Factual and Procedural Background
This appeal concerns the scope of an authorised firm's statutory responsibility for the acts of its appointed representative under the Financial Services and Markets Act 2000 (“FSMA”), section 39.
The Appellant (“Company A”) was an authorised person with Part 4A permission to carry on regulated activities including arranging deals in investments and advising on investments, subject (at the relevant time in June 2015) to limitations excluding dealings with retail clients. Company A entered an Appointed Representative Agreement (“ARA”) appointing another firm (“Company B”) as its appointed representative to carry on specified “Relevant Business” (arranging and advising), but expressly prohibited Company B from conducting any business with retail clients.
Company B promoted a series of residential property investment schemes. Investors were classified by Company B as professional clients. The schemes failed, and investors (the Respondents) lost a combined total of £1.7 million.
The Respondents issued proceedings against multiple defendants including Company A, alleging (save for one claimant) that they were in truth retail clients. Default judgments were entered against Company B and certain other defendants, and other procedural outcomes were noted, leaving Company A as the relevant defendant for this appeal.
On an application for summary judgment against Company A, the High Court (Judge [Last Name], sitting as a Deputy High Court Judge) refused summary judgment on two pleaded bases but granted summary judgment on a third basis: that Company A was liable by virtue of section 39(3) for Company B’s conduct, giving rise to damages under section 241, because Company B had invited participation in schemes which were collective investment schemes as a matter of law.
The High Court’s decision on Company A’s responsibility under section 39(3) was affirmed by a majority in the Court of Appeal. There was no appeal on the finding that the schemes were collective investment schemes. The sole issue before the Supreme Court was whether Company A was responsible under section 39(3) for Company B’s dealings with retail clients despite the ARA’s prohibition and Company A’s own regulatory limitation.
Legal Issues Presented
- Whether, for the purposes of FSMA section 39, “dealing with retail clients” can constitute “part of” the “business of a prescribed description” such that an authorised principal may validly accept responsibility only for dealings with non-retail clients, with the result that section 39(3) responsibility does not extend to dealings with retail clients prohibited by the appointed representative agreement.
Arguments of the Parties
This information was not available in the provided opinion.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Anderson v Sense Network Ltd [2019] EWCA Civ 1395; [2020] Bus LR 1 |
Construction of FSMA section 39; the “whole or part of that business” language; distinction between limits on “what” business is permitted and requirements as to “how” permitted business is carried on; AR exemption and principal responsibility are coextensive. |
Treated as binding/common ground and not challenged. Used to frame the statutory mechanism (contract + written acceptance of responsibility + exemption), and to emphasise that contractual drafting cannot avoid responsibility for failures in how permitted business is conducted, while responsibility may be limited to a “part” of business. The Supreme Court applied this framework to assess whether “retail clients” is a permissible “part” limitation. |
| Ovcharenko v InvestUK Ltd [2017] EWHC 2114 (QB) |
Referred to for a view that section 39(3) provides a “long stop” liability target for clients dealing with appointed representatives. |
The Supreme Court disagreed with the Court of Appeal’s endorsement of this “long stop” characterisation as the “whole point” of section 39(3), preferring the purpose statement in Anderson emphasising controlled conferral of exempt status consistent with protective regulatory aims. |
| R (O) v Secretary of State for the Home Department [2022] UKSC 3; [2023] AC 255 |
General approach to statutory construction: text as primary source, read in context and in light of purpose; use of external aids where relevant. |
Cited as part of the general interpretive framework for construing FSMA section 39. |
| R (PACCAR Inc) v Competition Appeal Tribunal [2023] UKSC 28; [2023] 1 WLR 2594 |
General approach to statutory construction (as above). |
Cited as part of the general interpretive framework for construing FSMA section 39. |
| Financial Conduct Authority (formerly Financial Services Authority) v Asset LI Inc (trading as Asset Land Investment Inc) [2016] UKSC 17; [2016] Bus LR 524 |
Regulatory legislation as a compromise between consumer protection and avoidance of regulatory overkill (Lord Sumption at para 88). |
Used to caution against interpretations producing “regulatory overkill” and to support construing section 39 in a way consistent with a balanced protective regime. |
Court's Reasoning and Analysis
The court treated the appeal as turning on statutory construction of FSMA section 39, particularly the meaning of “the whole or part of that business” in section 39(1)(b) and, correspondingly, the scope of the principal’s responsibility under section 39(3). It proceeded on the basis (unchallenged) that the appointed representative’s exemption under section 39(1) and the principal’s responsibility under section 39(3) are coterminous.
The court identified the central question as whether “dealing with retail clients” can be a “part” of the prescribed business (here, advising on investments and arranging deals), so that responsibility can be accepted for dealings with professional clients and eligible counterparties but not for retail clients.
As a matter of ordinary language, the court considered it unobjectionable to describe retail dealings as a distinct part of a financial services business. It emphasised that FSMA and FCA rules draw a significant regulatory distinction between retail and professional clients, reflecting different protective needs, which supported treating client category as a meaningful demarcation within a broader regulated activity.
The court further relied on the fact that the FCA may impose limitations on an authorised person’s Part 4A permission restricting business to certain categories of client (including excluding retail clients). That regulatory capacity suggested that “part” of a business can be identified by reference to client category for section 39 purposes as well.
Rejecting a primarily remedial (“long stop liability”) account of section 39, the court emphasised the regime’s prophylactic structure: section 39 is designed to allow non-authorised persons to participate in regulated business only where a competent authorised principal can assess suitability and supervise the permitted business. On that approach, consumer protection is served by ensuring that (i) appointed representatives are permitted to deal with retail clients only when competent and qualified to do so, and (ii) they are supervised by principals similarly equipped. The court considered it counterproductive to consumer protection to make a principal responsible for retail business where the permission and agreement were limited to professional business “for good reason” and where the principal’s own permission excluded retail dealings.
The court also regarded as unsatisfactory the implication of the Court of Appeal majority’s approach that a principal could be responsible for an appointed representative’s retail dealings even if the principal’s own permission excluded retail clients, and cited explanatory material indicating that the principal “must therefore have permission ... for all the activities” carried on by the representative under such arrangements.
Another significant consideration was the consequence for the appointed representative’s exemption. If retail dealing were not capable of constituting a “part” limitation, then an appointed representative expressly prohibited by contract from dealing with retail clients could nonetheless remain exempt from the general prohibition when it did so, avoiding the section 23 offence and section 26 unenforceability consequences. The court viewed that as creating an excessively broad exemption inconsistent with the regulatory design.
The court then addressed and rejected the Court of Appeal majority’s principal reasons. It did not accept that “type of business” and “for whom” it is undertaken are necessarily distinct in a way that prevents client-category segmentation into “parts” of business for section 39. It also disagreed that client categorisation is sufficiently analogous to “suitability” assessments to be treated merely as “how” business is conducted; it considered categorisation often involves no assessment (and, where it does, is not comparable in nature and depth), and in any event did not see why the presence of assessment would preclude identifying a part of the business. The court reaffirmed the “what/how” distinction as a helpful tool but insisted it cannot displace the statutory phrase “part of that business”; on the court’s analysis, retail vs professional dealing goes to scope (“what/part”) rather than mere conduct standards (“how”).
The court also rejected a submission that any limitation must be framed by reference to regulated activities/investments rather than client types, noting that Anderson had accepted a “part” limitation by reference to providers (company agency products) and that client categorisation is an important feature of the overall regime.
Finally, while noting the dissenting concerns below, the court clarified that once a person is authorised it is an “authorised person” for FSMA purposes, though it may breach regulatory obligations by acting beyond its Part 4A permission.
Holding and Implications
ALLOWED: The appeal was allowed. The court held, as a final determination, that “dealing with retail clients” is a “part” of the business of a prescribed description within FSMA section 39, with the result that the Appellant had no responsibility under section 39(3) for anything done or omitted by its appointed representative in carrying on business with retail clients.
The direct effect is that the Respondents could not maintain the summary judgment basis that relied on extending section 39(3) responsibility to retail-client dealings prohibited by the appointed representative agreement. The opinion does not state any broader implications beyond this construction of section 39 in the context described.