Personal Touch Financial Services Ltd v Simplysure Ltd & Anor

This is an appeal from the order of His Honour Judge Bird, sitting in the Mercantile Court in Manchester, in which he held that the Respondent Claimant, SimplySure Ltd, was entitled to judgment against the Defendant and present Appellant, Personal Touch Financial Services Ltd, for breach of the appointed representative agreement between them, and that the Appellant is liable to pay commissions to Usay Business Ltd (as transferee from SimplySure) on renewals of insurance policies introduced by Simply Sure. For convenience I shall refer to the Appellant as “PTFS”, to SimplySure Ltd as “SimplySure” and to Usay Business Ltd as “Usay”.

The appeal raises an important point as to the meaning and effect of Article 25 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544). I shall refer to the Financial Services and Markets Act 2000 as “the Act”, and to the 2001 Order as “the Order”.

There is a cross appeal by SimplySure and Usay (to which the Judge held that SimplySure had transferred its right to renewal commissions) contending that the Judge wrongly found that SimplySure had acted in breach of the general prohibition under the Act.

PTFS was at the times material to this appeal directly authorised by the Financial Services Authority (“the FSA”) under the Act. (It is now authorised by the Financial Conduct Authority, the successor to the FSA.). PTFS entered into a written agreement, described as a “Compliance Agreement and Appointed Representative Agreement” (“the Agreement”), and stated to be dated 1 December 2006, by which it appointed SimplySure to act as its appointed representative “for the purpose of soliciting applications for the products detailed on the authorisation schedule (to be issued shortly)”. SimplySure was not then authorised under the Act. The only product to be sold by SimplySure was private medical insurance (“PMI”).

In the Agreement PTFS was referred to as “the Company” and SimplySure as “the Appointed Representative”. “Adviser” was defined as “An individual that is authorised by [PTFS] to give advice on behalf of the Appointed Representative”. The terms of the Agreement included the following:

“3.

Advisers of the Appointed Representative are not authorised until notified by the Company in writing.

6.

The Appointed Representative is prohibited from carrying on any of the activities detailed in the authorisation schedule as a Principal or as an Appointed Representative of another Principal.

7.

It is a condition of the Agreement that the Appointed Representative be aware of and abides by the rules of the regulator and that the Appointed Representative shall regularly acquaint himself/herself with any new Rules or Regulations issued by the regulator and adhered to the Company’s Compliance and Procedures Manual, and Training and Competence Manual.

13.

The Appointed Representative is responsible for ensuring that Advisers attend all theoretical and practical training provided by the Company or any other organisation approved by the Company.

18.

The business submitted by the Appointed Representative remains the property of the Appointed Representative, unless by mutual agreement the business is purchased as a whole from the Appointed Representative by the Company.

21.

Commission is payable on indemnity terms where applicable. Until further notice, the level of commission payable for each product to the Appointed Representative is as detailed on the Company website. The Company reserves the right to alter commission levels and payment terms with one months (sic) notice.

23.

The Company will pay commission due to the Appointed Representative within 28 days of receipt from the Insurance Company.

31.

The contract is deemed to have been terminated when the Company notifies the Appointed Representative in writing.

32.

This agreement terminates automatically on the death, act of bankruptcy or insolvency of the Appointed Representative, or the Appointed Representative compound with creditors or the commission of any criminal or other act which in the Company’s opinion precludes the Appointed Representative from a position [of] trust, or the suspension of the Appointed Representative’s membership or authorisation by the regulator.”

SimplySure paid a monthly fee to PTFS; PTFS paid commissions to SimplySure on policies it sold.

PTFS provided to SimplySure a standard form for a fact-find, essentially a questionnaire, to be completed with information provided by a potential client to enable advice to be given to that potential client concerning a new PMI to be taken by the client. The fact-find form contained a number of sections for completion by the person interviewing the client. The first section was headed “Personal Details” and included spaces for the insertion of information such as the name, address and nationality of the client, the date of birth, whether he or she was a smoker, occupation and employment status, and details of any children. The second part was headed “Existing Policies Details” and sought information as to any existing PMI, including who was covered and whether the cover was “Moratorium/Full Medical/Switch”. Between that section and the next was the rubric:

“Private Medical Insurance (to be completed by PMI authorized advisors only).”

I shall refer to this rubric as “the rubric”.

Following that statement were the questions, “Does your employer currently offer a PMI scheme? If yes, please provide details of the scheme.” There were then questions designed to elicit further personal details and “Client PMI Concerns”. The following section was headed “Establishing a Budget”. The last part of the questionnaire sought information as to possible future changes in the affordability of a policy.

On 20 January 2009 Philip Rex and Ian Ibbertson of PTFS visited SimplySure. According to their Risk Assessment Report they interviewed Paul Carrington of SimplySure, who told them that “Prospect advisors conduct initial fact finds, before the client is referred to an authorised adviser pre-research-quotation”. As is implicit in this statement, “prospect advisers” were representatives of SimplySure who had not been authorised by PTFS. Under the heading “Overall Opinion”, the Report stated:

“The issue of fact finding activities of the non-authorised advisers has been referred to Compliance Management for guidance.”

On 30 January 2009, the Compliance Director of PTFS wrote to SimplySure stating:

“Further to your recent Risk Assessment visit, it has become apparent that there are a number of compliance processes and procedures which are not being adhered to within your branch, which are fundamental to the adherence of FSA regulation.

All our findings have been assessed on the basis of risk and we have concluded that the risk is too great to allow you to continue as an Appointed Representative of Personal Touch Financial Services Limited. I am therefore writing to inform you that your authorisation is terminated with immediate effect.”

SimplySure became directly authorised by the FSA on 3 February 2009, and thereby became an authorised person for the purposes of the Act. If the Agreement had not already come to an end, SimplySure’s appointment under it would have come to an end on that date by virtue of either or both of clause 6 and section 39 of the Act, set out below.

The statutory framework is intended to restrict the activities that are governed by the Act to qualified and suitable persons and to regulate those activities and persons. Section 19 is headed “The General Prohibition” and provides:

“(1)

No person may carry on a regulated activity in the United Kingdom, or purport to do so, unless he is –

(a)

an authorised person; or

(b)

an exempt person.

(2)

The prohibition is referred to in this Act as the general prohibition.”

For the purposes of the Act, PTFS was an authorised person, and as a result of and during the currency of the Agreement, SimplySure was an exempt person: see section 39, set out below.

Section 22 of the Act is as follows:

“22.

The classes of activity and categories of investment.

(1)

An activity is a regulated activity for the purposes of this Act if it is an activity of a specified kind which is carried on by way of business and—

(a)

relates to an investment of a specified kind; or

(b)

in the case of an activity of a kind which is also specified for the purposes of this clause, is carried on in relation to property of any kind.

(2)

Schedule 2 makes provision supplementing this section.

(3)

Nothing in Schedule 2 limits the powers conferred by subsection (1).

(4)

‘Investment’ includes any asset, right or interest.

(5)

‘Specified’ means specified in an order made by the Treasury.

Section 23 provides that a contravention of the general prohibition is a criminal offence. At the time material to this appeal, Section 39 provided, so far as material:

“39.

Exemption of appointed representatives.

(1)

If a person (other than an authorised person)—

(a)

is a party to a contract with an authorised person (“his principal”) which—

(i)

permits or requires him to carry on business of a prescribed description, and

(ii)

complies with such requirements as may be prescribed, and

(b)

is someone for whose activities in carrying on the whole or part of that business his principal has accepted responsibility in writing,

he is exempt from the general prohibition in relation to any regulated activity comprised in the carrying on of that business for which his principal has accepted responsibility.

…

(3)

The principal of an appointed representative is responsible, to the same extent as if he had expressly permitted it, for anything done or omitted by the representative in carrying on the business for which he has accepted responsibility.”

The Order was made by the Treasury in the exercise of the power conferred by section 22 of the Act. Article 25 is as follows:

“Arranging deals in investments

25.—(1) Making arrangements for another person (whether as principal or agent) to buy, sell, subscribe for or underwrite a particular investment which is—

(a)

a security,

(b)

a contractually based investment, or

(c)

an investment of the kind specified by article 86, or article 89 so far as relevant to that article,

is a specified kind of activity.

(2)

Making arrangements with a view to a person who participates in the arrangements buying, selling, subscribing for or underwriting investments falling within clause (1)(a), (b) or (c) (whether as principal or agent) is also a specified kind of activity.”

It is common ground that PMI is an investment to which Article 25 applied.

There are, however, a number of exceptions to the application of Article 25(1) and (2). For present purposes the most relevant is Article 26, which is as follows:

“Arrangements not causing a deal

26.

There are excluded from article 25(1) arrangements which do not or would not bring about the transaction to which the arrangements relate.”

The Judge helpfully summarised, in clause 11 of his judgment, the main exceptions to the broad definition in Article 25:

“11.

The Order sets out a number of exceptions to the broad definition set out in art.25. The main exceptions are at arts.72C, 27, 28 and 33. in broad outline:

i)

Art.72C deals with the provision of information on an incidental basis

ii)

Art.27 deals with the mere provision of a means of communication, for example services provided by Internet service providers and telecommunications networks.

iii)

Art.28 deals with a transaction to which the arranger is a party.

iv)

Art.33 excludes the activity of an introducer in certain circumstances. The exclusion does not however apply if the arrangements relate to insurance.”

He then referred to the guidance published by the FCA:

“12.

A useful starting point to determine if an activity is regulated or not is the "Perimeter Guidance" manual issued by the FCA. The introductory words of the manual are as follows: ‘The purpose of this manual is to give guidance about the circumstances in which authorisation is required, or exempt person status is available, including guidance on the activities which are regulated under the Act and the exclusions which are available.’ The guidance is issued under section 139A of FSMA and represents the views of the FCA. It expressly does not bind the court. However, ‘If a person acts in line with the guidance in the circumstances mentioned by it, the FCA will proceed on the footing that the person has complied with the aspects of the requirement to which the guidance relates.’

…

14.

PERG 5.6.2 deals with art.25(1) as follows:

‘The activity in article 25(1) is carried on only if the arrangements bring about, or would bring about, the transaction to which the arrangement relates. This is because of the exclusion in article 26 of the Regulated Activities Order (Arrangements not causing a deal). Article 26 excludes from article 25(1) arrangements which do not bring about or would not bring about the transaction to which the arrangements relate. In the FSA's view, a person would bring about a contract of insurance if his involvement in the chain of events leading to the contract of insurance were important enough that, without it, there would be no policy. Examples of this type of activity would include negotiating the terms of the contract of insurance on behalf of the customer with the insurance undertaking and vice versa, or assisting in the completion of a proposal form and sending it to the insurance undertaking. Other examples include where an insurance undertaking enters into a contract of insurance as principal or an intermediary enters into a contract of insurance as agent.’

15.

PERG 5.6.4 deals with art.25(2) as follows:

‘Article 25(2) may, for instance, include activities of persons who help potential policyholders fill in or check application forms in the context of ongoing arrangements between these persons and insurance undertakings. A further example of this activity would be a person introducing customers to an intermediary either for advice or to help arrange an insurance policy. The introduction might be oral or written. By contrast, the FSA considers that a mere passive display of literature advertising insurance (for example, leaving leaflets advertising insurance in a dentist's or vet's waiting room and doing no more) would not amount to the article 25(2) activity.’

16.

PERG 5.6.18 provides as follows:

(1)

Article 25(2) applies to ongoing arrangements made with a view to transactions taking place from time to time as a result of persons having taken part in the arrangements. So, they will not apply to one-off introductions or introductions that are not part of an ongoing pre-existing arrangement between introducer and introducee. An introducer who merely suggests to a person that he seeks advice or assistance from an authorised person or an exempt person with whom the introducer has no pre-existing agreement that anticipates introductions will be made, will not be making arrangements at all. He will simply be offering general advice or information.

(2)

The purpose of the arrangements must be for the person who is introduced to, in general terms, enter into a transaction to buy or sell securities or relevant investments. So, arrangements for introducing persons for advice only will not be caught (for example, introductions to a financial planner or to the publisher of an investment newsletter). In other cases, it may be likely that transactions will' be entered into following the provision of advice. Provided the introducer is completely Indifferent as to whether or not a contract of insurance may ultimately be bought (or sold) as a result of the advice given to the person he has introduced, the introducer will not be making arrangements with a view to transactions in investments. This is likely to be the case where the introducer does not receive any pecuniary reward that is linked to the volume of business done as a result of his introductions.’”

The judge held that the activity of a person who interviewed a client or potential client in order to complete the first parts of the standard form of fact-find referred to above was a regulated activity for the purposes of the Act. Since it had been carried out by persons who were not authorised to do so by PTFS under the Agreement, their doing so amounted to a breach of clause 7 of the Agreement. However, although termed a condition, clause 7 was not a condition of the Agreement strictly so called. It was an intermediate term. Whether its breach was repudiatory depended on the circumstances and consequences of the breach, and in the circumstances of this case, in which there was no evidence that the breach had caused loss to anyone, it was not repudiatory. Moreover, he made the following findings:

“60.

It is important to note that PTFS required SS to employ Fact Find questionnaires created by PTFS and that SS did so. It is equally important to note that those Fact Find questionnaires (described at clause 26 above) contained clear instructions that certain parts were "to be completed by PMI authorized advisors only". An instruction that parts of the questionnaire are to be completed only by certain qualified persons strongly suggests that parts not covered by the directive can be completed by a person who is not so qualified.

61.

It therefore seems to me that in acting as they did SS are entirely right to say that they were following PTFS's instructions. That does not absolve them from the finding that they are in breach, but in my judgment, taken with my finding that the breach lower end of the spectrum of potential breaches it is an indicator that the breach was not repudiatory.”

Furthermore, the Judge held that PTFS was not entitled to rely on clause 32 of the Agreement since nothing Simplysure had done precluded it from a position of trust. It followed that PTFS was not entitled to terminate the Agreement when it had purported to do so, but was itself in repudiatory breach by purporting to terminate it. It followed that SimplySure was entitled to damages for the wrongful termination of the Agreement (albeit that the Agreement would in any event have been terminated when on 3 February 2009 SimplySure became directly authorised by the FCA, by virtue of clause 6 of the Agreement or section 39 of the Act).

More importantly in money terms, the Judge held that PTFS was liable to pay renewal commission on business introduced by SimplySure. The entitlement to payment of that commission had been sold by SimplySure to Usay:

“115.

PTFS argue that the right to renewal commission is lost on termination, because there is no express contractual right to receive any commission after termination and because clause 23 makes it clear that the right to receive renewal commission had not arisen at the point the contract was terminated. Clause 23 provides:

‘[TFS] will pay commission due to [SS] within 28 days of receipt from the Insurance Company’

116.

Clause 23 in my judgment deals with the timing of payment rather than the obligation to pay. The clause does nothing to answer the question: when does the commission fall due? Rather it deals with the point at which "due" commission is paid. The clause cannot be read (as PTFS argue) to mean that the obligation to pay arises only once payment is made.

117.

The absence of an express obligation to pay commission post termination does not mean that there is no obligation.

118.

In my judgment the Claimants are right to say that the right to renewal commission accrued (a) before it became payable and (b) at a time prior to termination of the agreement. I therefore accept that the right to receive commission must continue after termination. As it is put in the opening note: "C had a vested right to the commissions and the termination does not deprive it of them".

119.

Who then has the right to collect the renewal commissions? At clause 67 above I have set out those assets sold by SS to UB. They are: the goodwill, the stocks, the IP rights, the debts, the income and the sale contracts. The sales contracts were defined as the benefit of all then current and pending contracts and the debts were defined as all book and other debts.

120.

In my judgment it is clear that the right to collect renewal commissions was sold to UB. Such right clearly falls under income or sales contracts or possible debts. It seems to me not to matter which heading they fall under.”

On behalf of PTFS, it was submitted that:

On behalf of SimplySure and Usay, it was submitted:

It follows that there are the following issues to be determined on this appeal and cross appeal:

Did SimplySure act in breach of the general prohibition?

In my judgment, the Judge correctly found that the completion of the first part of the fact-finds (i.e., the questions above the rubric) by employees or agents of SimplySure who were not authorised by PTFS was in breach of the general prohibition. The purpose of the completion of the first part of the fact-find was for the client to buy PMI, and arranging for an unauthorised person to visit or to interview the client was an arrangement within Article 25(1) of the Order, and indeed also within Article 25(2) since it was an arrangement with a view to the client, who participates in the interview, buying PMI. The wording and therefore scope of Article 25 is deliberately wide. I am encouraged in this conclusion by the consideration that SimplySure put the unauthorised person in a position in which he could advise the client. Furthermore, the questions above the rubric were not limited to the name and address of the client and his or her date of birth: the answer to the question as to whether any existing PMI cover was “Moratorium/Full Medical/Switch” required a degree of specialist knowledge. My conclusion is consistent with the FSA Guidance in PERG 5.6.2 and PERG 5.6.4, cited above, which I would approve as a correct explanation of the effect of Article 25(1) and (2). Furthermore, since Article 25(2) was applicable, it is unnecessary to consider the effect of Article 26, which applies to Article 25(1) alone.

SimplySure did not suggest that if it acted in breach of the general prohibition it did not act in breach of clause 7: if it did act in breach of the general prohibition, it did not “abide by the rules of the regulator”. It follows that SimplySure acted in breach of clause 7 of the Agreement.

As the Judge correctly remarked, the fact that a contractual provision is described as a condition of the agreement is not conclusive. Agreements often refer to all their terms as conditions, as in “conditions of sale”. However, this was not such a case. The word “condition” appears only once in the Agreement, in clause 7, and its use was emphasised by the introductory words “It is a condition of the agreement”. While its use is not conclusive, it must be given due weight when the agreement is construed. In Schuler (L) Att.-Gen. v Wickman Machine Tool Sales Ltd [1974] AC 235 Lord Reid said, at 251:

“Schuler maintains that the use of the word 'condition' is in itself enough to establish this intention [for the term to be a condition strictly so called]. No doubt some words used by lawyers do have a rigid inflexible meaning. But we must remember that we are seeking to discover intention as disclosed by the contract as a whole. Use of the word 'condition' is an indication - even a strong indication - of such an intention but it is by no means conclusive.”

PTFS submit that the Judge failed to give any weight to the use in the Agreement of the words “It is a condition of the agreement”. I agree. Instead, having concluded that clause 7 was an intermediate term, he focused on the consequences of SimplySure’s breach of clause 7 in the particular case before him.

However, I do not think that construing clause 7 as a true condition leads to an unreasonable result. Its breach was liable to have serious consequences for PTFS. Breach of the general prohibition is a criminal offence, and by reason of section 39(3) of the Act the use of unauthorised personnel by SimplySure could render PTFS criminally liable and would render it liable in damages to any client adversely affected, and could lead to a regulatory sanction. It was therefore commercially sensible for the parties to the Agreement to have included clause 7 as a true condition.

In my judgment, the clear words of the Agreement require clause 7 to be construed as a condition.

The fact that in the event there was no evidence before the Judge that SimplySure’s breach of clause 7 caused any loss is irrelevant: if, as I think is the case, clause 7 was a true condition of the Agreement, any breach was repudiatory irrespective of any damage that it caused or did not cause.

Subject to the question as to the effect of the rubric in PTFS’s fact-find form, I would therefore hold that SimplySure’s breach of clause 7 entitled PTFS to treat the breach as repudiatory and to terminate the Agreement on the ground of that breach, as it did by its letter of 30 January 2009.

PTFS contend that the Judge failed to ask the correct question in respect of clause 32. Clause 32 refers to an act of SimplySure “which in [PTFS’s] opinion precludes the Appointed Representative from a position [of] trust”. PTFS accepted that it could not rely on clause 32 if its opinion was perverse, but unless its opinion was perverse or irrational the fact that the Court would not have come to the same opinion on the facts in question is irrelevant. It contended that the Judge did not address the question whether PTFS’s opinion, given in evidence, that it did consider SimplySure’s acts to preclude it from a position of trust, was reasonable or perverse, but arrived at his own decision, as if the clause made no reference to PTFS’s opinion.

Given my conclusion on the effect of clause 7, this issue is academic. However, I agree that the Judge did not ask the correct question, and failed to address the question whether PTFS’s opinion was reasonable or unreasonable. Had he correctly construed and applied clause 32, he would have addressed PTFS’s evidence as to why it came to its opinion more thoroughly than he did. It was for SimplySure to establish that PTFS’s opinion was perverse or irrational, and the Judge made no finding in that respect.

In these circumstances, I would leave the question of breach of clause 32 out of account. It is sufficient that PTFS was entitled to terminate the Agreement for breach of the condition in clause 7.

This allegation was not pleaded, and addressed by the Judge incidentally. In my judgment, SimplySure should not have been allowed to raise this issue without its having been pleaded. If it had been properly pleaded (which would of course have required an amendment to SimplySure’s pleading, and a responsive pleading from PTFS) it might have been given the consideration it deserved.

As it is, the Judge failed to consider PTFS’s evidence as to the scope of its business and of its authorisation under the Act. PMI is not the only kind of insurance with which PTFS deals. It also sells life insurance, and it does so through individuals who are appropriately authorised. Thus, when the rubric stated that the remainder of the fact-find “was to be completed by PMI authorized advisors only”, it did not follow that the previous part of the fact-find could be completed by someone who had no authorisation at all. The earlier part of the fact-find could be completed by an authorised advisor whose authority related, for example, to the sale of life insurance.

For this reason, I would reject the contention that the rubric excused SimplySure’s breach of clause 7 or otherwise precluded PTFS from relying on that breach.

It follows that in my judgment the Agreement was lawfully terminated by PTFS.

It also follows that in my judgment PTFS is not liable for breach of contract, and SimplySure is not entitled to damages for the premature termination of the Agreement.

Insurance companies pay to the professional introducer two kinds of commission in relation to PMI policies: original commissions, payable in respect of the inception of a policy, and renewal commissions, payable on the renewal of the policy. It was common ground that under the Agreement, and during its currency, PTFS was bound to pay part of both kinds of commission to SimplySure on PMI policies introduced by it. The issue before the Judge was whether PTFS remained liable to pay renewal commissions after the termination of the Agreement.

In the ordinary way, the executory obligations of the innocent party to a contract come to an end if the contract is terminated by the innocent party on the ground of the other party’s repudiation, or breach of a true condition, of the contract. That consequence is of course subject to any clear term of the contract providing for the innocent party’s obligation to continue after termination for repudiation.

I see no reason why the normal rule should not apply to the liability under the Agreement in respect of renewal commissions. The Judge came to a different conclusion:

“117.

The absence of an express obligation to pay commission post termination does not mean that there is no obligation.

118.

In my judgment the Claimants are right to say that the right to renewal commission accrued (a) before it became payable and (b) at a time prior to termination of the agreement. I therefore accept that the right to receive commission must continue after termination. As it is put in the opening note: ‘C had a vested right to the commissions and the termination does not deprive it of them’.”

I find these paragraphs of his judgment confusing. Having found that there was no express obligation to pay commission after termination of the Agreement, he did not explain the basis of his finding that there was an implied obligation to do so, or his finding that the right to renewal commission accrued during the currency of the Agreement even though the renewal takes place after its termination.

For present purposes, it is sufficient for me to say that the right to a renewal commission cannot accrue unless and until the policy is renewed. The right does not accrue when the policy is originally taken out. For post-termination renewals to result in a right to commission, it is necessary to find an implied term to that effect, and, moreover, a term that survives termination for repudiation.

SimplySure and Usay sought to rely on clause 18 of the Agreement. In my judgment, that provision is too vague for their purpose. There is no indication in its terms that it is to apply after SimplySure’s repudiatory breach. More importantly, it does not clearly relate to SimplySure’s right in respect of repeat commissions.

In my judgment, there is no such implied term as the judge seems to have found. I see no basis for one that would displace the normal rule that executory obligations of an innocent party terminate with the agreement on its acceptance of the other party’s repudiatory breach.

For these reasons, I would hold that PTFS has no liability to SimplySure or to Usay in respect of renewal commissions on contracts introduced by SimplySure during the currency of the Agreement.

For the reasons I have given, I would allow PTFS’s appeal; I would dismiss SimplySure and Usay’s cross appeal; and I would set aside the order made by the Judge. I would ask the parties to agree an order to be made by this Court, if my Lord and my Lady agree with my conclusion.

I agree.

I also agree.