FSMA s.39: Client Category Limits Define “Part of the Business”, Restricting Principal Liability for Appointed Representatives

1. Introduction

Kession Capital Ltd (in Liquidation) v KVB Consultants Ltd and others concerned the scope of an authorised firm’s statutory responsibility for the acts of its appointed representative under section 39 of the Financial Services and Markets Act 2000 (“FSMA”).

The appellant, Kession Capital Ltd (“Kession”), was an FCA-authorised person with Part 4A permission to advise on investments and arrange deals in investments, subject (at the material time) to a limitation excluding retail clients. Kession appointed Jacob Hopkins McKenzie Ltd (“JHM”) as its appointed representative via an Appointed Representative Agreement (“ARA”) that expressly limited JHM’s “Relevant Business” to professional clients and eligible counterparties and prohibited retail business.

Seven property-based investment schemes failed, producing losses of about £1.7 million. Investors sued multiple parties. As against Kession, the central question on this appeal was narrow but significant: was Kession responsible under FSMA section 39(3) for JHM’s dealings with investors who (it was alleged) were in truth retail clients, despite the ARA’s prohibition on retail business and Kession’s own retail limitation?

2. Summary of the Judgment

The Supreme Court allowed the appeal. It held that, for the purposes of FSMA section 39, “dealing with retail clients” can constitute a “part” of the prescribed business (such as advising on investments or arranging deals). Therefore, an authorised person may accept responsibility only for the non-retail “part” of that business.

On the facts, because the ARA limited JHM’s permitted business to professional clients/eligible counterparties and excluded retail clients, the Court made a final determination that Kession had no responsibility under section 39(3) for JHM’s acts or omissions in carrying on business with retail clients.

3. Analysis

3.1 Precedents Cited

Anderson v Sense Network Ltd

The Court treated Anderson v Sense Network Ltd as the controlling modern authority on section 39 and reaffirmed its core propositions:

  • Section 39(1) operates in three steps: a contract permitting prescribed business; written acceptance of responsibility for the whole or part of that business; and exemption from the general prohibition only to the same extent.
  • The AR’s exemption under section 39(1) and the principal’s responsibility under section 39(3) are coterminous.
  • The “whole or part of that business” language is not confined to multi-principal arrangements; partial appointments can reflect the expertise and monitoring capacity of the principal and/or representative.

In Anderson v Sense Network Ltd, a contractual restriction (“only using a Company Agency”) successfully delineated a “part” of the business, defeating claims seeking to impose liability for out-of-scope fraudulent promotions. In the present case, the Supreme Court applied the same structural logic: the statute permits demarcation of “part” of the business, and the dispute became whether “retail clients” can be such a “part”.

Ovcharenko v InvestUK Ltd

The Court disagreed with the Court of Appeal’s reliance on Ovcharenko v InvestUK Ltd as characterising section 39(3) primarily as a “long stop” remedy for clients. The Supreme Court instead emphasised section 39’s prophylactic regulatory function: enabling supervised participation in regulated activity by non-authorised persons, within defined and monitorable limits.

R (O) v Secretary of State for the Home Department; R (PACCAR Inc) v Competition Appeal Tribunal

These authorities were cited for orthodox interpretive method: construing statutory language in context, within the statute as a whole, and in light of statutory purpose, with cautious use of external aids (including explanatory notes).

Financial Conduct Authority (formerly Financial Services Authority) v Asset LI Inc (trading as Asset Land Investment Inc)

The Court adopted Lord Sumption’s caution that regulatory regimes are often a compromise between consumer protection and avoiding “regulatory overkill”. That caution featured prominently in rejecting an interpretation that would impose responsibility on a principal for retail business it had prohibited and was not equipped (or permitted) to supervise.

3.2 Legal Reasoning

(a) The statutory structure: “permission/acceptance/exemption” are aligned

The Court’s reasoning begins from the mechanics of section 39: an AR is exempt only to the extent the principal has accepted responsibility in writing for the whole or part of the prescribed business. By section 39(3), the principal is responsible to the same extent “as if” it had expressly permitted what the AR did or omitted to do.

This makes the definition of the “part” decisive. If “retail clients” can define a “part”, the principal can limit responsibility accordingly. If they cannot, liability expands regardless of contractual prohibition—producing, in the trial judge’s memorable phrase, “promiscuously broad” outcomes.

(b) Ordinary language and regulatory context: retail/professional distinctions are real “parts” of business

The Supreme Court held there is “no difficulty as a matter of ordinary language” in treating the retail segment as a “part” of a financial services business. That linguistic conclusion is reinforced by the regulatory reality: FSMA and the FCA Handbook draw sharp distinctions between retail clients and others, with materially different conduct burdens (marketing rules, charging structures, liability exclusions) and competency/training requirements.

(c) Consistency with the FCA’s power to limit permissions

The Court treated as important that the FCA can restrict a Part 4A permission by client category (via section 55E(5)). If client-category limits can define the scope of authorised activity, it is coherent that the same kind of delineation can define a “part” of the prescribed business for section 39 purposes.

(d) The “prophylactic” purpose of section 39: supervision capacity and competence

The Court reframed section 39 away from a remedy-centric “long stop” and toward a preventive supervision model: the AR regime enables regulated activity by a non-authorised person because a suitably authorised and competent principal can assess and monitor it.

On that model, it would undermine consumer protection to force a principal specialising in professional business (and possibly barred from retail) to assume responsibility for retail dealings—precisely where additional protections and competence requirements apply. The Court cited FCA materials (including SUP 12.4.2 R) to show that principals must have adequate controls, resources, and monitoring capability for the activities for which they are responsible.

(e) Avoiding “promiscuously broad exemption”: criminal and civil consequences for ARs acting out of scope

The Court gave substantial weight to a consequence of the Court of Appeal’s approach: if an AR remains exempt even when it conducts expressly prohibited retail business, then it avoids section 23 criminal liability and the section 26 unenforceability regime for out-of-scope regulated activity. The Supreme Court considered that outcome inimical to consumer protection, because it would grant an AR a broad statutory safe harbour precisely when it acts outside carefully chosen restrictions.

(f) The “what/how” distinction from Anderson v Sense Network Ltd: retail limitation goes to scope (“what”), not conduct (“how”)

The Court accepted the utility of distinguishing “what” business is permitted from “how” it is conducted, while warning against substituting slogans for statutory language. It held that retail/professional client limits are scope-defining: they determine which segment of the prescribed business is permitted (and monitored), rather than being mere instructions about how to perform the permitted activity.

In rejecting the Court of Appeal’s analogy with investment “suitability” assessments, the Supreme Court reasoned that client categorisation is often objective (and, in any event, defaults to retail unless clearly professional). Even where assessment exists (elective professional clients), that does not stop the retail segment from being a “part” of the business.

(g) Explanatory notes and FCA guidance: the principal must have permission for the activities covered

The Court relied on Bill explanatory notes indicating that regulated activities carried on under an AR arrangement are the principal’s responsibility, and the principal “must therefore have permission ... for all the activities.” It also cited FCA guidance (e.g., SUP 12.4.1A G and SUP 12.5.3 G) supporting the expectation that AR-covered activities fall within the principal’s permission and are compatible with limitations on that permission.

This addressed (and effectively validated) the policy concern raised by Lewison LJ’s dissent below: it would be anomalous for a principal to be made responsible for retail activity where its own permission excluded retail.

3.3 Impact

  • Client-category limits can validly define “part of the business” under FSMA section 39. Principals may confine statutory responsibility by restricting AR business to professional clients/eligible counterparties (or, conversely, to retail-only segments).
  • Out-of-scope AR conduct is more exposed: if an AR deals with retail clients contrary to the written acceptance/permission, it risks losing exemption and triggering section 23 (offence) and section 26 (unenforceability) consequences, rather than shifting liability “up” to the principal.
  • Supervision and competence alignment: firms will likely structure AR appointments more explicitly around the principal’s resources, controls, and competence for the relevant client segment—consistent with SUP 12 monitoring obligations.
  • Litigation reorientation: claimants may focus more on (i) whether the investor is actually retail/professional under COBS, (ii) what the written acceptance of responsibility covers, and (iii) direct claims against the AR (including statutory consequences of acting without exemption), rather than assuming a solvent principal is always a “liability target”.
  • Regulatory design signal: the Court indicated that if broader principal liability is desirable as policy, it is for the FCA (within its powers) to pursue through rule-making rather than for courts to achieve through an expansive reading that produces “regulatory overkill”.

4. Complex Concepts Simplified

General prohibition (FSMA section 19)
You cannot carry on regulated financial activities in the UK unless authorised or exempt. Breach can be criminal and can make agreements unenforceable.
Authorised person / Part 4A permission
An FCA-authorised firm can only carry on the regulated activities (and within the limits) stated in its permission (e.g., “no retail clients”). Acting outside permission is a regulatory breach (sanctions), but not usually criminal and does not usually void transactions.
Appointed representative (FSMA section 39)
A non-authorised business can lawfully perform certain regulated activities if a principal (authorised firm) contracts with it and accepts responsibility in writing for all or part of the prescribed business.
Coterminous exemption and responsibility
The AR is exempt only for the business the principal has accepted responsibility for; the principal is responsible only for that same scope. If the AR steps outside that scope, it may lose exemption for that activity.
Retail vs professional clients (COBS)
Retail clients are the default category and get higher protections. Professional/eligible counterparty status is defined by objective criteria or (for “elective” status) formal assessment and written acknowledgments.
“What” vs “how” (from Anderson v Sense Network Ltd)
“What” concerns the permitted scope of business; “how” concerns performing it properly (e.g., suitability, compliance). A firm cannot avoid liability by writing “you must comply with rules” and calling non-compliance “out of scope”. Here, the Court held that limiting the client segment (retail vs professional) goes to “what” is permitted.

5. Conclusion

The Supreme Court has clarified that, under FSMA section 39, client category can define a “part” of the prescribed business. A principal may therefore accept responsibility only for professional/eligible-counterparty business and exclude retail dealings; where it does so, the principal is not liable under section 39(3) for an appointed representative’s out-of-scope retail activity.

The decision strengthens the internal logic of the AR regime: responsibility tracks permission; permission tracks competence and supervisory capacity; and consumer protection is advanced primarily through preventive regulatory structure, not by automatically providing a solvent defendant whenever an appointed representative goes rogue.