Tenetconnect Services Ltd, R (on the application of) v Financial Services Lts & Anor

Financial advice must be characterised as a whole where regulated and unregulated elements form a single, inseparable activity. There is no mandatory bright line between advice to sell a specified investment and advice to place the proceeds in an unregulated investment. Where the proposed unregulated transaction motivates and forms part of the advice to sell, the whole stream of advice may constitute regulated activity within the Financial Ombudsman’s compulsory jurisdiction.

Under section 39(3) of the Financial Services and Markets Act 2000, a principal’s responsibility for its appointed representative is statutory and is not confined by ordinary agency principles. Fraudulent or contractually prohibited conduct remains within the provision when committed in carrying on the business for which the principal accepted responsibility.

A financial adviser, acting as the claimant’s appointed representative, advised longstanding clients to surrender specified investments and transfer the proceeds to him for a purported property purchase and loans. He misappropriated the money. The Financial Ombudsman decided that the regulated surrender advice and the ostensibly unregulated transactions were intrinsically linked, and ordered the claimant to compensate the clients.

The claimant sought judicial review, contending that the complaint concerned only unregulated activities and that neither the Ombudsman’s compulsory jurisdiction nor section 39(3) of the Financial Services and Markets Act 2000 extended to the adviser’s unauthorised fraud. The central issues were the proper characterisation of the combined advice and whether the adviser’s conduct occurred in carrying on the business for which the claimant had accepted responsibility.

1. The claim was dismissed. The Ombudsman had jurisdiction to determine the complaint and his decision on its merits was not otherwise challenged.

2. The scope of a complaint to the Financial Ombudsman is a question of fact for the Ombudsman, reviewable on rationality grounds. The scheme is intended to provide informal and reasonably speedy redress. Complaints need not have the precision of pleadings. On the documents, the only rational conclusion was that the clients complained about both the advice to surrender their existing investments and the proposed use of the proceeds.

3. Neither the legislation nor the authorities imposed an artificial bright line between regulated advice to sell a specified investment and advice to make an unregulated investment. Paragraph 53 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 and DISP 2.3.1R required the activities to be characterised realistically. Their relationship could range from clearly separate transactions to an inextricably linked, single stream of advice.

4. Here, the proposed property purchase and loans motivated the advice to surrender the specified investments. The alternatives were compared as part of the same recommendation, and the sales occurred so that the proposed transactions could proceed. The ostensibly unregulated advice therefore formed part and parcel of the regulated advice. The whole activity fell within the Ombudsman’s compulsory jurisdiction. The approach in Martin v Britannia Life Ltd and the reasoning in Emptage v Financial Services Compensation Scheme Ltd [2013] EWCA Civ 729 supported that conclusion.

5. Where part of a single activity is regulated, the protective purpose of the legislation requires the whole activity to be treated as regulated. The position was stronger concerning the purported property purchase because no property was acquired: the representation about that purchase was the fraudulent means by which the adviser procured the surrender and obtained the proceeds. Regulation did not depend on the precise terms used to disguise the fraud.

6. Section 39(3) of the Financial Services and Markets Act 2000 creates a statutory basis of responsibility distinct from contractual agency. The absence of actual or apparent authority, the representative’s breach of contractual restrictions and the fraudulent character of his conduct did not remove acts from the provision where they occurred in carrying on the business for which the principal had accepted responsibility. Martin v Britannia Life Ltd and Ovcharenko v InvestUK Ltd [2017] EWHC 2114 (QB) supported that construction. The claimant was therefore responsible for the adviser’s conduct.

• High Court (Administrative Court): The claimant’s judicial review challenge was dismissed. The court held that the Financial Ombudsman had jurisdiction to consider the complaint.
• Financial Ombudsman: By a Final Decision dated 3 April 2017, the Ombudsman upheld the clients’ complaint and required the claimant to compensate them for losses connected with the adviser’s regulated activities.