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

Under Financial Services and Markets Act 2000, section 39, “business of a prescribed description” refers to the regulated activity prescribed in generic terms, not the class of customer. A principal may confine an appointed representative to a clearly defined part of that activity, but cannot use a condition about how it is performed to avoid statutory responsibility. Client classification, like suitability, concerns how the business is conducted. A contractual restriction to professional clients and eligible counterparties therefore did not prevent responsibility for retail-client misclassification. Permission to advise on or arrange investments included collective investment schemes where “units” were authorised; an express prohibition on operating such a scheme excluded operation only. The appeal was dismissed.

Kession Capital Ltd, an authorised investment business, appointed Jacob Hopkins McKenzie Ltd as its appointed representative under section 39 of the Financial Services and Markets Act 2000. JHM promoted seven property investment schemes in which the claimants invested. The schemes failed and the claimants sought recovery from Kession.

On an application for summary judgment, the Deputy High Court Judge held that Kession had accepted responsibility for JHM’s promotion of the schemes and entered judgment on the section 39 claim: [2023] EWHC 1686 (Comm). Kession appealed on whether the agreement excluded collective investment scheme business and whether its restriction to professional clients and eligible counterparties limited the statutory responsibility accepted. The central issue was the meaning of “business of a prescribed description” and “part of that business”.

Appeal dismissed. Lord Justice Males gave the leading judgment. The Master of the Rolls agreed. Lord Justice Lewison agreed that ground 1 failed but dissented on ground 2.

1. Collective investment schemes. The legislation distinguished operating a collective investment scheme from advising on or arranging investments in one. The prescribed activities under the appointed representative regulations included advising and arranging, but not operating a scheme. The ARA’s reference to “units” therefore included units in collective investment schemes. Its statement that there was “no CIS” recorded the parties’ mistaken understanding and was not a limitation. The express prohibition on operating a collective investment scheme excluded operation only; it did not remove permission to advise on or arrange investments in such schemes. Kession accepted no section 39 responsibility for operation, but did accept responsibility for advisory and arranging activities. Ground 1 failed.
2. Meaning of section 39. Following Anderson v Sense Networks Ltd [2019] EWCA Civ 1395, exemption of the appointed representative and the principal’s statutory responsibility are co-extensive. A principal may accept responsibility for part of a generic prescribed business, but the limitation must identify what activity may be carried on. It cannot operate as a condition governing how that activity is performed.
3. Client classification. Deciding whether a client is professional, an eligible counterparty or retail requires an evaluative assessment closely analogous to assessing investment suitability. It concerns how the business is conducted. The restriction to professional clients and eligible counterparties was therefore enforceable between Kession and JHM as a contractual obligation, but did not limit the section 39 permission or responsibility. Kession remained responsible where JHM wrongly classified retail clients. This reflected the investor-protection purpose of section 39 and the reasoning in Ovcharenko v Investuk Ltd [2017] EWHC 2114 (QB).
4. Kession’s own authorisation, which apparently excluded advice to retail clients, did not alter that construction. The statutory scheme placed responsibility on the principal to supervise its appointed representative and protected investors affected by misclassification. Ground 2 failed.
5. Lord Justice Lewison considered that the exclusion of retail clients fell on the “what” rather than the “how” side of the distinction and that the effect of Kession’s authorisation required fuller argument. He would not have entered summary judgment on ground 2. The majority view prevailed, and the appeal was dismissed.

• Court of Appeal (Civil Division): The appeal by Kession Capital Ltd was dismissed on both grounds: [2024] EWCA Civ 765.
• High Court of Justice, King’s Bench Division, London Circuit Commercial Court: The Deputy High Court Judge granted summary judgment on the section 39 claim concerning schemes 1 to 7, but declined summary judgment concerning scheme 8: [2023] EWHC 1686 (Comm).