Direct link Share on

Andrew George represented a former partner of Collyer Bristow in the 16-week "Innovator" trial in the Commercial Court involving allegations of conspiracy, dishonest assistance, breach of the financial services regime relating to Collective Investment Schemes ("CISs") and negligence made by 555 Claimants against a multitude of Defendants, including the law firm Collyer Bristow and two of its former partners. The claims arose out of a series of tax efficient investment schemes relating to technology products – the Innovator Schemes.  The majority of the tax relief claimed was disallowed by HMRC and extensive "class action" litigation ensued.

In a 277-page judgment handed down on 18 May 2012, Hamblen J dismissed each of the Claimants' claims against both lay and professional Defendants whilst holding that the majority of the Innovator Schemes had been unauthorised CISs. In doing so, the Judge gave detailed consideration to many of the provisions of FSMA, particularly those relating to CISs and the personal claims which can be brought under FSMA.

It was held that (1) despite extensive reference in the scheme documentation to individual investors having "day-to-day control" of the Innovator Schemes, as a matter of fact the Schemes had not been operated in this way and so constituted CISs for the purposes of FSMA s235(2); and (2) this meant that the Innovator Schemes had been unauthorised CISs from the outset. It was held that (notwithstanding the "lack of clarity as to what the "day-to-day control" requirement means") "more was required" than being "in a position to tell [the Scheme manager] what to do on a continuing day-to-day basis" to take investment schemes outside the provisions relating to CISs....."[Investors] must actually exercise that control sufficiently to be regarded as being in effective control."

However, the Claimants' allegations that Collyer Bristow and its lawyers had therefore been in breach of the general prohibition (FSMA s19) were rejected as it was held that they had not "operated" the CISs. The "operator" of a CIS, for FSMA purposes, was held to be "the person responsible for the management of the property as a whole." This was held not to be the solicitors’ firm into which subscription monies were paid and subsequently disbursed.  A "faciliatory rather than a management role in respect of the Scheme property" was insufficient.

Nonetheless, the Claimants contended that, having established that the Schemes were CISs, they were entitled to recovery of the sums they had invested from all individuals and entities, including Collyer Bristow, that had received the subscription monies. These claims failed. It was held that "even where a person is the controlling shareholder and sole director of a company" it will "absent special circumstances" be the entity, not the individual, which carries on a regulated activity "by way of business" for the purposes of the general prohibition in FSMA; and (2) the remedies under FSMA s26 and s30 for recovery of sums paid under an agreement made in breach of the general prohibition or as the result of an unlawful promotion are only available against contractual counterparties and not third party recipients of the relevant funds.  Collyer Bristow, it was held, had no contractual or trust relationship with individual subscribers.

It was also held that the Defendants would, if necessary, have been able to satisfy the "just and equitable" defence provisions in FSMA ss 28 and 30 as "it was reasonable for [the relevant Defendants] to believe they were not contravening the general prohibition" given, in particular, the general "lack of clarity as to what the "day-to-day control" requirement means."

It was also held that the provisions of FSMA give rise to no free-standing private law claim, whether for breach of statutory duty or under a duty of care analogous to the FSMA provisions in tort law. FSMA is a complete statutory scheme which contains defined remedies that leaves no room for lawyers to "read across" its provisions into general common law claims.

In summary, the judgment contains the first detailed consideration of a number of complex areas of FSMA. It provides important and useful analyses and arguments for those facing claims either under the provisions of FSMA or by reference to "analogous" causes of action in tort law.  It is more concerning, however, for those who seek to rely on the "day-to-day control" exemption to prevent investment schemes falling foul of the CIS regime.