Supreme Court narrows principals’ liability for ARs under FSMA

On 1 April 2026, the Supreme Court handed down its judgment in the case of Kession Capital Ltd (in liquidation) v KVB Consultants Ltd [2026] UKSC 11. In allowing the appeal, the Court clarified and narrowed the scope of a principal firm's statutory responsibility under section 39 FSMA for the acts of its Appointed Representative (AR). 

Under section 39, a non‑authorised AR can carry on certain regulated activities if it has a written contract with an authorised firm and that firm has accepted responsibility in writing for the AR's activities in carrying on the whole or part of a prescribed business.  For that business, the principal is responsible "to the same extent as if he had expressly permitted" the AR's acts and omissions.

The decision should be welcomed by principal firms appointing ARs. It confirms that, for the purposes of section 39 FSMA, a principal's responsibility for an AR's activities is defined by the terms of the AR agreement and the scope of the principal's own regulatory permissions. This removes the uncertainty created by the now‑overturned Court of Appeal decision, which had raised the prospect of principals being held responsible for activities carried on by ARs outside the scope of the AR agreement or beyond the principal's Part 4A permissions.

In practical terms, principal firms should:

• ensure AR agreements are carefully drafted to set out clearly the business the AR is permitted to conduct and any restrictions (including restrictions on client types), and that these restrictions reflect any limitations on the principal's Part 4A permission,
• review AR agreements periodically to ensure they remain fit for purpose and aligned with the firm's permissions and business model,
• maintain robust due diligence, supervision and monitoring arrangements for ARs, and review these frameworks regularly and whenever issues arise, particularly in light of the Consumer Duty and the FCA's increasingly assertive supervisory approach, and
• stay alert to forthcoming changes to the AR regime, which are discussed below, and be prepared to adjust their AR strategy and documentation accordingly.

Background

Kession was an authorised investment firm, permitted to advise on and arrange investments but, at the relevant time, not for retail clients. It entered into an AR Agreement as principal with Jacob Hopkins McKenzie Ltd (JHM), which acted as its AR. Under the AR Agreement, JHM was expressly prohibited from conducting any business with retail clients.

JHM then promoted a series of residential property investment schemes which subsequently failed, resulting in losses of about £1.7 million. The investors (who were retail clients but had been incorrectly classified as professional clients) brought proceedings against Kession on the basis that, under section 39(3) FSMA, Kession was responsible for JHM's activities in relation to those schemes.

Kession resisted the claim on the basis that, in dealing with retail clients, JHM had acted outside the scope of the permission conferred by the AR agreement and therefore outside the scope of the business for which Kession had accepted responsibility. The eventual appeal to the Supreme Court focused on whether, by restricting JHM's permission to dealings with professional clients only, Kession had limited its statutory responsibility to that part of the business and had not assumed responsibility for JHM's dealings with retail clients.

The Supreme Court's judgment  

The Supreme Court held that Kession was not responsible under FSMA for anything done or omitted by JHM in carrying on business with retail clients. Dealing with retail clients was treated as a distinct "part" of the business of advising on and arranging investments.

Kession had only accepted responsibility for the part of the business involving professional clients, it had not accepted responsibility for the separate part involving retail clients. Therefore, in dealing with retail clients, JHM was acting outside the scope of business for which Kession had accepted responsibility under section 39.

The Court's reasoning included:

• It would undermine effective regulation and consumer protection if an authorised person that is neither permitted nor equipped to deal with retail clients were nonetheless required to supervise, monitor and accept responsibility for its AR's dealings with retail clients. The appointed representative regime is intended to be prophylactic, ensuring that only those competent and authorised for a given segment of business can confer exempt status on ARs for that segment.
• If the contrary view were adopted, an AR expressly prohibited by its contract from dealing with retail clients would nonetheless remain exempt. The principal would be treated as having accepted responsibility for all of the AR's advising and arranging activities, including those with retail clients, and the AR would avoid the criminal and civil consequences that would normally follow from breaching the general prohibition. In the Court's view, this would give the AR an unjustifiably broad exemption, even where it had deliberately gone beyond the scope of its agreed remit.
• It would be inconsistent and contrary to the scheme of FSMA to require an authorised person to be responsible for its AR's dealings with retail clients where the principal has properly concluded that the AR is qualified to deal only with professional clients. The regime, including SUP 12, assumes that the principal will only accept responsibility for activities it is itself permitted and competent to supervise, and that it may legitimately limit its acceptance of responsibility to that "part" of the business.

Contextualising the decision within the AR Regime

The Supreme Court's decision provides an important judicial backdrop to the government's proposed reforms of the Appointed Representatives regime. By confirming that a principal's statutory responsibility under section 39 FSMA can be limited to a defined "part" of the AR's business the Court has effectively endorsed a more granular, segment‑by‑segment approach to responsibility.

That aligns conceptually with the proposed "principal permission" gateway and the move to place more of the detailed requirements for AR relationships into FCA rules. Both the judgment and the reforms assume that responsibility should track competence and permission i.e., a firm should only be able to confer exempt status, and be held responsible, for those activities it is itself authorised and equipped to oversee.

At the same time, Kession exposes a consumer‑protection gap that the reforms are expressly designed to close. The Court's reasoning avoids a "promiscuously broad exemption" for ARs, but it also means that consumers dealing with an AR outside the scope of the principal's accepted responsibility may have no recourse against the principal under section 39. The proposed extension of Financial Ombudsman Service (FOS) jurisdiction to ARs in those circumstances, and the reinforcement of principal oversight through a dedicated permission, Senior Managers and Certification Regime (SM&CR) alignment and enhanced FCA rule‑making, are all directed at addressing that gap.

In combination, the judgment and the reforms point towards a more coherent regime in which:

• the scope of the AR exemption is tightly aligned with the principal's permissions and oversight capability,

• consumers retain access to redress via the FOS and, where necessary, the Financial Services Compensation Scheme (FSCS), even where the principal is not responsible under section 39, and

• the FCA has clearer tools to prevent unsuitable principals and poorly supervised AR models from operating in the first place.