Facts

The Company, 24Hr Trading Academy Ltd, entered into contracts with its customers to provide, in return for payment, a “trading signals service” and third party educational material on FX trading including market commentary, news articles, and internet links to educational tutorials on You Tube.  The Company later changed its offering so that customers could only receive the trading signals service if they enrolled on either the 12-month online course or four-week face-to-face course that it provided.

Access to an FX trading platform was needed to enter into the kinds of transactions that were dealt with in the Company’s educational materials and referred to in the signals.  The Company offered inducements (free trial of the Company’s services and reduced fees thereafter) to its customers to open an account with one of two specified platforms.  Mr Maricar, sole director of the Company, personally received commission from the two platforms for the introduction of customers who opened accounts.

Issues

The case addressed a range of issues.  These included whether the inducements were financial promotions (reliance was placed on Avacade[1]), issues not suitable for determination on summary judgment (in this case causation for the purposes of arranging under the first limb of article 25 of the RAO[2] and piercing of the corporate veil in relation to Mr Maricar), and Mr Maricar being knowingly concerned in contraventions by the Company.However below we focus on two key issues: whether the signals constituted advice, and whether the inducements amounted to arranging under the second limb of article 25 of the RAO.

“Signals” – were these advice on investments?

This was the only issue in dispute relevant to the question of whether there was any breach of the general prohibition set out in section 19 of FSMA[3] as a consequence of “advice” being given by the Company, a firm not authorised by the FCA, for the purposes of article 53 of the RAO.

Signals were sent to customers over WhatsApp, and referred to “buy” transactions, “sell” transactions and different currency pairs in shorthand that would be familiar to those with some knowledge of FX transactions.Those customers also had access to a Company manual that explained how to interpret the signals and how to effect the transactions referenced in the signals on an FX trading platform.

The Company and Mr Maricar contended that:

- when determining whether, viewed objectively, the signals constituted “advice”, those signals had to be understood in context including the educational offering that the Company was giving to its clients; and

- it was relevant to consider the extent to which Mr Maricar, or the Company, made statements disavowing any intention to give “advice”.

The judge agreed with those contentions.  However, it was found that the signals, read objectively, suggested that they described transactions which, if copied, could be expected to produce a profit.  The signals therefore contained not only information on transactions, but also a comment or value judgment on the relevance of that information to a customer’s investment decision.  The fact that the signals were provided together with educational content did not alter the nature of the signals and they remained advice.  Similarly, any realisation by customers that they may need to exercise independent judgment on the advisability of a transaction also did not alter the nature of the signals.

Identifying where a particular communication sits on the spectrum ranging from pure information to outright recommendation for the purposes of assessing whether it constitutes advice is often challenging and will depend on the content of the specific communication itself and the circumstances in which it is communicated.  From this case it is clear that merely asserting a communication is an educational training material is not sufficient to put that communication at the information end of the spectrum so as not to constitute advice.  At the recommendation end of the spectrum, the case shows that a communication providing details of a specific transaction that could be expected to produce a profit would effectively be a recommendation constituting advice.  Further, the characterisation of the communication remains the same regardless of whether the recipient acts on it, applies independent judgment, or is expected to or in fact seeks further advice on the subject matter of the communication.  Unauthorised firms should carefully assess communications that refer to regulated investments to check that they do not fall on the wrong side of the line.

Inducements to customers to open accounts at specified platforms – was this arranging?

In considering the issue of arranging under article 25 of the RAO, reliance was placed on two cases: In Re The Inertia Partnership LLP[4] and Avacade. “Arrangements” was found to be “a wide term which embraces matters which do not give rise to legally enforceable rights”.  The second limb of article 25 is concerned with the making of arrangements “with a view to” a person acquiring “investments” generally and not necessarily particular investments.  It was noted in the judgment that the person who is envisaged to acquire the investments is required to be a party to the arrangements.

Was there an arrangement?

An arrangement was found to have been entered into by the Company with the Company’s customers and with the two FX trading platforms.  It involved the inducements for customers who used the Company’s sponsored links to open accounts with one of the two FX trading platforms. The tripartite relationship was “plainly … an arrangement having regard to the wide meaning of that term.”

The term “arrangement” has been interpreted widely here.  The arrangement in question involved links to open accounts, rather than links to enter into investments directly.  It would be very difficult for an unauthorised firm to argue that it was not carrying on regulated activity under article 25(2) of the RAO on the basis that the activity of the firm did not involve an arrangement, including where the purported arrangement was several steps removed from any potential investment transaction.

Were customers “party” to the arrangement?

Customers using the sponsored links to open accounts were found to be party to the arrangement since they both performed actions in accordance with the arrangement and enjoyed benefits under it.

Article 25(2) of the RAO refers to “a person who participates in the arrangements” (emphasis added).  The tripartite characterisation of the arrangement supports the conclusion that the customers were “party” to the arrangement.  Although if the arrangement had been alternatively characterised the customer might not have been considered to be “party” to it, the arguably lower threshold of “participation” would likely have been satisfied using the natural meaning of that term based on the actions taken and benefits received by the customers. 

Was the arrangement made with a view to customers acquiring investments (CFDs)?

The arrangement was found to have been made “with a view to” customers acquiring CFDs generally, since those were the kind of transactions that formed the subject matter of the signals. 

No causative relationship between the arrangement and a particular transaction was required.  It was enough that the arrangement be “with a view” to a party to that arrangement acquiring investments. In this case the arrangement was made with a view to customers acquiring CFDs or FX options and it did not matter whether the customer made any actual acquisitions.

Further, it was found that there was no realistic prospect of the Company or Mr Maricar successfully arguing that the arrangements were made only with a view to the Company’s customers opening accounts at one of the two FX trading platforms, and not with a view to those customers acquiring investments.  On the facts of the case it was not necessary to determine whether the relevant test should be objective (based on the objective characteristics of the arrangements) or subjective (based on the subjective purposes for which the Company or Mr Maricar made the arrangements) as applying either test the arrangements were found to have been made with a view to customers acquiring investments.

It having been determined above that sponsored links to open accounts was sufficient to constitute an arrangement, it is the characterisation of that account opening as having been “with a view to” customers entering into transactions in investments (even if they ultimately did not enter into such transactions) that satisfies the third element of activity under article 25(2) of the RAO.  Whilst it was not decided whether “with a view to” should be assessed on an objective or subjective basis, it is likely that this phrase will continue to be interpreted widely such that unauthorised firms should think carefully before carrying on activities that involve arrangements concerning regulated investments.

[1] FCA v Avacade Ltd (in liquidation) [2020] Bus LR 1897

[2] Financial Services and Markets Act 2000 (Regulated Activities) Order 2001

[3] Financial Services and Markets Act 2000

[4] [2007] EWHC 502 (Ch)