Court ruling to create two-tier client protection

Ms Hann said: "This judgment now leaves consumers at the mercy of unscrupulous appointed representatives acting in breach of their private arrangement with their principal, for which the principal avoids liability despite the law providing for it to seek damages from the appointed representative for breach of that contract.

"Yet again the consumer is blind, victim of an inequality of information and bottom of the pile when it comes to protection. This can hardly be paying due regard to the interests of its customers and treating them fairly."

A spokesperson for Sense said: "Whilst Sense feels sympathy for the investors and the losses that they have incurred, Sense was totally unaware of the scheme and had no part in causing those losses.

"Responsibility for those losses lies 100 per cent with [the appointed representative] and the individual who masterminded the fraud." 

The claimants are now seeking permission to appeal the decision to the Supreme Court.  

Harriet Quiney, partner and professional indemnity lawyer at DWF Law, said the ruling would prove helpful in an area of ongoing dispute in the advice industry, especially in providing clarity in cases reaching the Financial Ombudsman Service. 

The Fos is required to take judgements into account when deciding a case or explain itself if it chooses to differ from a court ruling. 

Ms Quiney said: "The network is responsible for the actions of their appointed representatives as though it had carried them out itself, as specified in the regulation.

"It gives direct liability for those actions but there has to be some sort of break in it, because obviously you can risk having an appointed representative who goes on a rampage of fraud and it is not right that a network who has taken reasonable precaution should be liable for those kind of actions.

"We've always said the key is in the contract between the network and appointed representative, and if, as in this case, there are very specific products included in that contract and reasonable checks in place with a proper relationship then that ought to be good enough in terms of imposing liability." 

Ms Quiney suggested advice networks "look carefully" at contracts with appointed representatives and review agreements in light of the Sense ruling, meaning advisers could potentially be hearing from their principals with any future changes. 

Phil Young, chairman of the Sense Network and founder of adviser consultancy Zero Support, said Section 39 of the Financial Services and Markets Act 2000 only imposed liability on the principal for the business described in the contract with the appointed representative, which was existing law he said was "simply upheld" by the original judge and the Court of Appeal.