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Finance litigation: the latest cases and issues - June 2017

11 July 2017

This month we consider the court's view on the extent to which firms' activities in handling complaints are themselves subject to adjudication by the Financial Ombudsman Service; the exercise of the court's discretion in refusing an unopposed application to annul a bankruptcy order; and more cases and issues affecting the industry:

The High Court considers the remit of the FOS's jurisdiction

In the recent decision in Mazarona Properties Ltd v Financial Ombudsman Service, the court considered the extent to which firms' activities in handling complaints are themselves subject to adjudication by the Financial Ombudsman Service (FOS). It found that they were not within the FOS's compulsory jurisdiction.

Mazarona Properties Ltd (MPL) had brought a claim against Allied Irish Bank Great Britain (AIB) for alleged misselling of interest rate swaps. Pursuant to an agreement with the Financial Services Authority (the FSA), the statutory predecessor to the Financial Conduct Authority and Prudential Regulation Authority, AIB conducted a review and notified MPL that the swaps had been sold in a non-compliant way. It made an offer of redress to MPL. MPL rejected the offer and made a counter offer. AIB withdrew its offer.

MPL made a complaint to the FOS about AIB's withdrawal of its offer and an adjudicator concluded that it would be fair and reasonable for the withdrawn offer to be remade. AIB asked the FOS to reconsider that decision. The FOS did so and declined to uphold MPL's complaint as it considered that AIB's review process was not a regulated activity, or an ancillary activity connected with a regulatory activity, and so fell outside the scope of its compulsory jurisdiction. MPL challenged that decision.

The High Court dismissed MPL's challenge. The judge considered ss 226 and 404 of the Financial Services and Markets Act 2000 (s404), the glossary of the Financial Conduct Authority's General Provisions and the FCA's Dispute Resolution: Complaints Sourcebook (DISP). Together, these provide that the FOS can only consider a complaint as defined in the glossary which provides that a complaint has to be about the provision of, or failure to provide, a financial service or a redress determination (as defined).

The court distinguished between:

  • AIB's selling of the swaps - which was a specified regulated activity in respect of which a complaint would fall within the compulsory jurisdiction of the FOS; and
  • AIB's resolving of the subsequent dispute between it and MPL. MPL's complaint was not a complaint about the provision and/or failure to provide a financial service but about the payment of compensation for the manner in which that service was provided. Further, the offer of redress was not a redress determination (as defined) as it was not the result of a consumer redress scheme conducted under s404.

The court found that the complaint was outside the FOS's remit. It held that a financial service is commonly and rightly understood to mean the provision of a service of a financial nature to a customer in connection with his or her personal or business affairs, not the payment of compensation for the manner in which that service was provided.

Things to consider

The case provides clarification of the limits of the FOS's jurisdiction and confirms the court's view that dispute resolution - and the payment of compensation as a result - is not itself a financial service but something which may arise as a result of the provision of a financial service.

Court refuses unopposed application to annul a bankruptcy order

A creditor is under an obligation to do all that is reasonable for the purpose of bringing a statutory demand to a debtor's attention, including, if practicable, effecting personal service of it. A bankruptcy petition should be personally served on a debtor or an order obtained for substituted service to be effected if that is not possible - Insolvency Rules 1986 (IA) r6.3 and r6.14 and Practice Direction: Insolvency Proceedings [2014] B.C.C.502 apply.

In Emmanuel v Revenue & Customs Commissioners, Emmanuel failed to file tax returns for the period 2004 to 2011. HMRC raised assessments against him in November 2013 for a sum in excess of £176,000. HMRC obtained Emmanuel's address from the police and attempted to serve both a statutory demand and subsequently a bankruptcy petition against him by way of personal service at that address. No response was received so HMRC obtained permission to serve the petition by first class recorded delivery and first class post. The recorded delivery was returned but the first class post was not.

A bankruptcy order was made in December 2014. Emmanuel alleged he only found out about the bankruptcy order in April 2015 when he was arrested following his failure to attend at a public examination. In September 2015, he applied to have the bankruptcy annulled on the basis that neither the statutory demand nor the bankruptcy petition had been served on him, that HMRC had not made reasonable endeavours to obtain his correct address and that he only owed £14,750 in tax. He provided evidence that he was living at a different address at the time of the assessment and attempted services.

HMRC chose not to oppose the application on the basis the petition probably did not come to Emmanuel's attention. Despite HMRC's non-opposition, the Registrar hearing the application concluded that the demand and petition were validly served as HMRC had attempted personal service and substituted service. The Registrar determined that HMRC could not realistically have known of Emmanuel's different address and as Emmanuel was hopelessly insolvent - he owed other creditors in excess of £177,000 - it was not in the interests of HMRC or his other creditors to grant the annulment. Emmanuel appealed.

On appeal, HMRC continued to take a neutral stance but at the same time contended that the Registrar's decision could not be impugned.

The High Court held that HMRC had satisfied the high test that creditors must meet in attempting to bring a demand or petition to a debtor's attention. Service had been in accordance with the rules. HMRC had relied on information provided by the police and could not have discovered Emmanuel's different address by doing all that was reasonable. If Emmanuel had filed his tax returns, HMRC would have known of his different address. Not opposing the application for annulment was not a concession by HMRC that it had not done all that it reasonably could to serve. It was within the Registrar's discretion to decide whether to grant an annulment or not, considering not only HMRC's position but all other creditors' too. He could not be criticised for dismissing the application even though it was unopposed.

Things to consider

The Registrar's decision was discretionary under the IA s282(1)(a) and his decision that HMRC had done all it could reasonably have been expected to do was justifiable on the facts. Emmanuel would not be permitted to benefit from his own failure to provide an up to date address through failing to file his tax returns.

No real prospects of defending appointed representative's actions

Under s39(3) of the Financial Services and Markets Act 2000 (FSMA), a principal of an appointed representative is responsible, to the same extent as if he had expressly permitted it, for anything done or omitted by the representative in carrying on the business for which he has accepted responsibility.

The High Court has recently considered the provisions of s39(3) FSMA in Ovcharenko and another v Investuk Ltd and Anglo-Sino Capital Partners Ltd. Anglo-Sino Capital Partners Ltd (AS) was authorised by the Financial Conduct Authority (FCA) to carry on certain regulated activities, namely arranging and advising on investments. Investuk Ltd (IL) was its appointed representative for the purposes of s39 FSMA.

The claimants entered into client agreements (the Client Agreements) with IL which arranged investments for them (of £100,000 and £160,000 respectively) in a UK company. The claimants alleged the UK company was loss making and insolvent and IL was in breach of the Client Agreements. They alleged IL had failed to carry out adequate due diligence on the company and had given inaccurate and misleading advice which was also in breach of the Conduct of Business Sourcebook (COBS). The claimants issued proceedings against IL and AS. They claimed AS was responsible for IL's failures pursuant to s39(3) FSMA and they were entitled to claim compensation from them under s138D FSMA.

IL served an acknowledgment of service and applied for the proceedings to be stayed pending arbitration as per the Client Agreements. AS filed an acknowledgement of service but did not challenge the court's jurisdiction and then failed to file its defence on time. A judgment in default was entered against AS which applied to set it aside on the basis it had a real prospect of successfully defending the claim and that it could take advantage of the arbitration clause in the Client Agreements.

The High Court refused to set the default judgment aside. The court did not accept AS's argument that it was not liable for IL's contraventions of the COBS rules as IL had acted outside the scope of the appointed representative agreement. The court found that arranging and advising on investments was expressly included in the appointed representative agreement.

Further, the claimants could rely on s39(3) FSMA as a separate, free standing basis of liability as that is a statutory, long stop provision which made AS responsible to the same extent as if it had expressly permitted anything done or omitted by its representative in carrying on the business. Neither had IL been acting outside the terms of the Client Agreements as argued by AS. The Client Agreements provided that IL would not give investment advice. The claimants' claim was not for breach of investment advice but for failing to carry out due diligence adequately and making misleading statements in breach of the Client Agreements. AS had not produced any evidence to prove that IL was not in breach.

AS could not take advantage of the arbitration provision in the Client Agreements. There was nothing in the regulatory framework or Client Agreements to lead to a conclusion that there was an agency relationship between AS and IL, or that AS was acting as an undisclosed principal so as to enable it to take advantage of the provisions in the Client Agreements. IL was in business on its own account and received a fee from AS for providing its services. The fact that this conclusion meant that there could have been a separate arbitration claim against IL and litigation against AS was not significant.

The court held that AS had no real prospect of successfully defending the claim and there was no other good reason to set the default judgment aside.

Things to consider

An unsurprising decision given the terms of s39(3) FSMA and the protection which it is intended to and does afford those dealing with appointed representatives.

In case you missed them:

Insolvency Litigation: recent cases and issues - June 2017

The Court of Appeal has confirmed that a company must have a settled intention to appoint an administrator before it can file a notice of intention to appoint and benefit from the interim moratorium that applies as a result. We cover this, and other issues affecting the insolvency and fraud industry, in June's update.

Contra proferentem - another Latin principle bites the dust

Contra proferentem is a legal principle which, broadly speaking, means that where there is ambiguity in a contract, a clause will be construed against the party who put it forward and seeks to rely upon it.

But in a recent judgment, the Court of Appeal has suggested that the effect of the rule should now be restricted. What does this mean for parties to commercial contracts?

Court orders litigation funder to give security for costs

A series of recent decisions shows that litigation funding is here to stay, and that the court is taking pragmatic decisions on commercial funders' liability for costs.

Here, our commercial litigation experts look at when a litigation funder might be ordered to give security for costs.


NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.

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