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Court of Appeal considers vicarious liability for fraudulent financial agent

Court Exterior Print publication

30/04/2018

Walker Morris’ Head of Banking Litigation explains the case of Frederick v Positive Solutions (Financial Services) Ltd [1], in which the Court of Appeal considered whether a financial services firm was liable for the acts of its fraudulent agent.

Facts and claim

The facts and the fraud underlying this case are not uncommon. The claimants were persuaded by a long-time friend, Mr Quereshi, to invest in a property development scheme.  Mr Quereshi was carrying out the development scheme with a Mr Warren.

Mr Warren was appointed as an agent of the defendant financial advice firm for the purposes of introducing business. As a result of that agency, Mr Warren had access to an online mortgage application portal (the portal).

Mr Warren’s position as an FSA-regulated independent financial adviser (IFA) gave comfort to the claimants, who allowed him to arrange re-mortgage applications on their behalf to raise the funds needed for their investment.  Using the portal, Mr Warren made the re-mortgage applications, which were approved and funds were advanced.

Unknown to the claimants, however, the re-mortgage applications submitted by Mr Warren had been fraudulent in that they were based on incorrect information as to the claimants’ income and employment.

The funds were then misappropriated and lost in the property scheme and Mr Warren went bankrupt. To try to recoup their losses, the claimants sued the defendant firm.

Vicarious liability and/or duty of care

The claimants contended primarily that the defendant firm was vicariously liable for the wrongdoing of its agent; and secondly that it had assumed responsibility to the claimants by virtue of having granted Mr Warren access to the portal, and that it therefore owed them a duty of care. The case reached the Court of Appeal.

Accepting the defendant’s arguments on the principal issue of vicarious liability, the Court of Appeal held that:

  • merely giving an agent the opportunity to commit fraud is not enough to fix the principal with vicarious liability for its agent’s acts
  • before a principal can be vicariously liable, all acts or omissions which are necessary to make the agent personally liable must have taken place within the scope of the agency.

On the facts, all of the circumstances which were necessary to make Mr Warren personally liable took place as a result of him being engaged on his own business (that is, his property development scheme with Mr Quereshi), and not within the course of his agency with the defendant. In addition, merely providing Mr Warren with access to the portal, which then gave him the opportunity to commit fraud was not sufficient to found vicarious liability.

As to the duty of care claim, the Court of Appeal found that: the absence of any relationship between the defendant firm and the claimants; the fact that the defendant was unaware of Mr Warren’s fraud; and the fact of the claimants’ reliance on his regulated status as an IFA, meant that the requisite proximate relationship to establish a duty of care [2] did not exist.

WM Comment and practical advice

Had the claimants succeeded in this case, the scope of vicarious liability would have been widened considerably, which would have been a real concern for financial services firms. As it is, the Court of Appeal has reached a sensible decision and has provided clear guidance on the applicable principles.

However, the circumstances in this case arise relatively frequently and may occur even more often when the economic climate and property market are in the boom/bust cycle. With property prices currently outpacing earnings and rising rapidly in certain hotspots around the country, and with the threat of recession looming (whether Brexit-related or otherwise), financial advice firms, mortgage lenders and consumers/investors alike should be alive to the risks.

To further protect themselves from vicarious liability attaching by virtue of the fraud of agents, and to protect their customers wherever possible, principal firms should ensure that the scope of any agency arrangement is clearly and strictly defined. Robust policies and procedures should in place to prevent, identify and minimise the impact of any agents’ fraud.  In addition, where firms employing agents also have direct relationships with consumers, those relationships should be closely monitored so that any dishonest dealings can be detected and dealt with at the earliest possible time.

For more advice or information on these or any other fraud or financial services-related issues, please do not hesitate to contact any member of Walker Morris’ Banking Litigation Team.

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[1] [2018] EWCA Civ 431
[2] Caparo Industries v Dickman [1990] UKHL 2

 

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