Anderson v Sense Network (Court of Appeal)

The Court of Appeal dismissed the appellants' challenge to the Commercial Court's dismissal of claims against Sense Network Limited based on section 39(3) of the Financial Services and Markets Act 2000 and on vicarious liability. The court construed section 39 as making the authorised principal liable only for acts or omissions of an appointed representative in carrying on the business for which the principal has accepted responsibility in writing; that acceptance can be limited to part of a prescribed category of business. Because the written AR agreement limited Sense's acceptance of responsibility to business conducted using the principal's notified "Company Agencies", advice and arrangements concerning the separate scheme operated by Midas fell outside the business for which Sense had accepted responsibility and so outside section 39(3).

The court also rejected vicarious liability: Midas and its advisers carried on a recognisably independent business and their tortious acts were not activities assigned to Sense as an integral part of Sense's own business. The court nevertheless agreed with the Commercial Court that, on the appellants' evidence of what they were told, the Midas scheme was a collective investment scheme as defined by section 235 FSMA, and rejected Sense's argument that the scheme fell within the "common accounts" exception in paragraph 6 of the Collective Investment Schemes Order 2001.

This appeal arises from claims by a group of investors who lost money operating through Midas Financial Services (Scotland) Limited and its controlling director, Mr Greig. The investors alleged Sense Network Limited was liable for those losses because Midas was an appointed representative of Sense under section 39 FSMA and Sense had thereby accepted responsibility for Midas's regulated activities. Ninety-five claimants issued proceedings, twelve lead claimants were tried before Jacobs J in the Commercial Court, and his judgment ([2018] EWHC 2834 (Comm)) dismissed all claims. The appeal concerned only liability under section 39(3) FSMA and common law vicarious liability; Sense also filed a respondent's notice challenging the finding that the Midas arrangements were a collective investment scheme under section 235 FSMA.

• Nature of the claim: recovery from Sense based on (i) statutory liability under section 39(3) FSMA for acts or omissions of its appointed representative and (ii) vicarious liability at common law for tortious advice by Midas advisors. The investors alleged they had been induced to invest in a short-term deposit scheme promising high returns.
• Key factual findings: the Commercial Court found Midas (and Mr Greig) operated a dishonest Ponzi-style scheme; clients were told funds would be placed in a special Royal Bank of Scotland account yielding high returns when in fact no such arrangements existed; payments were handled outside Midas' audited company account and efforts were made to conceal the scheme from Sense. When the FCA intervened in 2014 there were significant unpaid sums and limited remaining funds.
• Issues framed by the court: (i) construction and application of section 39(3) FSMA — whether Sense had accepted responsibility for the activities that caused the losses; (ii) whether Sense was vicariously liable for tortious acts of Midas advisors; (iii) whether the Midas scheme was a collective investment scheme within section 235 FSMA and, if so, whether an exception applied.
• Court's reasoning: the court read section 39 as requiring the authorised principal's acceptance of responsibility in writing to define the scope of exemption and of liability; that acceptance may cover only part of a generic prescribed business. The AR agreement between Sense and Midas contained express contractual limits (notably the obligation to use a "Company Agency") and a written acceptance of responsibility limited "only to the extent required by section 39". Advice and arrangements relating to the separate scheme did not involve use of a Company Agency and therefore fell outside the business for which Sense had accepted responsibility. On vicarious liability, the court applied the Supreme Court's test (Cox v Ministry of Justice) and concluded Midas carried on a recognisably independent business; its advisers' wrongful acts were not activities assigned to Sense as part of Sense's own business and the risk was not created by Sense in the relevant sense. On the collective investment issue the court agreed with the trial judge that, as represented to investors, the arrangements were a collective investment scheme under section 235 and that the paragraph 6 "common accounts" exception did not apply.

The court therefore dismissed the appeal.

Appeal dismissed. The court held that (i) section 39(3) FSMA exposes an authorised principal to liability only for acts or omissions of an appointed representative in carrying on the business for which the principal has accepted responsibility in writing; that acceptance may be limited to part of a prescribed category of business and is to be ascertained from the written acceptance (here the AR agreement). Sense had limited its responsibility to business using notified "Company Agencies", and the Midas scheme fell outside that scope. (ii) Sense was not vicariously liable because Midas and its advisers carried on a recognisably independent business and their tortious acts were not activities assigned to Sense as part of Sense's own business. (iii) The Midas arrangements were nevertheless a collective investment scheme under section 235 FSMA, and the paragraph 6 exception did not apply.

Appeal to the Court of Appeal from the Commercial Court (Queen's Bench Division), judgment of Jacobs J [2018] EWHC 2834 (Comm) following a 13-day trial in July 2018; Court of Appeal hearing 2-3 July 2019; judgment delivered 31 July 2019 ([2019] EWCA Civ 1395).