Adam Anderson & Others v Sense Network Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice David Richards,Lord Justice Hamblen,Mr Justice Snowden |
| Judgment Date | 31 July 2019 |
| Neutral Citation | [2019] EWCA Civ 1395 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A4/2018/2931 |
| Date | 31 July 2019 |
[2019] EWCA Civ 1395
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
COMMERCIAL COURT
MR JUSTICE JACOBS
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice David Richards
Lord Justice Hamblen
and
Mr Justice Snowden
Case No: A4/2018/2931
Hugh Sims QC, Gerard McMeel and Jay Jagasia (instructed by Cubism Law) for the Appellants
Simon Howarth and Alexander Echlin (instructed by Reynolds, Porter, Chamberlain LLP) for the Respondent
Hearing dates: 2–3 July 2019
Approved Judgment
Introduction
This is an appeal against the dismissal of claims made against the respondent Sense Network Limited (Sense) under provisions contained in the Financial Services and Markets Act 2000 ( FSMA) and at common law. The claims arise out of the activities of Midas Financial Services (Scotland) Limited (Midas), the advisors employed by it and its controlling director and shareholder, Alistair Greig. It is not alleged that Sense was itself involved in those activities, but it is alleged to be liable for the losses suffered by the claimants, on the grounds that Midas was an “Appointed Representative” (AR) pursuant to section 39 of FSMA by virtue of contracts with Sense made in 2007 and 2013.
Ninety-five claimants issued proceedings against Sense. Case management directions were given for the claims of twelve claimants, as lead claimants, to proceed to trial. The trial of these claims took place over 13 days in July 2018 before Jacobs J, sitting in the Commercial Court, who gave an impressively clear and comprehensive judgment running to over 500 paragraphs on 26 October 2018.
Claims were made on a number of different bases, all of which were dismissed. Permission to appeal has been given on just two claims, those made under section 39(3) of FSMA and those made on the basis of vicarious liability at common law. By a respondent's notice, Sense seeks to uphold the dismissal of the statutory claim on the grounds that the scheme operated by Midas and Mr Greig, to which I refer below, was not a collective investment scheme as defined by section 235 of FSMA. There are therefore essentially three issues on this appeal and, after summarising the relevant facts and referring to the regulatory background, I will deal with them in that order.
The facts
I summarise here the critical findings of fact made by the judge. I should say that Mr Greig is facing a criminal enquiry in Scotland, but that he has not to date been formally charged with any offences. Mr Greig did not give evidence at the trial of this action and it may be assumed that he denies any wrongdoing. The judge's findings in this case do not bind Mr Greig.
Midas was founded by Mr Greig in 2006 and carried on a financial advisory business based in Aberdeen. From its appointment as an AR in 2007, it advised clients on a range of investments for which Sense held agencies and arranged deals in such investments for its clients. Much of the business was mortgage advice.
Midas also, without the knowledge of Sense, advised on and operated a scheme (the scheme) whereby clients would invest in what they understood to be short-term deposits carrying very high interest rates. The scheme was masterminded by Mr Greig who had started the similar scheme when he was previously employed as a financial advisor and continued it after he founded Midas, both before and after it became an AR of Sense. The claims in these proceedings all relate to payments made by the claimants under this scheme.
Mr Greig represented to clients that their funds were invested under special deposit arrangements with Royal Bank of Scotland (RBS) which was able to obtain high rates of return. He told clients that his relationship with RBS enabled him to gain access to these favourable arrangements.
In fact, there were no special deposit arrangements with RBS. It was not in dispute before the judge that Mr Greig was operating a dishonest Ponzi scheme, under which the deposits of later clients were used to repay earlier deposits with interest. When the Financial Conduct Authority (the FCA) intervened in 2014 and obtained appropriate orders from the Court of Session in Scotland, there were some 279 members of the public whose investments had not been repaid. They had paid £12.8 million and were owed £13.6 million. The available funds still held by Midas amounted to only £379,000.
On Mr Greig's instructions, steps were taken by Midas staff to conceal the scheme and its operation from Sense, although I should mention that the judge recorded that there was no evidence that any of the staff knew that it was a Ponzi scheme. In particular, no documents in connection with the scheme or containing any reference to it, or to transactions or payments under it, were uploaded to the cloud-based system operated by Sense, by which it monitored the activities of the ARs for which it was responsible. Payments and repayments under the scheme were not made to or from Midas' bank account, which was subject to audit by Sense, but to and from a separate account operated by Mr Greig personally.
Regulatory framework
FSMA establishes a framework for the regulation of financial services. It is directed to any “regulated activity” of a specified kind carried on by way of business and relating to an “investment of a specified kind”. The relevant activities and investments are specified in delegated legislation, principally the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (the RAO), as amended. For present purposes, it is enough to note that regulated activities include arranging deals in investments, advising on investments, operating a collective investment scheme and accepting deposits. Specified investments include units in a collective investment scheme, but not deposits.
Section 19 of FSMA prohibits a person from conducting a regulated activity in the United Kingdom, unless that person is either “authorised” or “exempt”. Under section 23(1), it is an offence to act in breach of the prohibition in section 19.
A person is “authorised” if permitted by the FCA to carry on regulated activities. Permission may be restricted to particular kinds of activity. Sense was at all material times an authorised person, permitted to advise on investments, to arrange deals in investments, and to agree to carry on either of those regulated activities.
The category of “exempt” person relevant to this case is that of AR. Instead of being authorised by the FCA, a person may be appointed as an AR by an authorised person who thereby becomes responsible for the AR's compliance with regulatory requirements. Regulation of ARs may thus be said to be outsourced by the FCA to the relevant authorised person. It is designed to reduce the regulatory burden on both the FCA and the large number of tied agents and independent financial advisors whose activities are conducted on a relatively modest scale.
The AR system is created and governed by section 39 of FSMA which, in the terms in force during the time relevant to this case, provided:
39.-Exemption of appointed representatives.
(1) If a person (other than an authorised person) –
(a) is a party to a contract with an authorised person (“his principal”) which—
(i) permits or requires him to carry on business of a prescribed description, and
(ii) complies with such requirements as may be prescribed, and
(b) is someone for whose activities in carrying on the whole or part of that business his principal has accepted responsibility in writing,
he is exempt from the general prohibition in relation to any regulated activity comprised in the carrying on of that business for which his principal has accepted responsibility.
(1A) But a person is not exempt as a result of subsection (1) –
(a) if his principal is an investment firm or a credit institution, and
(b) so far as the business for which his principal has accepted responsibility is investment services business,
unless he is entered on the applicable register.
(1B) The “applicable register” is –
(a) …[not relevant]
(b) …[not relevant]
(c) in any other case, the record maintained by the Authority by virtue of section 347(1)(ha).
(2) A person who is exempt as a result of subsection (1) is referred to in this Act as an appointed representative.
(3) The principal of an appointed representative is responsible, to the same extent as if he had expressly permitted it, for anything done or omitted by the representative in carrying on the business for which he has accepted responsibility.
(4) In determining whether an authorised person has complied with a provision contained in or made under this Act, or with a provision contained in any directly applicable Community regulation made under the markets in financial instruments directive, anything which a relevant person has done or omitted as respects business for which the authorised person has accepted responsibility is to be treated as having been done or omitted by the authorised person.
(5) “Relevant person” means a person who at the material time is or was an appointed representative by virtue of being a party to a contract with the authorised person.
(6) Nothing in subsection (4) is to cause the knowledge or intentions of an appointed representative to be attributed to his principal for the purpose of determining whether the principal has committed an offence, unless in all the circumstances it is reasonable for them to be attributed to him.
(7) A person carries on “investment services business” if –
(a) the business includes providing services or carrying on activities of the kind mentioned in Article 4.1.25 of the markets in financial documents directive, and
(b) as a...
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