,655) and substantial sums passed through the defendant's bank account.
• The defendant admitted he was not authorised by the FSA and that he bought, divided and sold land, but his defence asserted he did not intend to seek planning permission or to arrange on-sales; he said he forbade employees from making contrary representations. The court found the investor evidence overwhelming, and, applying agency principles and having regard to the defendant's default, treated the representations as made on his behalf.

Issues framed:

• Whether the arrangements amounted to a collective investment scheme under section 235 FSMA.
• Whether the defendant thereby contravened the general prohibition in section 19 FSMA.
• Whether summary judgment was appropriate and, if so, what remedies should be granted (declaration, final injunction and monetary relief under section 382), and the proper scope of injunctive relief.

Court's reasoning and conclusions:

• The court held that the arrangements objectively had the purpose or effect directed by section 235(1): enabling participants to receive profits from acquisition, management or disposal of the land; participants lacked day to day control; contributions and management were pooled or conducted as a whole on behalf of investors. The inability in practice to obtain planning permission did not prevent there being an unlawful contravention of the general prohibition.
• On the Part 24 summary judgment test the FSA had discharged the burden of showing the defendant had no real prospect of defending the claim and there was no other compelling reason for a trial, especially given the defendant's failure to provide information and debarment from defending.
• The court accepted that declaratory relief was appropriate despite the general reluctance to grant declarations without full trial, considering the public interest, protection of consumers, the FSA's regulatory objectives (section 2 FSMA) and the absence of special reasons to refuse relief. It identified specific public purposes served by the declaration.
• The court was prepared to grant a final injunction but expressed concern at an overly wide form of order restraining all land sales as too broad; it invited the FSA to re-draft the order more narrowly in light of section 380 FSMA and the court's discretion under section 37 SCA 1981.
• On monetary relief the court was satisfied an interim payment was just under section 382 FSMA having regard to the profits appearing to have accrued and the losses suffered, and ordered payment of £919,655 as an interim payment with directions for distribution.

First instance judgment for the claimant. The court held that the defendant was operating one or more collective investment schemes within the meaning of section 235 of FSMA and therefore contravened the general prohibition in section 19. Summary judgment was entered for the FSA: a declaration was made that the defendant purported to operate a collective investment scheme for the identified period, a final injunction was ordered in appropriate terms (with refinements to the draft to avoid undue breadth), and an interim monetary payment of £919,655 was ordered under section 382 FSMA because the FSA had shown the defendant had no real prospect of defending the claim and there was no other compelling reason for a trial.