Jersey MAY NOT HAVE a compensation scheme, BUT it does have Article 26(2) of the Financial Services Law.

In light of the current, JFSC initiative about MISSELLING the following 2007 CASE is of HIGH IMPORTANCE TO ALL in the finance industry.

BACKGROUND:

1. In Jersey Financial Services Commission v Alternate Insurance Services Limited & Others [2007] JRC048 the Royal Court of Jersey (Commissioner R Southwell QC and Jurats Le Brocq and Georgelin) delivered a very significant judgment concerning certain of the provisions in the Financial Services (Jersey) Law 1998 (the “1998 Law”).
2. A 150 page judgment clarified the law concerning making misleading statements to investors and confirmed that Court has very wide powers to compensate investors.
3. The JFSC brought the proceedings against Alternate Insurance Services Limited (“Alternate”), a company formerly registered to carry on business as an investment adviser in Jersey.
4. In the proceedings, the JFSC sought orders under the Financial Services (Jersey) Law 1998 (“the Financial Services Law”) restoring the investors to the position they were in before they had entered into the purchase of certain financial products from Alternate.
5. The Royal Court found in the JFSC’s favour, and this represents the first successful action brought by the JFSC under these provisions of the Financial Services Law.

HIGH OR LOW RISK INVESTMENTS?

6. The investments which were purchased by the investors from Alternate consisted of products known as Traded Endowment Portfolio Plans or “TIPPs”.
   1. These products comprise a portfolio of traded (i.e. second-hand) endowment policies which are purchased using a combination of the investor’s resources and a loan from a financial institution. The latter may represent up to 90% of the value of the portfolio of the endowment policies purchased. The consequence is that TIPPs are often “highly geared” in that the loan element constitutes a very significant proportion of the policies purchased and may be many times the customer’s contribution.
   2. The TIPP products were sold to investors as being “low risk” investments which did not place the investors’ capital investments at risk.
   3. However, downturns in the equity markets with consequent reductions in the values of endowment policies meant that many of the plans suffered significant losses. The effect of the high level of gearing was to magnify the level of losses with the result that the investments were disastrous for many of the investors. Investors suffered serious losses, in some cases part or all of their savings or even in some cases more than their entire savings.

ARTICLE 26(2) OF THE FINANCIAL SERVICES LAW:

7. The JFSC commenced an action under Article 26(2) of the Financial Services Law seeking orders to put the investors back into the position they were in before they entered into the purchase of the TIPPs.

KEY FACTS:

8. Article 26(2), which was modelled on the old Section 6 of the English Financial Services Act 1986, provides that relief may be granted by the court where a financial services company has recklessly made false or misleading statements which caused an investor to enter into a transaction.
9. Article 26(2) was tested on 16 February 2007, where
   1. The Royal Court delivered a judgment in a ground-breaking action brought by the Jersey Financial Services Commission (“the JFSC”) on behalf of investors for the recovery of losses suffered by those investors resulting from financial products purchased from a Jersey company.
10. Under Article 26, the Court
    1. has a wide discretionary power to grant relief to put parties back into the position they were in before the relevant transaction was entered into and
    2. the Court was, therefore, able to order Alternate to pay sums to the investors as a means of undoing the relevant transactions.
11. The decision
    1. highlights the importance of financial services companies giving their customers accurate and appropriate advice about the purchase of financial services products and
    2. shows that, where such advice has not been given, the Court will be prepared to intervene to put investors back into the position they were in before the purchase of the products in question.
12. The decision is highly relevant to all involved in the financial services industry and in particular their clients and those advising them,

LEGAL ISSUES THE COURT DECIDED THE FOLLOWING LEGAL ISSUES:

13. As regards the meaning of “transaction” in Article 26(2) of the 1998 Law,
    1. Alternate argued that because there was no contract between the investors and Alternate, the Court could not intervene under Article 26(2). This argument was rejected.
    2. The Court held that there was an agency agreement between the investors and Alternate and that the reference to “transaction” in Article 26(2) is sufficiently wide to include agency agreements.
14. Under Article 30 of the 1998 Law a person makes a misleading, false or deceptive statement, promise or forecast if, among other things, it is made recklessly, with or without dishonesty.
    1. The Court
       1. adopted the test of recklessness in the House of Lords case of R v G [2004] 1 AC 1034 and
       2. held that it should apply to both criminal and civil proceedings under Article 30 (Article 30 also creates a criminal offence for misleading statements, punishable by an unlimited fine and/or imprisonment for up to 10 years).
    2. The test is more subjective than objective:
       1. “A person acts ‘recklessly’… On – (i) a circumstance when he is aware of a risk that it exists or will exist; (ii) a result when he is aware of a risk that it will occur; and it is, in the circumstances known to him, unreasonable to take the risk.” 
    3. However, the Court expressly stated that it can infer recklessness from all the circumstances and that it will not accept a defendant’s assertion that he never thought of a risk when all the circumstances show that he must have done.
15. Article 26(2) of the 1998 Law provides that the Court can order that a person who makes a misleading statement take such steps as the Court directs to restore the parties to the position they were in before the transaction was entered into.
    1. The Court held that no restriction should be placed on the type of order that could be made under Article 26(2).
    2. It could make a restorative order even where rescission would not be available as a remedy under the common law because the property had moved to other parties.

THE ROYAL COURT

16. The Royal Court found that Alternate had made false and misleading statements about the TIPP products which caused investors to purchase those products.
    1. The Court had no hesitation in finding that, due to the levels of gearing involved, TIPPs were in fact high risk investments and had been unsuitable for virtually all of the investors.
    2. Statements made by Alternate to the effect that the investments were a low risk were therefore found to have been false and misleading.
17. The Royal Court further held that Alternate had acted recklessly in making these statements.
18. The Royal Court found that it was appropriate to order Alternate to pay sums to the investors to put them back into the position they were in before they had entered into the purchases of the TIPPs.
19. In coming to these conclusions, the Royal Court made the following important findings of the scope of Article 26:
    1. the test for “recklessness” in Article 26 is subjective rather than objective, but even the subjective test was satisfied on the facts of this case since Alternate was aware of the risks on which it misled the investors;
    2. The relationship between Alternate and the investors was sufficient to trigger the operation of Article 26.
    3. Although the TIPP products were purchased from a third party and not from Alternate itself, the dealings between the investors and Alternate were sufficient to represent a “transaction” for Article 26.
20. The Royal Court commented on
    1. The difficulties posed by the opaque drafting of Article 26 of the Financial Services Law and suggested that this, and other provisions of the Law, might be revisited by the States of Jersey.
    2. Of general importance for the financial services industry about the desirability of the States of Jersey establishing a compensation scheme and
    3. The importance of financial services companies carrying on business in Jersey being properly insured so that any claims made against those companies can, if necessary, be recovered from insurers.

CONCLUSIONS

The 16 February 2007 decision highlights

1. the importance of financial services companies giving their customers accurate and appropriate advice about the purchase of financial services products and
2. shows that, where such advice has not been given, the Court will be prepared to intervene to put investors back into the position they were in before the purchase of the products in question.

Also, the decision concerning the test of recklessness in Article 26(2) of the 1998 Law is particularly important, not least because there are similar provisions concerning misleading statements in

1. the Collective Investments Funds (Jersey) Law 1988, and
2. it is also relevant to the provisions concerning misleading statements in prospectuses under the Companies (Jersey) Law 1991