KVB Consultants Limited & Ors v Jacob Hopkins McKenzie Limited & Ors

The Court of Appeal considered whether Kession Capital Ltd (KCL), by appointing Jacob Hopkins McKenzie Ltd (JHM) as its appointed representative under an Appointed Representative Agreement (the ARA), accepted responsibility under section 39 of the Financial Services and Markets Act 2000 (FSMA) for JHM’s promotion and operation of property investment schemes which were collective investment schemes (CISs) within the meaning of section 235 FSMA.

The court held that the ARA, read in its commercial and regulatory context, permitted JHM to advise on and arrange investments (including units in collective investment schemes) and to market/promote those investments, while expressly prohibiting JHM from operating a collective investment scheme. That distinction between operating a CIS and promoting/arranging/advising on one is recognised in FSMA and the subsidiary legislation. Accordingly KCL had accepted responsibility under section 39 for JHM’s promotional activity, and summary judgment in favour of the claimants on that basis was sustainable.

The court also held that contractual limits in the ARA restricting JHM to dealing with professional clients and eligible counterparties were contractual stipulations inter se and amounted to directions about how the permitted activity should be carried out rather than a lawful narrowing of the business for which KCL accepted responsibility under section 39. Applying the what/how distinction articulated in Anderson v Sense Networks Ltd, such client-classification limits did not defeat KCL’s statutory responsibility where JHM in practice promoted the schemes to investors who were retail clients or were misclassified.

Background and procedural posture. This appeal was brought by Kession Capital Ltd (the 12th defendant) from a summary judgment given by Paul Stanley KC (sitting as a Deputy High Court Judge), [2023] EWHC 1686 (Comm). The claimants are investors who lost money in a series of property investment schemes promoted and operated by Mr Andrew Callen through Jacob Hopkins McKenzie Ltd (JHM). The judge below held that KCL had accepted responsibility for JHM’s promotional activities under section 39 FSMA and gave judgment in favour of the claimants in respect of schemes 1–7; the judge declined summary judgment in respect of a separate scheme (Kingsley Terrace).

Parties, facts and the ARA. KCL is an authorised person under FSMA and entered an Appointed Representative Agreement (ARA) with JHM dated 30 June 2015, appointing JHM as an appointed representative to carry on "Relevant Business". The ARA permitted JHM to market, promote, arrange business and give advice, limited dealings to professional clients, elective professional clients and eligible counterparties, and contained an express contractual provision stating "There is no pooling of capital and no CIS" and a concluding clause stating the AR "cannot ... operate a collective investment scheme". Investors (save one) were in practice classified by JHM as professional or otherwise non-retail, but the schemes as implemented used a bare trust structure and were found to be collective investment schemes.

Nature of the claim and issues. The claimants sought recovery for their losses on multiple grounds, including (i) breach of SUP 12 supervision obligations, (ii) unlawful approval of financial promotions (sections 238/241 FSMA), and (iii) liability under section 39(3) FSMA for JHM’s acts or omissions. The appeal concerns the third ground only: whether KCL accepted responsibility under s39 for the activities in question. The legal issues framed were (i) the interpretation of the ARA in light of FSMA and the Appointed Representatives Regulations (what activities were "business of a prescribed description" and whether "part of that business" can be limited), (ii) the distinction between operation of a CIS and promotion/arranging/advising on one, and (iii) whether client-classification limits in the ARA (excluding retail clients) operate to limit KCL’s s39 responsibility.

Court’s reasoning and subsidiary findings. The court analysed the statutory scheme (notably ss19, 21, 235, 237, 238, 240, 241 and s39 FSMA), the AR Regulations and the Regulated Activities Order. It accepted that operation of a CIS is not a prescribed category of business for the purpose of the AR Regulations but that arranging and advising in relation to investments (including units in CISs) and financial promotion are prescribed activities. The court read Schedule 5 and the definition of Relevant Business in the ARA as permitting advising/arranging and promotion of the very schemes at issue while the express clause that the AR cannot operate a CIS confined the agreement to a prohibition on operating rather than a blanket omission from all CIS-related activity. Applying Anderson v Sense Networks Ltd, the court held the contractual restriction to dealing only with professional clients and eligible counterparties was a stipulation about how the permitted activities should be carried out and did not negate KCL’s statutory acceptance of responsibility for the business permitted by the ARA. The court noted a minority view (Lewison LJ) who considered it arguable that the principal was not authorised to advise retail clients and thus that the exclusion of retail clients was a "what" limitation; the majority rejected that view and dismissed the appeal.

Wider context. The decision applies the what/how distinction from Anderson and emphasises investor protection as an objective behind section 39: contractual drafting between principal and appointed representative cannot be used to avoid statutory responsibility to third-party investors where the representative carries on the permitted business in a manner that affects client classification or suitability.

The appeal is dismissed. The Court of Appeal concluded that the ARA permitted JHM to advise on, arrange and promote investments (including units in collective investment schemes) while expressly prohibiting the operation of a CIS; that distinction is consistent with FSMA and subordinate legislation. Applying the what/how distinction in Anderson v Sense Networks Ltd, contractual limits excluding retail clients were directions about how the permitted activity should be carried out and did not prevent KCL from having accepted responsibility under section 39 FSMA for JHM’s promotional activities. Accordingly KCL remained liable for JHM’s unlawful promotions and the judge’s grant of summary judgment in respect of schemes 1–7 was sustainable.

Appeal from the judgment of Paul Stanley KC (sitting as a Deputy High Court Judge), Business and Property Courts (King's Bench Division, London Circuit Commercial Court), Paul Stanley KC [2023] EWHC 1686 (Comm); appealed to the Court of Appeal (Civil Division), [2024] EWCA Civ 765.