Appointed Representatives – the Good, the Bad and the Ugly?

The Key Facts

Mr Greig was a principal of Midas Financial Services (Scotland) Ltd (Midas). Midas was an Appointed Representative (AR) of Sense Network (Sense). Mr Greig, unbeknown to Sense and prior to Midas’ appointment as Sense’s AR, was operating a Ponzi scheme (the Scheme).

The Scheme was simple: Midas told clients that Mr Greig had access to a special RBS high interest account that was secure and gave very high, guaranteed returns. In fact, no such account existed. Mr Greig took steps to disguise his activities from Sense (who operated a very tight ship when it came to its regulatory duties). The money was used by Mr Greig for his own gratification, and any investor who withdrew their funds was paid from sums invested by new clients.

The Scheme unravelled in 2014. At that time, 279 investors were owed £13.6 million, with funds of £379,000 available.

The Good? The Court of Appeal’s decision

Understandably, the investors were upset, and, since Midas was impecunious, pursued Sense. Their case was that Sense were responsible because Midas was Sense’s AR, and because Sense were vicariously liable for Midas’ actions.

The Court of Appeal rejected both arguments. This was the first time the Court of Appeal had considered the key legislative provision on Appointed Representatives, section 39 Financial Services and Markets Act 2000 (FSMA). It found that Sense did not have blanket responsibility for its ARs’ actions. Rather Sense were responsible for Midas only to the extent that it had agreed to be under the relevant AR agreement. That agreement limited Midas in various ways: in particular it required Midas to use a “company agency”, in other words a provider authorised by Sense to sell its products. Since the Scheme did not use such a provider, it fell outside the AR agreement and thus was not Sense’s responsibility.

The vicarious liability claim was also dismissed. Midas was carrying out its own business, parallel to its work as an AR, and the work streams were separate. Sense had not given Midas the job of operating the Scheme, nor could it be said that the Scheme was for Sense’s benefit, when it did not even know of it. The test for establishing vicarious liability was not therefore met.

The Bad? Where does this leave matters?

The Court of Appeal’s findings should be a welcome outcome for IFAs/Networks as it confirms the industry’s understanding of how section 39 FSMA operates.

However, the decision is not without criticism. Investors who lost money will remain disappointed, and the outcome from the case does not sit easily with the regulatory focus on consumer protection. That said, a finding against Sense would have achieved no benefit to the industry. Sense’s approach to its regulatory duties was diligent. If, in those circumstances, Sense had been found wanting, there was a very real possibility that it would dissuade regulated firms from doing anything other than the bare minimum to comply with regulatory requirements. That is not a position the Regulator would want encouraged.

The decision also commented further on the definition of an unregulated collective investment scheme (UCIS), which remains a point of contention following the Supreme Court’s Asset Land decision. You can read a summary on this case here. The Anderson decision will need to be considered in future debates on this issue.

The Ugly? The Crystal Ball effect

While the case has resulted in a positive outcome for IFAs/Networks, some areas are still open to challenge. The law around vicarious liability is not wholly clear so there remains potential for further debate in future claims.

The construction (or wording) of section 39 FSMA could also be challenged in future, especially if the regulatory focus remains on consumer protection and the application of section 39 FSMA in accordance with this case leads to the opposite effect.

Perhaps the most crucial issue is the strain and constraint on IFAs/Networks in an increasingly regulated market, where the cost of indemnity insurance is becoming punitive. The indemnity insurance position has worsened in the past year, with insurers dropping out of the market (particularly if defined benefit (DB) pension transfer advice is an activity), or from increasing premiums (in part following the Financial Ombudsman Service’s redress limit change).

The effect on consumers cannot be underestimated. The insurance position has had the effect of reducing both the market, and thus, consumer choice and access to advice. It has also had the unfortunate side effect of positively encouraging unregulated and less scrupulous advisers. Following recent publicity of another Ponzi Scheme (the Churchgate Trading Syndicate) we await with interest any regulatory investigations that could result in the imposition of more restrictions on firms/their ARs.