Rory Spillman and Adriano Stagni discuss the UK Supreme Court’s judgment in Kession Capital Ltd v KVB Consultants Ltd, and what it means for the appointed representative regime, in Law360

The U.K. Supreme Court judgment in Kession Capital Ltd. (in Liquidation) v. KVB Consultants Ltd., handed down on April 1, considered whether a Financial Conduct Authority-authorized person can limit their responsibility for acts undertaken by an appointed representative.[1]

This is the first time that the Supreme Court has considered this issue, and it found that authorized persons are able to limit their responsibility to only part of the appointed representative's financial service business.

In this article we discuss the reasoning behind the decision and how it affects the market and those operating under the appointed representative regime.

Background

The appeal by Kession to the Supreme Court concerned the extent of an authorized person's responsibility for the activities of its appointed representative under Section 39 of the Financial Services and Markets Act 2000, or FSMA. In a unanimous judgment, the U.K.SC reversed decisions in the lower courts.

Kession was an FCA-authorized firm with permission to undertake regulated activities, including arranging deals in, and advising on, investments under Part 4A of the FSMA. However, permission was subject to a limitation, which excluded Kessian from dealing with retail clients and restricted it to professional clients and eligible counterparties.

Section 39 of the FSMA enables a person not authorized by the FCA to be appointed by an authorized person to carry on regulated activities, provided that the authorized person accepts responsibility in writing for the representative's activities in carrying on "the whole or part of" the relevant business.

Under Section 39(3), the authorized person is then responsible for anything done or omitted by the appointed representative in carrying on the business for which it has accepted responsibility.

Under an appointed representative agreement dated June 30, 2015, Kession appointed Jacob Hopkins McKenzie Ltd. to carry on relevant business. The agreement included arranging deals in investment and advising on investment, subject to the limitations of Kession's Part 4A permission: expressly prohibiting JHM from conducting any business with retail clients, and restricting it to professional clients and eligible counterparties.

The agreement also listed the regulated activities and confirmed that the customers with which Kession and the appointed representative were permitted to deal were limited to eligible counterparties and professional clients.

JHM promoted investment in property development schemes, classifying all investors as professional clients. Every one of the seven relevant schemes failed. Having lost a combined total of around £1.7 million ($2.3 million), the investors issued proceedings, including against Kession, and all except one investor asserted that they were retail clients who had been misclassified.

High Court and Court of Appeal Decisions

At first instance, Paul Stanley KC granted summary judgment against Kession on the basis that, notwithstanding the limitations in both Kession's Part 4A permission and the agreement, it was responsible under Section 39(3) for JHM's activities in dealing with retail clients.

The Court of Appeal affirmed this decision, holding that the description of the business in Section 39(1)(a) referred to the regulated activity in question, i.e., "advising on investments" and "arranging deals in investments" and was not defined by reference to the classification of clients. It was considered that limiting responsibility of the authorized principal to professional clients would be contrary to the purpose of investor protection.

Appeal to Supreme Court

The central question for the Supreme Court was the proper construction of Section 39, and specifically whether an authorized person's responsibility for its appointed representative's activities could be limited by terms of the agreement so as to exclude dealings with retail clients.

This turned on the meaning of the words "the whole or part of that business" in Section 39(1)(b), and whether dealing with retail clients constituted a part of the business of a prescribed description, such as advising on investments or arranging deals in investments.

Supreme Court Decision

The Supreme Court unanimously allowed the appeal. Justice David Richards held that, as a matter of ordinary language, dealing with retail clients is capable of being described as a part of a financial services business.

The different treatment of retail and professional clients forms a very important element of the FSMA regulatory regime, and the FCA may itself restrict a Part 4A permission to dealing with professional clients only: Both support the view that dealing with a particular class of clients constitutes a part of the business for the purposes of Section 39.

Justice Richards advanced three grounds in support of this construction. First, requiring an authorized person experienced only in professional client business to assume responsibility for retail dealings would defeat the supervisory purpose of the regime.

Second, an authorized person may legitimately assess that an appointed representative is qualified for professional but not retail work, making it senseless to impose responsibility for the latter.

Third, without this construction, an appointed representative expressly prohibited from dealing with retail clients would nonetheless be exempt from the general prohibition if it did so. It would commit no criminal offense and suffer no civil consequences, creating a "promiscuously broad exemption," contrary to investor protection.

Justice Richards rejected each of the reasons given by Justice Stephen Males in the Court of Appeal and held that:

• It did not follow that dealing with retail or professional clients could not form different parts of that business;
• That client categorization often involves no assessment at all; and
• That Section 39's primary protective mechanism operates not through remedies, but by ensuring only competent persons deal with retail clients under proper supervision.

Justice Richards also endorsed Justice Jonathan Sumption's observation in Asset Land Investment PLC v. FCA that regulatory legislation is a compromise between consumer protection and the avoidance of regulatory overkill.[2]

Justice Richards concluded that imposing responsibility on an authorized person for its appointed representative's retail dealings, in the face of an express prohibition, would be unfair and would likely discourage the use of appointed representatives.

Practical Takeaways for Lawyers

This Supreme Court judgment provides important clarification for authorized persons operating within the appointed representative regime, which is an integral part of the financial services sector.

The judgment provides greater certainty to authorized persons as to how they may limit the scope of the appointed representative's permission — and their own corresponding responsibility under Section 39(3). Where an agreement expressly excludes a particular type of business, the authorized person will not be responsible under Section 39(3) for the appointed representative's dealings in relation to that business, even where it acts in breach of that restriction.

Notably, the Supreme Court decision focused on the construction of s.39 in light of a particular agreement. It remains to be seen what else can be considered by the court as being part of the business and whether there is a threshold.

It is also important to note the corollary identified by the court: An appointed representative that deals in breach of such a restriction will not benefit from the exemption under Section 39(1) and will therefore be subject to the criminal and civil consequences of breaching the general prohibition under Sections 23 and 26 of the FSMA.

The authorized person, and their legal representatives, should ensure that agreements clearly delineate the scope of the permitted business, including any client category restrictions, and that robust monitoring arrangements are in place to enforce compliance.

Conclusion

Although the UKSC Judgment in Kession provides an important precedent for practitioners to consider, it should also be viewed against the backdrop of a HM Treasury consultation, which recently closed. The consultation concerned the Government's policy statement (published last August)[3] which set out proposals intended to increase confidence in the use of appointed representatives. The consultation proposed that authorised firms wanting to use appointed representatives obtain permission from the FCA. Further, it also proposed that the Financial Ombudsman Service apply to the appointed representatives regime.

Ultimately, the consultation recognised that the appointed representative regime is an important feature of the UK financial services framework. The Government paper noted that the regime brings benefits for both firms and consumers, especially as it enables businesses to carry out regulated activities without obtaining full authorisation, thus offering a more proportionate and cost-effective route into the market. This encourages competition and innovation, contributing to economic growth.

The Government may indeed seek to refine the legislative framework, but only in a way that strengthens investor protection without narrowing the regime unnecessarily. Preserving the regime’s broad scope would allow the financial services sector to continue benefiting from its flexibility.

[1] https://supremecourt.uk/uploads/uksc_2024_0114_judgment_b06648d630.pdf.

[2] Asset Land Investment Plc (Appellant) v. The Financial Conduct Authority (Respondent) [2016] UKSC 17: https://www.bailii.org/uk/cases/UKSC/2016/17.html.

[3] "Consultation: The Appointed Representatives Regime", https://www.gov.uk/government/consultations/consultation-the-appointed-representatives-regime/consultation-the-appointed-representatives-regime.