The Court of Justice of the European Union has made a ruling on the reception and transmission of orders for the purposes of the Markets in Financial Instruments Directive.

In Khorassani v Pflanz, the court ruled this month that the investment service consisting in the reception and transmission of orders in relation to one or more financial instruments does not include brokering with a view to concluding a contract covering portfolio management services. The court drew its authority from Article 4(1)(2), read in conjunction with point 1 of Section A of Annex I of the directive.

In November 2007 a Ms Pflanz, who is not authorised to provide financial services under Article 32(1) of the German Kreditwesengesetz (Law on the financial sector) or KWG, recommended to a Mr Khorassani an investment called the ‘Grand-Slam’ and advised him to sign a service agreement with GSS AG, and a portfolio management agreement with D. AG as well, both of these companies being established in Liechtenstein. The latter contract provided for the purchase and sale as well as the management of financial instruments constituting a finance portfolio management activity.

Mr Khorassani committed himself to a one-off payment of €20,000 and to monthly instalment payments of €1,000, each with a 5% premium. In December 2007 the applicant paid €27,000 in total, from which the amount of €19,731.60 was deducted as an administration charge to be paid in advance and the amount of €1,285.71 was deducted as a premium. Mr Khorassani subsequently cancelled the agreements and sought repayment of the amounts paid and damages.

The Landgericht Berlin (a regional court in Germany) ruled the action brought against the two undertakings established in Liechtenstein inadmissible on the grounds that it lacked international jurisdiction, and held that the action taken against Ms Pflanz was unfounded.

After he obtained repayment of €6,803.03, Mr Khorassani’s appeal seeking repayment of the remainder of the amounts he had claimed was dismissed by the Kammergericht Berlin (a higher regional court), which considered that Ms Pflanz had not provided financial services within the meaning of points 1 and 1a of the second sentence of Paragraph 1(1a) of the KWG, for which an authorisation must be held pursuant to Paragraph 32(1), as both the investment advice and the investment brokering provided by her did not relate to a transaction involving the purchase and sale of financial instruments but rather an asset management agreement which, whilst serving subsequently as a basis for the purchase and the sale of specific financial instruments, was not itself a financial instrument. That court accordingly found that Mr Khorassani was not entitled to damages under the combined provisions of Article 823(2) of the BGB and Article 32(1) of the KWG. The German Federal Court of Justice upheld this, saying that Ms Pflanz had not infringed Article 32(1) of the KWG.

On the other hand, the question whether, in causing Mr Khorassani to sign an asset management agreement, Ms Pflanz had provided him with investment brokering services within the meaning of point 1 of the second sentence of Paragraph 1(1a) of the KWG led to the European Court having to interpret Article 4(1)(2) of and point 1 of Section A of Annex I to MiFID (also known as Directive 2004/39). Because of its judgment, the reception or transmission of an order that relates to portfolio management activity is not to be classified as an investment service for the purposes of that directive.