Court of Appeal allows termination for failure to comply with FCA rules

The decision

Court of Appeal in May 2016 gave an important decision on regulated activities performed by appointed representatives in Personal Touch Financial Services Limited -v- Simplysure Limited (PTFS).

Effect

If compliance with FCA regulation is a clear condition of an agreement with an intermediary a breach could be considered repudiatory and permit immediate termination.

The facts

PTFS was directly authorised by the FCA to undertake regulated activities. It entered into an agreement with Simplysure allowing it to act as an appointed representative to source applications for private medical insurance.

Simplysure’s advisors were required to be approved by PTFS and it was a condition of the agreement that they adhere to and abide by the rules and regulations of the FCA relevant to appointed representatives.

PTFS became aware that certain advisors of Simplysure had not been approved by it and were carrying out regulated activities without the correct authorisation. PTFS terminated the contract with Simplysure for repudiatory breach by using advisors who were not approved by PTFS and for failing to comply with the FCA regulations, which was a condition of the agreement. PTFS argued that, in the absence of any express term, Simplysure was not entitled to renewal commissions following termination.

First instance decision

HHJ Bird found that Simplysure was in breach of the agreement by allowing advisors who lacked the appropriate authorisation to undertake a regulated activity in breach of the Financial Services and Markets Act 2000. However, he decided that it was not a repudiatory breach and that by wrongfully terminating PTFS had itself committed a repudiatory breach. HHJ Bird also determined that the right to renewal commission survived termination.

Court of Appeal

The CoA unanimously agreed that Simplysure was in breach of the agreement by failing to comply with the FCA regulations. It also ruled that the clause of the agreement was a clear condition and the breach was repudiatory, allowing PTFS to terminate. In so doing the CoA had regard to:

• clear words of the clause;
• the serious consequences for PTFS if Simplysure breached the FCA regulations; and
• the commercial sense of including the clause as a specific condition.

The general rule is that executory obligations of the innocent party end if the contract is terminated for repudiation. This is subject to a clear term providing for continuance of any obligation, post termination for repudiation. The CoA determined there was no clear clause which provided for Simplysure to continue to receive renewal commissions post termination. The CoA would not imply a term into the contract and saw no basis to displace the normal rule. Factors were:

• no express obligation to pay renewal commissions post termination;
• no justification for implication of such a term; and
• right to renewal commission accrued when the policy renewed and renewal occurred after termination.

Implications

This decision highlights the importance of certainty and clarity in drafting when determining whether compliance with FCA regulation is a term or condition of the contract. This is of crucial importance when a party considers relying on such a breach as a basis for termination.

The CoA considered the fact there was no evidence of the innocent party suffering any loss to be irrelevant and determined that since it was a true condition of the contract which had been breached ‘any breach was repudiatory irrespective of any damage that it caused or did not cause.’

What should you do?

Review your agreements with intermediaries and appointed representatives and seek legal advice on:

• whether the relevant clauses are sufficiently certain to be considered a condition of the contract;
• the extent to which a breach could be considered a repudiation and entitle you to terminate the agreement; and
• the post termination consequences, in particular in respect of commission payments.

How can Hill Dickinson help?

We have expertise in acting for insurers in dispute with contracting parties over issues of compliance with statutes and FCA guidance/regulation.

We have extensive experience litigating breaches of contract and in the specialised area of financial services and FCA regulation. We can also review your terms and conditions to identify risks and help pre-empt the need for litigation.

Our team will be delighted to discuss the decision, its implications and the opportunities it may present for your organisation.