Breach of the general prohibition: agreement unenforceable against the client (FSMA s.26)
Corrigan Mbeki, an SRA-authorised firm in England that is not authorised by the FCA, agreed with a client, Elena Petrova, to arrange her purchase of a portfolio of listed shares as a stand-alone service for a fee of £4,000, unconnected with any other legal work for her. The arrangement did not fall within any exclusion, and the firm could not rely on the exemption for professional firms in Part 20 of FSMA because the service was not incidental to legal services. Elena has paid £2,000 and refuses to pay the balance.
Which of the following best describes the civil consequences of the agreement with Elena?
Choose one answer to see the reasoning.
Worked answer
Correct answer B: The agreement is unenforceable against Elena, and she may recover the £2,000 she paid plus compensation for any loss from parting with it.
THE RULE TO REMEMBER
An agreement made in the course of a regulated activity carried on in breach of the general prohibition is unenforceable against the other party, who may recover money paid and compensation (FSMA 2000 s.26).
Breach of the general prohibition: agreement unenforceable against the client (FSMA s.26)
Section 19 FSMA 2000 (the general prohibition) bars anyone from carrying on a regulated activity in the UK unless authorised or exempt. Arranging deals in shares is a regulated activity. The firm is not FCA-authorised and cannot use the Part 20 exemption, so it contravened the general prohibition, which is an offence under s.23. On the civil side, s.26(1) provides that an agreement made by a person in the course of carrying on a regulated activity in breach of the general prohibition is unenforceable against the other party. Under s.26(2) the other party is entitled to recover any money paid under the agreement and compensation for any loss sustained as a result of having parted with it. Elena therefore need not pay the balance and can recover the £2,000 she has paid. This is subject to s.28, under which the court may allow the agreement to be enforced or the money paid to be retained if it is satisfied that this is just and equitable, having regard to whether the firm reasonably believed it was not contravening the general prohibition.
Why A is wrong: Section 26 gives a civil consequence: the agreement is unenforceable against the other party.
Why C is wrong: Section 26(2) expressly entitles the other party to recover money paid under the agreement.
Why D is wrong: Unenforceability under s.26(1) does not depend on the client proving loss; loss is relevant only to compensation.
Why E is wrong: The SRA has no power to ratify a breach of the general prohibition; unenforceability flows from the statute.
A little more practice done.
Related questions
Recognising a specified investment: company shares v land and goods (RAO art 76)
Which asset is a specified investment for the purposes of the Financial Services and Markets Act 2000?
Introducing a client to an independent financial adviser: the introducing exclusion (RAO art 33)
Which of the following best describes whether Rupert's introduction is a regulated activity?
Commission and the Part 20 exemption: accounting to the client (FSMA 2000 s.327(3))
What must the firm do with the commission if it is to continue to rely on the exemption for professional firms?
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