The UK regulated activity of arranging deals in investments presents some difficult questions of interpretation. The courts have considered this activity on a number of occasions and generally endorse a broad approach to the types of ongoing involvement in a transaction that might amount to a regulated arrangement. This broad reading raises the question as to what activities an unregulated introducer might perform without straying into the realms of regulated activity.
In this article, we revisit the relevant case law and extrapolate common themes and learnings as to which activities may fall inside and outside the regulatory perimeter.
The Regulated Activity
By way of reminder, the regulated activity of arranging deals in investments comprises two distinct limbs, which are set out in Article 25 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the RAO):
- Article 25(1) covers “Making arrangements for another person (whether as principal or agent) to buy, sell, subscribe for or underwrite a particular investment” (including securities, rights under contracts of insurance, options, futures, contracts for difference, and structured deposits).
- Article 25(2) covers “Making arrangements with a view to a person who participates in the arrangements buying, selling, subscribing for or underwriting investments” (investments for these purposes being the same as those caught by Article 25(1)).
Article 25 features a number of exclusions, including arrangements not causing a deal, enabling parties to communicate, arranging deals with or through authorised persons, and introducing. However, all of these exclusions come with technical conditions that must be met.
Arranging (Bringing About)
It is well established that Article 25(1) arranging requires a strong link to the transaction, as it must bring about the transaction, whereas Article 25(2) does not need such a strong link. Therefore, arrangements can fall within Article 25(2) that do not fall within Article 25(1).
Upon the first judicial consideration of Article 25, the court held that “the word ‘arrangements’ is, depending on the context, capable of having an extremely wide meaning, embracing matters which do not give rise to legally enforceable rights” and “a person may make ‘arrangements’ within article 25 even if his actions do not involve or facilitate the execution of each step necessary for entering into and completing the transaction”.Re The Inertia Partnership LLP [2007] EWHC 502 (Ch), [2007] Bus LR 879.
This view was supported in a later case, in which the judgment stated that “for something to count as ‘making arrangements’, it must ‘involve or facilitate the execution’ of sufficient of the steps necessary for entering into and completing the transaction such that, as a matter of causation, those arrangements bring about the transaction”.Brown and others v. InnovatorOne plc and others [2012] EWHC 1321 (Comm).
Therefore, it is clear that there must be a substantive causative relationship between the arrangements and the transaction taking place. However, the arrangements need not involve every step necessary to ensure that the transaction takes place.
While this is a helpful explanation, it does not establish what the correct test should be. The courts have grappled with this question, indicating that, while the test of causation is higher than a “but for” test, the arranging does not need to be the direct or substantial cause of the transaction to be regulated. Consequently, “[f]or arrangements to ‘bring about’ a transaction for the purposes of article 26 [the exemption for arrangements not causing a deal], they must play a role of significance. Whether or not arrangements ‘bring about’ a transaction is not to be judged simply on a ‘but for’ basis, but neither is a ‘direct’ connection inevitably required”.Adams v. Options UK Personal Pensions LLP [2021] EWCA Civ 474.
One decision suggests that the interposition of advice by an authorised representative breaks the chain of causation.Trafalgar Multi Asset Trading Company Ltd (in liquidation) v. Hadley [2023] EWHC 1184. However, there is otherwise limited guidance as to where to draw the line. Given that the cases where activities do not amount to an arrangement under Article 25(1) often succeed on Article 25(2), there may be less need for the courts to examine the requirements for a causal link in great detail.
Making Arrangements With a View
Despite the difficulties in determining whether there is a sufficient causal link under Article 25(1), Article 25(2) is even more complex to navigate. The courts have found that a mere introduction is “too nebulous and too remote an act to fall within the concept of ‘making arrangements’ within RAO article 25”.Re The Inertia Partnership LLP [2007] EWHC 502 (Ch), [2007] Bus LR 879.
However, the FCA takes a different approach in its guidance in its Perimeter Guidance Manual (PERG). Following the judgment in Watersheds,Watersheds Ltd v. (1) David Da Costa (2) Paul Gentleman [2009] EWHC 1299 (QB). with which it disagreed, it re-wrote PERG 2.7.7B to suggest that arrangements made by introducers will typically amount to regulated arranging. Yet the case law is quite consistent that there must be something more than a mere introduction to fall within Article 25, even if that something is not particularly substantive.
The cases referred to in our endnotes generally find that a regulated arrangement has been undertaken only where activities beyond a mere introduction are involved. Still, which activities will tip the balance is not always clear. The courts seem readier to find that introductions which, on their own, would not amount to arranging will do so when coupled with additional introducing activities. For example, a courier would not need to be regulated in order to deliver documents, and a bank would not be arranging when cashing a cheque. Yet the case law has found that adding such activities on to introducing results in regulated arranging when considering the sum of the introducer’s activities.Adams v. Options UK Personal Pensions LLP [2021] EWCA Civ 474); Financial Conduct Authority v. Capital Alternatives Ltd and others [2018] 3 WLUK 623. The courts have also decided that a “receiving agent” (an entity that receives and administers investors’ money) would “almost by definition” be making arrangements within Article 25.Financial Conduct Authority v. Capital Alternatives Ltd and others [2018] 3 WLUK 623.
One area in which the FCA and courts align is that helping complete or check application forms in the context of ongoing arrangements does amount to arranging.Personal Touch Financial Services Ltd v. SimplySure Ltd [2016] EWCA Civ 461; PERG 5.6.4G. While the FCA guidance is from an insurance context, the courts have not limited its application to such circumstances.Financial Conduct Authority v. Avacade Ltd and others [2020] EWHC 1673 (Ch). In one case, completing the pre-rubric part of a questionnaire for clients was found to amount to regulated arranging. However, it seems to have been important that the questions were somewhat specialised and not simply about personal details.Personal Touch Financial Services Ltd v. SimplySure Ltd [2016] EWCA Civ 461. Another critical aspect in this case was that the introducer received commission for the policies sold and so was actively trying to sell the policies. Had the introducer been indifferent as to whether a policy would be bought, then it might have been able to argue that it was a mere introducer.
AvacadeFinancial Conduct Authority v. Avacade Ltd and others [2020] EWHC 1673 (Ch); FCA v. Avacade Ltd [2021] EWCA Civ 1206. represents the high-water mark for the expansive view as to what falls within Article 25(2) and provides detailed commentary on the scope of this regulated activity. The High Court held that Article 25(2) is broader than Article 25(1) and captures arrangements which might not bring about a deal, but which are performed with a view to encouraging or assisting the deal to happen. The Court of Appeal expanded further on this in its judgment, which includes this key passage:
An intended purpose, an end in view, must be that a relevant transaction take place, but the arrangements do not need to bring it about by way of an actual or notional test of causation. These are wide words which suggest that all that is necessary is that a relevant transaction is part of the purpose of making the arrangements. A person may have a relevant transaction as an end in view where the arrangements do no more than create or facilitate a situation which provides the opportunity for it to take place. That may be an intended result notwithstanding that the arranger is powerless to ensure that it takes place or even influence the decision which leads to it taking place. You cannot make the proverbial horse drink, but taking it to water involves making arrangements with a view to it drinking.
For more details on this case, see this Latham blog post.
Another important outcome in Avacade was that the High Court disagreed with the view put forward in Watersheds that providing assistance to one party only does not involve making arrangements under Article 25(2). The High Court instead followed the judgment in SimplySure in which helping one party fill out application forms amounted to arranging.
Avacade further clarifies that transactions and processes should not be divided up into discrete parts when analysing the application of Article 25(2) and the relevant exemptions, as it is arbitrary to take apart a person’s role in the process. Therefore, a person’s role must be viewed as an indivisible whole when deciding whether they are carrying out regulated arranging activities. In this case, Avacade tried to argue that an exemption applied to its arranging activities, on the basis that commission was only payable in respect of other steps in the process, but not the step that constituted regulated arranging.
The Introducer Exemption
Avacade is the first case to provide detailed discussion of Article 33 of the RAO, which is the exemption for introducing. This exemption only applies in respect of Article 25(2), and requires an introduction to an authorised or exempt person “with a view to the provision of independent advice or the independent exercise of discretion in relation to investments generally or in relation to any class of investments to which the arrangements relate”.
The court in Avacade took the view that independent advice for these purposes must involve advice that adequately addresses the potential risk to the consumer from the arrangements. Further, the court indicated that Article 33 is really aimed at introducers earning commission from introductions to independent financial advisers (in this case, Avacade received the bulk of its commissions from the product providers, not the advisers). The court found that the purpose of the introduction was not with a view to the provision of independent advice, but with a view to the desired investments being made so that Avacade could earn commission, and so facilitating the advice was not the end goal.
In relation to the independent exercise of discretion limb, the court held that Article 33 envisages an introduction to an independent investment manager, whose role involves exercising discretionary authority in the selection of investments. A residual discretion that merely enables the investment manager to refuse to execute the investment does not suffice.
Commentary
These cases demonstrate that typically not much more than a mere introduction will result in regulated arranging activities. When an introducer also carries out tasks such as filling out forms on behalf of investors, dealing with paperwork, or otherwise acting as an ongoing conduit between investors, advisers, or product providers, this tends to tip the balance.
Notably, many of the Article 25 cases involve difficult circumstances or substantial consumer loss. It is not clear how these circumstances or outcomes have swayed the courts in their assessments and whether the courts might give a less expansive interpretation in, for example, a purely wholesale context.
Parties should view the activities undertaken in the round and on a case-by-case basis, as every element must be considered, and specific facts may affect the analysis. What is clear is that the case law leaves little room for unregulated introducers to take any steps beyond the introduction, meaning they must tread carefully thereafter.
ENDNOTES
1Re The Inertia Partnership LLP [2007] EWHC 502 (Ch), [2007] Bus LR 879.
2Brown and others v. InnovatorOne plc and others [2012] EWHC 1321 (Comm).
3Adams v. Options UK Personal Pensions LLP [2021] EWCA Civ 474.
4Trafalgar Multi Asset Trading Company Ltd (in liquidation) v. Hadley [2023] EWHC 1184.
5Re The Inertia Partnership LLP [2007] EWHC 502 (Ch), [2007] Bus LR 879.
6Watersheds Ltd v. (1) David Da Costa (2) Paul Gentleman [2009] EWHC 1299 (QB).
7Adams v. Options UK Personal Pensions LLP [2021] EWCA Civ 474); Financial Conduct Authority v. Capital Alternatives Ltd and others [2018] 3 WLUK 623.
8Financial Conduct Authority v. Capital Alternatives Ltd and others [2018] 3 WLUK 623.
9Personal Touch Financial Services Ltd v. SimplySure Ltd [2016] EWCA Civ 461; PERG 5.6.4G.
10Financial Conduct Authority v. Avacade Ltd and others [2020] EWHC 1673 (Ch).
11Personal Touch Financial Services Ltd v. SimplySure Ltd [2016] EWCA Civ 461.
12Financial Conduct Authority v. Avacade Ltd and others [2020] EWHC 1673 (Ch); FCA v. Avacade Ltd [2021] EWCA Civ 1206.
