The Court of Appeal considers the different ways in which one person may be held liable for the acts and omissions of another in the business and financial context.
Under section 19 of the Financial Markets and Services Act 2000 (“FSMA”) and associated Regulations, only ‘authorised’ or ‘exempt’ persons may conduct regulated activities by way of business which relate to specified kinds of investment in the UK.
The Respondent (‘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 these activities. Sense was also was in the business of providing a ‘regulatory umbrella’ for smaller financial firms pursuant to section 39 of FSMA, which establishes the concept of ‘appointed representatives’ (‘ARs’).
ARs comprise a category of ‘exempt’ person permitted to conduct regulated activities under section 19 of FSMA. The regulatory compliance of an AR is not directly overseen by the FCA but is “outsourced” to a section 19 Authorised Person.
In 2007, Sense entered into an agreement (‘the AR Agreement’) with an independent financial services company (‘Midas’). Pursuant to the AR Agreement (and section 39(1) of FSMA), Midas became an AR, meaning that Sense took regulatory responsibility for Midas’s independent advice to clients on a range of investments for which Sense held agencies and arranging deals in such investments for its clients. Much of the business was mortgage advice.
The Appellants were victims of a Ponzi scheme simultaneously operated by Midas and masterminded by its founder, controlling director, and shareholder; one Mr Greig. It was not alleged that Sense itself knew about or was involved in the fraud but, rather, that Sense was liable for losses suffered by the Appellants.
The present appeal was decided on the issues of (i) whether Sense was liable for Midas’ acts under section 39(3) of FSMA; and (ii) whether Sense was vicariously liable for the same at common law.
Under section 39(3) FSMA, Authorised Persons are liable “to the same extent as if he had expressly permitted it”, for the acts or omissions of their AR “in carrying on the business for which the Authorised Person has accepted responsibility.”
In construing this deemed liability provision, David Richards LJ, with whom Hamblen LJ and Snowden J agreed, considered that it was “critical” to understand how the section interacts with the exemption provision under section 39(1). This was found to comprise three main steps (emphases original):
- there must be a contract between the Authorised Person and the AR which “permits or requires [the AR] to carry on business of a prescribed description.”
- The AR must be someone “for whose activities in carrying on the whole or part of that business [the Authorised Person] has accepted responsibility in writing”.
- If both criteria are satisfied, the AR “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”
“As the quid pro quo for accepting responsibility for the activities of an AR in carrying on the whole or part of a prescribed business, and thereby exempting the AR from obtaining its own authorisation [under section 39(1)], the authorised person becomes personally liable to third parties for the AR’s acts or omissions in the course of those activities. Exemption and liability under section 39(3) are co-extensive.”
In the present case, David Richards LJ found that the AR Agreement, a contract for the purposes of criterion 1, contained two restrictions limiting the type of business Midas was permitted to conduct as an AR. By clause 4.2, Sense had accepted 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.” Clause 3.1 then required Midas to conduct its AR activities via a “Company Agency”, defined as an “agency which [Sense] maintains or has maintained with an institution.” Reading these two clauses together, it could not be said that Sense had accepted responsibility for any activity relating to the Ponzi scheme, which had not involved the use of a Company Agency.
Sense was therefore held not liable under s 39(3) of FSMA and the appeal on this ground was dismissed.
The trial judge referred to the decision of the Supreme Court in Cox v Ministry of Justice  UKSC 10, which broadened the scope of vicarious liability at common law to include independent contractors:
“… a relationship other than one of employment is in principle capable of giving rise to vicarious 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.”
As a result, David Richards LJ found there was “no substance in the appeal on vicarious liability.” The trial judge had made “clear findings that Midas was carrying on its own business” within the regulatory umbrella provided by Sense as part of its own business activities, and it was “not open to the appellants to go behind those findings.”
The second ground of appeal was therefore also dismissed.
In an increasingly flexible and independent labour market, this case highlights the care that needs to be taken in identifying the risks of incurring liability for the wrongs of third parties (i) as a result of the AR scheme of FSMA and (ii) at common law, both under the law of agency and as matter of vicarious liability.
Obiter, the distinction with common law agency was made clear: section 39(3) exists to “overcome difficulties” in circumstances specifically identified in the legislative history, such as in tortious liability or because ARs have only limited agency roles, where the principal will or may not become liable for the acts or omissions of the agent. Hence the deeming provision in section 39(3): “to the same extent as if he had expressly permitted it.” FMSA 2000 thus imposes third-party liability to a wider range of business relationships than is typically seen in an agency context.
Vicarious liability, even in its extended form, requires a closer relationship between employer and contractor/employee to that contemplated by the AR scheme. Authorised Persons may accept responsibility for a wholly independent AR with whom it shares no common business interests, but this is limited to liability only in respect of specified business activities of the AR for which the Authorised Person has expressly accepted responsibility in writing. On the other hand, extended vicarious liability at common law requires a closer relationship: the business activities must be “an integral part of the business activities carried on by a defendant and for its benefit.”
As a result: No, you will not be held liable for a Ponzi Scheme perpetrated by a third party for whose acts and omissions whom you are otherwise liable unless you have expressly accepted responsibility for it in writing under s 39(1) FSMA; or the scheme is an integral part of your business carried out by the third party for your benefit; or it can be established that the third party acted as your agent.