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Peter Hamilton: How liable are networks for the acts of an AR?

The purpose of imposing responsibility on the principal is to make sure they are treated as if they had acted in breach of the rules, as well as the AR

A recent High Court case has emphasised the importance of a principal’s responsibility for the actions and omissions of their appointed representative. The case was called Ovcharenko and Another vs Investuk Ltd and Anglo-Sino Capital Partners Ltd, and it is worth looking up.

Two clients of the AR, Investuk, sued it because of its total failure to carry out any due diligence in relation to an investment before advising the clients to invest. Investuk had failed to spot the company in which the clients were to invest was loss-making and that one of its main assets was illusory.

Anglo-Sino was Investuk’s principal. It tried to escape its responsibility for Investuk’s failures by arguing it was in breach of the AR agreement it had with Anglo-Sino because of what it had done or the way in which it had acted, and was therefore not liable to the clients under section 39 of the FSMA. Judge Waksman, QC, regarded the proposition “as wholly unarguable” and refused to set aside the default judgment which the clients had entered against Anglo-Sino.

It is worth looking at the legal position between a principal and its AR to understand the arguments in the case. The starting point is the so-called general prohibition in section 19 of the FSMA, which provides that no one may carry on a regulated activity unless that person is either duly authorised under the act or “an exempt person”. ARs are exempt persons by virtue of s.39 of the act:

If there is an agreement between the principal (who must be properly authorised under the act) and the AR, that agreement permits or requires the AR to carry on one or more of the usual kinds of financial business, and the principal accepts responsibility in writing for the activities of the AR in carrying on that business. If those conditions are satisfied, the AR does not need to be authorised in order to carry on those regulated activities. And most important from a client’s point of view, in the words of s.39(3), the “principal of an [AR] is responsible, to the same extent as if he had expressly permitted it, for anything done or omitted by the [AR] in carrying on the business for which he has accepted responsibility”. In other words, the principal is made to stand in the AR’s shoes and take full responsibility.

There is an obvious relationship between the extent of the business as defined in the agreement and the express authority given to the AR to carry on that business on the one hand, and on the other, the extent of the principal’s responsibility to the client. But although the express extent of the AR’s authority, and therefore of the principal’s responsibility, will be limited by the actual words used, the AR’s actual authority and the principal’s actual responsibility may go wider than the narrow terms of the words. This is because the AR will also have implied authority to do or say whatever is necessary for the effective execution of his express authority. It follows that the principal’s responsibility will cover what is done under that implied authority as well.

From the client’s point of view, the principal’s responsibility cannot be limited by, for example, the AR agreement imposing on the AR an obligation to comply with the rules in Cobs. If that were possible, the responsibility of the principal to the AR’s client could effectively be avoided. Take, for example, a simple situation in which the principal has given the AR the ability to carry on the regulated activity of giving investment advice and has accepted responsibility to the client for that advice and for anything the AR does or does not do.

If the AR advises in a way that is contrary to the rules in Cobs, the principal will still be responsible to the client for the AR’s breaches of the rules, even if the AR agreement specifically requires the AR to follow the rules – as is usually the case.

The very purpose of imposing responsibility on the principal is to make sure they are treated as if they had acted in breach of the rules, as well as the AR. Thus, the judge had no trouble in deciding  a clause in the AR agreement, which had the effect of requiring Investuk to act in a certain way, could not affect or limit the statutory duty on Anglo-Sino to take responsibility for the failures of Investuk in doing a proper job for the clients. The judge was plainly right.

Of course, it is usual for AR agreements to contain an indemnity by which the AR indemnifies the principal. This covers all amounts which the principal might be liable to pay to clients of the AR if the principal were required to take responsibility for the faults of the AR. But that does not limit the principal’s liability to the client.

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of moneymatterslegal.co.uk 

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Apart from the final paragraph I’ve been saying this for…er…decades. One more case to sort out the premise that an indemnity clause allows recovery in all situations.

    • Pretty much common sense and not surpirsing the judge foudn in that way as it sound very similar to agency law which I suspect that aprt of FSMA was based on. Pitty FSMA dropped the bity of common law we all tyhink should have been left in, i.e. the 15 year longstop.

  2. With all due respect Mr Hamilton, this a very roundabout, albeit learned, way of saying what is self-evident and what we already know.

    A network (for example) is responsible for the outcome/s of ALL financial advice given by its ARs. It cannot simply wash its hands of responsibility for activities that fall outside those laid down in its AR agreements, as Sesame recently tried and failed to do. Were it able to do so, its AR’s would be free, effectively, to ignore the network’s product panels and documented advice standards. The network could just shrug its shoulders and say: Oh well, on your head be it, there’ll be no comeback on us if it all goes wrong. That would be a recipe for a partial return to the pre-regulation Wild West. Crazy even to think that the powers that be would allow that to happen.

  3. The only true way for a Network to act is 100% File checking Prior to the Advice being given, Anything else is simply neglect and retention of joint earnings and tantamount to Retrospective (Partial) Compliance and endeavouring to deflect accountability for the sake of profit. As a Principal I sign Off “All” applications Prior to submission to the providers, if I am going to be responsible for any Complaint, I can not bleat about it or pass the buck when it comes to Regulatory Accountability

  4. These issues come under the Law of Agency – where the Principal is wholly responsible for their agent. Often ignored in the Endowments scandals and Pensions selling scandals – where each representative ( appointed or Tied) has been largely ignored in Law for whatever reason. The abuse of investment rates (to fiddle endowment returns, by reducing premiums is scandalous). These were set by Ins companies – willing to allow their agents to mislead, fiddle and decive clients. The Regualtor is an Agent of the GOvernment. Put simply the Principal is wholly responsible for their Agents – and no amount of meddling and fudging should be accepted by regualtors or Ins Co’s or Banks. These financial institutions are guilty of deceit, at best and may be fraud – against their cusotomers and clients and the Directors should be dealt with under Law, and prison.

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