Unlicensed Deposit-Takers Face Court Action


In a recent case The Financial Services Authority (FSA), which is responsible for regulating the financial services industry in the UK, claimed that three men had unlawfully taken deposits from acquaintances without being licensed to do so.
This was the first case in which the High Court has had to consider the scope of the regulated activity of deposit taking under the Financial Services and Markets Act 2000. The case began after police enquiries led to an arrest on suspicion of conspiracy to defraud, fraud by misrepresentation and money laundering in May 2009. The criminal investigation is ongoing. However the FSA is pursuing the civil aspect of the case in the civil courts.
The FSA brought the case after it became apparent that the three men had been providing loans to businesses which could not secure funding from banks. The money loaned had been obtained from a wide circle of clients and the men were not licensed by the FSA.
The three men argued that the activity was not one regulated by the FSA as the money was not received by way of business, but as loans made to them personally. The judge found, however, that all the requirements for the definition of a deposit were present in the case. Repeated references to their ‘business’, ‘business venture’ and ‘commercial’ arrangements illustrated that the deposits had in fact been taken by way of business.
People should be aware when borrowing and lending money the FSA has controls in place to ensure the regulation of financial services markets, exchanges and firms. They set the standards that should be met and will take action against those firms that fail to meet the requisite standards. The courts will take a tough line on those who fail to be regulated by the FSA when they are ‘clearly involved in activities which mean they should have been.’
This case provides useful guidance as to the application of the business test under the FSMA s22 (1), the meaning of ‘deposits’ for the purposes of RAO 5 and the application of the by way of business exemption under the Business Order. A hearing will take place shortly to determine the sums to be repaid by the defendants.

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