In what circumstances is a financial advice network liable for the acts and omissions of its appointed representatives (ARs)?
The Court of Appeal has today provided valuable guidance for those operating this business model. The decision will be welcomed by financial advice networks in confirming, in particular, that they are able to place restrictions on the business of ARs for which they have accepted responsibility.
The Court of Appeal today handed down judgment in the case of Anderson & Others v Sense Network Limited. RPC acted for Sense, the successful Defendant.
The 95 Claimants deposited money in a 'Ponzi' scheme operated by the director of one of Sense's ARs. Sense discovered the scheme in 2014 on receiving a whistle-blower notification and immediately reported the scheme to the FCA, leading to the scheme's collapse. The funds placed into the scheme were almost entirely lost.
In a lengthy High Court trial that took place in 2018 the Claimants asserted that Sense was liable for their losses on various grounds. Mr Justice Jacobs dismissed the claim, accepting expert evidence that Sense was a "very good firm" and not at fault in not having discovered the scheme. The Judge also found on the facts that the AR had no actual or ostensible authority to run the scheme.
The Claimants obtained permission to appeal to the Court of Appeal on two grounds, neither of which alleged any wrongdoing by Sense: (1) that Sense was liable by operation of s.39 Financial Services and Markets Act 2000 ("s.39"); and (2) that Sense was liable on the basis of the general doctrine of vicarious liability. This was the first case in which the Court of Appeal had been asked to consider the interpretation of s.39.
The Court of Appeal today dismissed the appeal. In relation to s.39, the provision under which principal firms accept liability for certain actions of their ARs, the Court found that it is entirely valid, as Sense had done, to place limits on the scope of the permission granted to an AR. S.39 allows a principal to authorise the whole or part of a regulated activity. The Court accepted that Sense had only given permission for its AR to do business through the Company Agencies it maintained with individual product providers. The scheme had not been business done through such agencies and therefore fell outside the scope of the business for which Sense had accepted responsibility in writing. Consequently, Sense was not liable under s.39 for the AR's acts.
This finding will be helpful to any advice network seeking to rely upon contractual restrictions on the AR business for which it has accepted responsibility, including in the context of complaints to the Financial Ombudsman Service, which is obliged to take account of the law on this issue.
In relation to vicarious liability, the Court was dismissive of the Claimants' argument that Sense was vicariously liable at common law for the actions of its AR. Even if the general principles of vicarious liability did apply to an AR relationship (a point the Court decided it did not need to determine) the Court noted that the AR: (a) was part of a recognisably separate business from that of the principal; and (b) was not 'assigned activities' by the principal. Although the decision was on the facts this finding is encouraging for financial advice networks defending allegations of vicarious liability for ARs.