Out-Law News 3 min. read

Principal firm had no real prospect of successfully defending a claim against acts of its appointed representative, court rules


An investment firm has failed to overturn a default judgment entered against it in favour of investors who had lost their money, on the grounds that the principal firm had no real prospect of successfully defending the actions of its appointed representative (AR).

There are few cases that come to court concerning the liability of a principal firm for the loss caused by the acts of its AR, making the judgment a particularly interesting one, according to wealth management expert Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com.

Under section 39(3) of the 2000 Financial Services and Markets Act, a firm which has engaged an AR is liable for that representative's acts and omissions when carrying on the business for which it has accepted responsibility, "to the same extent as if he had expressly permitted it".

Anglo-Sino Capital Partners Ltd (AS), a Financial Conduct Authority (FCA) authorised investment firm, had engaged InvestUK Ltd to act as its AR. InvestUK entered into client agreements with two UK-resident Russian nationals, Anna Ovcharenko and Yuri Moskaltsov, to arrange investments for them in a UK company under the UK entrepreneur visa programme.

The investors claimed that the UK company was loss-making and insolvent, and that InvestUK had failed to carry out adequate due diligence and given inaccurate and misleading advice in breach of the terms of the FCA's Conduct of Business Sourcebook (COBS). They issued proceedings against both InvestUK and AS, on the grounds that AS was liable for InvestUK's actions. AS failed to file a defence in time, and the court granted a default judgment in favour of the investors.

AS applied to have the default judgment set aside on the grounds that it had a real prospect of successfully defending the claim. It claimed that it was not liable for InvestUK's breaches of the COBS rules, as InvestUK had acted outside the scope of the AR agreement. It also argued that it was entitled to take advantage of an arbitration clause contained in the client agreements between the investors and InvestUK.

The High Court dismissed the challenge by AS. Arranging and advising on investments was expressly included among the services that InvestUK had agreed to provide on behalf of AS under the terms of the AR agreement, meaning that AS had no real prospect of successfully defending its claim. Additionally, FSMA section 39(3) created a "separate, free-standing basis of liability" on which the investors were entitled to rely, the court said, according to a summary of its decision published on Lawtel.

The court also dismissed the argument by AS that it was entitled to take advantage of the arbitration clause in the client agreements, as these were between InvestUK and the investors. The nature of the AR relationship created by FSMA was not the same as one of agency, according to the court. Rather, InvestUK was in business on its own account, providing its own services in return for a fee, the court said.

AS also attempted to argue that InvestUK had been providing investment advice; something which was expressly prohibited under the terms of its client agreements with the investors. The court said that this was irrelevant. The investors' claim was based on failure to carry out due diligence and making misleading statements, in breach of the client agreements, and not on investment advice. AS did not provide any evidence that InvestUK was not in breach of these obligations, the court said.

The court took the view that, as the shares in the UK company in this case were worthless, there was no point in delaying the assessment of damages to a further hearing, especially since the AR and principal firm were of doubtful solvency.  With apparent sympathy for the investors, who had lost their whole investment, the court ordered that the investors were entitled to damages to recover the invested amounts that had been lost.               

"The case is a clear reminder to principal firms to ensure that they have adequate controls over their ARs to enable them to monitor and enforce compliance with the relevant regulatory requirements for which they are responsible and undertake checks that their ARs have appropriate professional knowledge to be able to carry out the services they provide to investors," said wealth management expert Bruno Geiringer.

Geiringer added that it was unusual, when legal proceedings involve complex investment decisions, for a judge to be comfortable exercising discretion so as not to overturn a default judgment.

"However, the principal firm in this case did itself no favours by failing to act promptly which was a crucial factor in the court's decision to refuse to set aside the default judgment," he said.  

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