UK: Financial Advice: Is A Network Liable For Advice Of A Dishonest Adviser?

Last Updated: 29 November 2018
Article by Susan Hopcraft

Independent financial advisers often operate as small businesses. They are regulated under the Financial Services and Markets Act 2000 and must be authorised to advise on investments. Due to their size, smaller firms do not typically have the resources to employ someone responsible for compliance. In that situation, they can use external sources such as compliance consultancy firms. The other option is to join a 'network'. Many IFAs become 'authorised representatives' of a much larger organisation providing adviser support services, in return for an annual fee.

Broadly speaking, the network organisation (the principal) the authorisation from the FCA. The individual businesses underneath the principal have their obligations to the regulator monitored and supervised and covered by the umbrella arrangement in the network. Financial intermediary networks have grown over the years and the largest currently has approximately 3,500 individual financial advisers.

The legal effect is that the network assumes regulatory responsibility for its IFAs. Can that lead to legal liability in all circumstances though? Two recent cases have examined where the line is drawn as to when a network should be liable if an adviser goes 'rogue'.

Tenet v Financial Ombudsman Service (March 2018)

In the first case an IFA defrauded 37 of his clients of £2.9m in a scheme by which he persuaded them to buy apartments in Goa and lend him money, in place of their existing investments. He helped them to sell their investments and pay monies to him, ostensibly to invest in Goa but which he in fact used to gamble or pay his gambling debts.

The fraudster was an authorised representative of the Tenet network of financial advisers. The clients claimed against Tenet via the Financial Ombudsman (FOS), which found for them. FOS exercised its regulatory redress function looking at what was fair and reasonable, as it is required to do, rather than deciding strictly in accordance with the law of negligence. FOS decided that it would be fair and reasonable for Tenet to compensate for the loss caused by the fraudulent activities of the IFA.

Tenet's view was that, although the IFA was undertaking a regulated activity when advising the clients to sell investments, and was doing so as its appointed representative, he was not undertaking a regulated activity, nor was he acting as Tenet's appointed representative, when he advised them on what to do with the money realised from the sale of assets. It was that advice, to invest in Goan property and/or lend monies to the fraudster, which caused the losses.

The court case was a judicial review of whether FOS had jurisdiction to award compensation in this situation. Only if the activity was regulated could FOS order compensation. The court agreed with FOS that the decision to sell the investments was intrinsically linked to the advice to invest in Goa. The advice to invest elsewhere was directly linked to the sale of regulated investments. Since they could not sensibly be separated it was decided that the advice as a whole was regulated.

The other issue was whether, under FSMA s39(3) Tenet, as the principal of the IFA, was responsible for the advice given by its authorised representative, in relation to the "unregulated" investments. The court agreed with FOS again in deciding that fraud in the course of giving "regulated" advice comes within s39(3). The IFA was not acting in a personal capacity when he gave the advice and therefore he was representing Tenet.

Anderson v Sense (October 2018)

In this similar case an IFA in Aberdeen set up a scheme which involved his clients paying monies to him, purportedly to invest in high return short term deposits. However, the IFA received the cash personally. He was able to make the interest payments to the first investors out of new subscriptions by later investors. The scheme continued until the total invested was £27m, with payments out amounting to £26.6m.

The IFA was an appointed representative of the Sense network. Sense were kept in the dark about the scheme and carried on their regulatory file reviews and oversight, ignorant of the fraud.

The fraud was brought down by a whistle blower reporting the existence of the scheme to Sense, although that person had no idea that the scheme was a free-standing account run by the IFA with no underlying investment.

It was immediately clear that the receipt of deposits by the IFA was not authorised and was manifestly in breach of FSMA.

A group of 95 clients made a claim against Sense seeking to hold them liable as principal by a variety of routes. Claims were made under section 39 of FSMA, actual or apparent authority, breach of supervisory obligations by attribution of knowledge, or failure to monitor, or failure to investigate, and under vicarious liability.

Overall the court considered that the scheme, and advice in connection with the scheme, were well beyond the scope of the "business" for which Sense accepted responsibility pursuant to the authorised representative agreement. It was considered clear that the activities of the fraudster in relation to the scheme, both in terms of operating it and advising on it, were wholly unauthorised.

The court also noted that taking deposits is not the normal activity of a financial adviser, which strengthened the view that there could not have been actual or ostensible authority from Sense to receive client funds.

The claims were made by various legal routes, but they all failed; it remains to be seen whether they will appeal on any aspect.


Sense avoided being held liable, a situation Tenet may find difficult to reconcile when they were found liable for a similarly 'rogue' adviser operating a fraudulent scheme.

In both cases there were no evident failings in the network's level of supervision or compliance systems. Had there been any failings the outcome could have been very different for Sense.

Nonetheless there is a distinction between these types of fraud and all networks and clients need to take note if and when fraud is detected. It would appear that fraud carried out using the proceeds of regulated investments is liable to be compensated, but if loss is caused by a fraud using fresh subscriptions it is less likely to be recovered.

That might sound like an unfortunately technical distinction, since both schemes at their heart had a dishonest IFA and clients will consider they ought to be compensated if regulatory protection has any meaning. FOS has greater latitude to compensate based on principles of 'fairness' rather than the letter of the law and it is at least possible that, had each of the 95 Sense claimants applied there, they might have benefitted from a more sympathetic ear than that of Mr Justice Jacobs.

The FOS compensation limit looks likely to rise from £150,000 to £350,000 on 1 April 2019 and that is an unpalatable prospect for networks in light of the Tenet case.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions