Court finds introducer in breach of FSMA but allows commission to stand

Kinled Investments Limited introduced an investor to Zopa Group Limited. Kinled claimed a £4.2m fee from Zopa for its intermediary work when the investor made a second investment, while Zopa counterclaimed £345,000 as the initial introduction fee which had already been paid. The case hinged on whether, in making introductions of investors to Zopa (Kinled had introduced 2 investors), Kinled was carrying on regulated activities in breach of FSMA. If it was, any engagement letter between it and Zopa was unenforceable and Zopa was entitled to reclaim the fee it had paid.

The judge concluded that Kinled was carrying out unauthorised activities in making the introduction. However, in the circumstances he considered it was just and equitable that the introduction fee should be paid. He did so on the basis of the facts. Kinled was a Hong Kong incorporated company which is part of a family office group. Essentially, Kinled was a vehicle to find investment opportunities for one family. Zopa was the holding company of two FSMA-regulated entities.

For our purposes, the investment manager at Kinled agreed that he was aware the financial services businesses required regulation, that Kinled had never taken advice on whether their activities required authorisation, and that the “principal” (family member investor) behind Kinled was happy that no regulation was required – although it was not known on what basis. He also said that this is a grey area and that no-one had ever complained that Kinled was not regulated.

The judge referred to FCA v Avacade and concluded that Kinled’s activities fell within Article 25(2) RAO, and that the engagement letter between the parties was made when it was in the course of carrying on such activities. Hence the letter was unenforceable unless it was equitable to enforce it.  The judge found that Kinled could not establish that it reasonably believed it was not acting in breach of the general prohibition – more like, it failed to consider it.  And also the principal behind Kinled is said to have believed there were no regulated activities, his investment manager could not explain why he thought that, so it cannot establish that the belief was reasonable. This would normally weigh against Kinled being able to retain the commission. Indeed, to allow them to retain it, could be potentially to open the floodgates to all introducers being reckless as to whether they needed authorisation.  However, on the facts of the case, specifically that the customer was about as sophisticated as it was possible to be, and was always going to rely on its own due diligence and, effectively, was merely paying for access to a contact list – and that is what it got.  On that basis, the judge felt it got what it wanted, and it was therefore equitable to allow the commission to stand.

Emma Radmore