UK regulatory perimeter: When does a statement become advice?

Last week, in 24HR Trading Limited and anr v FCA , the High Court held that an unauthorised company, that had been providing trading signals via WhatsApp, had breached the general prohibition in s.19 of the Financial Services and Markets Act 2000 (FSMA 2000) by advising on investments within article 53 of Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO), without authorisation to do so.  

The general prohibition in s.19 FSMA 2000 prohibits persons from carrying out specified regulated activities in the UK without being an authorised or exempt person. Art 53 of the RAO describes the specified activity of "advising" as advice:

1. 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

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

   1. buying, selling, subscribing for, exchanging, redeeming, holding or underwriting a particular investment which is a security, structured deposit or a relevant investment…

The company entered into contracts with its customers for the provision of trading signals, together with other services. The other services consisted of a variety of educational materials and courses providing instruction on FX trading.

It was accepted that the company in this case was not authorised or exempt. Consequently, one of the key issues was whether the trading signals constituted “advice” for the purposes of Art 53 of the RAO.

When does a tip or a statement become advice?

Drawing on a range of authorities Justice Richards (sitting as Deputy Judge of the High Court) relied on the following propositions.

• Mere information is not advice. It must either be accompanied by a comment or value judgment on the relevance of the information to a client’s investment decision; or must itself be a product of the process of selection that will tend to influence the investment decision of the recipient.
• Objective test. Whether advice is given, is to be determined objectively.
• A recommendation as to a course of action is capable of being advice.

The court also considered the weight that should be given to the context of the communication and a variety of disclaimers / warnings.

Context is relevant

The court accepted that the signals should be understood in context. Context considered relevant in this case included:

• what the firm had said about the signals on its own website;
• ancillary documents / materials. Customers were sent educational material or required to enrol on an FX Trading course. This included the provision of a manual on how to interpret the signals and turn them into CFDs;
• communications sent to customers receiving the signals: boasted of success ratios; providing updates on the performance of the signals; and emphasising the lack of “hard work” required to use the signals to generate a profit.

Taking this context into consideration, the court held that the signals were advice. A reasonable recipient of the signals would conclude they constituted a recommendation to effect the specific transactions referred to and the educational context did not displace this “clear meaning” of the signals.

Disclaimers

Useful guidance on the effect of disclaimers relating to financial services advice in general is provided at paragraph 35 of the judgement: “…if a person making a statement says that it is not to be taken as ‘advice’, that is at least relevant to the question of whether, viewed objectively, it is advice. However, because the matter is objective, the subjective intention of the person making the statement is not determinative. A person can give something that, viewed objectively, is 'advice' without intending to do so”.

The company and its owner had issued various disclaimers and warnings. For example:

• customers were warned not to rely on the signals alone, but to deploy their own skill and judgment;
• during a particularly bad week for signal performance, a message was sent to customers warning that the signals were an 'assistance' and that customers should make efforts to learn every day via the other educational materials that were on offer;
• messages were sent claiming that information sent to customers was “general market information for education and entertainment purposes and did not constitute investment advice”; and
• customers were told to engage in “extensive independent research” before making decisions.

None of these warnings were considered to have a realistic prospect of displacing the court’s conclusion that the company was providing advice of the kind described in Art 53 of the RAO. (This judgment relates to an application for summary judgment rather than a substantive trial.)

It is important to distinguish between the effect of “disclaimers” for the purposes of determining whether or not advice is being delivered; and whether or not the communicator owes the recipient of the information a duty of care. These are entirely separate issues. In this case, the court did not consider whether or not the “disclaimers” operated to restrict or exclude the company’s liability to its customers associated with the provision of the signals. However, it did emphasise that even if they had operated to restrict or exclude liability, this would not have prevented the signals from constituting advice for the purposes of Art 53 of the RAO.

Stay on the right side of the line

Whilst this case focuses on a business model unlikely to be followed by more established financial services firms, it is always important to consider whether the provision of information and recommendations not intended to be provided as advice, could be captured by the description in Art 53 of the RAO.  If this is a possibility, consideration should be given to either: (i) applying for the appropriate permissions from the FCA; or (ii) discontinuing the service. A bare disclaimer is unlikely to displace the classification of such information as investment advice.