This is the first of two key decisions expected this year on the responsibility of “principals” for their “appointed representatives” under the Financial Services and Markets Act 2000.
This is a slightly odd arrangement which originates a long time ago and allows a business – the Principal – to appoint individuals or companies – Appointed Representatives – to sell financial products that require regulation. This was historically often done by, for example, insurance companies so that their tied brokers did not need to be separately regulated, of course a customer could go to a whole of market adviser who had to be regulated.
Now, it may seem odd that an Appointed Representative does not need to be regulated, but they only obtain this exemption from being directly regulated because their Principal accepts responsibility for anything done by them under their agreement.
This is important because in Anderson v Sense, Sense are the Principal and the 95 claimants were duped by Sense’s Appointed Representative – Midas – into a Ponzi scheme.
So far, so good, as Midas were Appointed Representatives, the Claimants say Sense are responsible (this is important as fraud tends to lead to insurance being avoided and Sense have the means to actually pay compensation).
Now the court initially rejected the claim on the various grounds it was brought and the Court of Appeal only considered section 39(3) – the statutory basis – and vicarious liability for tort.
The Court of Appeal rejected the notion that once the Principal has accepted responsibility for a generic kind of work, defined by reference to those permissions the Principal has, then even if the Appointed Representative strays from the approved list, then as long as the work is within the permissions granted to the Appointed Representative then the Principal is liable. This was on various basis but ultimately the interpretation of the provisions and the agreement between the Appointed Representative and Principal limited what the Appointed Representative could do to the terms of that agreement and therefore the Principal’s liability was limited to those limits it imposed. So the Appointed Representative undertaking other business was not covered.
The concept if vicarious liability was also considered. However, the Court of Appeal agreed with the trial judge that Midas was carrying on its own business not that of Sense.
One helpful note is that Sense sought to overturn the (now moot) finding that the Ponzi scheme was not a collective investment scheme. This was clearly dismissed and upholds the trend that a CIS will be found when its low threshold is met – even when what is sold is not what is being done as in the case of this fraudulent Ponzi scheme.
Whilst this was unsuccessful, there is mention in it that a question was left open with the Court of Appeal decided Frederick v Positive Solutions – and this similar case of a rogue Appointed Representative which has gone to the Supreme Court and a judgment is awaited!