Jersey Law | Jersey F.S.C. v Alternate Ins. | 16 Feb 2007

[2007 JLR 95]

JERSEY FINANCIAL SERVICES COMMISSION v. ALTERNATE INSURANCE SERVICES LIMITED, CLARK and LE FUSTEC

ROYAL COURT (Southwell, Commr. and Jurats Le Brocq and Georgelin): February 16th, 2007

Financial Services—investment consultant—misleading statements and practices—court has wide power to grant relief under Financial Services (Jersey) Law 1998, art. 26(2) to restore investor to position before transaction induced by misleading statement contravening art. 30(1)(b)—not limited to strict rescission and relief possible against agent even if property passed to third parties—account to be taken of any benefit obtained by investor

The Commission brought proceedings against the defendants on behalf of numerous investors, seeking relief under art. 26 of the Financial Services (Jersey) Law 1998.

The first defendant was a company registered to carry on business as an investment adviser in Jersey. Through inter alios the second and third defendants, it advised 28 investors (either individuals or married couples) with limited assets to make wholly unsuitable investments. As a result, they lost considerable sums, in some cases more than their entire savings.

The defendants advised the investors to purchase traded endowment investment portfolio plans (“TIPPs”). The purchase, with savings, of one or more carefully selected traded endowment policies (“TEPs”) would have been a relatively low-risk investment. The investments in TIPPs (i.e. portfolios of TEPs), however, were funded partly by the investors’ savings and as to the rest by substantial loans secured on the underlying TEPs. As the investments were therefore geared, there was a high risk of the investors making substantial losses. Any competent investment adviser would have recognized that the investments involved not only the risk that the bonuses on maturity of the underlying TEPs might be less than anticipated, but also the risk that the loans might increase (e.g. through interest rate rises) and might exceed the amount available on maturity of the TEPs. TIPP investments were suitable only for sophisticated investors.

The investors in the present case had little or no financial understanding and had emphasized to the defendants that they wanted low-risk investments. Most had been personal friends of the second or third defendants and had relied completely on their advice, in some cases

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signing financial documents without even reading them. The investors had agreed with the first defendant that it would arrange on their behalf the purchases of the TIPPs from third parties and also the loans from overseas lenders. The lenders (two banks and a building society), who were not parties to the present proceedings and were not the investors’ usual banks, appeared to have agreed to the loans without obtaining sufficient information as to the investors’ financial circumstances.

Although the second and third defendants appreciated the high risks involved in investing in TIPPs, they had advised the investors that the risks were low or very low. The Commission claimed that in so doing they contravened art. 30(1)(b) of the Financial Services (Jersey) Law 1998, by making recklessly (but not dishonestly) a statement, promise or forecast which was misleading, false or deceptive, for the purpose of inducing, or reckless as to whether it might induce, the investors to enter into an agreement or arrangement which constituted financial service business. Such an offence was punishable by up to 10 years’ imprisonment and a fine.

The Commission brought the present proceedings under art. 26 of the Law, seeking inter alia an order under para. (2), which provided that if “a person . . . entered into any transaction as a result of the person’s contravening Article 30, the Court may order that person and any other person who appears to the Court to have been knowingly concerned in the contravention to take such steps as the Court may direct for restoring the parties to the position in which they were before the transaction was entered into.” Two of the investors had paid off their loans but retained the TEPs; five investors’ TIPPs had matured or they had surrendered the TEPs; and the remaining investors’ TIPPs were still active because not all the TEPs had matured or been surrendered.

The parties reached a settlement under which the second and third defendants were released from the proceedings. The action continued against the first defendant but it was virtually without funds and its insurers had apparently treated the insurance policy as void on the ground of late notification. Although the States had power under art. 27 of the Law to establish schemes for compensation in cases in which registered persons were unable to meet civil claims against them, no such schemes had been established.

The Commission submitted that (a) the first defendant should be ordered to restore the investors to their previous financial positions, as it had contravened art. 30 by inducing them to purchase the TIPPs; (b) although the TIPPs had not been purchased from the first defendant, the investors had entered into agency agreements with it for the purpose of purchasing TIPPs, which constituted “transactions” under art. 26(2); (c) the correct test as to whether the first defendant had been “reckless” under art. 30 was objective, i.e. that there had been an obvious risk that the total maturity values of the TEPs would be less than the amount borrowed, and the first defendant either did not give any thought to the risk or recognized it but nonetheless advised the investments; and (d) the court

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had a wide discretionary power under art. 26(2) to direct the taking of such steps as were necessary to restore the parties to their financial positions before entering the agency agreements with the first defendant for the purchase of TIPPs and it was not limited to strict rescission.

The first defendant submitted in reply that (a) the alleged agency agreements between it and the investors with regard to the purchase of TIPPs were not relevant “transactions” for the purposes of art. 26(2); (b) the correct test for recklessness under art. 30 was subjective, i.e. that it had been aware of the risk of loss to the investors and it had been unreasonable for it to have taken the risk in the circumstances known to it; and (c) as the court could not order rescission of the TEP sales and the loan agreements, which involved third parties, no relief was available under art. 26(2).

Before the settlement agreement was reached, the second and third defendants had claimed that they had not been reckless in advising the purchase of TIPPs, as they had studied marketing information from TEP providers.

Held, ruling as follows:

(1) The first defendant would be ordered, under art. 26(2) of the Financial Services (Jersey) Law 1998, to take steps to restore all but one of the investors to the financial positions in which they had been before they invested in the TIPPs, as they had been induced to enter into the transactions by its contravening art. 30(1)(b). The Commission had proved on the balance of probabilities that (a) the investors had entered into transactions with the first defendant for the purpose of purchasing TIPPs, the making or performing of which transactions constituted financial service business; (b) the investors were induced to enter into such transactions as a result of statements made by the first defendant (through the second and third defendants, and others) that TIPPs were low-risk investments, although any competent investment adviser would have advised that the risks were high; (c) such statements were misleading or false; (d) the misleading or false statements were made by the first defendant recklessly (though not dishonestly); and (e) such statements were made by the first defendant for the purpose of inducing the investors, or in making the statements it was reckless as to whether they might induce the investors, to enter into the transactions (paras. 78–80).

(2) Agency agreements had been made between each of the investors and the first defendant, under which the first defendant had agreed to take the necessary steps to enable the investors to purchase TIPPs. Those agreements constituted relevant “transactions” under art. 26(2), in respect of which relief could be ordered because the investors had been induced to enter them as a result of the first defendant’s contravening art. 30. “Transaction” was not restricted to agreements of purchase, loan or other investment, and was sufficiently wide to include the great majority of purchases of investments by Jersey investors which were made by agency

2007 JLR 98

agreements between investors and financial advisers operating within the Island for the purchase of investments from overseas (para. 37; para. 41).

(3) The first defendant had acted “recklessly” under art. 30(1)(b) when it made the misleading statements because it had been aware of the high risk that as the TIPP investments were geared the investors might suffer substantial losses, and it had been unreasonable, in the circumstances known to it, for it to have seriously misled them by representing that risk to be low. Since both civil and criminal proceedings could be brought under art. 30, the subjective test of recklessness was appropriate because it took into account directly the mens rea of the defendant (paras. 48–49).

(4) The court had wide powers under art. 26(2) to order the first defendant, and any other person who appeared to have been knowingly concerned in the contravention of art. 30, to take such steps as were necessary to restore the investors to the financial positions in which they had been before entering the relevant transactions, i.e. the agency agreements under which the first defendant facilitated the purchase of TIPPs and arranged the loans from the lenders. Article 26(2) was not limited to a strict rescission of the transactions; even if the property had moved on to other parties, the court could order restoration by the payment of an equivalent sum. Account had to be taken, however, of any residual benefit to the investors from the TEPs, which would be set off against the amount to be paid by the first defendant to restore them to their previous positions. The TEPs which had not matured or been surrendered would be valued at their current surrender value, rather than their market value which, while usually greater than the surrender value, did not represent additional value to the investors. The first defendant would therefore be ordered to pay approximately £1.5m., being the sum required to restore all but one of the investors to their previous financial positions, reduced by the value (if any) that they had obtained from the TEPs (paras. 54–56; para. 81; para. 84; para. 91).

(5) The first defendant was, however, unable to pay the sum ordered and its insurers had apparently treated the insurance policy as void for late notification. If that were the case, it was inconceivable that the investors should not be compensated for their serious losses and a fund should therefore be established to make good the losses, to which all involved (the States, the Commission and the lenders) should contribute. It was unacceptable that persons operating in Jersey financial services were not sufficiently insured, under terms which were firmly binding on the insurers and could not be treated as void for late notification or any other ground. The Commission should consider what steps could be taken to ensure that all those whom it regulates were fully insured. In addition, it should undertake a full review because it was not acceptable that unsophisticated, small investors in Jersey could be so badly advised regarding their limited resources and then find, as might be true in the present case, that they had no redress. Consideration should also be given to whether a suitable compensation scheme(s) should be established under art. 27 of the Law (paras. 99–103; para. 109).

2007 JLR 99

(6) The Commission was empowered under art. 26(2) to bring proceedings on behalf of investors only if a registered person were reckless (dishonestly or otherwise) under art. 30. It might, however, be desirable for the Commission to have similar powers in cases involving negligence or failure to meet appropriate professional standards, as such cases might also result in losses to investors who, if they were unsophisticated investors with limited assets, would probably be unable to bring legal proceedings themselves (para. 104).

(7) Although the banks and building society which loaned money to the investors to purchase the TIPPs were not parties to this action, and it was probable that the court had not seen all the documents that had passed between them and the investors, it seemed that, contrary to good banking practice, the lenders had agreed to the loans with little or no knowledge of the investors’ circumstances. Indeed, if they had obtained sufficient information, the court could not see how the loans could have been made. It was a fundamental element of good practice for banks and building societies to “know your customer,” particularly if they were asked by an intermediary to lend a large sum (or a sum which was large for the customer) to a customer of whom they had no previous knowledge. The court has not seen any evidence to suggest that the lenders asked the appropriate questions before agreeing to these substantial loans. As they were financial service providers trading into Jersey from overseas, the lenders’ activity should have been regulated, either by the Commission or by regulators in the jurisdictions in which they were based, but there was no evidence of any activity by a regulator in respect of these loans (paras. 105–108).

(8) Finally, while it was unnecessary to decide the matter in light of the settlement, the second and third defendants could not have successfully pleaded in their defence that they had not been reckless under art. 30 because they had studied promotional material supplied by the TEP providers and had had detailed discussions with their representatives. Marketing statements, whether written or oral, were no substitute for seeking out and studying an independent and expert assessment of the realities of the market in TIPPs, which the defendants had failed to do (para. 80).

Cases cited:

(1) Metropolitan Police Commr. v. Caldwell, [1982] A.C. 341; sub nom. R. v. Caldwell, [1981] 1 All E.R. 961; [1981] Crim. L.R. 392; (1981), 73 Cr. App. R. 13; 125 Sol. Jo. 239, not followed.

(2) R. v. G, [2004] 1 A.C. 1034; [2003] 4 All E.R. 765, followed.

(3) R. v. Lawrence, [1982] A.C. 510; [1981] 1 All E.R. 974; [1981] RTR 217, distinguished.

(4) R. v. Reid, [1992] 1 W.L.R. 793; [1992] 3 All E.R. 673; [1992] RTR 341, considered.

(5) R. v. S (1983), 78 Cr. App. R. 149, referred to.

2007 JLR 100

(6) R. v. Spratt, [1990] 1 W.L.R. 1073; [1991] 2 All E.R. 210, referred to.

(7) Securities & Invs. Bd. v. Pantell S.A. (No. 2), [1993] Ch. 256; [1993] 1 All E.R. 134, considered.

(8) Securities & Invs. Bd. v. Scandex Capital Management A/S, [1998] 1 W.L.R. 712; [1998] 1 All E.R. 514, considered.

Additional cases cited by counsel:

R. v. Cunningham, [1957] 2 Q.B. 396; [1957] 2 All E.R. 412.

R. v. Stephenson, [1979] Q.B. 695; [1979] 2 All E.R. 1198.

Legislation construed:

Financial Services (Jersey) Law 1998 (Revised Edition, ch.13.225, 2006 ed.), art. 26: The relevant terms of this article are set out at para. 10.

art. 27: The relevant terms of this article are set out at para. 8.

art. 30: The relevant terms of this article are set out at para. 9.

A.D. Hoy for the plaintiff;

F.B. Robertson for the defendants.

1 SOUTHWELL, COMMISSIONER: This action concerns disastrous investments into which 28 investors with little or no understanding of financial investing (either individuals or husbands and wives) were induced to enter by a company registered to carry on business as an investment adviser in Jersey. The investments were wholly unsuitable for all the investors, who have suffered serious losses, in some cases part or all of their savings, and in other cases more than their entire savings. The action raises directly (inter alia) questions as to whether the registered investment adviser acted recklessly (but without dishonesty) in advising the investors to make these investments. The action also raises, indirectly, questions as to how the adviser obtained registration; how the principal and other persons acting for the registered adviser could have been able to give advice which bore no relation at all to the highly risky nature of the investments into which they were placing the investors; questions as to why the relevant statute provides for reparation to be made only where the registered person is dishonest or reckless, and not where it is negligent, however seriously, or it fails to meet acceptable professional standards; questions as to why the States of Jersey have chosen not to exercise their statutory power to establish compensation schemes; questions as to the requirements for insurance of persons registered to give investment advice in Jersey; and questions as to the conduct of the two banks and one building society which lent large sums to these investors apparently without any proper enquiry as to the ability of the investors to maintain or repay the loans, or if such enquiry was made, without taking adequate account of the investors’ financial circumstances. The consequences for almost all of the investors are tragic.

2007 JLR 101

2 The plaintiff, the Jersey Financial Services Commission (“JFSC”), has been established under the Financial Services Commission (Jersey) Law 1998 (“the FSC Law”), as amended. Under art. 5 of the FSC Law, the JFSC is responsible (inter alia) for the supervision and development of financial services provided in or from within Jersey (art. 5(1)(a)) and preparing and submitting to the Minister for Economic Development recommendations for the introduction, amendment or replacement of legislation appertaining to financial services, companies and other forms of business structure (art. 5(1)(c)), and such functions in relation to financial services or such incidental or ancillary matters as are required or authorized by or under any enactment (art. 5(1)(d)(i)). Article 7 of the FSC Law lays down guiding principles to be taken into account by the JFSC as follows:

“In exercising any of its functions the [JFSC] may take into account any matter which it considers appropriate, but shall in particular have regard to—

(a) the reduction of the risk to the public of financial loss due to dishonesty, incompetence or malpractice by or the financial unsoundness of persons carrying on the business of financial services in or from within Jersey;

(b) the protection and enhancement of the reputation and integrity of Jersey in commercial and financial matters; and

Under art. 8(1), the JFSC is given power to do anything that is calculated to facilitate or is incidental or conducive to the performance of any of its functions.

3 The matters in issue in this action arise out of the provisions of the Financial Services (Jersey) Law 1998 (“the 1998 Law”). Under art. 2 of the 1998 Law, “financial service business” is defined as including investment business carried on by a person who gives investment advice to persons in their capacity as investors or potential investors on the merits of the purchase, sale, subscription for or underwriting of a particular investment (art. 2(1) and (2)(c)(i)). Under art. 5, the JFSC has the powers conferred on it by the 1998 Law and the duty generally to supervise the persons registered by it in the exercise of those powers.

4 By art. 7(1) of the 1998 Law (inter alia):

“(a) a person shall not carry on financial service business in or from within Jersey; and

“(b) a person being a company incorporated in Jersey shall not carry on such business in any part of the world,

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unless the person is for the time being a registered person under this Law, and acting in accordance with the terms of his or her registration.”

5 Provision is made for applications for registration in art. 8, and for registration, with or without conditions, or refusal or revocation of registration, in arts. 9–11. Registration depends (inter alia) on the JFSC being satisfied that an applicant is “a fit and proper person to be registered” (art. 9(3)):

“(a) having regard to the information before the [JFSC] as to the—

ii(i) integrity, competence, financial standing, structure and organization of the applicant,

i(ii) persons employed by or associated with the applicant for the purposes of the applicant’s business or who are principal persons in relation to the applicant,

(iii) description of business which the applicant proposes to carry on . . .”

6 “Principal person” is defined in art. 1 in relation to a company as including a shareholder with more than 10% of the share capital and a director. Provision is made in arts. 13 and 14 in relation to principal persons, including in art. 14(1) the provision that no one shall become a principal person in relation to a registered person unless the JFSC has first been notified and has in turn notified that it has no objection.

7 Under art. 19, the JFSC is given power to prepare, issue and revise Codes of Practice for the purpose of establishing sound principles for the conduct of financial service business. The court will refer later in this judgment to the Code of Practice which it has been shown.

8 Under art. 27, dealing with compensation schemes:

“The States may by Regulations establish in relation to any financial service business . . . or to classes of such business . . . schemes for compensation in cases where registered persons or formerly registered persons are unable, or are likely to be unable, to satisfy claims in respect of any description of civil liability incurred by them in connection with such business, and the provisions of such schemes may be different for different classes of person or for different classes of such business.”

The court has been informed that, despite the existence of this power since 1998, the States have established no such compensation schemes.

9 Under art. 30, dealing with misleading statements and practices, it is provided (inter alia):

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“(1) Any person who—

(a) makes a statement, promise or forecast which the person knows to be misleading, false or deceptive, or dishonestly conceals any material facts; or

(b) recklessly makes (dishonestly or otherwise) a statement, promise or forecast which is misleading, false or deceptive,

is guilty of an offence if he or she makes the statement, promise or forecast or conceals the facts for the purpose of inducing, or is reckless as to whether it may induce, another person (whether or not the person to whom the statement, promise or forecast is made or from whom the facts are concealed)—

i(i) to enter or offer to enter into, or refrain from entering or offering to enter into, an agreement or arrangement the making of which or performing of which constitutes financial service business or would do so but for Schedule 2; or

(ii) to exercise, or refrain from exercising, any rights conferred by an investment . . .

(4) A person guilty of an offence under this Article shall be liable to imprisonment for a term not exceeding 10 years or a fine, or both.”

In this action, one of the primary issues has been whether statements made by the defendants were made recklessly (but not dishonestly) and were misleading, false or deceptive within art. 30(1).

10 Article 26 gives powers of intervention to the JFSC and the court (inter alia) as follows:

“(1) Where, on the application of the Commission, the Court is satisfied in relation to a registered person that—

(a) the registered person is not, in terms of Article 9(3)(a), a fit and proper person to carry on financial service business which the registered person is purporting to carry on, or is not fit to carry it on to the extent which the registered person is purporting to do; or

(b) the registered person has committed or is likely to commit a contravention of a type referred to in Article 24(1)(a) to (e); and

i(i) for the protection of persons with whom a registered person has transacted or may transact financial service business; or

2007 JLR 104

(ii) if the registered person is carrying on trust company business—for the protection of—

(A) persons who have entered into or may enter into agreements for the provision of services to be provided by the registered person when carrying on trust company business, or

(B) persons who have received or may receive the benefit of services to be provided or arranged by the registered person when carrying on trust company business,

the Court may, as it thinks just, make an order making the registered person’s business subject to such supervision, restraint or conditions, from such time, and for such periods, as the Court may specify, and may also make such ancillary orders as the Court thinks desirable.

(2) If, on an application made under paragraph (1), the Court is satisfied that a person, by entering into any transaction, has contravened Article 7, or entered into any transaction with another party who was induced to enter the transaction as a result of the person’s contravening Article 30, the Court may order that person and any other person who appears to the Court to have been knowingly concerned in the contravention to take such steps as the Court may direct for restoring the parties to the position in which they were before the transaction was entered into . . .

(7) The provisions of this Article shall be without prejudice to any right of any aggrieved person to bring proceedings directly in respect of any right such person may otherwise have independently of the Commission.”

In this action, the next set of primary issues concerns the applicability to the defendants of art. 26(1) and (2).

11 Under art. 24(1), the JFSC is empowered to apply to the court for an injunction restraining a person from committing or continuing or repeating a contravention of (inter alia) art. 30, and art. 24(2) provides as follows:

“(2) Where, on the application of the [JFSC], the Court is satisfied that any person has committed a contravention of [Article 30], and that there are steps which could be taken to remedy the contravention, the Court may make an order requiring that person, or any other person who appears to the Court to have been knowingly concerned, to take such steps as the Court may direct to remedy the contravention.”

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The JFSC has not, in this action, applied for any relief under art. 24(2) and the court will return to this provision at the end of this judgment.

12 The first defendant, Alternate Insurance Services Ltd., is a Jersey company and has been at all material times registered under the 1998 Law as a financial services business acting only as a financial services adviser. The second defendant, Mr. Douglas Clark, has at all material times been the sole shareholder in and a director of Alternate, and a principal person in relation to Alternate. The third defendant, Mr. Robert Le Fustec, was a director of Alternate from August 2000 to April 2004, and during that period was also a principal person in relation to Alternate.

13 Two other representatives of Alternate, Mr. John Cronin and Mr. David Harrison, were involved in some of the matters raised in this action. Both were employees of or associated with Alternate and were not principal persons. Cronin was, at an earlier stage, joined as a defendant, but was subsequently released from the action as a party. We omit the title “Mr.” in relation to these four persons only because their names are repeated so often in this judgment and intend no disrespect by this omission.

14 In this action, Advocate Hoy appears for the JFSC, and Advocate Robertson appeared initially for the three defendants. The court is indebted to them for the assistance they have given it in the resolution of the issues between the parties.

Background

15 This action is brought by the JFSC seeking relief under art. 26(1) and (2) of the 1998 Law against the defendants in relation to advice given by Alternate through Clark, Le Fustec, Cronin and/or Harrison between about September 2000 and July 2002 to 28 individual investors or married couples who were investors. It is the JFSC’s case that such investors were induced to make certain investments and to borrow money in order to make such investments by false, deceptive and misleading statements as to the risks involved made recklessly (but not dishonestly) by Clark, Le Fustec, Cronin and/or Harrison on behalf of Alternate.

16 This action concerns investment in second-hand with-profit endowment insurance policies, which are commonly known as “traded endowment policies,” or “TEPs” for short. If the original insured under an endowment policy wish to cease to maintain the policy by not continuing to pay the premiums until the maturity date, the original insured have two options: they can surrender the policy to the insurance company and be paid the surrender value at the time of surrender, or they can sell the policy in the TEP market at the then market value. Market values are usually but not always higher than surrender values. The level

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of the market value, and the surrender value, will depend on factors such as (a) the time left until the maturity date; (b) the level of premiums to be paid during that period; (c) the bonuses already credited to the TEP by the time of sale or surrender; (d) estimates as to the likely bonuses to be credited from then until maturity, including terminal bonuses; (e) the strength and quality of the insurance company liable under the TEP, including its past record on bonuses and market estimates as to its future policies on bonuses; and (f) generally, the state of the market in TEPs, since the value of TEPs can go down as well as up in the marketplace and can be affected by other changes, such as rises and falls in share prices and interest rates.

17 What were involved for the 28 investors advised by Alternate were not simple purchases of TEPs. They were advised to buy a portfolio of TEPs, usually funded in part from the investors’ own savings and as to the balance by a loan from a bank or building society, which loan was secured in favour of the lender by the underlying TEPs and in some cases also by existing TEPs or other investments already held by the investors. Such transactions are called traded endowment investment portfolio plans or, for short, “TIPPs.”

18 TIPPs plainly involve “gearing,” i.e. an increase of investment risk by borrowing money in order to purchase the investment. The level of gearing depends on the ratio of money borrowed to the surrender value of the underlying TEPs. Usually, the lender agrees to pay the premiums due on the TEPs until the maturity dates. So the amount loaned increases over time by the addition of such premiums paid by the lender and other charges by the lender, and by the relevant floating interest rate charged by the lender on the total of the loan over the periods to maturity. When each of the TEPs matures, the proceeds at maturity go to the lender to reduce the total amount of the loan and the hope is that in the end, once all the TEPs have matured, the investor will be left with a sum of money materially larger than the amount of his savings originally invested in the TEPs. In all or almost all of the 28 cases, the “gearing” (as the ratio of money borrowed to the surrender value of the policies purchased) was excessive having regard to the financial position of the investors.

19 The maximum level of gearing available from most banks, building societies or other lenders for the purposes of TIPPs was in the region of 85–90%, i.e. the lender would lend money up to a maximum of 85–90% of the combined surrender value of the underlying TEPs. If the investor did not have savings to invest, they could still invest in TIPPs by borrowing against the security of other TEPs, policies or bonds which they already owned. If the security consisted of other TEPs, the lender might lend up to a maximum of 85–90% of the surrender value of the TEPs. If the security consisted of investments other than TEPs, the

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lending might be only up to a lower percentage of the value of such investments. The lender would assess its total lending by reference to a percentage of the surrender values of the TEPs, but knowing that usually the market values would be likely to be above the surrender values.

20 The basic aim in investing in TIPPs is to take advantage of the hoped-for excess in the growth of value of the TEPs to maturity, over the total amount of the loan, added to as indicated above, at maturity. Clearly, if that excess existed, the investor would have made a profit. But if, on the other hand, the total loan increased (e.g. through a substantial increase in interest rates) by more than the value of the TEPs, then the investor would have made a loss. Such a profit or such a loss could be substantial.

21 In the case of the purchase of one or more TEPs with the investor’s savings, provided that the TEPs were carefully selected, the risk of loss over the periods to maturity would be relatively low. Annual bonuses once declared would usually be fixed and not removable by the insurance company. The investor would know what premiums would have to be paid to maturity and would, subject to the rates of bonuses declared, be reasonably able to assess whether the final payments of maturity values would exceed the amounts paid initially in the market to buy the TEPs and the further amounts paid in premiums. So the risk of loss, certainly of any serious loss, would be relatively low, provided that the selection of the TEPs had been careful and appropriate.

22 Investments in TIPPs, because of the gearing by the borrowing of money to pay for part or all of the TEPs, would carry a much higher degree of risk. Introduction of a loan in order to buy a substantial part or all of the purchased TEPs would inevitably increase the risk of loss considerably. Investment in a TIPP involves not only the risk that the bonuses to maturity on the TEPs might be smaller than anticipated, but also the risk that if interest rates rise the amount of the loan may rise more than anticipated and may exceed the amount available on maturity from the TEPs, facing the investor potentially with a substantial loss which might involve the loss of part or indeed all of the savings (if any) used by the investor to invest in the TIPP.

23 The investors in relation to whom the JFSC brings this action were almost all wholly unsophisticated investors. Not a few of them, in fact, even after the event and by the time they came to give evidence in November 2006, were unable to understand how the TIPPs in which they had invested worked. All had placed total reliance on Alternate’s personnel, and particularly on Alternate’s principal persons (Clark and Le Fustec), in taking up the investments in TIPPs. Most were personal friends of Clark or Le Fustec. To take just two examples:

(i) Mrs. Investor 11 is a young widow with three small children. Le Fustec was her husband’s best man at their wedding. The result of

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Alternate’s advice through Le Fustec is that Mrs. Investor 11 may lose a large part of her original savings and is tied into the TIPP until 2012–2013, unless the policies can be sold.

(ii) Mr. and Mrs. Investor 4 are a young married couple. The husband has suffered from a degenerative spine condition and in early 2001, when Le Fustec was advising them to invest in a TIPP, the husband had been warned that his early retirement for medical reasons was inevitable (though he was then only 33 years old). Mr. and Mrs. Investor 4’s mortgage protection cover, taken out through Alternate and Le Fustec, did not extend to cover the husband’s spine condition and they could not keep up their mortgage repayments. They sold their property and received a balance of £55,000 which they wanted to invest against the time when the husband could no longer work. They were advised by Le Fustec to invest £40,000 in a TIPP and the result is that they have lost a substantial part of that £40,000.

24 These are just two of the most tragic consequences of Alternate’s investment advice among the 28 investors advised by it. It should be added that some of these investors were so lacking in understanding of investments and investment decisions that, as they state they told Le Fustec at the time, they signed the relevant purchase and loan documents without even reading them, because they could not understand Le Fustec’s verbal explanation and knew that the detailed documents would be beyond their capacity to understand. Several of the investors arranged for documentation coming from the insurance companies and the lenders to go to Alternate and to be held by it, so that they did not even see such documents, unless they had to sign them.

The issues

25 Each of the issues in this action has to be considered in relation to each of the investors and to the specific evidence going to the circumstances in respect of the advice given to each by Alternate, the TIPPs in which each invested, the loans which each borrowed, and the outcome of each of the TIPPs and of the loans. Mr. Hoy most helpfully summarized the issues, dividing them into three groups: (i) liability; (ii) the imposition of conditions; and (iii) restoration of the position.

Settlement

26 After 2½ days of hearings, in the course of which the court heard the advocates’ opening addresses and the cross-examined evidence of 10 investors (Investors 9, 3, 4, 12, 1, 27, 11, 19, 15 and 18), the trial was adjourned to enable the advocates to discuss settlement and obtain instructions from their clients in this regard. By the time of the adjournment, the court had been informed that (a) Alternate was virtually

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without funds; it was being represented by Mr. Robertson pro bono; though its articles of association required a minimum of two directors, since Le Fustec’s resignation in April 2004 Clark had been the sole director, with the result that Mr. Robertson had not been validly appointed to represent Alternate; and the insurance company with which Alternate was insured had treated the insurance policy as void on the ground of late notification; and (b) Clark and Le Fustec were in receipt of legal aid for their representation by Advocate Robertson.

27 On November 15th, 2006, a without prejudice settlement agreement was reached between the parties. It is unnecessary to set out the terms in this judgment. The court accepted that those terms were appropriate, having regard to (inter alia) the burden on the public purse of the representation of all parties except Alternate, and the burden on Mr. Robertson’s firm of pro bono representation of Alternate.

The issues following the settlement

28 The consequences for this action following the settlement are these:

(i) Clark and Le Fustec are released from the action as defendants, on the basis of undertakings which they have given and this court accepts;

(ii) the action continues against Alternate, which is no longer represented by Mr. Robertson;

(iii) the relief sought under art. 26(1) of the 1998 Law is still in issue but this issue has become of less importance in the light of the undertakings given to the court by Clark and Le Fustec; and

(iv) the issues as against Alternate under art. 26(2) of the 1998 Law remain to be decided because, though Alternate is unable to put the 28 investors back in their position before they made these regrettable investments, it may yet be possible for the JFSC to obtain relief in other proceedings (whether in Jersey or in England) against Alternate’s insurers.

29 The issues remaining against Alternate, as stated by Mr. Hoy under the headings of “Liability” and “Restoration of the position,” are as follows:

“Liability

1. Whether, in relation to each of the investors, they entered into transactions with Alternate, namely, agreements with Alternate to purchase a TIPP.

(a) The meaning of ‘transaction’ in art. 26(2) of the Financial Services (Jersey) Law 1998.

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2. Whether the investors were induced to enter into these transactions as a result of statements made by Alternate.

3. Whether the statements were false or misleading.

4. Whether the statements were made recklessly;

(a) The meaning of ‘reckless’ and ‘recklessly’ in art. 30 of the Financial Services (Jersey) Law 1998.

5. Whether the statements were made for the purpose of inducing the investors to purchase TIPPs or recklessly as to whether they would have such an effect.

Imposition of Conditions . . .

Restoration of the position

9. Whether the court should order under art. 26(2) of the Financial Services (Jersey) Law 1998 that Alternate take steps for restoring the parties to the position in which they were before the relevant transactions were entered into.

10. If so, what form of relief ought to be granted for the purpose of restoring the position:

(a) Whether the court should direct Alternate to transfer to the relevant investor the price of the TIPP (as defined in the re-amended Order of Justice) conditional upon the relevant investor disgorging the value of the TIPP (as defined in the re-amended Order of Justice);

(b) Whether the court should order that the price of the TIPP be paid to the investors conditional upon—

i(i) where the endowment policies purchased as part of the TIPP have not matured or been surrendered, the relevant investor agreeing to assign the benefit of those policies to Alternate; and

(ii) where the endowment policies have matured or have been surrendered, the investor agreeing to pay the proceeds to Alternate;

(c) Whether, in the alternative, the sum representing the price of the TIPP should be set off against the sum representing the value of the TIPP; and

(d) Whether further or other relief ought to be granted.”

30 Each of these issues has to be considered and decided by reference to the circumstances relating to each investor. But they raise three general issues of statutory interpretation of the relevant articles of the 1998 Law

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and the court takes these three general issues first, before turning to their application to the circumstances relating to each investor.

First general issue: “Transaction”

31 The first general issue concerns the meaning to be given to the word “transaction” in art. 26(2) of the 1998 Law (para. 10 above) in the context of these words:

“If . . . the Court is satisfied that a person . . . entered into any transaction with another party who was induced to enter the transaction as a result of the person’s contravening Article 30, the Court may order [etc.].”

32 This is not a good piece of statutory drafting. However, these points are reasonably clear:

(i) the “person” referred to is the person alleged to have contravened art. 30, here Alternate; and

(ii) “another party” must refer to the party induced by Alternate to enter into a transaction, here the 28 investors.

33 In its original consolidated Order of Justice, the JFSC pleaded in respect of each of the investors that the “transaction” relied on was the contract by which each investor purchased a TIPP. Mr. Robertson argued that this did not plead a relevant transaction because it was not an agreement to which Alternate was a party (except in so far as it acted as agent for the investor in arranging such agreement). Accordingly, the defendants applied to strike out in its entirety the JFSC’s claim under art. 26(2). If that application had succeeded, the JFSC would have been left with only its claim that conditions be imposed under art. 26(1). As explained in my judgment of July 17th, 2006, it became apparent, in the course of the advocates’ oral submissions at the hearing of the application to strike out, that the JFSC’s then pleading did not accurately reflect the case which it in reality wished to make, because it wished to rely on not just the purchases by the investors of TIPPs from the TIPP providers and the loans obtained by investors from the lenders but also the dealings between the investors and Alternate, which were summarized in that judgment. Accordingly, as explained in that judgment, leave was given to the JFSC to amend, the application to strike out was adjourned, and in the event that application was not renewed by Mr. Robertson.

34 What is now pleaded in the amended consolidated Order of Justice in relation to each investor (we take Mr. and Mrs. Investor 4 as an example) is as follows:

“14. As a result of advice given by Alternate through Mr. Le Fustec, [Mr. and Mrs. Investor 4] agreed with Alternate that they

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would to [sic] purchase a TIPP. Pursuant to such agreement, Alternate thereafter made appropriate arrangements for effecting the purchase of the TIPP and ultimately received a commission from the seller of the TIPP once the TIPP had been purchased . . .

15. Documents given by Alternate to [Mr. and Mrs. Investor 4] in relation to the purchase of the TIPP record that the following statements were made by Alternate to [Mr. and Mrs. Investor 4] for the purpose of inducing them to enter into the purchase of the TIPP, alternatively recklessly as to whether they might induce [Mr. and Mrs. Investor 4] to enter into the said purchase . . .”

35 In the amended answer it is pleaded in response:

“(2) It is denied that [Mr. and Mrs. Investor 4] agreed (in any legal sense) with Alternate that they would purchase a TIPP. There was no contract between Alternate and [Mr. and Mrs. Investor 4] in such regard: Alternate had no right to require [Mr. and Mrs. Investor 4] to purchase a TIPP, nor any entitlement to compensation if [Mr. and Mrs. Investor 4] chose not to do so. It is admitted, however, that Alternate arranged for the purchase of the TIPP on [Mr. and Mrs. Investor 4’s] instructions. It is also admitted that Alternate received a commission from the seller of the TIPP once the TIPP had been purchased.”

36 As Mr. Robertson submitted before he left the trial, the pleading of the JFSC is not perhaps as clearly drafted as it might be so as to plead what Mr. Hoy for the JFSC relies on, namely, a form of agency agreement under which Alternate agreed with each of the investors to take the necessary steps to enable them to buy TIPPs. Such steps included (a) the selection of a TIPP provider; (b) the selection of the portfolio of TEPs; (c) the arrangement of an appropriate price for each of the TEPs; (d) the selection of a lender; (e) the arrangement of appropriate terms of the loan agreement, including the interest rate to be paid; and (f) arrangements as to the remuneration of Alternate, which in the event came from the TIPP providers rather than from the investors themselves. All these steps had to be carried out by Alternate with reasonable skill and care, and attention to the investors’ interests. What is not submitted by Mr. Hoy is that each of the investors agreed with Alternate to purchase a TIPP from Alternate, though Mr. Hoy’s pleaded paragraphs, such as those in relation to Mr. and Mrs. Investor 4, might appear to be so alleging.

37 Despite the not entirely clear wording of the JFSC’s pleading and some answers given by some of the 10 investors who gave evidence before the adjournment of the trial to enable settlement discussions to take place (answers to questions some of which trespassed out of the field of fact into that of law), this court finds as a matter of fact and holds as a

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matter of law that such an agency agreement was made between each of the investors and Alternate. Plainly, until each of the investors had signed agreements with the TIPP providers and the lenders, the investors would be able to withdraw and not to proceed with the purchases or the loans (though Alternate might then have been entitled to reasonable remuneration for its work done before the withdrawal, either pursuant to an implied term or on a quantum meruit). But in so far as Alternate acted on behalf of each of the investors in procuring agreements with TIPP providers and with lenders, it did this pursuant to an agreement with each of the investors under which it undertook to take each of the necessary steps summarized in para. 36 above with reasonable skill and care, and under which it was to be remunerated by commission from the TIPP providers.

38 Mr. Robertson submitted that such agency agreements between the investors and Alternate were not relevant “transactions” for the purposes of art. 26(2). This submission goes to two points: first, whether such an agency agreement could be a “transaction” within art. 26(2); and secondly, whether in relation to any such agreement (if any) relief can be given under art. 26(2). This second point is left over until later in this judgment when the relief sought by the JFSC will be considered.

39 Mr. Robertson’s submission was that “transaction” in art. 26(2) could only refer to the agreements with TIPP providers for the purchase of TEPs, and perhaps the loan agreements with the lenders, and could not relate to mere agency agreements between an investor and an investment adviser. He also referred to the wording of the amended consolidated Order of Justice, and of several paragraphs of Mr. Hoy’s written opening skeleton, in which Mr. Hoy was referring to the transactions within art. 26(2) on which the JFSC relied as being the purchase of a TIPP, sometimes put as a purchase from Alternate, and sometimes generally as a purchase of a TIPP, into which Alternate had induced each of the investors to enter.

40 On the other hand, later in Mr. Hoy’s skeleton it was submitted that the relevant transactions include those between investors and Alternate such as the court has found to have been made. Despite the inconsistencies in the ways in which the JFSC has chosen to put its case, the court is satisfied that the JFSC is relying on the agency agreements as constituting the relevant “transactions” for this purpose, as well as the purchases of TIPPs which Alternate arranged as such agents.

41 The court is also satisfied that such agency agreements are relevant transactions for this purpose. The wording of art. 26(2) does not, in the court’s judgment, confine “transaction” to agreements of purchase, loan or other investment, and is sufficiently wide to include such agency agreements. As Mr. Hoy correctly observed, in Jersey the arrangements

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for the purchase of investments are in the great majority of instances made for purchases from insurance companies, stock markets and the like away from the Island, through financial advisers operating within the Island. If art. 26(2) were to be interpreted as excluding agency agreements such as these made in these circumstances with Alternate, that would leave out of art. 26(2) almost all the agreements made within the Island in relation to financial products. In the court’s judgment, such an agency agreement between an investor and an adviser in the Island is within the words “any transaction” and is covered by art. 26(2). Mr. Hoy also relied on the English case of Securities & Invs. Bd. v. Pantell S.A. (No. 2) (7), which is considered below.

Second general issue: Recklessness

42 The second general issue is how the words “reckless” and “recklessly” in art. 30(1)(b) of the 1998 Law (see para. 9 above) are to be interpreted. For the JFSC, Mr. Hoy submitted that the correct test is the “objective” test which found favour with a majority in the House of Lords in a different statutory context in Metropolitan Police Commr. v. Caldwell (1). Caldwell concerned a man who had been convicted of recklessly endangering life contrary to s.1(2) of the Criminal Damage Act 1971 by setting fire to a building when drunk. We describe this as an “objective” test despite Lord Diplock’s protestations to the contrary. Lord Diplock stated ([1982] A.C. at 354) that a man was reckless within that section if—

“(1) he does an act which in fact creates an obvious risk that property will be destroyed or damaged and (2) when he does the act he either has not given any thought to the possibility of there being any such risk or has recognised that there was some risk involved and has nonetheless gone on to do it. That would be a proper direction to the jury; cases in the Court of Appeal which held otherwise should be regarded as overruled.”

43 It may be noted that the number of Court of Appeal decisions which were overruled in Caldwell was large; many distinguished judges with greater experience of English criminal law had decided those cases, and the decision in Caldwell was contrary to the opinions of distinguished jurists (especially Professor Kenny) before and also after it. The main dissent was by Lord Edmund-Davies, who said this (ibid., at 357–358):

“. . . [A]nd it is well known that the Criminal Damage Act 1971 was in the main the work of the Law Commission, who, in their Working Paper No. 31, Codification of the Criminal Law, General Principles, The Mental Element in Crime (issued in June 1970), defined recklessness by saying, at p. 52:

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‘A person is reckless if, (a) knowing that there is a risk that an event may result from his conduct or that a circumstance may exist, he takes that risk, and (b) it is unreasonable for him to take it, having regard to the degree and nature of the risk which he knows to be present.’

It was surely with this contemporaneous definition and the much respected decision of Reg. v. Cunningham [1957] 2 Q.B. 396 in mind that the draftsman proceeded to his task of drafting the Criminal Damage Act 1971.

It has therefore to be said that, unlike negligence, which has to be judged objectively, recklessness involves foresight of consequences, combined with an objective judgment of the reasonableness of the risk taken. And recklessness in vacuo is an incomprehensible notion. It must relate to foresight of risk of the particular kind relevant to the charge preferred, which, for the purpose of section 1(2), is the risk of endangering life and nothing other than that.

So if a defendant says of a particular risk, ‘It never crossed my mind,’ a jury could not on those words alone properly convict him of recklessness simply because they considered that the risk ought to have crossed his mind, though his words might well lead to a finding of negligence. But a defendant’s admission that he ‘closed his mind’ to a particular risk could prove fatal, for, ‘A person cannot, in any intelligible meaning of the words, close his mind to a risk unless he first realises that there is a risk; and if he realises that there is a risk, that is the end of the matter’: see Glanville Williams, Textbook of Criminal Law (1978), p. 79.

In the absence of exculpatory factors, the defendant’s state of mind is therefore all-important where recklessness is an element in the offence charged, and section 8 of the Criminal Justice Act 1967 has laid down that:

‘A court or jury, in determining whether a person has committed an offence,—(a) shall not be bound in law to infer that he intended or foresaw a result of his actions by reason only of its being a natural and probable consequence of those actions; but (b) shall decide whether he did intend or foresee that result by reference to all the evidence, drawing such inferences from the evidence as appear proper in the circumstances.’

My Lords, it is unnecessary to examine at length the proposition that ascertainment of the state of mind known as ‘recklessness’ is a subjective exercise, for the task was expansively performed by Geoffrey Lane L.J. in Reg. v. Stephenson [1977] Q.B. 695.”

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A longer part of this dissenting speech in Caldwell is cited here because of the subsequent case law in England and Wales, and because Lord Edmund-Davies (unlike Lord Diplock) recognized that the rival interpretations did involve what can properly be described as “subjective” and “objective” elements.

44 Mr. Hoy submitted that, since Caldwell (1) was not departed from until well after the 1998 Law was enacted, this court should proceed on the footing that the States in 1998 was intending to adopt Lord Diplock’s Caldwell test.

45 This submission is met with at least two objections. The first is that “recklessness,” even after the Caldwell decision and the decision on the same day on reckless driving in R. v. Lawrence (3), had different meanings in other statutory contexts in English law. In relation to assaults under the Offences Against the Person Act 1861, the test was still a subjective one (R. v. Spratt (6)), as it was in relation to consent as an issue in cases of rape (R. v. S (5)). In R. v. Reid (4), the House of Lords approved Lawrence in relation to reckless driving as an objective test but expressly confined the decision to reckless driving and recognized that “reckless” is used in several different contexts and may not necessarily be expected to bear the same meaning in all statutory provisions in which it is found (see [1992] 1 W.L.R. at 804, per Lord Ackner). At one time it was authoritatively suggested that there were at least six different meanings of recklessness in different contexts in English criminal law (despite Caldwell and Lawrence). This is not a case of recklessly endangering life or reckless driving.

46 The second objection is that recently, in R. v. G (2), the House of Lords disapproved Caldwell and unanimously held that the test of recklessness in s.1 of the Criminal Damage Act 1971 is more of a subjective test involving mens rea and that Caldwell should no longer be followed. Lord Bingham adopted the Law Commission’s definition contained in its draft Criminal Code Bill ([2004] 1 A.C. 1034, at para. 41) that—

“a person acts ‘recklessly’ [within the meaning of s.1 of the 1971 Act] 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.”

47 Though this test was established for criminal damage, it was recognized that in other contexts the objective test in Lawrence (3) and Reid (4) may be more appropriate. Further, it was also recognized by Lord Bingham of Cornhill in R. v. G (ibid., at para. 39) that—

“. . . the defendant rarely admits intending the injurious result in question, but the tribunal of fact will readily infer such an intention,

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in a proper case, from all the circumstances and probabilities and evidence of what the defendant did and said at the time. Similarly with recklessness: it is not to be supposed that the tribunal of fact will accept a defendant’s assertion that he never thought of a certain risk when all the circumstances and probabilities and evidence of what he did and said at the time show that . . . he must have done.”

See also Lord Steyn (ibid., at para. 58).

48 The court notes that art. 30 makes it a criminal offence to make misleading, false or deceptive statements recklessly (without dishonesty), and provides for a sentence of up to 10 years’ imprisonment on those found guilty of the offence. In the context of criminal proceedings under art. 30, the court considers that it would be right to adopt the same test as in R. v. G (2), which, having a “subjective” element, may be more favourable to the accused. Since criminal proceedings may yet be brought against (inter alios) Clark and Le Fustec, the court considers that the same test should be applied whether the proceedings are civil or criminal. Though this court is not bound by decisions of the House of Lords, it recognizes the need to apply a test of recklessness which involves directly the mens rea of the defendant, and the good sense of the Law Commission’s draft definition (para. 46 above) as applied by the House of Lords in R v. G.

49 The court adds that, in its judgment, the choice of the Caldwell test instead of the R v. G test in the present case would have made no difference, because the main risk (that the total maturity values of the TEPs would be less than the total of the moneys lent) was a risk of which those acting for Alternate were aware, but on which they seriously misled the investors by representing it to be a low or very low risk.

Third general issue: Relief

50 The power to grant relief in art. 26(2) is contained in the words:

“. . . [T]he Court may order that person and any other person who appears to the Court to have been knowingly concerned in the contravention to take such steps as the Court may direct for restoring the parties to the position in which they were before the transaction was entered into.”

51 Mr. Hoy for the JFSC submits that this provides a wide discretionary power to the court to direct the taking of such steps as are necessary to put the parties back in the position they were in before the relevant “transaction” took place. This means before Alternate facilitated the purchase of TEPs from TEP providers and arranged loans from the lenders on behalf of the investors. Because Alternate was not itself providing either TEPs or loans, the only step which Alternate can take is

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the payment of money. But account must be taken of any residual benefit from the TEPs available to the individual investor. In theory, this could be done by some form of assignment of the TEPs, or more realistically by the investors holding the TEPs in trust for Alternate. But since Alternate has no money, that would in the present case be impractical. So Mr. Hoy submits that a sum representing the value of the TEPs should instead be set off against the moneys restoring the investors to their former position, and the order against Alternate should therefore be only for the net sum after such set-off. The value of the TEPs should be treated as either (i) the actual realized value, if they have matured or been surrendered; or (ii) where the TEPs have not matured or been surrendered and are still held by the investor, the current surrender value.

52 Article 26(2) follows the form of the old s.6(2) of the English Financial Services Act 1986 which was considered in Pantell (7) by Browne-Wilkinson, V.-C. and the Court of Appeal, and in Securities & Invs. Bd. v. Scandex Capital Management A/S (8) by the Court of Appeal on appeal from the decision of Carnwath, J. In Pantell, the only question was whether the Securities and Investments Board (“SIB”) had an arguable case against solicitors who were not parties to the relevant transaction but were alleged to have been “knowingly concerned” in contravention of the English statute. The SIB submitted that the statute provided for a form of statutory restitution, under which the contravener could be ordered to restore the property or money he or it had received from the investor, in return for the investor restoring whatever he had received. If the contravener could be ordered to make such restitution, then a third party knowingly concerned (such as the solicitors in Pantell) could also be ordered to pay money to the investor, even though they had received nothing themselves. This argument was accepted by Browne-Wilkinson, V.-C., and also by the Court of Appeal. The Court of Appeal held that those who received no money and no property could be ordered to pay money to assist in restoring the party to the transaction to his former position. The remedy under the English statute, so far as concerned such third parties, was not limited to a strict rescission of the relevant transaction. Scott, L.J. dealt with a situation, such as here, where an investor was induced by a contravener to purchase a product from a third party, e.g. a purchase of shares. In Pantell, Scott, L.J. said ([1993] Ch. at 278):

“In particular, the fact that a person ‘knowingly concerned’ has not himself received anything under the transaction in question does not, in my judgment, restrict the power of the court to make a section 6(2) order against that person. It may be that the contravener himself has not received anything under the transaction in question. It is not hard to construct a case in which a contravener induces an investor to enter into a share purchase transaction with a third party

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associate under which the price for the shares is paid to the third party. The court has power under section 6(2) to order the contravener to ‘take such steps as the court may direct’ to restore the parties to the transaction to their former position. Mr. Sumption’s argument would, if right, be as applicable to the contravener as to a person ‘knowingly concerned.’ The contravener could not be made liable under section 6(2) except to the extent of the money or property he had himself received from the investor. I am unable to accept this argument, whether it is applied to the contravener himself or to persons ‘knowingly concerned.’” [Emphasis supplied.]

53 As to the conditions to be satisfied before the English courts could make an order by way of relief under s.6(2), Scott, L.J. said this (ibid., at 277–278):

“The precondition of an order under section 6(2) is that ‘a person has entered into [a] transaction in contravention of section 3.’ The purpose of an order under section 6(2) must be to restore the parties to the transaction to the position in which they were before the transaction was entered into. So an order ought not, in my opinion, to require a contravener to repay to an investor the purchase price of shares sold to the investor unless there is also provision for the return of the shares by the investor. Rescission under section 6(2), as under the general law, must go both ways. Otherwise only one of the parties is being restored to his former position.

In my judgment, provided the specified precondition is met, the only limitations on the type of order that can be made under section 6(2) that are justified by the statutory language are that the order must be intended to restore all the parties to the transaction to their respective former positions and that the steps directed by the order to be taken must be reasonably capable of doing so. An order requiring the contravener to repay the purchase price of the shares would not be capable of restoring the parties to their respective former positions unless the obligation to repay were made conditional on the tender of the share certificates. So an order confined to directing the repayment of the price would not, in my judgment, be a proper order for the SIB to seek or for the court to make under section 6(2).

Subject, however, to the limitations to which I have referred I do not see why any restriction should be placed on the type of order that could be made under section 6(2). The width of the statutory language, ‘such steps as the court may direct,’ is striking and there is, in my opinion, no good reason why it should be restricted. Nor, in my opinion, does the statutory language warrant any distinction

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between the type of order that can be made against the contravener and the type of order that can be made against a person ‘knowingly concerned’ in the contravention. The circumstances of a particular case may, as a matter of discretion, justify a more stringent order against a contravener than would be justified against a person ‘knowingly concerned,’ but that is not the point.”

54 The court observes that in Pantell (and similarly in Scandex) the SIB itself was arguing that s.6(2) contemplated a rescission of the transaction (such as might be effected at common law or in equity). This court does not consider that the Jersey statute, and in particular art. 26(2), is to be interpreted as restrictively as seems to have been argued for the SIB in Pantell and Scandex. The second passage from the judgment of Scott, L.J. quoted above, though in it Scott, L.J. was recognizing that wider orders might be made, was limited to some extent by his statement that “rescission under section 6(2), as under the general law, must go both ways.” But rescission at English common law (part of the “general law” to which he referred) requires the return by each party of what it has received: if that is no longer possible, rescission is not available by way of remedy. In the view of this court, that was too narrow an approach, which resulted from the narrow way in which the two cases were argued for the SIB. Even if property has moved on to other parties (which might render common law rescission unavailable) the general words of art. 26(2)—as those of s.6(2)—enable the court to order a restoration by the payment in money of the equivalent of the values transferred.

55 Mr. Robertson for Alternate argued that, in the absence of an ability to rescind, no relief could be given. The real underlying transactions here were the sale of TEPs and the grant of loans which involved innocent parties who could not be ordered to restore what they received, and without such restoration, argued Mr. Robertson, there was no basis for ordering Alternate to do anything. Alternate could not undo the TEPs sales or the grants of loans, and so no order could be made against it. In the judgment of the court, this argument proceeded on two erroneous bases:

(i) even under the English statute, the court had the wider power described by Scott, L.J. in Pantell (7); and

(ii) the relevant transactions here are the agency arrangements between Alternate and the investors, rather than the purchases or the loans which Alternate procured for the investors as their agents.

56 In the court’s view, Mr. Hoy’s basic argument is correct. The court does have a sufficiently wide power to order Alternate to pay whatever is needed to restore the position of the investors. If Mr. Robertson’s argument were correct, then however serious Alternate’s contravention

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might have been (for example, however dishonest and fraudulent), still no relief could be given under art. 26(2). But in Jersey much financial business is on the basis of Jersey advisers advising their clients as to purchases of choses in action outside Jersey. Mr. Robertson’s argument, if right, would in the context of Jersey render art. 26(2) largely useless. The court does not agree. Alternate can be ordered to pay money to investors to restore their former position, provided always that due allowance is made for any benefits which the investors have gained. Precisely what the relief should be in the different cases here in question will be considered after the court has dealt with liability.

Risk: Mr. Trevor Gray’s expert evidence

57 The court has touched on the risks involved in transactions of these kinds in paras. 16–23 above. We now turn to consider the expert evidence, especially that concerned with risk, in more detail. The court had the benefit of the written evidence of Mr. Trevor Gray, the expert called on behalf of the JFSC, which he confirmed on oath. The court also saw the written report of Mr. George Banbury, the expert who was to have been called on behalf of the defendants. Though Mr. Banbury was in the event not called to give evidence, the court has not ignored his report.

58 Mr. Gray has been in business in Jersey as an insurance broker for about 30 years. For much of that time, he was Managing Director of Martin-Gray Insurance Ltd. After that company was taken over in 2000, he remained as Managing Director (until March 1st, 2005) and thereafter as Chairman of Alexander Forbes Channel Islands Ltd. He clearly has a wide experience in the endowment assurance market.

59 As Mr. Gray stated, this action concerns with-profit endowment policies, which are contracts written by life assurance companies to pay a fixed sum (the basic sum assured, plus any accumulated profits declared as bonuses either annually, or as one-offs, or at the end of the contract) to the insured on a fixed maturity date in the future, usually 10 to 40 years ahead. If the assured person dies before the maturity date, the basic sum assured, plus bonuses added until the date of death, is paid to the estate of the deceased. Premiums are usually paid monthly or annually.

60 The investments in which with-profit endowment funds are invested vary from time to time and from company to company. At the time when most of the policies were sold to the 28 investors, most of such funds would have held 50–60% in equities, and in the case of Standard Life nearer 70%. The balance would have been held in fixed interest investments (gilts and bonds) and a much smaller percentage in property. Because of the substantial holdings in equities, the endowment funds would be subject to movements in the equity markets, whether up or down, in the medium term.

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61 The bonuses normally added to the basic sum assured are of three types:

(i) reversionary bonuses declared annually;

(ii) special, one-off bonuses; and

(iii) terminal bonuses at maturity.

Each bonus once declared could not be withdrawn. The level of bonuses depends on the overall endowment fund performance, and therefore to a material extent on the performance of the equities and other investments in which such fund is invested.

62 Expenses tend to be loaded into the early years of an endowment policy, such expenses including commissions and the cost of life assurance. This means that, if the policyholder wishes to surrender the policy in the early years, the surrender value may be less than has so far been paid to the insurance company.

63 As an alternative to surrender, the policyholder may be able to sell the policy to one of the companies making a market in TEPs. The market price of a policy will be based on the basic sum assured and bonuses added to date, and an assessment of the bonuses likely to be added by the insurance company down to the maturity date. The factors governing the market prices of TEPs are set out in more detail in para. 16 above. If a careful selection of a TEP is made, the guaranteed basic sum assured plus bonuses already added can be a significant proportion of the purchase price. The market price is likely to be above the surrender value. Mr. Gray showed how a market price for a sale by a market maker might be arrived at, giving, for example, a mark-up of 20% above the surrender value:

Surrender value	£20,000
Extra account offered by market maker to buy policy	£1,000
Commission to seller’s broker or agent (normally 3%)	£630
Legal fees for transfer of ownership, title checks, etc.	£500
Commission to buyer’s broker or agent (normally 3%)	£720
	£22,850
Profit for market maker	£1,150
Market price	£24,000

64 In the early years, the policyholder may have difficulty in obtaining a surrender value or a market price which reflects what has been paid to take out the policy. The surrender value in the early years will reflect the up-front loading of expenses, not yet balanced by the declaration of sufficient bonuses; and the same is likely to apply as regards the market value in the early years. In the middle years, if the bonuses already added are sufficient, and the premiums still to be paid not too high, the market

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value may be materially above the surrender value. In the years shortly before maturity, the policy may become unsaleable on the market because the difference between maturity value and any price that could be obtained on the market may be too small to allow for the necessary mark-up to cover expenses and profit for the market maker.

65 Mr. Gray assessed the risks involved in the purchase of a TEP as “a low to medium risk investment, though individual policies can differ.” He explained this conclusion as follows:

“In the mid-late 1990s the market thrived due to high bonus rates being declared by insurers. At the time, I would have placed these investments in a medium risk category simply because the guarantees within the plans would have formed a lower proportion of the projected maturity value than they did 3 or 4 years ago, when the markets had collapsed. When markets are buoyant and bonuses high, the market makers assume these high bonuses will continue and therefore the future bonuses form a larger part of the projected maturity value. When the markets are depressed and bonus rates are low, the future is not so bright and the guarantees already within the policies become more important.

2.3.2. As an example of the above, I was able to personally purchase individual policies once markets had fallen where the guaranteed sum assured and bonuses to date exceeded the sum I paid for them plus the future premiums I had to pay. In other words, I was guaranteed a profit, even if no future bonuses were paid.

2.3.3. Plunging surrender values and often ill-informed press comments led investors to either cancel policies, or decline to invest in new ones. Like most investments, however, this was the time to invest and therefore during the time that the markets had fallen a traded endowment policy was a low risk investment.

2.3.4. It should be noted that surrender values are not directly linked to the short-term performance of the markets, although long-term trends will eventually appear in them. A number of factors are taken into account when calculating a surrender value. These include the start-up costs, the length of the contract, the cost of the life assurance based on the age of the assured person, the performance of the underlying investments and, more importantly, the actuaries’ assessment of all of these factors, which are taken into account when allocating a fair value for each individual policyholder. Every surrender value will be different, taking these factors into account. The only time they would be exactly the same is if an identical policy were to be sold by an insurance company to two people of the same sex with the same date of birth and exactly the same terms and conditions prevailing, and on the same day.

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2.3.5. Taking into account the constituent parts of the with-profit fund and the performance of these contracts over a long period of time, I would normally assess individual policies as low to medium risk.”

66 Mr. Gray sharply contrasted with this low to medium risk the risks involved in a TIPP, with the gearing created by the borrowing of money to buy more TEPs within the TIPP. His experience led him to conclude that a TIPP is “a high risk product” and that “any investment that is geared is in my opinion a high risk investment.” His summary of the reasons why he reached this conclusion is as follows:

“(a) Gearing is introduced with no cap on the future rates of interest charged on the borrowing.

(b) Falling surrender values and/or increasing interest rates can result in the requirement for the investor to commit additional assets or cash funds to the plan.

(c) Re-trading in the early years involves another layer of costs and is almost certain to result in a loss. The examples [in para. 63 above] show how in theory a market price is arrived at. If an investor were to wish to sell a policy, say, two or three months after purchasing it, it is highly likely that the surrender value would be much in line with the figure at the date of purchase. Therefore to put this policy back on the market, the same level of costs would again be incurred in order to transfer the policy to a new owner.

(d) Re-trading in the final years is often very difficult. Surrender values tend to move closer to the actual maturity value as maturity date nears. As shown in [para. 63] a margin needs to be created between the surrender value and the purchase price in order to be able to pay all the professionals involved and provide the vendor with an enhanced sale price. When policies are in their last years, there is often not enough ‘margin’ between what is likely to be a good surrender value being offered by the insurance company and the projected maturity value. The policies therefore become difficult to trade.

(e) These Portfolios hold a small number of plans typically between 5 & 10. This does not give a big enough spread of risk as achieved by a traded endowment fund.

(f) Active management as available in a [traded endowment fund] such as the EGF is not available to a TIPP holder [i.e. the endowment growth fund—such funds involve substantial investments in large numbers of TEPs, spreading the risks and enabling the managers of the funds to manage actively the spread of TEPs in which the funds are invested].

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(g) Escalating interest rates and falling surrender values can, in some cases, mean the total loss of the initial investment. This is not the case with any of the other types of investment detailed above.”

67 Mr. Gray emphasized that, in his own business at Alexander Forbes, and in businesses purchased by Alexander Forbes—Marsh and Shepherd Financial Services, the staff were not allowed to recommend TIPPs to their customers because of the high risks involved. As Mr. Gray pointed out:

“2.4.4. Problems arise if the surrender values fall and/or interest rates rise. Also, the level of on-going premiums can be a factor. If a particular policy has a very high premium to be paid for a long period going forward, the compounding of the premium and interest upon it can have a significant negative factor if the increase in surrender value is less than the accumulating debt.”

68 The court considers it important to quote the rest of Mr. Gray’s report, where he dealt with the risks involved in investment in TIPPs:

“2.4.5. Using my theoretical example of a purchase price of £24,000 [see para. 63 of this judgment], let us assume that markets fall by 25% and consequently the surrender value falls by say 20% to £16,000 one year after purchase. If the client is paying interest on the moneys to buy the policy, this will have accumulated over the year. The risk of markets falling and affecting surrender values is something every IFA should be aware of. This possibility, however remote, should be conveyed to all clients with an explanation that if surrender values fail to keep pace with escalating debt, a loss will result.

2.4.6. Let us be conservative again, and assume a rate of interest of 5% giving an increased debt of £25,000. However, if the policy had been one with larger on-going premiums of say, £150 per month, the total debt would have increased to £27,000. I have not included interest on these premiums for the sake of simplicity. It is therefore easy to see that a relatively small fall in the surrender value, without any increase in interest rates can cause a serious differential between the value of the policy and the moneys owed to the lending institution. Without producing another example it is clear to see that if an individual policy had been bought for 15%, 20% or 25% more than its surrender value and then surrender values fall as in my theoretical example, the whole plan would unravel. The situation becomes even worse if interest rates rise.

2.4.7. Each case is slightly different but typically the lending institution will advance between 1 and 2 times the amount of the original investment made by the client. All the money is then used to

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buy the Portfolio, but again, typically but not exclusively, the lender will require the outstanding loan not to exceed 85–95% of the total surrender value of the Portfolio of policies.

2.4.8. If the lending limits are breached the investor is required to pay off some of the loan or pledge other investments. This has happened in the majority of cases here.

2.4.9. A simple example of gearing a low risk investment and turning it into a high risk investment would be to consider an investor’s private house.

2.4.10. Let us assume an investor owns a private house valued at £400,000 with a mortgage of £300,000. It would universally be agreed that in investment terms this is a very very low risk investment as fluctuations in the value of the property will have no affect on the investor simply due to the fact that as long as he is able to meet the mortgage payments, the market value of his house is irrelevant.

2.4.11. If, however, the investor decides to ‘gear’ his house by buying another identical house next door and let it out, it would, on the face of it, be the addition to his Portfolio of another low risk investment. However, this is not the case.

2.4.12. Let us assume that due to the fact that he had £100,000 equity in his house, a lender was willing to advance £400,000 for the purchase of the second house, therefore, his assets total £800,000 and his total indebtedness £700,000.

2.4.13. In the initial weeks and months after purchase, he will incur costs and expenses such as legal fees, redecoration, rates, etc. This increases the cost of the purchase to him.

2.4.14. Let us assume there is a slump in the property market reducing property values by 20%. The two properties are then valued at a total of £640,000 but the indebtedness to the bank is £700,000 plus accumulating interest, which the investor has been unable to service due to the fact that he has been unable to let the property. At the same time he has been running up extra costs to maintain the second property.

2.4.15. In this situation, he is unable to finance his increased borrowings and the lender decides that as he is now in a negative equity situation the properties must be sold to clear the indebtedness. The upshot of all of this is that he loses his home and is seriously in debt to the lender. The underlying investments that caused the problem were deemed to be low risk, but the gearing changed them into a very high risk investment indeed.

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2.4.16. In summary, therefore, gearing can produce enhanced returns when all the necessary criteria fall into place. Equally, when these criteria are not met the gearing will magnify any losses.

2.5. The type of investor that a traded endowment is suitable for.

2.5.1. In my opinion an individual traded endowment policy or an investment in a traded endowment fund (ungeared)—see Appendix 2.1 is suitable for the vast majority of investors.

2.6. The type of investor that a TIPP is suitable for

2.6.1. In my opinion a TIPP is suitable for only the most sophisticated investor who fully understands the concept of gearing and appreciates the risks involved. The investor must have the ability to top-up the plan should it be necessary during its term without any significant effect on their financial circumstances. In any event, only a small proportion of personal wealth, even for the most sophisticated investor, should be placed in this type of plan.

2.7. The advice in relation to the risk that you would give to the client if that client was to consider investing in a TIPP

2.7.1. I would have used the above example of a house which I think all investors can understand easily. I would stress that any gearing introduces a higher level of risk. Quite simply, the whole object of gearing is to provide a higher rate of return and if it did not introduce a higher level of risk then every investment ever made would be geared.

2.7.2. I would stress that only a small proportion of an Investment Portfolio should be invested in a TIPP and cash funds or other investments should always be available to ‘top-up’ to cover the scenario that has in fact happened here.”

69 The example which Mr. Gray gives of the purchase of a second house with a loan secured on the purchaser’s home is significant for this reason. The evidence before the court shows that those who acted for Alternate were aware of the risks involved in the purchase of TIPPs. But it also shows that they greatly minimized those risks when advising the investors. In minimizing the risks with TIPPs, the example of buying a second house was used by Alternate to persuade the investors that the risks were low or very low, contrary to the opinion of Mr. Gray which, in the judgment of the court, correctly assessed the potentially high risk of gearing, whether in the purchase of a house or of a TIPP.

70 The point made by Mr. Gray in para. 2.7.2 of his report (see above) is also a significant one for this action. Mr. Gray was there correctly drawing attention to the major risk involved in putting all one’s eggs in one investment basket, rather than spreading the risks by investing in a

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range of different investments. This was of particular importance to those of the investors who were advised by Alternate to place all or most of their life savings in one TIPP. In the judgment of the court, Mr. Gray correctly assessed the risks of investment in TIPPs as high risks.

71 Mr. Gray went on in later sections of his report to consider the particular cases of four investors—Mr. and Mrs. Investor 4, Mr. Investor 28, Mr. and Mrs. Investor 14, and Mr. Investor 10. Here we summarize the overall conclusions which Mr. Gray reached, and which apply equally to all of the 28 investors:

(i) In giving advice to the investors, Alternate failed to take into account that the value of the underlying TEPs could fall as well as rise.

(ii) In giving advice, Alternate failed to take into account the high level of gearing which meant that in many cases there was a real risk that the investors would be called on to contribute further assets to the lenders so as to maintain their TIPP investments.

(iii) Alternate failed to take into account that, given the limited resources of most of the investors with which to meet any such call, this represented a serious risk to the safety of their TIPP investment.

(iv) Alternate failed to take into account that due to the costs, including interest charges, associated with the loans used to buy most or all of the TIPPs, it was necessary for the underlying TEPs to produce significantly high returns if the investors were to avoid suffering losses.

(v) Alternate failed to take into account the concentration of a substantial part (almost all in some cases) of the investors’ wealth into one product which itself was highly geared.

(vi) Alternate failed to take into account the potential difficulties in unravelling the TIPPs at an early stage without incurring a loss.

72 Finally, in his report, Mr. Gray considered the professional standards of Clark and Le Fustec as the principal persons of and acting for Alternate, and reached the conclusion that their conduct “fell well below usual professional standards for the following reasons”:

“7.11.1. They failed to fully establish the client’s financial circumstances.

7.11.2. They failed to consider numerous other products or investments that may have been suitable for the clients.

7.11.3. They totally ignored the clients’ stated attitude to risk.

7.11.4. They at all times stressed the positive points of the TIPP scheme without due regard to the far more important high risk factors.

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7.11.5. They led clients to believe that they would carry out reviews of the plans, when in fact this was left to the lender on an annual basis.

7.11.6. Regardless of whether or not they assessed a TIPP to be a high or lower risk investment, they concentrated far too much of each individual client’s wealth in a single product.

7.11.7. In my opinion, Messrs. Clark and Le Fustec should have been aware that any investment that promises returns significantly outside the band of returns offered by bonds, gilts and fixed deposits must involve either long-term or high risk investment or a combination of both. Quite simply, if the promised returns, often in the range of 10%–15% per annum, were easily achievable by a low risk investment, then everybody would be doing it. In such a situation financial advisers should ask themselves the question as to why very few people were.

7.11.8. Many of the statements made in the reason why letters are correct in as much as they apply to endowment policies, the market makers and the lenders. However, it is not these factors that introduce the high risk but the fact that the portfolios are geared. The failure to emphasize (in the ‘reason why’ letters) the high risk involved in TIPP plans is highly misleading to clients, particularly most of those involved here who have limited or no financial background.”

73 The court accepts Mr. Gray’s evidence in its entirety. The particular circumstances of each of the investors are considered below. Here it suffices to state that, in the court’s assessment, Mr. Gray’s expert evidence is plainly correct in its conclusions.

Chronology

74 The 28 investors were advised by Alternate to invest, and did invest, in TIPPs during a period from July 2000 to November 2002. The court will be considering their individual cases in chronological order. [The learned Commissioner set out the chronology and continued:]

75 The first observation on this chronology is that the documents placed before the court show that there was a decline in UK equity values from September 2001, when the attack on the World Trade Centre twin towers took place, until late in 2002, when a slow rally began. The decline in equity markets, coupled with the shift by insurance companies out of equities and into fixed interest investments, adversely affected the surrender and market values of TEPs. Mr. Gray indicated in his report that a time when surrender values are declining can be a good time for canny investors to buy suitable TEPs, because sometimes the basic sum assured plus bonuses to date could exceed the market price of the TEP plus the premiums still to be paid. But, for TIPPs, such an investor would still have to speculate as to future interest

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rates on the loan to buy the TIPP, and whether or not the total payable to the lender at maturity would exceed the maturity values of the TEPs within the TIPP. As Mr. Gray emphasized, such speculation was not for small investors investing the major part of their life savings.

76 In the court’s view, the events of September 11th, 2001 and the decline in equity markets should have alerted Alternate to the dangers for its client investors in investing in TIPPs. But out of the 30 TIPPs bought by these 28 investors, 8 were bought before September 11th, 2001, and 22 were bought after that date.

77 The second observation is that, by March 2002, Alternate knew that at least one of the investors’ TIPPs (Mr. and Mrs. Investor 5’s) had exceeded the maximum level of gearing permitted by their lender because of the decline in stock market values and therefore in surrender values. This was a further event which should have alerted Alternate to the dangers for its client investors in investing in TIPPs. Nevertheless, Alternate continued to advise client investors to invest in TIPPs and 10 further TIPPs were bought by investors after that time.

What has to be proved in each case by the JFSC to establish liability

78 For the purposes of arts. 30 and 26(2), the JFSC has to prove on the balance of probabilities, so as to establish Alternate’s liability in relation to each of the investors, that—

(i) the investor entered into a transaction with Alternate for the purposes of the purchase of a TIPP, the making or performing of which transaction constituted financial service business;

(ii) the investor was induced to enter into such transaction as a result of statements made by Alternate;

(iii) such statements were misleading or false;

(iv) such misleading or false statements were made by Alternate recklessly (though without dishonesty); and

(v) such statements were made by Alternate for the purpose of inducing the investor, or in making the statements Alternate was reckless as to whether the statements might induce the investor, to enter into the transaction.

The JFSC has also to prove in relation to each investor what steps by way of relief the court may direct for restoring the parties to the position in which they were before the transaction was entered into.

[79 The learned Commissioner then considered the cases of the individual investors and the TIPPs into which they entered. He emphasized that he heard no evidence from the defendants. He was aware of a number of matters which they might have put before him but, in the absence of any

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evidence from them, he could not place reliance on most of those matters. But where, even in the absence of evidence, such matters could be taken into consideration, he endeavoured to do so. He continued:]

Summary on liability

80 The court’s conclusions on liability can be summarized as follows:

(i) The necessary conditions are satisfied and proved by the evidence adduced by the JFSC for the making of an order under art. 26(2) in relation to all of the investors and all the TIPPs, with the exception of Mr. Investor 2 and the two TIPPs into which he entered.

(ii) Subject to this exception, the JFSC has proved that Alternate, through Clark, Le Fustec, Cronin and Harrison, entered into transactions with the investors, who were induced by statements made on Alternate’s behalf, which were made for the purpose of inducing the investors to enter into TIPPs, which were false or misleading or both, and which were made recklessly by those persons on Alternate’s behalf and for which Alternate was paid substantial commissions.

(iii) The fundamental points on recklessness are that those persons were well aware that TIPPs involved risks for the investors but unreasonably and unprofessionally chose to represent those risks, not as the high risks which were clearly involved in the borrowing of large sums to buy speculative investments, but as “low” or “very low risks” which would not endanger the capital resources of the investors.

(iv) The degree of recklessness on the part of Clark and Le Fustec in particular was serious and it may be fortunate for them that no case based on dishonesty has been brought by the JFSC. But, on the case as brought by the JFSC alleging recklessness short of dishonesty, the court concludes that Clark and Le Fustec knew that the TIPPs involved investment risks for their clients because of the substantial loans used to pay for the TIPPs, but chose to represent these risks as being low or very low risks (though any competent and responsible investment adviser would have advised that the risks were high). Such misstatements of the level of risk were entirely unreasonable and involved a high degree of recklessness on the part of investment advisers in Jersey. The court accepts the evidence of Mr. Gray in this respect, as in all other respects.

(v) In his opening address to the court on behalf of the defendants, Mr. Robertson indicated that one line of defence would have been that Clark and Le Fustec had studied brochures of TEP sellers such as Rochford and Policy Plus, and had had detailed discussions with representatives of such TEP sellers. The court cannot express any formal view about this, because it has not heard the defendants’ evidence. But, as a guide for the future, it wishes to give this cautionary note. The TEP sellers were

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engaged in seeking to persuade Alternate (and other financial advisers like Alternate) to increase the TEP sellers’ market by, in turn, advising clients to buy from the TEP sellers. Marketing statements, whether written or oral, are no substitute for seeking out and studying an independent and expert assessment of the realities of the market in TIPPs, a step which, it appears, no one in Alternate took.

Relief

81 The court has already considered the interpretation of art. 26(2) in paras. 50–56 above and concluded that it has power to order Alternate to pay money to each of the investors (except Mr. Investor 2) to restore them to their previous financial position. To do this, account must be taken of the value (if any) obtained by an investor from the TEPs which they were persuaded by Alternate to buy. Account of this value could be taken by ordering Alternate to pay an appropriate sum to the investor, and by ordering the investor to pay to Alternate the value of the TEPs. But our view is that that would anyway ultimately result in a set-off of the amounts ordered either way, and that a more appropriate process is for the court simply to reduce the amount to be paid by Alternate by the value of the TEPs in so far as still held by the investor. As Mr. Hoy has submitted, in any event, Alternate is without means to pay whatever it may be ordered to pay and may be insolvent, and therefore this process is in the present case clearly appropriate.

82 The investors fall into three categories:

Category 1. Those who have paid off the loan but retained the TEPs and any other collateral—Mr. and Mrs. Investor 3 and Mrs. Investor 16.

Category 2. Those whose TIPPs have matured or who have surrendered the TEPs—Mr. and Mrs. Investor 4, Mr. and Mrs. Investor 1, Mr. Investor 6, Mr. Investor 9 and Mr. and Mrs. Investor 21.

Category 3. Those for whom their TIPPs remain active, because not all of the TEPs have matured or been surrendered—all those investors not in the other two categories (excluding Mr. Investor 2).

83 One question of principle needs to be considered at the outset. For the purpose of assessing the value of TEPs still held by an investor (but mortgaged to a lender), Mr. Hoy submits that the up-to-date surrender value of a TEP is the correct value to be taken into account. In his opening address, Mr. Robertson submitted that market values should be taken. He relied on the fact that market values may be and often are higher than surrender values. An example of this could be seen in the disparity between surrender values and the prices which investors had to pay to buy the TEPs. The court has drawn attention to this disparity in considering many of the 30 TIPPs above.

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84 The court’s conclusion is that Mr. Hoy’s submission is right and more appropriate in the present case. In his evidence, Mr. Gray explained how a market price might be arrived at (see para. 63 above) with a mark-up of 20% above surrender value. Most of these elements of the mark-up do not represent extra value to the investor selling the TEP. Not all TEPs are capable of being sold, or of being sold within a reasonable period. There are examples of this in a number of the cases the court has considered. Market prices are subject to movements up and down according to market sentiment. We conclude that the value which the life company places on the TEP for purposes of surrender is more appropriate, less subject to the vagaries of the marketplace, and anyway excludes those elements which, as Mr. Gray pointed out, do not realistically represent value to a selling investor.

Category 1

85 For those investors who have paid off their loans and retain TEPs and other collateral, the method of calculation which the JFSC submits as being the correct method is as follows. On the one hand, the value still available to the investor is taken as the surrender value of the TEPs they hold, plus any surplus in their loan account. On the other hand, there are taken the payments made by the investor, including any original payment made when the TIPP was entered into, plus any sums paid to maintain the continuance of the loan, and also any sums paid in respect of premiums on the TEPs. Taking the case of Mr. and Mrs. Investor 3 as an example (as the JFSC has done)—

the surrender value of the TEPs they hold is at November 16th, 2006	£36,096.00
the credit balance in their loan account (this takes account of the proceeds of 2 TEPs—which matured in 2006—paid into the loan account) is	£6,827.67
the total positive value is	£42,923.67
minus the payments they made, both the original payment and later payments into the loan account	£41,564.00
minus the payments of TEPs premiums they made is	£21,320.00
the total negative amount is	£62,884.00
so the amount required to put them back into their former position (subject always to interest) is	£19,960.33
the JFSC then asks for statutory interest on the sums paid by Mr. and Mrs. Investor 3 from the various dates of payment, amounting to	£14,433.28
so the total claimed by the JFSC in respect of Mr. and Mrs. Investor 3 is	£34,393.61

If the original collateral assigned to the lender was or included policies already held by the investor, these are excluded from the calculation,

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because the investor already had this investment before entering into the TIPP.

86 Subject to one point, the court concludes that the calculations by the JFSC are correct in Category 1. The point of exception is that the JFSC should give credit for the amounts of the share allocation by Standard Life by reference to TEPs bought by the investors. This has made necessary some adjustments to the JFSC’s figures. The totals ordered in respect of Mr. and Mrs. Investor 3 and Mrs. Investor 16 are set out below.

Category 2

87 These investors have TIPPs which have fully matured or the investors have surrendered the TEPs to pay back the loans. Taking the case of Mr. and Mrs. Investor 1 as an example—

the money received by them from the loan account after all the TEPs matured or were surrendered amounts to	£21,336.05
minus the payments made by them including their original payment to set up the TIPP and a sum obtained by the surrender of a TEP	£51,886.29
the net amount to be paid by Alternate is	£30,550.24
the JFSC asks for statutory interest on the sums paid by Mr. and Mrs. Investor 1	£3,875.13
So the total claimed by the JFSC is	£34,425.37

As stated above, where the original collateral included policies already held by the investor, these are excluded from the calculation, as for Category 1.

88 Subject to the point about Standard Life share allocations, the court concludes that the calculations on this basis are correct for the investors in Category 2. The totals ordered are set out below.

Category 3

89 This concerns all the other investors (except Mr. Investor 2), whose TIPPs remain active. Taking the case of Mr. and Mrs. Investor 12 as an example—

the surrender value of their TEPs at November 16th, 2006 is	£66,211.53
minus the sums paid by Mr. and Mrs. Investor 12 during 2006	£52,998.70
minus the amount outstanding on their loan account	£50,971.45
plus value received from the Standard Life share allocation	£1,949.40
the amount required to restore their former position is	£35,909.22
the JFSC claims statutory interest on the sums paid from the dates of payment	£1,011.62
the total claimed by the JFSC in respect of Mr. and Mrs. Investor 12	£36,820.83

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90 In other cases within this category the investors have also paid premiums on the policies and the amount so paid is included in the calculations, as well as statutory interest on such sums from the dates of payment. Where policies or other investments held before the TIPP was entered into were used as collateral for the loans, the values of these investments have been excluded from the calculations, as in Categories 1 and 2. Where, in this category, some of the TEPs have matured or been surrendered, then if the money obtained has gone to pay part of the loan such TEPs are not included separately in the calculations because their value has been taken into account as a reduction in the loan. Otherwise they would appear in the calculation as a specific item. The point relating to Standard Life share allocations applies in this category also. The totals ordered in respect of all the investors in Category 3 are set out below.

Amounts to be paid by Alternate

[91 The amount required to restore all the investors (except Mr. Investor 2) to their previous financial positions is £1,417,868.08. Statutory interest on that sum is £146,260.48. Accordingly, the court orders Alternate to pay to the JFSC the total sum of £1,564,128.56.]

Conditions

92 The issue as to conditions will be a matter to be considered at the delivery of this judgment, if the JFSC wishes to pursue this.

Further observations

93 The court wishes to make some further observations on matters arising out of this action, which strictly go outside the issues which the court has to decide. This is done in an effort to assist those involved directly or indirectly in these issues for the future.

The Jersey Financial Services Commission

94 In the course of the hearing, the court expressed concerns regarding the regulation of financial advisers operating in Jersey. Alternate was registered in Class D, i.e. as an advisory only business which could not handle clients’ assets. Initially, the Investment Business (Jersey) Law 1998 provided for regulation by the JFSC. This law was renamed the Financial Services (Jersey) Law 1998 in 2001, with some renumbering of the articles to allow for the introduction of provisions for the regulation of trust company business. Codes of Practice were issued on March 1st, 1999 and were updated in March 2001. Relevant provisions in the Code relating to such Class D persons do not require such persons to have two or more principal persons who hold the minimum investment qualifications. Rather, in pursuance of the “Four Eyes” principle, they require a

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Class D licence holder to have at least two principal persons who are able to demonstrate a balance of appropriate qualifications, skills and experience. These need not all be qualifications from the Codes of Practice, but must recognize the needs of the business. Paragraph 3.4 of the Code sets out the minimum examination requirements expected of investment employees and the court notes that it is there stated that further qualifications would be required by any investment employee advising in the specialized area of “long-term insurance products.” The court has not seen any document showing what such further qualifications might be.

95 There was a transitional period to give those who practised in this area a reasonable period of time to meet the new minimum standards required by the 1998 Law and the Codes. Applicants who applied to be registered persons under art. 7 by July 1st, 1999 were allowed to continue carrying on their businesses until the JFSC granted or refused their application. During this transitional period, some of the Code requirements for financial advisers, including the examination requirements in para. 3.4, did not need to be met until December 31st, 2000.

96 Alternate applied for a Class D licence on June 17th, 1999 and this was granted on August 13th, 2001, on the basis of Clark, Le Fustec and Cronin being Alternate’s principal persons. Le Fustec had passed the Financial Planning Certificate (“FPC”) of the Chartered Insurance Institute in 1994 and worked in the insurance sector for over 20 years. Clark had worked in financial services as an independent financial adviser for over 20 years and had passed two out of the three stages of the FPC by August 13th, 2001. The court is concerned to note that the position as regards Cronin is as follows. Alternate applied to the JFSC on April 6th, 2000 on the footing that Cronin would be a “principal person” of Alternate. The JFSC replied by letter of June 7th, 2000 stating that it did not object to Cronin being a principal person of Alternate, but as Cronin would “not hold a major shareholding or be appointed a Director,” the JFSC required a signed declaration from Cronin confirming that he was a principal person and shared responsibility for the direction of Alternate. It appears that Cronin may not have signed any such declaration. The court does not know the position as regards further qualifications for those who, in advising on TIPPs, were advising on “long-term insurance products.”

97 The JFSC made on-site spot checks at Alternate on December 14th, 1999, April 9th, 2002 and March 26th, 2003. It appears that on the second and third of these visits the files relating to TIPPs were not examined. This is by no means surprising since only 28 clients of Alternate were advised, wrongly, to invest in TIPPs, out of a client base of around 1,000 clients. The court, however, repeats in relation to Mr. and Mrs. Investor 14 [that the first defendant was instrumental in putting their money into one or two further investments, in addition to the TIPP, which are not referred to in the Order of Justice or Mr. Investor

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14’s evidence], because there may be other investments advised on by Alternate which called for investigation.

98 One problem for the JFSC is that the principal persons of Alternate did seem to understand the risks involved in a single purchase of a life company policy or bond. But they completely failed to explain to their clients the nature of the high risks where any investing by an investor of small or modest means, whether in property or TIPPs, or other investments, is either based wholly or substantially on borrowed money, or involves the whole or a large proportion of the investor’s available money, or both.

99 It is not for this court to engage in criticism of the working of the JFSC. But the court does recommend that a full review is now made as a matter of some urgency so as to learn as many lessons as possible from what has gone wrong in this regrettable affair. This recommendation is made because it is not acceptable that unsophisticated, small investors in Jersey can be so badly advised in relation to their small resources and then find, as might be the case here, that they have no redress. The question of redress is one to which the court will return below.

100 Before any such review can be concluded, there is one aspect on which the regulation of Alternate can be seen to have failed. The court has been told that Alternate’s insurers have treated the insurance policy as void on the ground of late notification of claims, or more likely of events which might give rise to claims.

101 In the view of this court, it would be simply unacceptable if persons operating in Jersey financial services were not to be insured to a sufficient amount of cover under terms which are firmly binding on the insurers, are recognized by the insurers to be binding, and cannot be treated as void whether for late notification or any other ground. Since that appears to be the case in relation to Alternate, it may be the case with other licensed entities and individuals. Paragraph 5.4 of the Code requires insurance but does not cover the above points. The JFSC should consider with even more urgency what can be done to ensure that all those whom it regulates are fully insured in every respect. An alternative would be to establish a mutual scheme for insurance, such as some professions in England and Wales and elsewhere have long established. But that would take some years to establish successfully.

The States of Jersey

102 If it be the case that Alternate is not insured, so that the sums ordered by the court to be paid cannot be recovered from Alternate’s

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insurers, then the question might be asked why the States have not yet exercised the power given to them by art. 27 of the 1998 Law to establish by regulations a suitable compensation scheme or schemes (see para. 8 above). In the absence of any effective system for ensuring that persons registered under the 1998 Law are firmly insured with adequate cover, that question becomes the more pertinent. The investors would be entitled to ask that question because, in the absence of insurance of Alternate, they would be left without redress, and the States might consider that the circumstances of the investors, including Mrs. Investor 11 and Mr. and Mrs. Investor 4 and others, require redress, a point to which we will return below.

103 For the future, however, the court recommends that the issue whether a compensation scheme or schemes should be established should now be addressed. We emphasize that for investors such as these to be left without compensation would not redound to the good reputation of Jersey and its investment community.

The Financial Services (Jersey) Law 1998

104 In the course of the hearing, the court expressed some concerns about the drafting of the 1998 Law. The main points are these:

(i) Under art. 26(2), the JFSC is empowered to act on behalf of investors only if there is dishonesty or non-dishonest recklessness. But it is in cases involving negligence or failure to meet appropriate professional standards that there is likely to be the greatest need for the JFSC to be able to act on behalf of investors. Both may result in investors losing much of their money. But neither is covered by arts. 26(2) or 30. If, as here, the investors for the most part have little money and are unsophisticated investors, they are likely to be unable to bring legal proceedings themselves through lack of money or other resources. It may be thought that this is a loophole which needs to be closed.

(ii) The court has dealt above with the arguments about the interpretation of art. 26(2), especially as regards the meaning of “transaction,” the circumstances in which relief can be given, and what form of relief. It would be difficult to find a set of provisions so opaquely drafted and so little adapted to the particular circumstances of this Island. Merely to copy an English statute is not the best way to legislate in Jersey where the circumstances are materially different.

(iii) Article 24(2) seems to cover much of the ground covered by art. 26(2), but the 1998 Law gives no clue as to how these provisions interconnect. The court appreciates the reluctance of the JFSC to put all its eggs in the art. 24(2) basket. But it might have been thought appropriate for the JFSC to proceed under both articles. This is another example of a statutory provision the purpose of which is wholly opaque.

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Bank of Ireland, Newcastle Building Society and Royal Bank of Scotland International

105 It is, the court understands, a fundamental element in good practice of banks and building societies to “know your customer”; particularly when a bank or building society is asked not by the prospective customer but by an intermediary to lend a large sum of money (or one which may be large for the prospective customer) to a prospective customer about whom the bank or the building society has no previous knowledge or experience. The court emphasizes again that Bank of Ireland (“BoI”), Newcastle Building Society (“NBS”) and Royal Bank of Scotland International (“RBSI”) are not parties to this action and the court probably has not seen all the documents passing between them and the investors. The documents that the court has seen appear to indicate these banks and the building society agreed to lend large sums to these investors with virtually no knowledge whatever of the circumstances of the investors.

106 If the banks and the building society failed to secure adequate knowledge of these new customers, their conduct is open to criticism. In this regard, the court is concerned about an apparent pattern of dealing which involved either (i) not obtaining any detailed information about their new customers at all; or (ii) where information was sought and obtained (as for example some was in the case of Mr. and Mrs. Investor 5) not obtaining sufficient information to enable the bank or building society to judge whether the loan transaction was appropriate for the bank or building society itself to enter into, or whether it was an improvident and unacceptable borrowing by the new customer. If, on the other hand, the banks and the building society did obtain full information about any of the investors’ financial circumstances, the court is unable to understand how the loans to those investors could have been made.

107 We take one example. BoI seems to have had a TEP office in London devoted entirely to lending money for TIPP transactions such as those involved in this action. On what the court has seen, it was normal practice when an intermediary such as Alternate, together with a TEP provider such as Rochford, approached the TEP office for a new transaction, simply to send out standard form documentation, to receive it back signed by the new customer and then to open a loan account and lend the money asked for. We have not seen any indication that the TEP office of BoI ever asked any of the questions which in ordinary good banking practice would be asked before a bank would agree to grant a substantial loan. NBS’s practice seems not to have been materially different, and similarly with RBSI, though there are fewer transactions involving that bank.

108 The context in which the court raises these matters includes the following:

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(i) if the investors’ ordinary banks had been asked to make the loans, it is probable that they would have refused and would have pointed out to their clients the improvident nature of the TIPP investments; it was because their ordinary banks were bypassed, and BoI, NBS or RBSI’s Guernsey branch were introduced, that the TIPP investments were enabled to go forward;

(ii) if, contrary to the impression which the court has gained, BoI, NBS or RBSI did ascertain sufficient information about the investors as their new customers, it appears that they did not do what the investors’ existing banks would probably have done (see (i) above);

(iii) BoI, NBS and RBSI were lending money to residents in Jersey and such activity involving Jersey residents needs to be regulated, either by the JFSC because Jersey residents are involved, or by the FSA in the United Kingdom, or by the Irish regulator; any financial service provider which trades into Jersey from outside must be regulated in respect of that trade either where its centre of business is or by the JFSC. The court has seen no indication of any activity by any regulator in respect of the loans to these investors. If there has been no such activity, then this seems to be a “black hole” which needs to be filled; and

(iv) the court understands that each of BoI, RBSI and NBS carry on business in this Island either themselves or through a subsidiary. The court recognizes that in this section it has raised a number of issues concerning BoI, NBS and RBSI, which will be for the JFSC to take forward in relation to these investors and for the future.

Making good the investors’ losses

109 If Alternate’s insurers do not pay the amount of this judgment, and cannot be compelled to pay, the question will then be raised as to how the investors’ losses are to be made good. To this court, it seems inconceivable that investors such as Mrs. Investor 11, Mr. and Mrs. Investor 4 and the others should be left uncompensated for their serious losses, because that would show that small investors in Jersey were wholly unprotected against the consequences of reckless investment advice by registered investment advisers regulated by the JFSC. The court recommends that, in those circumstances (though preferably in the immediate future), a fund be established to make good those losses, and that all involved (the States, the JFSC and the lenders—BoI, RBSI and NBS) contribute so as to ensure that such fund is adequate for the purpose. Such fund could be the precursor to the compensation scheme or schemes to be established to cover investors in the future (see paras. 102–103 above).

Order accordingly.

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