KVB Consultants Ltd & Ors v Jacob Hopkins McKenzie Ltd & Ors

Factual and Procedural Background

The appellant, Company A, an authorised person under the Financial Services and Markets Act 2000 (FSMA), entered into a contract (the Appointed Representative Agreement or ARA) with Company B, appointing it as its appointed representative to conduct designated investment business. Company B promoted and operated a series of property investment schemes in which the respondent claimants invested approximately £1.7 million. When these schemes failed, the claimants sought to recover their losses from Company A, the only active defendant. The central issue was whether Company A, by appointing Company B as its appointed representative, accepted responsibility for Company B’s activities in promoting and operating these investment schemes. The claimants obtained summary judgment at first instance on the basis that Company A had accepted responsibility for Company B's promotional activities. Company A appealed this decision.

Legal Issues Presented

1. Whether, by appointing Company B as its appointed representative pursuant to section 39 of FSMA, Company A accepted responsibility for Company B’s promotion and operation of the property investment schemes.
2. Whether the Appointed Representative Agreement (ARA) prohibited Company B from carrying on collective investment scheme business, and if so, whether this excluded Company A’s responsibility under section 39.
3. Whether the ARA’s prohibition on Company B dealing with retail clients limited the scope of Company A’s responsibility under section 39, or whether such a limitation concerned only how the business was conducted rather than what business was conducted.

Arguments of the Parties

Appellant's Arguments

• The ARA prohibited Company B from conducting collective investment scheme business, thus Company A never gave permission nor accepted responsibility for such business under section 39 of FSMA.
• The ARA prohibited promotion of the schemes to retail clients, constituting a limitation on what business could be conducted rather than how it was conducted, thereby limiting Company A’s responsibility.

Respondents' Arguments

• The promotion and marketing of collective investment schemes fall within the scope of the ‘Relevant Business’ under the ARA, and Company A accepted responsibility for these activities.
• The prohibition on dealing with retail clients in the ARA is a contractual term between Company A and Company B but does not affect the scope of permission or responsibility under section 39, which relates to the nature of the business rather than client classification.
• Investor protection is paramount, and Company A should remain liable for acts of Company B even if Company B misclassified clients or acted outside internal contractual restrictions.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Anderson v Sense Networks Ltd [2019] EWCA Civ 1395	Distinction between 'what' activity may be carried on and 'how' a permitted activity is carried on under section 39 FSMA; authorised person can limit responsibility to part of the business.	The court applied this distinction to hold that limitations concerning client classification relate to 'how' business is conducted and do not limit the scope of responsibility accepted under section 39.
Financial Conduct Authority v Asset LI Inc [2016] UKSC 17	Definition of collective investment schemes under section 235 FSMA.	The court accepted that the investment schemes in question were collective investment schemes within the statutory definition, informing the analysis of whether Company A accepted responsibility for such schemes.
Martin v Britannia Life Ltd [2000] Lloyd's Rep PN 412	Scope of investment advice and the breadth of authorised activities under predecessor legislation.	Supported a broad interpretation of regulated activities and incidental conduct falling within the scope of authority, reinforcing the protective purpose of section 39.
Ovcharenko v Investuk Ltd [2017] EWHC 2114 (QB)	Principal’s liability under section 39 for appointed representative’s misconduct despite internal contractual limitations.	The court rejected attempts to exclude principal liability based on contractual limitations, emphasizing the statutory purpose of investor protection.
Street v Mountford [1985] 1 AC 809	Substance over form in contractual interpretation.	The court applied this principle to interpret the ARA’s statement denying pooling of capital and collective investment schemes as a mistaken understanding, not limiting the true effect of the contract.

Court's Reasoning and Analysis

The court analysed the nature and scope of the Appointed Representative Agreement (ARA) and the statutory provisions under section 39 of FSMA. It distinguished between operating a collective investment scheme, which is not a prescribed activity for appointed representatives and thus outside the scope of section 39 responsibility, and promoting or marketing such schemes, which is a prescribed activity and within the scope of responsibility.

The court held that the parties intended the promotion and marketing of the schemes to be ‘Relevant Business’ under the ARA, despite the parties’ mistaken belief that there was no pooling of capital or collective investment scheme involved. The contractual prohibition on operating such schemes was acknowledged but did not exclude responsibility for promotion and marketing activities.

Regarding client classification, the court applied the distinction from Anderson between ‘what’ business may be carried on and ‘how’ it is carried on. It held that limitations in the ARA restricting Company B from dealing with retail clients were limitations on ‘how’ the business was conducted, not on ‘what’ business was permitted. Therefore, these did not limit Company A’s acceptance of responsibility under section 39.

The court emphasised the statutory purpose of investor protection underpinning section 39, rejecting interpretations that would allow a principal to avoid liability by contractual restrictions that merely govern the manner of carrying on business or client classification decisions. It reasoned that if a retail client was misclassified as a professional client, the principal’s responsibility would still be engaged.

The court also considered the scope of Company A’s own FCA authorisation and acknowledged some uncertainty but concluded that this did not undermine the statutory construction of section 39 or the protective purpose of the legislation.

A minority judgment expressed reservations about entering summary judgment on the issue concerning retail clients due to the complexity of the regulatory framework and the precise scope of authorisation, but this did not affect the overall outcome.

Holding and Implications

The court DISMISSED THE APPEAL, affirming the judgment that Company A accepted responsibility under section 39 FSMA for the promotional activities of Company B in relation to the investment schemes.

The direct consequence is that Company A remains liable for breaches of regulatory rules committed by Company B in promoting the schemes. The decision reinforces the protective purpose of section 39 by ensuring that appointed representatives’ principals cannot evade liability through contractual limitations concerning client classification or internal restrictions on activities that are part of the prescribed business.

No new precedent was established beyond clarifying the application of section 39 and the ‘what’ versus ‘how’ distinction in the context of appointed representative agreements and client classifications.