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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Anderson & Ors v Sense Network Ltd [2019] EWCA Civ 1395 (31 July 2019) URL: https://www.bailii.org/ew/cases/EWCA/Civ/2019/1395.html Cite as: [2020] Bus LR 1, [2020] 1 BCLC 555, [2019] WLR(D) 448, [2019] EWCA Civ 1395 |
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2019] EWCA Civ 1395 | ||
CIVIL
DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
COMMERCIAL COURT
MR JUSTICE JACOBS
Strand, London, WC2A 2LL |
||
2019 |
B e f o r e :
LORD JUSTICE HAMBLEN
and
MR JUSTICE SNOWDEN
____________________
ADAM ANDERSON & Others |
Appellants/ Claimants |
|
| - and - |
||
SENSE NETWORK LIMITED |
Respondent/ Defendant |
____________________
Simon Howarth and Alexander Echlin (instructed by Reynolds, Porter, Chamberlain LLP) for the Respondent
Hearing dates: 2-3 July
2019
____________________
VERSION
OF JUDGMENT APPROVED
Crown Copyright ©
Lord Justice David Richards:
Introduction
Sense
Network
Limited (
Sense)
under provisions contained in the Financial Services and Markets Act 2000 (FSMA) and at common law. The claims arise out of the activities of Midas Financial Services (Scotland) Limited (Midas), the advisors employed by it and its controlling director and shareholder, Alistair Greig. It is not alleged that
Sense
was itself involved in those activities, but it is alleged to be liable for the losses suffered by the claimants, on the grounds that Midas was an "Appointed Representative" (AR) pursuant to section 39 of FSMA by
virtue
of contracts with
Sense
made in 2007 and 2013.
Sense.
Case management directions were given for the claims of twelve claimants, as lead claimants, to proceed to trial. The trial of these claims took place over 13 days in July 2018 before Jacobs J, sitting in the Commercial Court, who gave an impressively clear and comprehensive judgment running to over 500 paragraphs on 26 October 2018.
vicarious
liability at common law. By a respondent's notice,
Sense
seeks to uphold the dismissal of the statutory claim on the grounds that the scheme operated by Midas and Mr Greig, to which I refer below, was not a collective investment scheme as defined by section 235 of FSMA. There are therefore essentially three issues on this appeal and, after summarising the relevant facts and referring to the regulatory background, I will deal with them in that order.
The facts
Sense
held agencies and arranged deals in such investments for its clients. Much of the business was mortgage advice.
Sense,
advised on and operated a scheme (the scheme) whereby clients would invest in what they understood to be short-term deposits carrying
very
high interest rates. The scheme was masterminded by Mr Greig who had started the similar scheme when he was previously employed as a financial advisor and continued it after he founded Midas, both before and after it became an AR of
Sense.
The claims in these proceedings all relate to payments made by the claimants under this scheme.
Sense,
although I should mention that the judge recorded that there was no evidence that any of the staff knew that it was a Ponzi scheme. In particular, no documents in connection with the scheme or containing any reference to it, or to transactions or payments under it, were uploaded to the cloud-based system operated by
Sense,
by which it monitored the activities of the ARs for which it was responsible. Payments and repayments under the scheme were not made to or from Midas' bank account, which was subject to audit by
Sense,
but to and from a separate account operated by Mr Greig personally.
Regulatory framework
Sense
was at all material times an authorised person, permitted to advise on investments, to arrange deals in investments, and to agree to carry on either of those regulated activities.
39.-Exemption of appointed representatives.
(1) If a person (other than an authorised person) –
(a) is a party to a contract with an authorised person ("his principal") which-
(i) permits or requires him to carry on business of a prescribed description, and
(ii) complies with such requirements as may be prescribed, and
(b) is someone for whose activities in carrying on the whole or part of that business his principal has accepted responsibility in writing,
he is exempt from the general prohibition in relation to any regulated activity comprised in the carrying on of that business for which his principal has accepted responsibility.
(1A) But a person is not exempt as a result of subsection (1) –
(a) if his principal is an investment firm or a credit institution, and
(b) so far as the business for which his principal has accepted responsibility is investment services business,
unless he is entered on the applicable register.
(1B) The "applicable register" is –
(a) …[not relevant]
(b) …[not relevant]
(c) in any other case, the record maintained by the Authority byvirtue
of section 347(1)(ha).
(2) A person who is exempt as a result of subsection (1) is referred to in this Act as an appointed representative.
(3) The principal of an appointed representative is responsible, to the same extent as if he had expressly permitted it, for anything done or omitted by the representative in carrying on the business for which he has accepted responsibility.
(4) In determining whether an authorised person has complied with a provision contained in or made under this Act, or with a provision contained in any directly applicable Community regulation made under the markets in financial instruments directive, anything which a relevant person has done or omitted as respects business for which the authorised person has accepted responsibility is to be treated as having been done or omitted by the authorised person.
(5) "Relevant person" means a person who at the material time is or was an appointed representative byvirtue
of being a party to a contract with the authorised person.
(6) Nothing in subsection (4) is to cause the knowledge or intentions of an appointed representative to be attributed to his principal for the purpose of determining whether the principal has committed an offence, unless in all the circumstances it is reasonable for them to be attributed to him.
(7) A person carries on "investment services business" if –
(a) the business includes providing services or carrying on activities of the kind mentioned in Article 4.1.25 of the markets in financial documents directive, and
(b) as a result of providing such services or carrying on such activities he is a tied agent or would be if he were established in an EEA State.
(8) In this section –
"competent authority" has the meaning given in Article 4.1.22 of the markets in financial instruments directive;
"credit institution" means –
(a) a credit institution authorised under the banking consolidation directive, or
(b) an institution which would satisfy the requirements for authorisation as a credit institution under that directive if it had its relevant office in an EEA State;
"relevant office" means –
(a) in relation to a body corporate, its registered office or, if it has no registered office, its head office, and
(b) in relation to a person other than a body corporate, the person's head office."
The AR Agreement between
Sense
and Midas
Sense
and Midas was dated 27 September 2007 and was replaced by a new agreement dated 7 February 2013. The terms of the agreements were materially the same and, like the judge, I will refer to the second of these agreements.
3.1 Subject to clause 2 and in particular subject to the scope of the AR's authorisation as set out in the Letter of Authorisation regarding Authorised Products and the provision of the Services, the Company:
3.1.1 authorises the AR acting through its Registered Individuals to sell and advise on Authorised Products and to provide Designated Investment Services, Personal Protection Insurance Services, General Insurance Services, and/or Mortgage Services using a Company Agency: and/or
3.1.2 authorises the AR acting through its Registered Individuals to provide Additional Services using a Company Agency; and
3.1.3 agrees that the AR may undertake Separate Business provided that the AR observes the restrictions set out in this Agreement and in the Compliance Manual."
Sense
provided the "Letter of Authorisation" referred to in clause 3.1, or at least none was shown to us or to the judge. It is defined as "the letter of authorisation issued to the AR and its Registered Individuals by which the Company authorise the AR and its Registered Individuals to advise on or sell Authorised Products". "Authorised Product" is defined as "those products, policies or services comprising Designated Investment Services, Personal Protection Insurance Services, Mortgage Services and/or General Insurance Services which the AR and its Registered Individuals are authorised to sell or advise on as notified in the Letter of Authorisation provided by the Company".
"The Company accepts responsibility to third parties only to the extent required by Section 39 of the Act in relation to the actions of the AR when the AR is carrying out regulated activities on the terms of this Agreement."
Issues on the appeal
Sense
was liable for the wrongful activities of Midas in relation to the scheme, all were rejected by the judge and permission to appeal has been granted only as regards liability under section 39(3) and
vicarious
liability for the tortious conduct of Midas. A claim based on actual or ostensible authority was rejected by the judge but does not arise on this appeal. The claim based on section 39(3) rests on the submission, accepted by the judge, that the scheme constituted a collective investment scheme, as defined by FSMA, and that the claimants invested in a collective investment scheme. If the scheme involved no more than the making of deposits by the claimants, section 39 would not be applicable. Although this could be seen as a threshold issue, I (like the judge) will first consider the application of section 39(3) on the assumption that the claimants were investing in a collective investment scheme.
Liability under section 39(3) FSMA
Sense
accepted responsibility pursuant to the AR agreement". At [145], the judge said that "Any advice that was given in connection therewith [the scheme] was therefore closely connected with unauthorised activities, and therefore must fall outside the scope of section 39". I think there is some force in Mr Sims' submission. If
Sense
had accepted responsibility for all investment advice given by Midas, I would not for my part consider that advice to invest in a scheme apparently operated by Midas or Mr Greig would on that account fall outside the business for which
Sense
had accepted responsibility.
Sense's
responsibility extended to advice given on, and deals arranged in, any type of investment that fell within the definition of "investment" in the RAO. As units in collective investment schemes are "investments" as so defined,
Sense
was liable in respect of advice given on investing in units. This was irrespective of any restrictions contained in the AR Agreement. Such restrictions, particularly the limitation imposed by the words "using a Company Agency" in clause 3.1.1 of the AR Agreement, were a matter which affected only the relationship between
Sense
and Midas and had no impact on
Sense's
liability under section 39(3).
Sense
had received authorisation and for which an exemption had in turn been passed on to Midas.
Sense
for the activities of Midas, I will start with the language of section 39, read as a whole in its statutory context.
Sense,
in this case) for the acts or omissions of the AR "in carrying on the business for which he (i.e. the authorised person) has accepted responsibility". The quoted words define the extent of the authorised person's liability.
sense.
Acceptance of responsibility is the equivalent of authorisation and is essential to the enjoyment of exempt status by the AR. The AR will be subject to the general prohibition as regards any activity falling outside the business, or part of the business, for which the authorised person has accepted responsibility.
sense
to limit an AR to a partial exemption, having regard to the breadth and depth of the expertise of that AR or indeed of the authorised person. If, as Mr Sims submits, the legislative intention is to make an authorised person responsible for all the activities of an AR that fall within the authorised person's own authorisation, it is inexplicable that section 39(1) is not drafted in clear terms to have that effect. For my part, I find it impossible to spell it out of section 39(1) as it is in fact drafted.
sensible
answer is to define the authorised person's responsibility by reference to its authority to conduct business of a prescribed, generic description. In my
view,
it will be a rare case which presents any difficulty in distinguishing between what activity may be carried on and how a permitted activity is carried on.
Sense
and Midas. It was common ground that the "applicable register" for the purposes of section 39(1B) was the record maintained by the FCA by
virtue
of section 347(1)(ha): see section 39(1B)(c).
Sense,
but it is difficult to derive much help from them. In one case, under the heading "Appointed representatives", it was stated "An appointed representative is a firm or individual that can carry on certain regulated activities without being authorised on the basis that another, authorised, firm or individual (its 'principal') has accepted responsibility for those activities". Another, referring to particular types of business (insurance distribution, for example), stated "For details of the precise activities that an AR can undertake on behalf of its Principal firm(s) please contact the Principal firm". If anything, these statements are more consistent with
Sense's
case than the appellants' case.
Sense's
services as included in the FCA Register determined the activities of Midas for which it accepted responsibility to the extent that they fell within the generic categories of prescribed business referred to in section 39(1). Otherwise, the record does not identify the activities that the AR is permitted to carry on and the domestic legislation will not have given effect to MiFiD I in this respect.
v
Britannia Life
Ltd
[2000] Lloyd's Rep PN 412, the claimants had taken out an endowment policy and a pension policy with an insurance company on the advice of one of its ARs. That was business within the terms of his AR agreement. He also gave associated advice, including advice in relation to the surrender of a number of life policies to provide funds for the new investments and a re-mortgage of their home, which was outside the terms of the AR agreement. Jonathan Parker J held that, because of the close connection between these transactions, the advice on the surrender of policies and the re-mortgage could not be separated from the advice on the new policies. The insurance company, or its successor, was liable under section 44 of the Financial Services Act 1986, the predecessor of section 39, in respect of all the advice. The basis of the decision is accurately summarised in Jackson and Powell on Professional Liability (8th ed. 2017) at 15-027:
"…while the terms of an appointed representative's express authority might be limited to providing investment advice to customers in relation to particular products of his principal, conduct that is incidental to the provision of that advice (such as soliciting the customers, identifying the financial and personal circumstances of the particular customer, assisting in any application that the customer might to choose to make) will still fall within the actual authority of that representative…[in Martin] the advice was inherently bound up with and incidental to the advice given by him in relation to other investments."
v
Financial Ombudsman (on the application of Tenetconnect Services
Ltd)
[2018] EWHC 459 (Admin), [2018] 1 BCLC 726.
v
InvestUK
Ltd
[2017] EWHC 2114 (QB) in which the authorised person was held liable for investment advice given by an AR where the advice fell within the business authorised by the AR agreement but the AR offered an inducement in breach of a term of the AR agreement. This was a case that concerned not what business the AR was authorised to carry on, but how he carried out that business.
"The companies say that they already accept [full responsibility for their activities]; but they are not necessarily legally bound to do so in relation to self-employed salesmen since thevicarious
liability of a principal for the acts of an agent who is an independent contractor differs somewhat from that of a master for the acts of his servants and, especially in relation to tortious liability, is less extensive. Moreover it is not clear that the salesman always acts as an agent of the company rather than of the client."
"Hence, I suggest that if the tied salesmen are to continue to be self-employed it should be specifically enacted that the company to which they are tied is fully responsible for their acts to the same extent as if they were its employees with full authority to act on its behalf. This should apply even if, in any particular case, the salesman sold the product of another company."
very
limited or perhaps non-existent.
Sense,
beyond generic descriptions such as "Designated Investment Services". First, the scope is limited by reference to "the Letter of Authorisation". As earlier explained, it is not clear whether there was a Letter of Authorisation, so on the facts of this case there is no such limitation. Second, it required Midas to use "a Company Agency", in other words, a product provider which had authorised
Sense
to sell its products. There is no doubt that
Sense
had Company Agencies which it notified to Midas and its other ARs.
Sense
in clause 4.2 was "only to the extent required by section 39 of the Act in relation to the actions of the AR when the AR is carrying out regulated activities on the terms of this Agreement".
Sense
of responsibility for part of the generic business prescribed in the AR Regulations. Advising clients to entrust their money to the scheme being operated by Midas and Mr Greig did not involve the use of a Company Agency and therefore fell outside the business for which
Sense
had accepted responsibility. The restriction of responsibility in this way enabled
Sense
to have effective controls and supervision of the authorised business of Midas: see the judgment at [120].
Vicarious
liability
vicarious
liability at common law to cover independent contractors as well as employees,
Sense
was liable for the tortious acts of the individual Midas advisors in recommending investment in the scheme. They submitted that, applying the decision of the Supreme Court in Cox
v
Ministry of Justice [2016] UKSC 10, [2016] AC 660,
Sense
created the risk of such tortious acts by entering into the AR Agreement and thereby exempting Midas from obtaining authorisation from the FCA.
"…a relationship other than one of employment is in principle capable of giving rise tovicarious
liability where harm is wrongfully done by an individual who carries on activities as an integral part of the business activities carried on by a defendant and for its benefit (rather than his activities being entirely attributable to the conduct of a recognisably independent business of his own or of a third party), and where the commission of the wrongful act is a risk created by the defendant by assigning those activities to the individual in question."
"…The individual for whose conduct it may bevicariously
liable must carry on activities assigned to him by the defendant as an integral part of its operation and for its benefit. The defendant must, by assigning those activities to him, have created a risk of his committing the tort."
Sense
was not
vicariously
liable for any actionable advice or other acts as regards investment in the scheme. He said that Midas was "clearly carrying out a recognisably independent business of its own", as evidenced by the numerous features of its operations summarised at [327] and that the activities of the advisors were entirely attributable to Midas' own business. Further, there was no basis in the evidence for suggesting that their activities were assigned to them as an integral part of
Sense's
business and for its own benefit.
Sense
and Midas. It seems to me that the judge was right in his approach but, in the end, I do not think it makes any difference.
Sense
when it appointed Midas as an AR.
Sense
had no revenue stream or business without its ARs, who were therefore integral to its business. The activities assigned to its ARs were the business of the
Sense
network
of ARs.
Sense
created the risk of negligent advice not only by appointing Midas but also by training, authorising and supervising its advisors in the provision of financial advice to the public.
vicarious
liability. The judge made clear findings that Midas was carrying on its own business and it is not open to the appellants to go behind those findings.
Sense
also carried on its own business which comprised providing the regulatory umbrella for independent financial services firms. When Midas and its advisors provided financial advice, they were doing so as part of Midas' own recognisably independent business. In no
sense
could it be said that they were carrying out activities assigned to them by
Sense
as part of
Sense's
business and for
Sense's
benefit.
view
on further submissions made on behalf of
Sense
that these principles of
vicarious
liability are not applicable in the case of commercial agents, particularly as regards the issue left open by this court in Frederick
v
Positive Solutions (Financial Services)
Ltd
[2018]
EWCA
Civ
431 at [77], and I do not do so.
Collective investment scheme
Sense
has challenged this but, if my Lords agree with my conclusion that the appellants' appeal against the dismissal of their claim under section 39 fails, this issue does not affect the outcome of the appeal. Nonetheless, it has been fully argued and it is appropriate to address it.
"235. Collective investment schemes.
(1) In this Part "collective investment scheme" means any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income.
(2) The arrangements must be such that the persons who are to participate ("participants") do not have day-to-day control over the management of the property, whether or not they have the right to be consulted or to give directions.
(3) The arrangements must also have either or both of the following characteristics -
(a) the contributions of the participants and the profits or income out of which payments are to be made to them are pooled;
(b) the property is managed as a whole by or on behalf of the operator of the scheme.
(4) If arrangements provide for such pooling as is mentioned in subsection (3)(a) in relation to separate parts of the property, the arrangements are not to be regarded as constituting a single collective investment scheme unless the participants are entitled to exchange rights in one part for rights in another.
(5) The Treasury may by order provide that arrangements do not amount to a collective investment scheme -
(a) in specified circumstances; or
(b) if the arrangements fall within a specified category of arrangement."
very
little paperwork provided to the appellants in relation to the scheme. There was no promotional literature nor any statement of how it would operate or of its terms and conditions, other than a letter issued when a client made a payment, headed "Short Term Deposit", followed by "Guaranteed Capital Return" and "Guaranteed Growth [X]%". The letter confirmed that the client had placed a specified amount "using the above product" and that a specified higher amount, being the capital and the "guaranteed growth", would be paid to the client on a specified date.
v
FCA [2016] UKSC 17, [2016] Bus LR 524 that the focus is on the common understanding of the parties when investment is made, not on what subsequently occurs. The issue is whether Midas was advising on what were apparently investments in a collective investment scheme.
very
broad meaning. Second, they were arrangements with respect to money which were intended to enable participants to "receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income". While the judge does not set out in detail what was intended to be the form of "the acquisition, holding, management or disposal" involved in the arrangement, it seems to me that it was the investment of the money into the RBS special account and the receipt of such money plus interest from RBS on the maturity of deposits.
Sense
submits that section 235(1) was not satisfied, because the guaranteed return was not dependent on the performance or otherwise of the funds but was a fixed return payable irrespective of whether profits or income were received. The statements made about the special account with RBS were simply explanations as to how such high returns could be paid. I do not accept this analysis. As explained to investors, the whole point of the scheme was to enable them to have access to the supposedly high rates of return that Mr Greig could obtain from RBS. Payment of their contributions into the (non-existent) special account with RBS was of the essence of the scheme. The fact that Midas promised a fixed return, for which it was legally liable irrespective of the performance of the RBS special account, does not in my
view
prevent the scheme from falling within section 235(1). First, section 235 does not define or limit the form of an investor's participation. There is no reason why it should not take the form of a fixed return. Second, whatever the bare legal rights of investors against Midas, the nature of the arrangements was clear. If one asks the question: was the apparent purpose or effect of the scheme to enable the investors to receive income from the acquisition, holding and disposal of the rights constituted by the payment of their contributions into the RBS special deposit account, the answer is "yes".
Sense
repeats the submission it made to the judge that the guaranteed return was not dependent on any particular level of funds being held pursuant to the scheme, but I agree with the judge that there is nothing in the wide language of section 235(1) which requires this feature.
Sense
submits that the judge was wrong to hold that the participants' contributions were "managed as a whole" by Midas. Simply to accept a deposit and repay it with a pre-determined premium on the agreed date is not management. The judge rejected this submission, saying that "Management does not necessarily require a great deal of hard work. It can simply be receiving money, paying it over to a person (RBS) with whom there is a close relationship and a special deal enabling high rates of interest to be earned, and receiving it back and accounting to the investors for the principal and interest." I agree with the judge. "Management" is, as Lord Sumption said in FCA
v
Asset Land at [98] "a protean word which can embrace a wide range of activities involving
varying
degrees of control over the property being managed". See also Re Sky Land Consultants plc [2010] EWHC 339 (Ch) at [77]-[79], cited by Lord Carnwath in FCA
v
Asset Land at [19]. Further, in
view
of the evidence that investors' contributions were all expected to be paid into, and all repayments calculated and made from the aggregate balance on a single RBS account, the judge was entitled to hold that the property was managed "as a whole".
view
the judge was entitled on the evidence to conclude that the arrangements satisfied section 235(3)(a) as well as section 235(3)(b).
Sense
submits that the scheme fell within the exception provided by paragraph 6 of the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (SI 2001/1062), which provides:
"6. Common accounts
Arrangements do not amount to a collective investment scheme if –
"(a) they are arrangements under which the rights or interests of participants are rights to or interests in money held in a common account; and
(b) that money is held in the account on the understanding that an amount representing the contribution of each participant is to be applied -
(i) in making payments to him;
(ii) in satisfaction of sums owed by him; or
(iii) in the acquisition of property for him or the provision of services to him."
various
participants would give money to him, and this money would find its way to the RBS [sic], and RBS in due course would repay the money together with enhanced rates on interest". In my
view,
he was right to say that such application of their pooled contributions cannot fall within any of the uses listed in paragraph 6(b). As they are the only permitted uses if the exemption in paragraph 6 is to apply, it follows that the exemption does not apply.
Sense
submits that the application of the funds in making the deposit with RBS involves "the acquisition of property for him [i.e. each participant]". In my
view,
this is untenable. The rights against RBS resulting from a deposit with it would not be acquired for any participant, certainly not individually (as required by paragraph 6(iii)) or indeed collectively. The rights against RBS would belong to Midas, albeit forming the property to which section 235(1) would apply. Section 235(1) states expressly that a collective investment scheme does not require the participants to become owners of the underlying property.
Sense
also submitted that paragraph 6(b)(i) applied, but that is equally untenable, essentially for the same reason. The money held in the deposit account with RBS is not held on the understanding that an amount representing the contribution of each participant is to be applied in making payments to him. It is held on the basis that the entire sum plus interest or a premium will be repaid to Midas on maturity.
Sense
in its respondent's notice that the scheme presented to the appellants by Midas and Mr Greig did not constitute a collective investment scheme.
Conclusion
victims
of a callous fraud. On any footing they have suffered severe losses. However, those losses are not in my
view
recoverable from
Sense for the reasons given in this judgment and for the reasons given by the judge. I would accordingly dismiss this appeal.
Lord Justice Hamblen:
Mr Justice Snowden: