A Principal's responsibility for an Appointed Representative – a tale of a summary judgment

14 August 2023. Published by George Smith, Partner and Rachael Healey, Partner

A recent summary judgment application, successfully made by claimants against a principal, provided that the principal was responsible for the acts of an appointed representative under the appointed representative agreement and highlights the risks of an unclear appointed representative agreement. The judgment also provides some useful commentary when it comes to considering the court's approach to the critical but potentially difficult distinction between limitations on what an appointed representative can do and on how the appointed representative should do it.

The Facts

In KVB Consultants Limited v Jacob Hopkins McKenzie Limited and others, the Claimants were a number of companies and individuals who, between October 2015 and March 2019, invested c. £1.7m in one or more investment schemes.  The schemes were devised, managed and promoted by Andrew Callen via a company, Jacob Hopkins McKenzie Limited (JHM).  The schemes were designed to allow investment in property development opportunities, with the intention that properties were sold at a profit, which would then be split between investors and JHM.  JHM classified each investor as an "elective professional investor", a "high net-worth investor", a "professional client", or a "sophisticated investor".  The Claimants alleged that in most cases the classification was incorrect. The ventures failed, half of the properties were repossessed by lenders, and Mr Callen was made bankrupt on 1 February 2022.

The claimant investors made a summary judgment application against the defendant principal firm, Kession Capital Limited (KCL).  KCL took on JHM as an authorised representative under s.39 of the Financial Services and Markets Act 2000 (FSMA), effectively lending its regulatory permissions to JHM.  In the application, the Claimants argued that the responsibility of KCL for JHM's activities was so clear summary judgment should be granted. 

KCL knew about JHM's intended property schemes but argued that it relied on assurances from Mr Callen of JHM that the schemes were not collective investment schemes (CISs).  KCL said it gave thought to whether the schemes met the definition of a CIS, given that it did not have authorisation to operate, promote or approve such schemes.

Under the terms of the appointed representative agreement (the AR Agreement), "Relevant Business" that KCL permitted JHM to undertake was defined as:

"… regulated activities which the [Appointed Representative] is permitted to carry out under this Agreement which are subject to the limitations of the Appointer's part IV permission… for the avoidance of doubt, the AR is not permitted to carry out any investment management activities…

The Appointer acknowledges that the [Appointed Representative] will offer advisory and arranging services to third party investors with regard to residential property investment.  There is no pooling of capital and no CIS"

Schedule 5 to the Agreement set out the limitations on KCL's Part IV permissions, including that KCL could not "operate a collective investment scheme".  Activities that fell within KCL's permissions included "advising on… rights to or interests in investments… share… unit". 

The Judgment

The court first found that the schemes were CISs.  The whole basis of the schemes was that the investors would contribute money, which would be pooled and used to purchase property that the investors would own in equity but over which they would have no day-to-day control.  The property would be managed for their overall and collective benefit with the sharing of profits.

Having established that the schemes were CISs, the court went on to consider the Claimants' case, which was put under 3 broad headings, asserting that KCL was responsible for the acts of JHM: (a) as a claim based upon breach of the rules in the FCA's supervision handbook; (b) on the basis that KCL had unlawfully approved promotions, leaving it liable under s.241 of FSMA; and (c) under s39(3) of FSMA, on the basis of a principal's responsibility for its appointed representative.

The substance of the judgment deals with s.39(3).  The Claimants argued that the services provided fell within the scope of the AR agreement as the definition of relevant business included that the appointed representative was "permitted to market and promote its services, arrange business and give advice". JHM's activities in promoting the various schemes therefore fell within the scope of the responsibility KCL had accepted.  JHM argued that the CISs were excluded from the ambit of "relevant business" and were not something KCL had accepted responsibility for, given KCL was only prepared to appoint JHM on the strict understanding that there would be no CIS.  Further, the Claimants' case was that they were retail investors and the terms of appointment expressly prohibited JHM from dealing with such investors.

The court first asked the question of whether the scope of the activities undertaken by JHM fell within the AR Agreement, i.e. was KCL responsible for the activities of JHM.  The court found:

  • So far as JHM operated various CISs, KCL would not be responsible for that, as one of the requirements for a valid exemption under s.39 FSMA is that the business to which the agreement relates and in relation to which responsibility is accepted should be "prescribed".  The AR Agreement therefore did not assume responsibility for activities falling outside the categories of activity that KCL itself was entitled to undertake, which did not extend to allowing KCL to operate CISs.
  • However, so far as JHM promoted or marketed the schemes, those activities fell within the prescribed categories within the AR Agreement and also fell within the activities KCL was authorised to conduct.
  • The court rejected KCL's argument that the activities fell outside the boundary of "Relevant Business" finding that:
  1. While KCL placed reliance on the fact that the Claimants were not retail clients, the court found that specifying the characteristics of those investors who may be appropriate candidates for the scheme was a requirement simply going to how the appointed representative should carry on business and therefore did not form part of the definition of "Relevant Business";
  2. While the AR agreement stated that JHM was not authorised to market CISs, it was clear in practice that the parties fully intended that the marketing of the schemes would fall within the definition of "Relevant Business".  The statement "no pooling of capital or CIS" therefore did not limit the scope of the business but instead simply expressed the parties' mutually agreed (albeit ultimately incorrect) conclusion about the legal label that was attached to the schemes.  This conclusion may have been contestable had there been any real possibility that KCL could establish that the structure of the business departed from what had originally been agreed, but KCL could not do that. 

The court, when reaching these findings, made some broad remarks of general application and useful guidance in relation to interpreting appointed representative agreements in the context of s.39 FSMA:

"… it would be wrong to apply section 39 with the single-minded objective of imposing the broadest possible liability upon those who appoint representatives.  Promiscuously broad liability would entail promiscuously broad exemption, and that is not what the FSMA intends.  Section 39 permits and requires lines to be drawn, based both on the prescribed categories of business for which exemption could be claimed, and the business for which the representative is appointed by the terms of the relevant agreement.  It operates alongside other principles including the ability of a concerned customer to ascertain from the register whether a person is authorised or exempt, and the obligations of the appointor to supervise the representative, which are not limited to the particular business that has been authorised.  But it is equally necessary not to dissect an appointment in the spirit of pedantry, divorced from commercial reality… [the Court of Appeal in Anderson v Sense] reminds us that a claimant cannot use section 39 to hold a firm liable for activities of representatives which are outside the scope of the business for which responsibility was assumed.  But it is not to be read as encouraging or requiring the court to take an artificially narrow view, or to assist appointors to draft away or around responsibility for business which in commercial reality falls squarely within the contemplated appointment."

The court then considered the issue of liability, as s.39 only imposes responsibility.  The court split the factual background into two periods: (1) the period after July 2016, in relation to which the evidence contained admissions by JHM that Mr Callen realised there was at least sufficient uncertainty about the status of the schemes that he should suspend marketing them, at which stage he claimed to have done so but he did not; and (2) the period from 2015 to mid-2016, at which stage Mr Callen honestly believed the schemes were lawful.  The court then granted summary judgment on the period after July 2016.

Take away

While the judgment is not ground-breaking, and does not provide for new law, it does provide a useful example of the practical application of the principles set out in Anderson v Sense.  In particular, the judgment highlights the importance to principals of ensuring that an appointed representative agreement is clear in its terms as to what constitutes relevant business for which the principal assumes responsibility for the appointed representative.  It is also a useful reminder of the importance of the distinction between "what" and "how" provisions in an appointed representative agreement, and in particular that the scope of responsibility depends on whether something is a "what" provision (e.g. not to advise on a CIS) or a "how" provision (e.g. clients can only be classified as sophisticated).  The judgment also demonstrates the difficulties of determining, in practice, what is a "what" provision and what is a "how provision", given that there is likely to be a substantial 'grey area'.  The court made clear that this important distinction will not be determined simply on the basis of how the relevant requirements have been drafted in the agreement, but rather requires an examination of the substance of the relevant provisions, assessed in a pragmatic manner.

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