Clients of appointed representatives could find themselves unprotected against losses following a judgement which ruled in favour of the Sense Network this week, a lawyer has warned.
Last week (July 31) the Court of Appeal sided with Sense, which was taken to court by 95 claimants over an alleged secret £12.8m "Ponzi scheme" run by one of its appointed representatives.
The ruling followed that handed down by a judge in November, who found the network was not responsible for the losses experienced by the claimants because the advice given by the appointed representative sat outside of its AR agreement.
The AR in question had advised clients to invest in what the judge called a Ponzi scheme, which involved what the clients understood to be short-term deposits carrying very high interest rates.
Philippa Hann, managing director of litigation at law firm Clarke Willmott which is representing the claimants, warned the ruling could create a "two-tier system of protection" for UK investors, with clients of principals afforded more protection than those of appointed representatives.
She said the crucial point in the decision landed with the provider panel approved by the network.
The court found because the investment scheme being run by the appointed representative, regardless of its legality, was not on the network's panel of approved providers, the network did not have any liability for the losses that occurred as a result as it fell outside of the business Sense had specified it was responsible for.
The Court of Appeal agreed with November's ruling that the private contract between a principal and appointed representative determined the business for which the former was responsible.
Ms Hann said: "Where an adviser is not an appointed representative but directly authorised by the FCA, the consumer will be protected in relation to the business it is permitted to undertake and which is listed on the publicly available FCA register.
"If the appointed representative had been directly authorised, the claimants would have been protected."
The judgement would be relevant to any appointed representative acting outside of its agreement with its principal, Ms Hann said.
She added: "The fact that the investment in this case was a Ponzi scheme is irrelevant to the decision the judge made and the consequences on the general public.
"Any client of an appointed representative advised in relation to anything which falls outside of the agreement with the principal – for example advice to invest with one provider rather than another - will leave the client without protection entirely without their knowledge.
"In this case, the staff at the appointed representative did not inform the claimants that the advice fell outside the agreement with the principal."
The court found the appointed representative had taken steps to conceal the scheme from the network and in particular no documents in connection with the scheme were uploaded to the cloud-based system operated by Sense.
According to the judgement, payments and repayments under the scheme were not made to or from the bank account of the appointed representative, which was audited by Sense, but rather to and from a separate account personally operated by its director.