The Court of Appeal (CoA) was faced with a case dealing with the liability of a principal for the acts of its appointed representative.
Background:
In June 2015, Kession Capital Ltd (KCL), a firm authorised to carry on designated investment business, entered into an appointed representative agreement with Jacob Hopkins McKenzie Ltd (JHM) to carry on "relevant business". It appointed JHM as its appointed representative to conduct ‘relevant business’ pursuant to Section 39 of the Financial Services and Markets Act 2000 (FSMA).
JHM promoted and operated various property investment schemes in which the respondent claimants invested a combined total of approximately £1.7m. The claimants lost their money when the schemes failed and sought to recover it from KCL. The question arose as to whether, by appointing JHM as its appointed representative, KCL accepted responsibility for the actions of JHM in promoting and operating the investment schemes.
KCL appealed the decision to award summary judgement.
Decision:
The CoA dismissed the appeal on both grounds, although there was a dissenting judgement from Lord Justice Lewison with respect to Ground Two. The Court ruled that the appellant had, under the terms of the agreement with JHM, which it had engaged as an appointed representative under Section 39, accepted responsibility for their conduct.
For Ground One, Lord Justice Males held that it was clear from the concluding paragraph in Schedule 5 to the Agreement that KCL did not give permission to JHM to operate a collective investment scheme and did not accept responsibility for JHM’s operation of such a scheme. However, this did not detract from the permission granted elsewhere in Schedule 5 to advise on and arrange deals within such schemes.
The next question was whether the prohibition of JHM from giving advice to or arranging deals for retail clients is permitted by Section 39 FSMA. The main discussion related to the meaning of "business of a prescribed description" in Section 39(1)(a) and "the whole or part of that business" in Section 39(1)(b) of FSMA. Lord Justice Males noted that (a) refers to the activity in question, in this case advising on investments and arranging deals in investments. These generic descriptions are not defined by reference to the classification of the clients that the advice may be given to or for whom deals may be arranged.
While the stipulation in the agreement that JHM should only deal with professional clients is a contractual term between JHM and KCL, it did not affect the scope of permission given by KCL or its responsibility for the purpose of Section 39 FSMA.
Implications:
This judgement provides a useful analysis of Sections 39(1)(a) and (b) of FSMA. It also provides a useful reminder to carefully draft and document arrangements with appointed representatives. Principals must ensure the appointed representative agreement’s terms are clear as to what constitutes relevant business for which the principal assumes responsibility for the appointed representative. Firms should also have systems in place to monitor the activities of their appointed representatives on an ongoing basis.
This decision also makes it clear that courts will make a difference between the what and the how. For consumers, this decision means that there are more possibilities to claim against principals opening further avenues for remedies.