Supreme Court overturns decision that financial service provider was responsible for authorised representative’s failed investment scheme

About this case:

• Citation:
  [2026] UKSC 11
• Judgment:
  External link
• Court:
  UK Supreme Court
• Judge:
  Lord Richards

Kession Capital Ltd, now in liquidation, was the defendant in an action brought by KVB Consultants Ltd and others seeking to recover £1.7 million following the failure of investment schemes set up by an appointed representative of the company. Kession had resisted the claim on the basis that its representative had acted outside the scope of their agreement, however earlier decisions of the London Circuit Commercial Court and Court of Appeal found that this was insufficient to prevent a claim being brought against them.

The appeal was heard by Lord Lloyd-Jones, Lord Sales, Lady Rose, Lord Richards, and Lady Simler, with Simon Howarth KC and Lucile Taylor appearing for the appellant and Hugh Sims KC, Jay Jagasia, and Charlotte Mallin-Martin for the respondents.

Contractual restriction

Under section 39 of FSMA, a person authorised to carry on a financial services business may permit an appointed representative to carry on a business on its behalf. Such an appointment would require a contract which specified the types of business the appointed representative was permitted to carry on, which could be the whole or part of the specified business. In June 2015, the appellant, Kession, agreed to appoint another firm, Jacob Hopkins McKenzie Ltd, as its appointed representative, however JHM was prohibited by the agreement from dealing with retail clients.

JHM proceeded, despite the terms of the agreement, to set up a number of investment schemes. All of the schemes failed and there was no return to the investors, who had invested a combined £1.7 million between them. While all the investors were classified by JHM as professional clients, all but one of them asserted that they were in truth retail clients. The investors thereafter sought summary judgment against Kession, which the Commercial Court gave on the basis that, by virtue of Kession’s responsibility for the actions of JHM under section 39(3), it was liable in damages.

The Court of Appeal upheld the Commercial Court’s decision by a majority, upholding the earlier finding that the prohibition on JHM dealing with retail clients was simply a contractual restriction which did not affect the rights of third parties. Dealing with retail clients could not be described, as Kession contended, as a distinct part of a financial services business for the purposes of section 39.

Regulatory overkill

In a judgment with which the other judges agreed, Lord Richards said of the interpretation of section 39: “There is no difficulty as a matter of ordinary language in describing dealing with retail clients as part of a financial services business. Although it is not precisely the distinction that is being drawn here, the distinction between retail and wholesale customers is centuries old. No-one would suggest that it was inapposite to say of a supplier who deals with both business and retail customers that the retail customers are a “part” (and a clearly identifiable part) of the supplier’s business.”

He continued: “The different treatment of retail and professional clients in the regulation of financial services forms a very important element of the regime, on account of their significantly different needs as regards protection. This, in my judgment, provides some support for the view that dealing with a particular class or category of clients, such as retail clients, is properly treated as ‘part’ of the business of a financial services provider.”

Explaining the reasoning behind this partition, Lord Richards said: “It would defeat the regulatory purpose if an authorised person, whose experience and expertise lay in dealing with professional clients, was required to assume responsibility for an appointed representative’s conduct of retail business, notwithstanding that the permission granted to the appointed representative was for good reason limited to dealing with professional clients. Self-evidently, such a result would not serve the interests of consumers. It is fundamental to any system of regulation that the regulator, or in this case the authorised person as its proxy, should have the experience and expertise appropriate to the permitted business.”

He added: “There would seem to be an element of regulatory overkill, and indeed unfairness, in making an authorised person responsible for an appointed person’s activities in dealing with retail clients when it is expressly prohibited from doing so by the terms of its appointment. It is likely to discourage the appointment of appointed representatives unless both the authorised person and the appointed representative are qualified and competent to deal with all categories of client. If that is a result which the Financial Conduct Authority considers appropriate, it may well be able to achieve it through its rule-making powers.”

Lord Richards concluded: “In my judgment, there is no basis in the language or purpose of section 39 for reading the ordinary words of section 39, ‘the whole or part of that business’, as restricted in the way submitted by Mr Sims. If, as in Anderson v Sense Network Ltd (2019), a restriction to particular providers of investments, which is not a restriction that can be derived from the definitions of regulated activities and investments, is permitted, it is difficult to see why the same is not also true of a restriction to particular categories of clients, especially as they are an important feature of the regulatory regime as a whole.”

The appeal was therefore allowed, with Kession ruled not to have any responsibility for anything done or omitted by JHM in carrying on business with retail clients.