Court Of Appeal Clarifies Scope Of Liability Under Section 39(3) Of FSMA

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Court Of Appeal Clarifies Scope Of Liability Under Section 39(3) Of FSMA

Author: Jared Ursell

Key Contact: Aisha Wardell

Judgment of Mr Paul Stanley KC

In the case of KVB Consultants Limited & Others v Jacob Hopkins McKenzie Limited & Others, a number of the Claimants, comprising a total of 26 investors in a series of investment schemes, previously obtained summary judgment against the Twelfth Defendant, Kession Capital Limited (“KCL”).

The schemes – which involved the purchase and development of plots of land, using investor capital, via a ‘bare trust’ structure – were collective investment schemes within the meaning of section 235 of the Financial Services and Markets Act 2000 (“FSMA”), and were unlawfully established, promoted and operated. The schemes failed in their entirety, and the Claimants (representing approximately half of the overall investor pool) brought proceedings against the individuals and companies involved. The claims included a breach of FSMA, a breach of the rules in the FCA’s Supervision handbook, SUP 12, and a breach of the Conduct of Business Rules. Claims in deceit were also made against two of the Defendants.

The application for summary judgment was made against the final remaining Defendant, Kession Capital Limited, with judgment having already been obtained against 10 Defendants and the other Defendant having been made bankrupt. KCL was the principal of the company that had established, promoted, arranged, advised on, and operated the schemes, Jacob Hopkins McKenzie Limited (“JHM”), under an authorised representative agreement.

The Judge, Paul Stanley KC, awarded summary judgment on the basis that KCL, by virtue of section 39 of FSMA, assumed responsibility for JHM’s activities in marketing the schemes.  

The Appeal

KCL appealed the decision of Paul Stanley KC to award summary judgment and, having been granted permission to appeal by the Rt. Honourable Lord Justice Phillips, the substantive appeal was heard by Sir Geoffrey Vos, Master of the Rolls, Lord Justice Lewison, and Lord Justice Males on 12 June 2024.

KCL appealed on two grounds:

  • on its true construction, the authorised representative agreement prohibited JHM from conducting collective investment scheme business, with the consequence that KCL neither gave permission nor accepted responsibility for the conduct of such business by JHM pursuant to section 39 FSMA; and
  • the authorised representative agreement prohibited the promotion of the schemes to retail clients, this being a prohibition which restricts what can be done, not how it can be done.

Whilst there was a dissenting judgment in respect of ground 2 from Lord Justice Lewison, Lord Justice Males and Sir Geoffrey Vos, MR dismissed the appeal on both grounds. In summary, the Court of Appeal held that:  

  1. The business which KCL was permitted to conduct was as set out in Schedule 5 of the authorised representative agreement. The permissions were identified by reference to the specified activities which, by virtue of the inclusion of ‘units’, included permission to advise on and arrange deals in collective investment schemes. KCL’s authorisation by the FCA included advising on and arranging such deals. The statement in Schedule 5 of the authorised representative agreement that “…. For the avoidance of doubt the AR cannot … operate a collective investment scheme…”, does not negative or detract from the permission granted in the earlier parts of Schedule 5 to advise on and arrange deals in such schemes.
  1. Whilst the provisions of the authorised representative agreement do, on the face of it, prohibit JHM from giving advice to or arranging deals for retail clients, the question for the Court of Appeal was whether such a limitation on the scope of the permission given to JHM by KCL is permitted by section 39 of FSMA.

The description of the business in subsection (1)(a) of section 39 FSMA refers to the activity in question, in this case ‘Advising on investments’ and ‘Arranging deals in investments’. Those generic descriptions are not defined by reference to the classification of the clients to whom advice may be given or for whom deals may be arranged. They do not distinguish, as descriptions of activities, between giving advice to or arranging deals for professional clients and eligible counterparties on the one hand and retail clients on the other. The type of business which an appointed representative is permitted to conduct is therefore distinct from the question of for whom that business is undertaken.

In the Court’s view, the stipulation in the authorised representative agreement that JHM should deal only with professional clients and eligible counterparties operated as a contractual term as between JHM and KCL, but did not affect the scope of the permission given by KCL, or the responsibility which it accepted, for the purposes of section 39 of FSMA.

A copy of the judgment can be found here.

Acuity Law acted for the successful Respondents in the appeal (and the Claimants in the underlying claim).

Hugh Sims KC and Jay Jagasia, both of Guildhall Chambers, were instructed on behalf of the Respondents.

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