Anderson & Ors v Sense Network Ltd

Factual and Procedural Background

This appeal concerns the dismissal of claims against the respondent Company A under provisions of the Financial Services and Markets Act 2000 (FSMA) and common law. The claims arise from the activities of Company B, its advisors, and its controlling director and shareholder, referred to as Director A. It is not alleged that Company A was directly involved in these activities but is claimed liable on the basis that Company B was an "Appointed Representative" (AR) pursuant to section 39 of FSMA by virtue of contracts with Company A made in 2007 and 2013.

Ninety-five claimants issued proceedings against Company A. Case management directions allowed the claims of twelve lead claimants to proceed to trial. The trial took place over 13 days in July 2018 before Judge A in the Commercial Court, who delivered a detailed judgment in October 2018 dismissing all claims.

Permission to appeal was granted on two claims: those under section 39(3) of FSMA and on the basis of vicarious liability at common law. Company A also sought to uphold the dismissal of the statutory claim on the ground that the scheme operated by Company B and Director A was not a collective investment scheme as defined by section 235 of FSMA. The appeal thus raised three main issues.

Company B was founded in 2006 by Director A and provided financial advisory services. From 2007, as an AR of Company A, it advised clients on investments for which Company A held agencies, mainly mortgage advice. Unknown to Company A, Company B operated a scheme under which clients invested in purported short-term deposits with high interest rates, masterminded by Director A, which was in fact a dishonest Ponzi scheme. When the Financial Conduct Authority (FCA) intervened in 2014, substantial investor losses were identified. Company B concealed the scheme’s operation from Company A, including by not uploading related documents to Company A’s monitoring system and by using separate bank accounts not subject to Company A’s audit.

The regulatory framework under FSMA was outlined, including the role of authorised persons and appointed representatives (ARs). Company A was authorised to carry on regulated activities including advising on and arranging deals in investments, while Company B was an AR appointed by Company A under contracts in 2007 and 2013. The AR regime under section 39 of FSMA exempts ARs from authorisation, but makes the authorised person responsible for the AR’s activities within the scope of the business for which responsibility is accepted.

The AR Agreements between Company A and Company B authorised Company B to advise and sell authorised products using Company A’s agencies, with express written acceptance of responsibility limited to regulated activities carried out on the terms of the Agreement. Restrictions included that Company B’s “Separate Business” must be distinct and unconnected with Company A.

Legal Issues Presented

1. Whether Company A is liable under section 39(3) of FSMA for losses suffered by claimants due to the activities of Company B in advising on and arranging investments in the scheme.
2. Whether Company A is vicariously liable at common law for the tortious conduct of Company B’s advisors in recommending investment in the scheme.
3. Whether the scheme operated by Company B and Director A constituted a collective investment scheme as defined by section 235 of FSMA.

Arguments of the Parties

Appellants' Arguments

• Company B negligently advised clients to invest in the scheme, which was unauthorised and dishonest, but the appellants did not allege Company B operated the scheme.
• Section 39(3) liability should extend broadly to cover advice given by Company B within the scope of its generic authorised business, regardless of contractual restrictions limiting responsibility to specific parts of the business.
• The authorised person (Company A) must accept responsibility for all activities of the AR (Company B) that fall within the authorised person’s own FCA authorisation, as reflected in the public FCA register.
• The statutory liability under section 39(3) is co-extensive with the written acceptance of responsibility, but the acceptance should be construed broadly to encompass all investment advice given by Company B.
• Vicarious liability arises because Company A created the risk of negligent advice by appointing Company B as an AR and supervising its advisors.
• The scheme operated by Company B was a collective investment scheme under section 235 of FSMA, satisfying all statutory conditions.

Respondent's Arguments

• Company A’s acceptance of responsibility under the AR Agreement was limited to business carried out using Company A’s “Company Agencies,” excluding the scheme activities.
• The scheme was not a collective investment scheme but merely involved deposits, which are outside the prescribed regulated activities for an AR.
• Company B operated a recognisably independent business, so Company A is not vicariously liable for tortious acts of Company B’s advisors.
• The FCA public register descriptions support a narrow construction of the scope of responsibility accepted by Company A.
• The exemption in the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 applies to the scheme, excluding it from the statutory definition.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Martin v Britannia Life Ltd [2000] Lloyd's Rep PN 412	Liability of principal under predecessor section 44 for acts closely connected to AR’s authorised activities.	Supported the principle that advice incidental to authorised business falls within principal’s liability under section 39.
R v Financial Ombudsman (on the application of Tenetconnect Services Ltd) [2018] EWHC 459 (Admin)	Application of section 39 liability principles to AR agreements and activities.	Reinforced approach to interpreting AR responsibility in line with statutory framework.
Ovcharenko v InvestUK Ltd [2017] EWHC 2114 (QB)	Liability for investment advice given by ARs within scope of AR agreement despite breaches of AR agreement terms.	Distinguished between authorised business and conduct, supporting liability for how business is carried out.
Cox v Ministry of Justice [2016] UKSC 10, [2016] AC 660	Extension of vicarious liability to independent contractors where activities are integral to defendant’s business and risk is created.	Applied to reject vicarious liability of Company A for Company B’s advisors, finding activities were independent business.
Asset Land Investment plc v FCA [2016] UKSC 17, [2016] Bus LR 524	Interpretation of “collective investment scheme” focusing on common understanding of parties at investment time.	Supported finding that the scheme constituted a collective investment scheme despite being a fraudulent Ponzi scheme.
Frederick v Positive Solutions (Financial Services) Ltd [2018] EWCA Civ 431	Issues on vicarious liability for commercial agents left open.	No decision on applicability to case; court declined to express view.

Court's Reasoning and Analysis

The court began by analysing the statutory scheme under section 39 of FSMA, focusing on the language of subsection (1) which defines the scope of the business for which an authorised person accepts responsibility in writing for the activities of an appointed representative. The court emphasised that the acceptance of responsibility must be explicit and in writing, and may relate to the whole or part of a prescribed generic business description.

The court rejected the appellants’ submission that the authorised person must accept responsibility for the entire generic category of business for which it is authorised by the FCA, holding instead that the acceptance of responsibility is contractually defined and can be limited to part of that business. This interpretation aligns with the statutory language and the regulatory purpose of the AR regime, which allows authorised persons to limit their responsibility and control their exposure.

The court considered the AR Agreement between Company A and Company B, noting express contractual restrictions such as the requirement to use Company A’s “Company Agencies.” The court found that advising on or arranging investments in the scheme did not involve the use of a Company Agency and thus fell outside the business for which Company A accepted responsibility. This limitation was held to be effective and consistent with the regulatory framework.

Regarding vicarious liability, the court applied the principles from the Supreme Court in Cox v Ministry of Justice. It found that Company B was carrying on a recognisably independent business and that its advisors’ activities were not assigned to them as an integral part of Company A’s business for its benefit. Therefore, Company A was not vicariously liable for tortious acts of Company B’s advisors.

On the issue of whether the scheme was a collective investment scheme, the court accepted the judge’s factual findings that the scheme met the statutory definition under section 235 of FSMA. The court rejected Company A’s arguments that the scheme was merely a deposit arrangement or fell within statutory exemptions. It held that the arrangements enabled participants to receive profits from the management of pooled property, satisfying the statutory criteria despite the fraudulent nature of the scheme.

Finally, the court noted that although the appellants suffered severe losses due to a fraud, these losses could not be recovered from Company A on the grounds advanced. The court thus dismissed the appeal.

Holding and Implications

The court DISMISSED THE APPEAL.

The holding confirms that under section 39 of FSMA, an authorised person’s liability for the acts or omissions of an appointed representative is limited to the business for which it has expressly accepted responsibility in writing, which may be a part only of the generic authorised business. Contractual limitations within AR agreements can effectively restrict the scope of such responsibility and liability.

The court also clarified that vicarious liability at common law does not extend to authorised persons for the tortious acts of ARs carrying on independent businesses, absent activities assigned as integral parts of the authorised person’s own business.

The court upheld the finding that the scheme operated by the AR constituted a collective investment scheme under FSMA, but this did not extend liability to the authorised person given the contractual and statutory limitations.

No new precedent altering the interpretation of section 39 or vicarious liability principles was established; the decision primarily applies established legal principles to the specific facts of the case.