On 1 April 2026, the Supreme Court unanimously allowed the appeal in Kession Capital Ltd (in Liquidation) v KVB Consultants Ltd [2026] UKSC 11, overturning the Court of Appeal majority. The decision clarifies the scope of a principal firm's responsibility under section 39 of the Financial Services and Markets Act 2000 (FSMA) when its appointed representative (AR) acts outside the terms of its appointment.
The Court held that dealing with retail clients constitutes a distinct "part" of a financial services business for the purposes of section 39(1) FSMA. A principal that restricts its AR to professional clients is therefore not responsible under section 39(3) for the AR's unauthorised dealings with retail clients.
Background
Kession Capital Ltd (Kession) was an FCA-authorised firm with Part 4A permission to arrange deals in and advise on investments, subject to a limitation excluding retail clients. In June 2015, Kession appointed Jacob Hopkins Mckenzie Ltd (JHM) as its AR under a written agreement (the ARA) that expressly prohibited JHM from dealing with retail clients, mirroring Kession's own regulatory permissions.
JHM promoted a series of property investment schemes, classifying all investors as professional clients. The schemes failed, with total losses of approximately £1.7 million. All but one of the investors were in fact retail clients whom JHM had misclassified. With JHM insolvent, the investors claimed against Kession under section 39(3), notwithstanding the express prohibition in the ARA.
The Judgment
Lord Richards, giving the unanimous judgment, held that dealing with retail clients is a "part" of a financial services business within section 39FSMA. Three considerations supported this conclusion: as a matter of ordinary language, dealing with retail clients is readily described as a distinct part of a business; the retail/professional distinction is fundamental to the regulatory regime, underpinned by different conduct requirements, qualifications, and training obligations; and the FCA itself may restrict an authorised person's Part 4A permission to exclude retail clients, confirming that dealing with retail clients is a severable part of a business.
Kession was accordingly not responsible for JHM's dealings with retail clients.
Key takeaways
Scope of responsibility can be effectively limited. The decision confirms that a principal may validly limit its section 39(3) FSMA responsibility by restricting the categories of client with whom its AR may deal. Where an AR acts outside those restrictions, the principal will not be responsible. This provides welcome clarity for firms that have structured their AR arrangements to reflect their own permissions and expertise.
Monitoring obligations remain critical. The judgment underscores the principal's ongoing obligation to monitor its AR's activities. SUP 12 requires adequate controls and resources to monitor compliance, and a firm should not appoint an AR in areas where it lacks the competence to supervise. A firm that restricts its AR to professional clients but fails to monitor adherence may face regulatory exposure - even absent section 39(3) FSMA liability.
Increased exposure for ARs acting outside scope. An AR dealing with retail clients in breach of its appointment will not enjoy exemption from the general prohibition. The consequences are severe:
- the AR commits a criminal offence under section 23 FSMA (contravention of the general prohibition in section 19);
- agreements made in the course of those unauthorised dealings are unenforceable against the other party under section 26 FSMA; and
- the AR will be in breach of its appointed representative agreement, entitling the principal to terminate and pursue contractual remedies; and
- the principal will not be responsible under section 39(3), meaning retail clients may have no effective remedy if the AR is insolvent.
Regulatory reform: the AR Consultation
The decision arrives at a time of significant regulatory focus on the AR regime. On 11 August 2025, HM Treasury published a policy statement signalling legislative reform, followed by a consultation paper, Consultation: The Appointed Representatives Regime (the AR Consultation) setting out proposals to strengthen the regime. The AR Consultation closed on 9 April 2026 and the government's response is awaited.
The AR Consultation proposes three reforms. First, a new regulatory gateway would require authorised firms to obtain FCA permission before acting as principal, enabling the FCA to assess suitability and to vary or withdraw permission where standards are not met. Existing principals would be deemed to hold permission, avoiding disruption to the ARs currently operating. Second, the Financial Ombudsman Service's (FOS) compulsory jurisdiction would be extended to ARs: where the FOS determines that a principal is not responsible for its AR's acts or omissions, it would consider the complaint directly against the AR. Third, ARs would be brought within scope of the Senior Managers and Certification Regime (SMCR), replacing the Approved Persons Regime and aligning accountability standards with those applying to authorised firms. Notably, the government does not propose to amend section 39 FSMA so that the AR's exemption depends on the principal holding the new permission - preferring regulatory action against the principal to exposing the AR to the general prohibition.
Read alongside the AR Consultation, the decision is likely to prompt a recalibration of risk across the AR market. Principal firms may feel more confident restricting ARs to professional clients, knowing such restrictions effectively limit section 39(3) exposure.
Comment
Kession clarifies the boundaries of principal firm responsibility under the AR regime, confirming that restrictions on client categories are effective limitations on the "part" of the business for which responsibility is accepted. AR agreements that accurately reflect the firm's permissions and expertise can limit section 39(3) FSMA exposure. However, the decision also underscores the importance of robust monitoring and oversight - both to satisfy FCA supervisory expectations and to ensure restrictions are observed in practice. Principal firms should also note that the judgment does not foreclose liability on other grounds, with claims under sections 138D and 241 remaining to be determined.
For the FCA, the judgment presents a gap in consumer protection that the AR Consultation's proposed reforms are designed to address. Of particular concern (pending the proposed changes set out above) will be that consumers who do the right thing and check that the firm they are dealing with appears on the FCA register, are likely to be misled in circumstances where the registration as an AR provides no protection. We consider it likely that where AR firms are acting outside their permission in this manner, the FCA will be significantly more likely to take enforcement action against the AR because of the availability of powers that can be used against unauthorised firms.
Notwithstanding the finding that principals are not responsible for the AR's unauthorised dealing with retail clients, the FCA will still expect that systems and controls put in place by principals identify where unauthorised business might be taking place. Where they do not the FCA may seek to establish a breach of Principle 3 (management and control) on the part of the principal firm.