FCA v Ferreira

The Court of Appeal considered the meaning of the phrase "been knowingly concerned in the contravention" in section 382 of the Financial Services and Markets Act 2000 in the context of a breach of section 21 FSMA (restrictions on financial promotion). The judge at first instance had found that the appellant director, Ms Ferreira, was involved in the communications giving rise to the contravention but had not known, and was not wilfully blind to, the fact that the communications lacked valid approval by an authorised person. The trial judge nevertheless held that it was sufficient to prove knowledge only of the facts in section 21(1) (that a communication inviting investment was made in the course of business).

The Court of Appeal allowed the appeal. It held that to be "knowingly concerned in the contravention" the secondary party must have known the facts which made the act complained of a contravention, which includes knowledge of factual circumstances that prevent a disapplication or exemption from operating (for example lack of approval by an authorised person). The court explained that this construction accords with the statutory wording, the form of indictment and the availability of the statutory defence in section 25 FSMA, and is not displaced by the drafting differences with predecessor provisions.

This was an appeal from a High Court judgment ([2020] EWHC 1097 (Ch)) in which the Financial Conduct Authority sought a compensation (restitution) order under section 382 FSMA against directors of Our Price Records Limited.

Background and facts:

• About 3.6 million was raised from over 250 retail investors in 2014and 2015; the company did not trade and entered administration with a large deficiency.
• Approximately £650,000 went to Mr Skinner and £21,000 for Ms Ferreira's benefit.
• The company had contravened section 21 FSMA by communicating invitations or inducements to engage in investment activity in the course of business; some communications bore approval letters from a firm purporting to be an authorised approver but that firm was not authorised to approve such communications and had been deceived.

Procedural posture:

• The FCA pursued a claim seeking a restitutionary/compensation order under section 382 FSMA against the company's controllers, including Ms Ferreira.
• At trial the judge accepted Ms Ferreira's evidence that she did not know and was not wilfully blind to the absence of valid approval for the communications and concluded she lacked knowledge that the communications were unapproved. Nonetheless the judge held liability could be imposed if the defendant knew only that the communications were made in the course of business (the elements of section 21(1)).
• Ms Ferreira appealed to the Court of Appeal challenging that construction of "knowingly concerned".

Issues:

• Whether, for the purposes of section 382 FSMA, a person has to have knowledge (actual or imputed by wilful blindness) of the facts that make the act a contravention, including the absence of approval or the inapplicability of any disapplication under the Financial Promotion Order.
• How earlier authorities such as SIB v Scandex Capital Management and Burton v Bevan apply to the statutory language of section 382 and section 21.

Court's reasoning and conclusion:

• The Court of Appeal held that "knowingly" requires knowledge of the facts on which the contravention depends and that those facts include the absence of factual circumstances which disapply section 21(1) (for example, approval by an authorised person or other FPO disapplications).
• The court rejected the argument that the drafting style of section 21 (as compared with earlier provisions) produced a different result; the difference was one of form not substance. The court reinforced the point by reference to how an indictment would have to be framed and to the statutory defence in section 25 FSMA.
• The appeal was allowed because the trial judge was wrong to hold that knowledge of the mere making of a communication in the course of business was sufficient for liability under section 382.

Appeal allowed. The Court of Appeal held that, for the purposes of section 382 FSMA, a person is "knowingly concerned in the contravention" only if they knew the facts which made the act a contravention; that knowledge therefore includes the factual circumstances that prevent a disapplication or exemption from operating (for example lack of approval by an authorised person under section 21(2) or relevant disapplications in the Financial Promotion Order). The trial judge erred in treating knowledge of the matters in section 21(1) alone as sufficient.

Appeal from High Court of Justice, Business and Property Courts (Chancery Division), Kelyn Bacon QC (sitting as a Deputy High Court Judge), judgment reported at [2020] EWHC 1097 (Ch); this Court of Appeal judgment reported at [2022] EWCA Civ 397.