Anderson v Sense Network Ltd [2019] EWCA Civ 1395
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Anderson v Sense Network Limited [2019] EWCA Civ 1395 was an appeal from the dismissal by Mr Justice Jacobs of claims brought under the Financial Services and Markets Act 2000 (FSMA) and at common law. The Court of Appeal (Lord Justice David Richards, Lord Justice Hamblen and Mr Justice Snowden) dismissed the appeal.
The appellants, comprising ninety-five investors (with twelve proceeding as lead claimants), sought to hold Sense Network Limited (Sense) liable for losses arising from the activities of Midas Financial Services (Scotland) Limited (Midas), its advisers and its controlling director Alistair Greig. Midas had been an Appointed Representative (AR) of Sense pursuant to agreements made in 2007 and 2013. It was found that Midas had operated a dishonest Ponzi scheme whereby clients believed they were making short-term deposits earning very high interest under special arrangements with the Royal Bank of Scotland. In fact no such arrangements existed and deposits from later clients were used to repay earlier deposits with interest. When the FCA intervened in 2014 there were 279 members of the public whose investments, totalling £12.8 million, had not been repaid; available funds amounted to only £379,000. The scheme had been concealed from Sense by steps taken on Mr Greig’s instructions, including non-disclosure of scheme documents to Sense’s cloud-based monitoring system and the use of a separate bank account operated by Mr Greig personally.
The claimants advanced claims under section 39(3) of FSMA, which imposes liability on an authorised person for the acts or omissions of an AR “in carrying on the business for which he has accepted responsibility”, and on grounds of vicarious liability at common law. The trial judge had dismissed both claims. Permission to appeal was granted only on these two grounds. Sense served a respondent’s notice seeking to uphold dismissal of the statutory claim on the ground that the scheme was not a collective investment scheme as defined by section 235 of FSMA.
On section 39(3), the claimants submitted that Sense had accepted responsibility for all investment advice given by Midas (a prescribed business under regulation 2 of the Financial Services and Markets Act 2000 (Appointed Representatives) Regulations 2001) and was therefore liable in respect of advice to invest in units of a collective investment scheme, notwithstanding any restrictions in the AR Agreement. They argued that a broad approach should be taken and that contractual restrictions affected only the relationship between Sense and Midas, not Sense’s liability to third parties. Mr Hugh Sims QC submitted on behalf of the appellants that the exemption in section 39 was conferred in broad generic terms based on the principal’s own authorisation and that section 39(3) applied to mis-selling as long as it occurred in the conduct of a generic category of business for which Sense had FCA authorisation.
The court rejected this submission. Lord Justice David Richards held that the scheme of section 39(1) was clear: an AR was exempt only to the extent that an authorised person had accepted responsibility for the business to be carried on by the AR. If responsibility was accepted for only part of a category of business, the AR would be exempt only in respect of that part. The words “the whole or part of that business” in section 39(1)(b) demonstrated that acceptance of responsibility need not relate to all activity that could fall within a generic type of business. The responsibility and hence potential liability of an authorised person under section 39(3) was limited to acts or omissions “in carrying on the business for which [the authorised person] has accepted responsibility”, taking one back to section 39(1)(b). Exemption and liability under section 39(3) were co-extensive. The court found nothing in the wording of section 39 or in case law to indicate that the business for which responsibility was accepted was to be determined not by reference to the contract but by reference to the authorisations held by the principal on the FCA register.
The AR Agreement between Sense and Midas contained express restrictions. Clause 3.1 authorised Midas to advise on and sell “Authorised Products” and to provide services “using a Company Agency”, defined as an agency which Sense maintained with an institution. Clause 4.2 provided that Sense accepted responsibility to third parties only to the extent required by section 39 in relation to the AR’s actions when carrying out regulated activities on the terms of the agreement. The court held that the restriction to business using a Company Agency constituted for the purposes of section 39 an acceptance by Sense of responsibility for part of the generic business prescribed in the AR Regulations. Advising clients to entrust money to the scheme operated by Midas did not involve the use of a Company Agency and therefore fell outside the business for which Sense had accepted responsibility. This restriction enabled Sense to have effective controls and supervision of Midas’s authorised business.
The court rejected the submission that section 39(1A) and (1B) (added by the Financial Services and Markets Act 2000 (Markets in Financial Instruments) Regulations 2007 to give effect to MiFID I concerning a public register) changed the meaning and effect of section 39 as regards the extent of liability. The court also rejected reliance placed on the Gower Report, noting that it was useful for identifying the general purpose of section 39’s predecessor provision in section 44 of the Financial Services Act 1986 but was not a guide to the detailed interpretation of section 39. The deeming words in section 39(3) (“to the same extent as if he had expressly permitted it”) overcame difficulties identified by Professor Gower as to when a principal would or might not be liable for the acts or omissions of an agent, particularly in cases of tortious liability.
On vicarious liability, the appellants relied on the extension of vicarious liability at common law to cover independent contractors in Cox v Ministry of Justice [2016] UKSC 10. They submitted that Sense created the risk of tortious acts by entering into the AR Agreement and thereby exempting Midas from FCA authorisation. The judge had held that Midas was clearly carrying out a recognisably independent business of its own and that there was no basis for suggesting that the activities of Midas advisers were assigned to them as an integral part of Sense’s business and for its benefit. The Court of Appeal agreed. The judge had made clear findings that Midas was carrying on its own business. When Midas and its advisers provided financial advice they were doing so as part of Midas’s own recognisably independent business. It could not be said that they were carrying out activities assigned to them by Sense as part of Sense’s business and for Sense’s benefit.
On Sense’s respondent’s notice, the claimants had to establish that the scheme was a collective investment scheme in order to succeed under section 39, as giving advice on investing in collective investment schemes was within the prescribed descriptions of business under the AR Regulations, whereas giving advice on deposits was not. The judge had held that the scheme satisfied section 235 of FSMA. Lord Justice David Richards agreed. Investors were told they would be participating in a scheme and getting the benefit of Mr Greig’s relationship with RBS and therefore enhanced returns. The arrangements constituted arrangements with respect to money intended to enable participants to receive income arising from the acquisition, holding, management or disposal of property or sums paid out of such income. The purpose or effect of the scheme was to enable investors to receive income from the acquisition, holding and disposal of rights constituted by payment of their contributions into the RBS special deposit account. The fact that Midas promised a fixed return did not prevent the scheme from falling within section 235(1). The condition in section 235(2) (that participants do not have day-to-day control) was satisfied. The condition in section 235(3)(b) (that the property is managed as a whole by the operator) was satisfied: management did not necessarily require a great deal of hard work and could simply be receiving money, paying it over to RBS and accounting to investors for principal and interest. The evidence that investors’ contributions were expected to be paid into a single RBS account and repayments made from it entitled the judge to hold that the property was managed “as a whole”. The condition in section 235(3)(a) (that contributions and profits are pooled) was also satisfied: the evidence showed that appellants thought their contributions would be pooled with those of other investors and paid into the RBS account. The exception in paragraph 6 of the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (the common accounts exemption) did not apply because paragraph 6(b) was not satisfied: the rights against RBS would belong to Midas and would not be acquired for any participant individually as required by paragraph 6(b)(iii).
In short, the appeal failed because the restriction in the AR Agreement to the use of Company Agencies meant that Sense had not accepted responsibility under section 39(1) for advice to invest in the Midas scheme, Sense was not vicariously liable for Midas’s acts in carrying on its own independent business, and Sense’s challenge to the collective investment scheme finding did not assist it given that the primary grounds of appeal failed.
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