Anderson & Ors v Sense Network Ltd

An authorised principal’s responsibility under Financial Services and Markets Act 2000 section 39 depends on the business for which responsibility was accepted in the appointed representative agreement. A broad construction is appropriate, but it cannot extend to an illegal deposit-taking scheme wholly outside that agreement. A collective investment scheme may involve money, pooling and fixed returns. However, classification as a collective investment scheme does not itself bring the activity within section 39. The knowledge of an employee of the appointed representative is not automatically attributed to the principal for the purpose of supervisory rules. A member supervisor is permissible if adequately supervised and supported by appropriate controls. The claimants’ claims failed on all routes to liability and were dismissed.

Ninety-five investors claimed losses caused by a fraudulent Ponzi scheme operated through Midas Financial Solutions (Scotland) Ltd, an appointed representative of Sense Network Ltd. The claims relied on Financial Services and Markets Act 2000 section 39, actual and apparent authority, attribution of an employee’s knowledge, vicarious liability, and alleged failures to monitor and investigate Midas.

The principal issues were whether the scheme was business for which Sense had accepted responsibility, whether it was a collective investment scheme, whether Sense was liable for the conduct or knowledge of Midas personnel, and whether its supervisory systems and investigations were adequate.

1. Section 39. The scope of responsibility under section 39 must be determined by the statutory language and the appointed representative agreement. The provision permits responsibility for part of a generic category of business. A broad approach is appropriate, but it cannot become divorced from the agreement. The scheme involved unauthorised deposit-taking, handling client money and no applicable Company Agency. It was therefore wholly outside the business for which Sense had accepted responsibility. The section 39 claim failed ([2018] EWHC 2834 (Comm), paras 131–146).
2. Collective investment scheme. If section 39 had applied, the scheme would have been a collective investment scheme under section 235. The arrangements were broad and non-technical. Participants surrendered day-to-day control over money, and the money was to be managed by the operator. A fixed return did not prevent classification as a collective investment scheme. The paragraph 6 exclusion in the 2001 Order did not apply because the money was collected for the common scheme rather than applied individually for each participant (paras 165–192).
3. Authority. MFSS had no actual authority to operate or advise on the scheme. The compulsory regulatory status disclosure did not represent that MFSS was authorised to run or advise on this deposit-taking scheme. The claimants also failed to prove reliance on such a representation (paras 210–243).
4. Attribution and supervision. The question was governed by the statutory context and purpose of SUP 12. Sense’s rules placed responsibility on its management to establish reasonable grounds, maintain controls and take reasonable steps. Mr Ingram was an employee of MFSS carrying out a member-supervisor role. His knowledge was not attributed to Sense because there had been no wholesale delegation of Sense’s supervisory responsibilities, and non-attribution did not frustrate the policy of SUP 12 (paras 282–313).
5. Monitoring, investigation and vicarious liability. The use of a member supervisor was not inherently contrary to SUP 12. Sense’s monitoring framework was reasonable, and the alleged additional measures would probably not have uncovered the concealed scheme. Its investigation of the Accord and Knowles matters was sufficient and proportionate. MFSS was a recognisably independent business, so Sense was not vicariously liable for the advisers’ conduct. The claims of the Lead Claimants were dismissed (paras 323–355, 367–397, 423–456 and 511).

First-instance decision. The claims of the Lead Claimants were dismissed.