The Financial Conduct Authority v Golding & Ors

When distributing money recovered under section 382(3) of the Financial Services and Markets Act 2000, the court should ordinarily respect the separate existence of separate investment schemes. Pooling is justified only where fairness requires it, including where the schemes are so hopelessly intertwined that separation is impracticable. Loss should ordinarily be calculated by reference to capital actually invested, less returns actually received, rather than promised or speculative profits. Investors who made a net profit do not qualify for compensation for that scheme. Where an investor switches schemes, losses are generally attributed to the original investment, with further sums invested after the switch attributed to the second scheme. Private arrangements between investors and aggregators fall outside the schemes.

The FCA sought directions under section 382(3) of the Financial Services and Markets Act 2000 for distributing £3,442,746.22 recovered following the settlement of claims concerning two unregulated investment schemes: the Digital Wealth Society scheme and the Outsourcing Express scheme.

The defendants had admitted that the first scheme involved accepting deposits and that the second was a collective investment scheme. The principal issue was whether the recovered money should be distributed through one pooled scheme or through two separate schemes. Further issues concerned the calculation of loss, investors who had switched schemes, aggregators, unidentified or non-responding investors, and individual claims.

1. Disposition. The court ordered two separate distributions under section 382(3) of the Financial Services and Markets Act 2000: £953,195.75 for the Digital Wealth Society scheme and £2,489,550.47 for the Outsourcing Express scheme.
2. The starting point was that the court should respect the separate existence of separate schemes. Pooling may be appropriate where fairness requires it, particularly where schemes are so hopelessly intertwined that disentanglement is impracticable. Here the schemes were sufficiently separable. The FCA could identify the scheme into which investments had been made, allocate recovered money accordingly, and distribute broadly by reference to the claims investors could have made when the FCA intervened.
3. The schemes involved materially different investment decisions and risks. The fact that investors suffered a broadly common misfortune was too general a basis for pooling. The different terms, operation and shortfall of the schemes made separate distributions fairer.
4. Qualifying persons were investors who suffered loss within section 382(8). The appropriate starting point was capital actually paid into the relevant scheme, less returns actually received. Promised or unrealistic returns were not an appropriate measure. An investor who made a net profit on a scheme had suffered no qualifying loss in relation to it.
5. Investors who switched from one scheme to the other were treated by reference to their original investment. Further sums invested as part of or after the switch were treated as investments in the second scheme. The court accepted that notional transfers did not create additional loss caused by the second scheme.
6. Arrangements between second-order investors and aggregators were private arrangements outside the schemes and were disregarded. The FCA’s proportionate efforts to identify investors were sufficient, and distribution was not delayed merely because further investors might emerge. The order allowed later applications for directions and adjustments where further evidence or recoveries justified them.

First-instance directions application. The underlying claims were settled by consent, and Chief Master Marsh made an order dated 28 June 2019. The present court then gave directions for distribution under section 382(3) of the Financial Services and Markets Act 2000.