Donegan & Ors, R (On the Application Of) v Financial Services Compensation Scheme Ltd

For regulatory purposes, a security is not a transferable security merely because it is described as a bond. The instrument must be negotiable on the capital market. An express prohibition on transfer may therefore prevent a bond from falling within that definition.

An unfair non-transfer term may be unenforceable against a consumer under the Consumer Rights Act 2015, but that does not alter the security’s inherent regulatory characteristics or create a capital-market instrument. The court cannot use the Act’s corrective provisions to convert an unregulated security into a regulated one. The same reasoning applies to an agreement to issue or subscribe for such securities.

The claimants were investors in securitised bonds issued by London Capital & Finance plc. They challenged the Financial Services Compensation Scheme Ltd’s decision that the issue of the bonds did not involve a regulated activity and that most resulting losses were outside the compensation scheme.

The claimants argued that the bonds were transferable securities under MiFID 2 and the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. Alternatively, they argued that contractual restrictions on transfer were unfair or had to be read down under the Consumer Rights Act 2015, and that LCF had at least agreed to deal in transferable securities. The central issues were whether the bonds were negotiable on the capital market and whether the statutory consumer protections altered that conclusion.

1. The claim was dismissed. The court held that the bonds were not transferable securities and that LCF’s issue of them did not fall within the relevant regulated activities.

2. The phrase “classes of securities which are negotiable on the capital market” in MiFID 2 Article 4.1(44) qualifies the securities identified in sub-paragraphs (a) to (c). Bonds are not automatically transferable securities merely because they are bonds. The express contractual restrictions stating that the bonds were not transferable meant that they were not negotiable on the capital market.

3. The absence or potential absence of a regulatory or compensation safeguard could raise a policy issue, but it could not justify interpreting the statutory definition contrary to its wording. Legal certainty also weighed against treating an instrument expressly described as non-transferable as transferable for regulatory purposes.

4. The non-transfer provisions were unfair under section 62 of the Consumer Rights Act 2015. They locked consumers into the investment, deprived them of advantages otherwise available under domestic law, and were imposed without explaining their relationship to the absence of regulatory protection. The terms were ancillary rather than part of the main subject matter, so the section 64 safe harbour did not apply.

5. That finding did not make the bonds transferable securities. Section 62 prevented enforcement of the unfair terms against the consumers, but the bonds remained securities constituted by instruments containing non-transfer characteristics. Disapplying the terms would not create a genuine capital market and would improperly change the regulatory status of the products. Section 69 did not apply because the terms did not have different possible meanings; they contradicted one another.

6. The same reasoning defeated the alternative claim based on agreements to subscribe. Those agreements remained agreements for bonds subject to non-transfer provisions and were not agreements concerning transferable securities. The court therefore dismissed all three grounds of challenge.

First-instance judicial review claim in the High Court (Administrative Court). The judgment records no prior appellate decision.