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Administrative Court finds that FOS has jurisdiction to consider a complaint relating to advice provided in connection with a tax mitigation scheme

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Hitchins Sarah
Sarah Hitchins

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London

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05 March 2015

In this case report, Sarah Hitchins, an associate in Allen & Overy LLP's Banking, Finance and Regulatory Litigation Group, considers the Administrative Court's decision to refuse a judicial review relating to the jurisdiction of the Financial Ombudsman Service (FOS) in R (Chancery (UK) LLP) v The Financial Ombudsman Service Ltd and another [2015] EWHC 407 (Admin). The Administrative Court's decision in this case turned on whether an individual was provided with investment advice in addition to tax advice, as well as the definition of a collective investment scheme (CIS).

The Scheme

The claimant, Chancery (UK) LLP (Chancery), is a firm of chartered accountants. Upon advice from Chancery, an individual (the Complainant) entered into a film investment scheme (the Scheme), the purpose of which of which was for the Complainant to take advantage of tax incentives that are allowed under such schemes.
 

In March 2011, the Complainant reached a settlement with HMRC. The terms of this settlement have not been published, but one of the results of it was that the Complainant could not take advantage of some tax incentives in relation to the funds that he had invested in the Scheme.

Through a claims management company, the Complainant submitted a complaint to Chancery in May 2012. The complaint alleged that:

• The Scheme was an unregulated CIS

• Chancery had not assessed the Complainant's suitability for the Scheme in line with the applicable regulations, which had led to the Complainant's investment in the Scheme being unsuitable due to the level of risk involved and the uncertainty that existed in relation to HMRC's attitude towards those who invested in film investment schemes in order to benefit from the associated tax benefits.

Chancery did not uphold the Complainant's complaint. Chancery argued that the Scheme was not a CIS and that the Complainant could not properly complain about a retrospective attempt by HMRC to close-off certain tax mitigation schemes.

FOS complaint

Later in 2012, the Complainant referred his complaint to the FOS (the Complaint). In response, Chancery argued that the Complaint fell outside the jurisdiction of the FOS. In support of this, Chancery argued that:

• The Scheme was not a CIS.

 

• It had provided the Complainant with tax advice which was not a regulated activity under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (RAO).

Chancery also submitted that it would be more appropriate for the Complaint to be heard by a court for several reasons, including the fact that the compensation sought by the Complainant far exceeded the statutory maximum that may be enforced by the FOS (that is, GBP 150,000), Chancery may wish to cross-examine the Complainant's evidence and Chancery may wish to adduce its own expert evidence. Chancery also noted that the Complainant had sufficient resources to fund court proceedings, as opposed to using the FOS process.

The FOS concluded that it did have jurisdiction to consider the Complaint. Chancery disagreed with this assessment and, as a result, launched judicial review proceedings in order to challenge the jurisdiction of the FOS to consider the Complaint.

Applicable legislation

Compulsory jurisdiction of the FOS

The scope of the FOS' compulsory jurisdiction is set out in section 226 of the Financial Services and Markets Act 2000 (FSMA).

Section 226 of FSMA sets out a number of conditions and restrictions relating to the types of complaints that the FOS may consider. One of these restrictions is that, in order for the FOS to consider a complaint, the complaint must relate to one or more regulated activities (sections 226(2)(c) and 226(4), FSMA). The term "regulated activities" is defined in FSMA as relating to "an investment of a specified kind" (section 22(1), FSMA). Further guidance as to what constitutes "an investment of a specified kind" is set out in article 53 of the RAO (see "Investment of a specified kind" (article 53, RAO) below) and includes advising on units in a CIS (article 81, RAO). For the definition of "collective investment scheme" set out in section 235 of FSMA, see Collective investment schemes (section 235, FSMA) below.

These proceedings turned on whether Chancery had only provided the Complainant with tax advice in relation to the Scheme and whether the Scheme constituted a CIS (thereby falling within the scope of section 226 of FSMA):

• Chancery argued that the Scheme was not a CIS and that its role in relation to the Complainant had been limited to providing him with tax advice (which is not a regulated activity for the purposes of FSMA). As a result, Chancery asserted that the FOS had no jurisdiction to consider the Complaint.

 

• The FOS argued that the Scheme did constitute a CIS and that, by providing advice in relation to the Scheme, Chancery had provided investment advice which is a regulated activity for the purposes of FSMA. As a result, the FOS asserted that it was within its jurisdiction to consider the Complaint.

"Investment of a specified kind" (article 53, RAO)

Article 53 of the RAO defines advising on investments as "advising a person is a specified kind of activity if the advice is:

• given to the person in his capacity as an investor or potential investor, or in his capacity as agent for an investor or a potential investor; and

 

• advice on the merits of his doing any of the following (whether as principal or agent)

 

• buying, selling, subscribing for or underwriting a particular investment which is a security or a relevant investment, or

 

• exercising any right conferred by such an investment to buy, sell, subscribe for or underwriter such an investment."

Collective investment schemes (section 235, FSMA)

Section 235 of FSMA defines collective investment schemes as follows:

• "In this Part "collective investment scheme" means any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income.

 

• The arrangements must be such that the persons who are to participate ("participants") do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions.

 

• The arrangements must also have either or both of the following characteristics:

 

• the contributions of the participants and the profits or income out of which payments are to be made to them are pooled;

 

• the property is managed as a whole by or on behalf of the operator of the scheme."

Decision

Who should determine the scope of the FOS' jurisdiction?

As a preliminary matter, the Administrative Court considered who should be able to determine the scope of the FOS' jurisdiction under FSMA. Chancery argued that the FOS should not be allowed to determine the limits of its own jurisdiction and that the question of whether or not a complaint fell within the FOS' compulsory jurisdiction was a matter for a court to decide.

Ouseley J emphasised that, when a complaint is received, it is for the FOS to determine in the first instance whether it has jurisdiction to consider the complaint. If a decision as to the FOS' jurisdiction is contested, the FOS should keep this under review. However, Ouseley J agreed with Chancery and accepted that, in the event of a dispute, the FOS should not be allowed to act as "the master of the limits of its [own] jurisdiction" and stated that it is a matter of statutory construction as to how the provisions in FSMA relating to the FOS' jurisdiction are construed.

Can tax advice also include investment advice?
 
The starting point for Chancery's argument that the FOS did not have the jurisdiction to consider the Complaint was the fact that the Scheme was not an investment but a tax mitigation scheme. Chancery also submitted that the FOS had erred in law in its approach to the distinction between tax advice and investment advice. As a result, Chancery argued that advice it provided to the Complainant about the Scheme was not investment advice that amounted to carrying on a regulated activity, but was advice given for the purposes of reducing the Complainant's tax exposure. Chancery also argued that where a product was recommended to a person solely for tax reasons, the advice provided was only tax advice, even if the type of investment or product was an investment specified for the purposes of article 53 of the RAO (see "Investment of a specified kind" (article 53, RAO) above).
 
The FOS rejected the distinction drawn by Chancery between tax and investment advice, highlighting that investment decisions are often made on the basis of their tax advantages. Even if the advice provided by Chancery to the Complainant was limited to the tax advantages of the Scheme, it was still advice on the merits of entering into an investment.
 

The Administrative Court agreed with the FOS and held that:

• Tax advice may or may not include investment advice. There is no "sharp distinction requiring advice to be pigeonholed as one or the other", nor could such a distinction be sensibly drawn where there are mixed reasons for advice given.

 

• Chancery had provided tax and investment advice to the Complainant in relation to the Scheme. Although the Complainant's main aim when entering the Scheme was to take advantage of certain tax benefits, the advice provided by Chancery also included advice about certain technical aspects of the Scheme which amounted to investment advice.

Was the Scheme a collective investment scheme?

Section 235(2) of FSMA states that an arrangement does not constitute a CIS if the people who participate in that arrangement have "day-to-day control over the management of the property" (see Collective investment schemes (section 235, FSMA) above). The meaning of "day-to-day control" in the context of CISs was previously considered in Russell-Cooke Trust Co v Elliott, 16 July 2001 (unreported) in which Laddie J held that:

"In colloquial terms, what [the day-to-day control] is directed towards is identifying who is or will be 'minding the shop' on a day to day basis. It may be that the person who is involved in a day to day basis is answerable to someone higher up the chain on whose behalf he is acting. But it is the former, not the latter, who has day to day control. If the investors have day to day control, then the investment is not a [collective investment scheme]".
 
Ouseley J took this to mean that the fact that one or more investor in a scheme might have a right to be consulted or give directions did not mean that they had day-to-day control over the management of the scheme. In determining what constituted "day-to-day control" in this case, Ouseley J commented that this was to be decided by reference to both the Scheme documentation and how the Scheme operated in practice.

In order to support its argument that the Scheme was not a CIS, Chancery argued that the Complainant had day-to-day control over the management of the Scheme. As evidence for this, Chancery pointed to the work that the Complainant and others undertook in relation to the Scheme, including, for example, reviewing potential film proposals, choosing films to invest in and "other types of ancillary work". Chancery therefore asserted that the Complainant's actions satisfied the concept of day-to-day control, which did not require the Complainant to control every conceivable activity that a business might have to engage in.

The FOS argued that the Complainant's involvement in the Scheme did not amount to him having day-to-day control over the management of the Scheme. In support of this argument, the FOS pointed to the overall purpose of the Scheme which was to allow wealthy investors who required no expertise or experience in the film industry to inject money into film production in order to obtain tax benefits. In reality, the FOS asserted that it was entitled to, and was right to, conclude that effective day-to-day control over the management of the Scheme rested with film industry experts who also participated in the Scheme, and not with the Complainant.

The Administrative Court agreed with the FOS' analysis on this point and held that the Scheme was a CIS. As to the level of the Complainant's activity, Ouseley J held that it was not sufficient for him to be said to have day-to-day control over the management of the Scheme in the way meant by section 235 of FSMA. Ouseley J added that "the level of activity for day to day control is not that of supervisory oversight; the power to exercise day to day control if so minded does not suffice".
 

Court or the FOS?

During these proceedings, Chancery also challenged the FOS' refusal to exercise its discretion under section 226 of FSMA not to determine a complaint falling within its jurisdiction and instead leaving the Complainant to pursue this matter in court.

Chancery argued that the Complaint was more suited to being heard by a court, as:

• The compensation sought by the Complainant far exceeded the statutory maximum that may be enforced by the FOS (GBP 150,000).

 

• Chancery indicated that it may wish to adduce its own expert evidence in these proceedings and also have the opportunity to cross-examine any witnesses produced by the Complainant.

 

• The Complainant was a wealthy individual who had the resources to fund court proceedings.
The Administrative Court was not persuaded by any of these arguments and held that Chancery had failed to establish that the FOS had acted irrationally in declining to exercise its discretion not to consider the Complaint under section 226 of FSMA.

Conclusion

Overall, the Administrative Court dismissed Chancery's judicial review on the basis that:

• Chancery had provided tax and investment advice to the Complainant (the latter of which fell within the definition of regulated activities for the purposes of section 226 of FSMA).

 

• The Scheme was a CIS.

Comment

This judgment is one of several recent cases where the FOS' compulsory jurisdiction has been examined by the Administrative Court, such as R (Bluefin Insurance Services Ltd) v Financial Ombudsman Service [2014] EWHC 3413 (Admin) (see article).

The comments made by Ouseley J in his judgment about the definition of a CIS for the purposes of section 235 of FSMA and, in particular, what "day to day control of management" may mean in practice in the context of this definition:

• What constitutes "day to day control" is to be determined by reference to both the available documentation and how the arrangement in question operated in practice.

 

• If an investor in a scheme has a right to be consulted or give directions in relation to that scheme does not necessarily mean that they have day to day control over the management of the scheme.

 

• Supervisory oversight of a scheme or an option to exercise day to day control over a scheme which is not taken up does not suffice for the purposes of establishing day to day control.

 

These comments build upon and provide a helpful overview of guidance as to what constitutes day to day control in relation to CISs which given by the courts in other recent cases, including Financial Services Authority v Fradley & Woodward [2005] EWCA Civ 1183 and Asset Land Investment plc and another v Financial Conduct Authority (FCA) [2014] EWCA Civ 435.
 
This case also emphasises the fact that that arguments about whether a complaint referred to the FOS may better be dealt with by the courts are unlikely to succeed in judicial review proceedings on the basis that they are insufficient to demonstrate that the FOS acted irrationally.

This article first appeared on Practical Law and is published with the permission of the publishers.