In the recent case of R (on the application of TenetConnect Services Limited) v Financial Ombudsman  EWHC 459 (Admin), the challenge of a jurisdictional decision made by the Ombudsman, there was some interesting commentary regarding the liability of Principals when Appointed Representatives (ARs) act outside of their arrangements with a Principal.
Mr and Mrs Thorpe engaged Mr Dhanda, a financial advisor. Dhanda was an AR of TenetConnect Services Limited. Dhanda recommended that the Thorpes sell certain specified investments (a Friends Life Policy, bonds and ISAs) in order to fund an alternative unregulated investment (a property in Goa) and some loans. The funds that they released were never invested by Dhanda, but apparently used by him to fund a gambling habit. Dhanda was later imprisoned for defrauding 37 people (including the Thorpes) in connection with what was described as a £2.9m Ponzi-type fraud. The Thorpes (and others) complained to Tenet about Dhanda's activities, but without recourse. They then made a complaint to the FOS, arguing that Tenet should compensate them for the loss caused by Dhanda's fraudulent actions.
Tenet argued that it was not liable for the loss suffered by the Thorpes because the loss occurred in connection with an unregulated investment (the property in Goa) and because the sale of the specified investments fell outside the scope of the Thorpes' complaint. Tenet also contended that Dhanda's actions vis a vis the unregulated investments were not carried out within the scope of the Principal / AR relationship and, as such, Tenet could not be liable.
Ouseley J found that Dhanda's advice in relation to (i) the sale of the specified investments and (ii) the investment in the unregulated alternatives, was so closely linked that all of the activities constituted regulated activities. In circumstances where the sale of one was to fund the purchase of the other it would be artificial to separate the activities – it was all part of the same transaction. This meant that the activities fell squarely within s.39(3) FSMA, under which a principal is responsible for an AR's actions. Further, the contractual relationship between Dhanda and Tenet which said that the AR relationship extended only to the giving of investment advice on buying or selling investments "dealt in by Tenet", did not divest Tenet of its liabilities pursuant to s.39(3).
There have been a number of cases in recent years regarding the relationship between Principals and ARs and it is also a recurring area of interest for the FCA. In November last year, the FCA issued an alert to Principals warning them to monitor their ARs activities. (Principals in the Spotlight over Relationships with Appointed Representatives and Introducer Appointed Representatives). This case is yet another reminder to Principals that they need to be diligent when it comes to AR relationships. To avoid criticism, Principals need to ensure that they carry out exemplary due diligence at the outset of any AR relationship and that they continue to closely monitor ARs' business to ensure early identification of any issues that may be of concern. This is an area that the FCA says that it is continuing to work on and we may well see further commentary from them in due course.
You can read the full judgment here.