In Financial Conduct Authority v Exall [2023] EWHC 1130 (Ch), the High Court considered two unrelated applications (the “Applications”) brought by the Financial Conduct Authority (the “FCA”) for directions under s.382(3) of the Financial Services and Markets Act 2000 (“FSMA”) as to the distribution of amounts recovered by enforcement action against persons concerned in unauthorised investment activity. This briefing explores the factors considered by the Judge in deciding to approve the FCA’s proposals for distribution.

This decision is likely to be of interest to regulators and investors seeking guidance on the relevant principles the Court will consider when deciding how to exercise its discretion under s.382(3) FSMA as to the distribution of restitution orders made under s.382 FSMA.

Restitution orders under s.382 FSMA

Section 382(1) FSMA allows the court to make a restitution order requiring a person to pay a regulator if it is satisfied that the person has contravened, or been knowingly concerned in the contravention of, a relevant requirement and (a) that profits have accrued to him as a result; or (b) that one or more persons have suffered loss or been otherwise adversely affected. 

Under s.382(2) FSMA, when deciding the sum that should be paid out, the court must have regard to the profits appearing to have accrued and/or the extent of the loss or other adverse effect (as applicable). 

Under s.382(3), any amount paid to the regulator under such order must be distributed by it to such “qualifying persons” as the court may direct.

A qualifying person for the purposes of s.382(3) FSMA is a person appearing to the court to be someone (a) to whom the profits mentioned are attributable; or (b) who has suffered the loss or adverse effect.

Background to the Applications

The Applications were for directions under s.382(3) and were heard by Master McQuail. 

The first Application (the “Synergy Application”) arose out of an unauthorised “land banking” collective investment scheme (where plots of land are sold to investors on the promise of a profit when the land becomes eligible for development) run by Synergy Land Group Limited (“Synergy”). The FCA recovered monies from Synergy via sales of the underlying land. The FCA proposed to distribute the entire recovered amount among the identified investors on a per capita basis.

The second Application (the “Maricar Application”) arose out of an unauthorised business run by 24HR Trading Academy Limited which advised and made arrangements in respect of regulated “forex” investments. The FCA obtained a s.382(2) restitution order for £530,695.03 plus interest. Mr Maricar, the company’s sole director and shareholder, was declared bankrupt and was therefore unable to pay the principal sum. Instead, pursuant to the restitution order, the FCA received a dividend of £106,650.58 from the Official Receiver. The FCA proposed to distribute the amount among the 411 investors (out of 1,387 in total) who have lost more than £500 on a pro rata basis.

Jurisdiction of the court to make an order under s.382(3) FSMA

In respect of the Synergy Application, a preliminary question arose as to whether the court had jurisdiction to give directions under s.382(3) FSMA, because the sum the FCA had received had not been paid to it under a s.382(2) FSMA restitution order. The court adopted the construction of s.382(3) in an earlier case (Financial Conduct Authority v Paradigm Consultancy SA [2019] EWHC 3648 (Ch)), which found that s.382(3) was not limited to cases where the court had made an order under s.382(2) but was engaged whenever the FCA had properly received money “arising out of a claim under s.382(2)”. The court found that it had jurisdiction to give directions in this case on the basis that the parties understood that the sums paid to the FCA were being paid or arose out of a claim under s.382(1). 

Relevant principles for the approach to distributions under s.382(3) FSMA

The court accepted the parties’ agreement that the following principles were applicable to the exercise of the court’s jurisdiction under s.382(3) FSMA:

1.1.1 the court should have regard to the purpose of the order for disgorging profits (or compensating for loss), which is to compensate those affected by the contraventions consistent with the FCA’s regulatory objective to protect consumers;

1.1.2 where there is a shortfall between the losses suffered by “qualifying persons” and the FCA’s recovery, and where the underlying facts have not been fully established or agreed, the court has “to do its best” and that will generally be on a “rough-and-ready basis”;

1.1.3 any method of distribution should be as simple as possible consistent with being fair and having regard to the expense of the available options; and

1.1.4 the court should be satisfied that: (a) the FCA has taken reasonable steps to identify all qualifying persons and their losses; and (b) the proposal is reasonably fair having regard to the sum available for distribution and the FCA’s limited resources.

The FCA also submitted to the court that the distribution orders it was seeking should not contain directions requiring investors to prove their losses to the FCA (as creditors must do in an insolvency), because the FCA did not have the resources to adjudicate on individual claims and instead would prefer to proceed on the basis of information gathered in the enforcement action. The court accepted that, bearing in mind the relevant principles (summarised above), a direction for distribution might properly not contain any direction for individuals to prove losses. 

The court approved of the FCA’s approach in the Synergy Application

The court concluded that the FCA’s actions to date in attempting to identify the Synergy investors through a forensic investigation, a press release publicising the Synergy investigation, and a proposed further press release on the FCA’s website, satisfied the duty on the FCA to take reasonable steps to identify potentially qualifying persons for distribution.

The FCA argued that a per capita distribution in this case was appropriate because: (a) the recoveries represented less than 2% of the losses claimed by the 32 investors identified to date; (b) the FCA had real concerns about any distribution on a pro rata basis because it had no way of verifying the investors’ losses; (c) the FCA had no means of verifying the claims – Synergy’s records were incomplete and investors held incomplete records; and (d) it was not certain that investors realised they could address the question of quantum when responding to the FCA, rather than assume the sums identified by the FCA were determinative of their losses, which might lead to unfairness. 

The court concluded that it was also satisfied that the FCA had taken reasonable steps to identify investor losses and that, in light of the difficulties in identifying those losses and the relatively small sum available for distribution, directing a per capita distribution was appropriately and sufficiently fair on the facts in Synergy.

The court approved of the FCA’s approach in the Maricar Application

The court concluded that the FCA’s actions to date in attempting to identify the Maricar investors through forensic analysis of relevant bank statements, information from PayPal and from forex brokers satisfied the duty on the FCA to take reasonable steps to identify potentially qualifying persons for distribution.

The court concluded that it was also satisfied that the FCA had taken reasonable steps to identify investor losses and that, in light of the range of those losses and the fact that the quality of records available to the FCA meant that the FCA was confident that a pro rata distribution could be fairly implemented, it was sufficiently fair to direct a pro rata distribution with a minimum threshold of loss in excess of £500.

Prerna Handa (Legal Advisor (New Zealand Qualified)) and Rebecca Burton (Managing Associate) in London

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