FSA takes two bites out of unauthorised deposit-takers

08/07/2010

The High Court has recently reinforced the FSA's right to recoup losses suffered by investors in unauthorised firms, in addition to requiring such firms to disgorge all profits.

The three businessmen Defendants in this proceeding had previously been found to have been guilty of contraventions of section 19 of the Financial Services and Markets Act 2000 (FSMA). The Court was asked to determined what steps the Defendants were to take to remedy their contraventions and what sums were justly payable by them.

The Defendants operated a scheme whereby they accepted short term deposits for the purposes of providing trade finance to distressed companies. The interest rates offered were between 4% - 20% per month, but insufficient onward loans were ever made to fund these interest payments. For a time, at least, interest payments were funded by taking new deposits. Perhaps unsurprisingly, cash flow difficulties were eventually encountered and interest payments could no longer be met.

Summary judgment was granted against each of the Defendants in an earlier hearing in relation to the carrying on of a regulated activity (deposit taking) without being an authorised or exempt person under FSMA, in breach of section 19.

The Court did not make any order in relation to steps that ought to be taken to unwind the mass of transactions, accepting that it was too complicated an exercise to attempt.

Section 382(2) provides that the Court may order a person who has contravened a relevant requirement of FMSA (including section 19) to pay to the FSA such sum as "appears just" having regard to any profits accrued by the contravener, and any losses suffered by any persons, as a result of the contravention.

In this case the Court determined that there were no circumstances justifying a departure from the principle that the sum total of profits made and losses suffered should be repaid. Across the three Defendants this amounted to more than £100 million.

Under section 383 of FSMA sums paid to the FSA are to be distributed to those who suffered losses as directed by the Court. Unfortunately for family members of the three Defendants, however, their investments did not involve the taking of deposits under FSMA, were not included the sum total of losses suffered, and were therefore not eligible for a share in any distribution.

This decision emphasises the need to tread carefully when undertaking regulated business under FSMA, as the FSA is no longer just baring its teeth, it is biting hard.

Contact: simonmunro@city-law.net

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