Jersey: Misleading Investors – The Royal Court Of Jersey Delivers An Important Judgment

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"). The 150 page judgment clarifies the law concerning making misleading statements to investors and confirms that Court has very wide powers to compensate investors. The Court also made observations which raise the possibility of further regulation for financial services businesses.

The Jersey Financial Services Commission ("JFSC") brought civil proceedings under Article 26 of the 1998 Law on behalf of 28 investors against Alternate Insurance Services Limited ("Alternate") and against its sole shareholder and a director. The investors were financially unsophisticated individuals with limited means. Some were particularly vulnerable, such as a widow with three young children, or a man with a family who had become unable to work due to a degenerative spinal condition.

Alternate was regulated by the JFSC and held a Class D licence allowing it to advise on investments but not handle client assets. All the investors were advised by Alternate to buy a portfolio of traded endowment policies ("TEPs") partly funded by their own savings and partly by a bank or building society loan. The transactions were known as Traded Endowment Portfolio Policies or "TIPPs" and were arranged with third party providers. The TIPPs involved "gearing" – i.e. an increase of investment risk by borrowing money to purchase the investment. Generally, the investors did not understand the documents they were signing.

The Court considered evidence of the statements made by Alternate to each of the investors, including Confidential Client Questionnaires completed by Alternate after meetings with the investors, and "Reasons Why" letters which detailed why Alterate recommended TIPPs to the investors. The Court also considered expert evidence adduced by the JFSC concerning the TIPPs, which concluded that, whilst a TEP was a low to medium risk investment, a TIPP was a high risk investment which was wholly unsuitable for the particular investors due to the effect of gearing.

The Court decided the following legal issues:

1. As regards the meaning of "transaction" in Article 26(2) of the 1998 Law, 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. 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.
2. Under Article 30 of the 1998 Law a person makes a misleading, false or deceptive statement, promise or forecast if, inter alia, it is made recklessly, with or without dishonesty. The Court adopted the test of recklessness in the House of Lords case of R v G [2004] 1 AC 1034 and 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). The test is more subjective than objective: "A person acts ‘recklessly’… with respect to – (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." 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.
3. 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. The Court held that no restriction should be placed on the type of order that could be made under Article 26(2). It could make a restorative order even where rescission would not be available as a remedy under the common law because property had moved to other parties.

On the evidence particular to this case the Court held that misleading statements had been made by Alternate to 27 of the 28 investors and Alternate was ordered to pay a total of £1,564,128.56 to the JFSC on their behalf. It found that Alternate’s statements to investors were grossly misleading as regards risk and described the consequences of Alernate’s conduct for many of the investors as "tragic".

The Court also made the following further observations:

1. It recommended that the JFSC conduct an urgent, full review of the matter. In particular, it was most concerned that the investors might not receive payment due to Alternate’s insurers avoiding cover. It considered that persons operating in Jersey financial services must have binding insurance cover. Other options were a mutual insurance scheme or the States of Jersey establishing a Compensation Scheme under its powers in Article 27 of the 1998 Law.
2. It was critical of aspects of the drafting of the 1998 Law, including the lack of provision for cases involving negligence or failure to meet appropriate professional standards.
3. It criticised the banks which made loans to the investors apparently without adequate knowledge of their resources, but emphasised that the banks were not parties to the action and that the Court had not seen all the documents passing between them and the investors.

The Court’s decisions concerning the legal issues and its further observations are significant for the financial services industry in Jersey and, although the regulatory framework is different, the judgment is likely to be of persuasive authority in Guernsey. 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 the Collective Investments Funds (Jersey) Law 1988, and it is also relevant to the provisions concerning misleading statements in prospectuses under the Companies (Jersey) Law 1991. The judgment raises the possibility of further regulation. The vast majority of responsible financial services businesses may therefore also come to share in the consequences of Alternate’s conduct.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.