Financial Conduct Authority v Forster

Key legal principles and grounds of decision:

• The court held that the arrangements marketed by the Qualia entities fell within the statutory definition of a collective investment scheme (CIS) under s.235 of the Financial Services and Markets Act 2000 (FSMA). The court examined both the purpose and the effect of the arrangements and concluded that promotional materials and conduct were part of the arrangements.
• The investment offers and promotions constituted unauthorised regulated activity in breach of s.19 and s.21 FSMA and were promoted using false or misleading statements and impressions in contravention of s.89 and s.90 of the Financial Services Act 2012 (FSA 2012).
• The first defendant, Mr Robin Forster, was found to be the directing mind and will of the relevant companies and was knowingly concerned in the contraventions; reliance on external legal opinions did not provide a defence where those opinions were based on factual assumptions known (or deliberately not investigated) to be incorrect.
• The court found that Mr Forster had been personally enriched as a result of the contraventions and identified sums paid to him and to related companies which he received and which he would not have received but for the sales and promotions.

Background and parties:

The claimant was the Financial Conduct Authority. The defendants were Mr Robin Scott Forster (first defendant), Fortem Global Limited (second defendant) and Richard Paul Tasker (third defendant). The second and third defendants did not participate in the trial; Fortem Global Ltd was in liquidation. The hearing took place in the Chancery Division and concerned four preliminary issues ordered for determination.

Nature of the application and relief sought:

• The FCA alleged that Mr Forster and associated Qualia entities established, operated and promoted one or more unauthorised collective investment schemes in breach of FSMA and that promotions contained false or misleading statements/impressions contrary to s.89 and s.90 FSA 2012. The FCA sought, in due course, restitution under s.382 FSMA and sought determination of four preliminary issues (CIS characterisation, misleading promotions, knowing concern and personal enrichment).

Issues before the court:

1. Whether the investments amounted to collective investment schemes within s.235 FSMA, including whether promotional statements formed part of the arrangements and whether the arrangements had the purpose/effect of enabling participants to receive profits or income from property management.
2. If CISs, whether promotions breached s.89 and s.90 FSA 2012, with specific questions about representations that certain homes were owned by the investment company and that the operations were sustainable without reliance on later investors' funds.
3. Whether Mr Forster was knowingly concerned in contraventions by the investment companies or by Fortem Global Ltd, and whether reliance on legal advice was a defence.
4. Whether Mr Forster had been personally enriched as a result of the contraventions.

Court's reasoning and concise outcome on those issues:

• The judge construed s.235 FSMA broadly, following authorities cited in the judgment, and concluded that the arrangements (including promotional material) objectively provided for participants to receive income/profits from the acquisition, holding and management of the care-home property. The court rejected the argument that fixed contractual returns necessarily excluded CIS characterisation and treated the arrangements as the ‘‘Investment Model’’ whereby investors expected returns from the portfolio as a whole.
• On misleading promotions, the court found (a) a widespread ‘‘Sustainability Impression’’ that the care-home portfolio would generate sufficient profit to meet promised returns was conveyed and was false or, at least, made recklessly, and (b) as to particular homes that were not owned by the investment company at the time of sale (the ‘‘Unowned Care Homes’’), the materials and sales process gave the clear impression that the company owned those homes and could transfer the title to investors; those impressions/statements were false and induced investors to contract.
• Turning to knowing concern, the judge found that Mr Forster was the guiding mind of the investment companies and of Fortem Global and was actively involved in strategy, marketing, brochures and sales campaigns. The court applied the two-limb approach (actual involvement and knowledge of the facts on which the contraventions depended) and held that Forster was knowingly concerned. The court also held that legal opinions relied upon by him could not provide a defence where they were based on factual assumptions he knew (or deliberately refrained from checking) to be incorrect.
• The court accepted the FCA’s calculations of payments and concluded Mr Forster had been personally enriched by sums he received which derived from the promoted sales, such that restitution would be available at a subsequent stage.

Procedural notes: the preliminary issues were ordered to trial by Deputy Master Nurse on 4 October 2021; the trial of preliminary issues was heard in May 2023 and the reserved judgment delivered on 28 July 2023.

This is a first instance judgment of the Chancery Division on preliminary issues. The court held that: (1) the arrangements sold by the Qualia entities were collective investment schemes within s.235 FSMA; (2) the investment promotions breached s.89 and s.90 FSA 2012 by conveying false or misleading statements and impressions (including that certain care homes were owned when they were not, and that the businesses were sustainable without reliance on new investors); (3) Mr Forster was the directing mind of the relevant companies and was knowingly concerned in the contraventions; (4) Mr Forster had been personally enriched by sums derived from the unlawful promotions. The judge reasoned from the documentary and management evidence, the promotional materials, expert accountancy analysis of the business model and the established legal tests for CISs, misleading promotions and knowing concern; reliance on counsel's opinions was rejected where those opinions rested upon factual assumptions inconsistent with Forster's own knowledge.

First instance determination of preliminary issues ordered by Deputy Master Nurse on 4 October 2021. Preliminary issues trial heard 2–5 and 15 May 2023 in the High Court (Chancery Division, Business List). Judgment delivered 28 July 2023. No appeal history recorded in the judgment.