In a case now before the courts, the Financial Services Authority (FSA), which is currently responsible for regulating the financial services industry in the UK, claimed that three men had unlawfully taken deposits from acquaintances, with a view to making money, without being licensed to do so.
This was the first time the High Court had been required to consider the scope of the regulated activity of deposit taking under the Financial Services and Markets Act 2000 (FSMA). The case arose when police enquiries led to arrests, in May 2009, on suspicion of conspiracy to defraud, fraud by misrepresentation and money laundering. The criminal investigation is ongoing and the FSA is pursuing the civil aspect of the case.
The FSA brought the case after it became apparent that the three men had been providing loans to businesses which were not able to secure funding from banks. The money loaned came from investments made by a wide circle of clients.
The three men argued that the activity was not one that was regulated by the FSA as the money came from loans made to them personally and not by way of business. The judge found, however, that the circumstances in which the money was obtained satisfied all the criteria of the definition of a deposit for the purposes of the FSMA. Repeated references to the men’s ‘business’, ‘business venture’ and ‘commercial arrangements’ illustrated that the money had in fact been obtained by way of business.
The FSA has strict controls in place to ensure the regulation of financial services markets, exchanges and firms. It sets the standards that must be met and will take action against those firms that fail to meet them. The courts will take a tough line in respect of those who act without FSA authorisation when they are clearly involved in activities which should be regulated.
The case gives useful guidance on the application of the ‘business’ test under Section 22(1) of the FSMA, on the meaning of ‘deposit’ for the purposes of Regulated Activities Order 5 and on the application of the ‘by way of business’ exemption under the Business Order. A hearing will now take place to determine the sums to be repaid by the defendants.