To recap, the claim centres around Mr Adams’ transfer of his existing FriendsLife personal pension, on an execution-only basis, into a Carey SIPP. Almost all of the £56,000 transfer value was used to purchase storage pod leases from Store First.
Mr Adams had been introduced to the investment opportunity and to Carey by an unregulated Spanish-based introducer called CLP Brokers Sociedad Limitaa (CLP) who paid Mr Adams a £4,000 ‘cash back’ inducement for entering into the investment.
The investment didn’t perform as Mr Adams expected. He received precious little in income and following evidence from an expert valuer at trial, Mr Justice Dight found the value at that time to be only £15,000.
Mr Adams pleaded three causes of action:
- ‘The s.27 Claim’ – due to the acts of CLP, the agreement for the SIPP should be rendered unenforceable pursuant to s.27 of The Financial Services and Markets Act 2000 (FSMA)
This was Mr Adams’ primary case at trial. For this to succeed, he needed to establish that Carey offered the SIPP in consequence of something said or done by CLP in the course of a regulated activity carried on by CLP for which it was not authorised.
The alleged regulated activities were ‘arranging deals in investments’ and ‘advising’ on the SIPP (it being common ground that advising on or arranging commercial property such as the storage pod leases are not regulated activities).
The Judge swiftly decided that CLP had not provided regulated advice as CLP had merely introduced Mr Adams to Carey but not recommended the SIPP itself. The Judge also decided that CLP had not arranged for Mr Adams to buy the SIPP as effecting an introduction is not sufficient to amount to regulated arranging.
Not for the first time, this appears to contrast with the FCA’s guidance that introductions can amount to regulated arranging. The Carey judgment therefore goes little way in settling this apparent disagreement between the FCA and the Courts.
- ‘The COBS Claim’ – Carey breached its duty under Conduct of Business Sourcebook (COBS) 2.1.1R to act fairly and professionally in accordance with the best interests of the claimant
The Judge considered the terms of the contract between Carey and Mr Adams as more important than the regulation to this question. The Judge found that the agreement was execution-only and Mr Adams was responsible for his own investment decisions; Carey owed no duty to Mr Adams to consider the suitability or appropriateness of either the SIPP or the underlying investment.
The Judge effectively disregarded the Financial Service Authority’s 2009 thematic review for these purposes. We understand the FCA has since clarified (through the Financial Times) that it still expects SIPP operators to comply with its expectations in the 2009 thematic review and other publications, despite the judgment.
A large portion of the judgment is dedicated to demonstrating that Carey had made its (and CLP’s) role and responsibility abundantly clear and that Mr Adams must have understood the execution-only nature of the relationship. It appears the Judge had little sympathy for Mr Adam’s position and felt that CLP’s inducement motivated him to proceed regardless of Carey’s actions and warnings.
- ‘The Tort Claim’ – that due to their relationship, Carey is liable for negligent investment advice provided by CLP
Such liability can arise as the result of a joint venture between parties, due to the concept of joint tortfeasor liability. Mr Adams argued that CLP was negligent in advising him to move to an unsuitable investment and that Carey is liable for CLP’s shortcomings because of a joint venture or common design between them. However the Judge decided there was neither any investment advice nor a joint venture or common design between CLP and Carey.
In a nutshell, the judgment in this case is that SIPP operators are not responsible for the investment decisions of their members, as long as the roles and responsibilities of the SIPP operator, intermediaries and the member are clear in this respect. The clarity of the agreement between the SIPP operator and the member is key.
Our analysis and thoughts
One cannot help but have sympathy for Mr Adams, losing as he did, most (if not all) of his retirement savings driven by a financial incentive which he was in need of and (probably) the persuasive sales techniques of an intermediary to whom the consumer protection of the regulatory regime did not apply.
Would other cases be decided differently?
Mr Adams was not successful in arguing that he had not understood the high risk and speculative nature of his investment choice, and in fact confirmed he was driven primarily by the inducement offered by CLP.
Not all investors who have suffered huge (or total) losses of their retirement funds following sales by an unregulated introducer will have been so motivated and so Carey may not set a general principle in this regard.
Might Mr Adams have any grounds for appeal?
The apparent disagreement between the Courts and the FCA on whether introducing amounts regulated arranging remains unsettled. However, this point was given short shrift here, but as it was not fully pleaded we wait to see whether this forms a potential ground of appeal.
Could Carey have done anything differently?
As Carey was the only FCA authorised entity in the chain, the spotlight settled on them. This is a scenario we see across financial services and is one in which firms should take caution. If a regulated firm is considering accepting a new business line from an unregulated channel, even where such unregulated status is legally permitted, consideration should be given to what would happen in the event that there is a poor outcome for the end client; the regulated firm could end up as the focus of legal or regulatory action.
Might the FCA introduce measures to force execution-only SIPP operators to fill the apparent gap in consumer protection left by unregulated introducers?
Possible developments include:
Prohibiting the acceptance of non-standard investments (NSI) into SIPPs on an execution-only basis
This seems too blunt a tool to be justified as there are many SIPP members who are more than capable of making sensible investment decisions, without advice, even in relation to NSI. This option would undermine the purpose of SIPPs for many.
Extend the COBS 10 appropriateness rules to apply to all SIPP operators considering accepting NSI on a non-advised basis
This is a possibility but it wouldn’t have prevented Mr Adams from going ahead with his Store First investment. We have seen many examples where SIPP operators have applied the appropriateness rules and given the necessary warnings, only for members to go ahead with their speculative or high-risk investment choices regardless. So we think this unlikely to result in improved outcomes for consumers.
Prohibit SIPP operators from accepting business from unregulated introducers
If the current regulatory perimeter permits introductions to be made from unregulated introducers to authorised firms other than advisers or DFMs (but see our comments above and below on this) then we do not think the FCA would have the jurisdiction to prevent SIPP operators from accepting such introductions. However this may be an area on which the FCA focuses its supervisory efforts further in future.
So what about the unregulated introducer?
In order to put the apparent disagreement between the Courts and the FCA beyond doubt, it would be a possibility for Parliament to legislate for all introductions to fall within the regulatory perimeter, giving future Mr Adamses some regulatory protection and recourse to the FOS/FSCS for complaints/claims against the introducer.
What about the inconsistency with Berkeley Burke?
The Judge made sure to stress the very different facts between the cases, in particular that Berkeley Burke was concerned with an investment into a scam and the key issue was whether sufficient due diligence had been carried out by the SIPP operator, something which the Judge considered Carey had undertaken appropriately in relation to Store First. As such we think the two cases are unlikely to be seen as contradictory.
Finally, what are the key takeaways for SIPP operators?
In our view SIPP operators should:
(a) Make sure their client agreements and all supporting materials are abundantly clear about the roles and responsibilities of the firm, the member and any intermediaries.
(b) Continue to ensure full, detailed and ongoing due diligence is undertaken in relation to NSI. Make sure all due diligence and decisions are documented and good, complete records are made and retained.
(c) Check intermediaries are authorised and if not, consider carefully whether you are prepared to accept business from them. Keep good records so you can demonstrate your thought process if challenged later.
(d) Keep up to date with the FCA’s response to the judgment.
Suzanne Padmore is a partner in the Pensions Disputes team and Anna Davis is an associate in the Funds and Financial Regulation practice at independent UK law firm Burges Salmon.