May 21, 2020

SIPP provider not responsible for losses sustained by investor when acting on execution-only basis

Adams v Carey Pensions [2020] EWHC 1229 (Ch)

In the long-awaited judgment in Adams v Carey Pensions [2020] EWHC 1229 (Ch), handed down on 18 May 2020, Mr Justice Dight held that the claim failed on each of the three heads and therefore dismissed the claim against Carey Pensions (the Defendant). The judgment brings much needed guidance as to (1) what a Self-Invested Personal Pension (SIPP) provider is responsible for when acting on an execution-only basis (2) the boundary of Rule 2.1.1 of the Conduct of Business Sourcebook Rules (COBS) and (3) the application of section 27 Financial Services and Markets Act 2000 (FSMA). Given the number of complaints and claims outstanding against SIPP providers, which are similar to the Carey claim, this judgment will give cause for optimism to SIPP providers although the precise facts in each case will still need to be carefully considered and it has been reported that Mr Adams is seeking permission to appeal.

Facts

Mr Adams (the Claimant), is a self-employed haulage contractor who held a pension of approximately £52,000 and wished to release some funds from this pot when he found himself in difficult financial circumstances. The Claimant approached CLP Brokers Sociedad Limitada (CLP), having seen an advertisement on the internet. CLP contacted the Claimant about reinvesting his pot in store pods operated by Store First Blackburn Limited, with the investment help in a SIPP provided by the Defendant. The Claimant was introduced to the Defendant by CLP and the Claimant proceeded to apply for a SIPP, transfer his pension pot into the SIPP and, ultimately, instruct the Defendant to make the investment in the store pods.

The Defendant is authorised by the Financial Conduct Authority (FCA) as an administrator of SIPPs. It is not, however, authorised to carry on the regulated activity of advising in respect of them. CLP is an unauthorised and unregulated broker/introducer.

The investment did not perform well and the Claimant brought a claim against the Defendant alleging that the Defendant operated a business model pursuant to which it used an unauthorised and unregulated introducer and broker to procure individual investors to enter into SIPPs, established by the Defendant, as vehicles for potentially unsuitable underlying investments. He alleged that, as a consequence, he suffered a loss for which the Defendant was liable. Specifically, the Claimant alleged:

  1. Breach of the regulatory regime in establishing the SIPP as a result of the acts of CLP thereby rendering the SIPP unenforceable under s.27 FSMA (the s.27 Claim);
  2. Breach of the obligation in Rule 2.1.1 of COBS to act honestly, fairly, and professionally in accordance with the best interests of the Claimant (the COBS Claim);
  3. Negligent investment advice provided by CLP for which the Defendant is liable as a result of a joint venture, common design or agreed common business model (the Tort Claim).

The s.27 Claim

S.27 provides that an agreement is unenforceable where it is made by an authorised person in the course of carrying out a regulated activity where such agreement was entered into in consequence of something said or done by a third party who was acting in breach of the general prohibition in s.19 FSMA, which provides that no person may carry on a regulated activity unless that person is authorised or exempt.

In this case, the Claimant asserted that he had entered into the SIPP with the Defendant as a consequence of CLP doing two regulated activities: arranging the investment (Article 25(1) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO)) and advising on the investment (Article 53 RAO), in breach of the general prohibition. As such, he argued that his agreement with the Defendant should be unwound pursuant to s.27 FSMA and that his investment in the SIPP should be returned.

When considering what was “arranged”, it was common ground that only the SIPP could fall within the definition of relevant regulated investments regulated by Article 25(1); the investment in the store pods could not. As such, the Court considered whether it could be said that CLP “arranged” the SIPP. Mr Justice Dight referred to Article 26 RAO, which provides that arrangements which do not or would not bring about the transaction to which the arrangements relate are excluded from Article 25, and stated that Articles 25(1) and 26, therefore, contemplate the need for a causal link between the act or acts of arranging and the transaction itself. He rejected Counsel for the Claimant’s submission that the “but for” test should be applied, as “bring about” “suggests that the arrangements have to be a positive or effective cause, not merely a set of circumstances which may be no more than the context of the transaction which eventuates.” In his view, the mere introduction by CLP would not suffice as this does ”not necessarily result in anything further happening and the further steps which were necessary to establish a SIPP were not within the introducer’s power to effect or direct.”

As the acts of CLP did not “bring about” the transaction, the SIPP was not entered into as a consequence of CLP making arrangements within the meaning of Article 25(1).

Turning to Article 53, Mr Justice Dight found on the evidence that no advice was given by CLP in relation to the SIPP. Any advice that may have been given related only to the underlying investment. Even if a recommendation was made by CLP (which the Judge thought in any case would fall short of “advice”), the evidence did not show that CLP had recommended any specific SIPP, let alone the particular SIPP which the Claimant ultimately agreed to enter into. The recommendation was to the SIPP provider only.

As such, the s.27 claim was dismissed. Mr Justice Dight went on to state that even if the agreement was found to have been unenforceable under s.27, the Court may nevertheless allow the SIPP to be enforced if the criteria of s.28 are satisfied. However, looking at the facts and evidence, Mr Justice Dight concluded that it was just and equitable to enforce the agreement: the lack of knowledge by the Defendant that CLP may have been undertaking regulated activities in contravention of the general prohibition, coupled with the Court’s finding that the Claimant was aware that the investment was high risk and speculative and his knowing assumption of this risk, meant that the Court could find no reason why the Claimant should not take responsibility for his own decision.

The COBS Claim

COBS Rule 2.1.1 provides that a firm must act honestly, fairly and professionally in accordance with the best interests of its client and breach of this rule is actionable by a private person under s.138(D) FSMA. Whilst not all the COBS Rules apply to the Defendant (on the basis that some do not apply to execution-only SIPP providers), it was common ground at trial that Rule 2.1.1 applies to the Defendant.

The Claimant alleged that Rule 2.1.1 required the Defendant to put in place systems to ensure that unsuitable investments of this kind are not posted within a SIPP wrapper and they are not introduced by unsuitable introducers like CLP. In particular, the Claimant alleged that the Defendant breached the rule by: allowing the store pod investment in the SIPP and failing to implement the guidance and/or have adequate regard to the expectations of the FCA (contained in its thematic review of 2009 and its Retail Conduct Risk Outlook 2011). As an aside, the Court’s attention was drawn after the trial to the decision of Jacobs J in Berkeley Burke SIPP Administration Ltd v Financial Ombudsman Services Ltd [2018] EWHC 2878 (Admin), in which the High Court sided with the FOS, ruling that it had correctly applied the COBS rules in its finding against Berkeley Burke that it had not acted fairly and reasonably in all the circumstances in its dealings with an investor. However, Mr Justice Dight stated that the case was not of direct relevance to the case before him1 and did not consider it further.

It should be noted that mere weeks before the trial, the FCA sought permission to make submissions in writing and orally at trial on questions of law concerning the issues of principle relating to the statutory regulation of SIPPs operators, and as to the proper construction of the relevant statutory provisions and related guidance. In relation to Rule 2.1.1, the FCA submitted that the function of the firm, as determined by the contract with an investor, will govern what is required to comply with COBS Rule 2.1.1 but the FCA pointed to the fact that firms cannot exclude or restrict their duties under COBS (cf Rule 2.1.2) and it does not accept that the obligations arising under Rule 2.1.1 must be limited by the contract. Further, the FCA submitted that Rule 2.1.1 imposes an obligation to undertake an assessment in respect of both the proposed introducer and the proposed investment and that there is a duty to ensure that the proposed underlying investment is not part of a fraud or scam. Further, disagreeing with the Defendant, the FCA submitted that Rule 2.1.1 “does include a duty not to accept into a SIPP an investment of a kind that is inappropriate for any SIPP investment, or for any SIPP investment by a retail customer who is not known to have received independent regulated advice about the investment.” This was said despite the FCA’s acceptance that COBS 9 (the obligation to provide advice on suitability) and 10 (the obligation to assess the appropriateness of the service or product) do not apply to execution-only SIPP providers.

Mr Justice Dight held that the starting point when considering the extent of the duty under Rule 2.1.1 is the contract between the Claimant and the Defendant on the basis that not every COBS rule applies to every authorised firm and that there was nothing to suggest that the regulatory regime should take precedence over the contractual relationship between the parties.

The Judge had set out a detailed analysis of the contract between the parties and had found that the Claimant had entered into it knowingly and willingly, accepting that the investment was high risk and speculative, and that it was clear from a number of documents that the Defendant was operating on an execution-only basis and not providing any advice. The obligations under Rule 2.1.1, therefore, had to be read in that light and in the light of the specific facts of the case.

Mr Justice Dight concluded, therefore, that “a proper analysis of the contract in the present case and the effect which that has on the interpretation of the rules does not lead to the conclusion that the defendant was obliged to refuse to accept the underlying investment in this case. The investment here was acknowledged by the claimant to be high risk and/or speculative. He accepted responsibility for evaluating that risk and for deciding to proceed in knowledge of the risk. A duty to act honestly, fairly and professionally in the best interests of the client, who is to take responsibility for his own decisions, cannot be construed in my judgment as meaning that the terms of the contract should be overlooked, that the client is not to be treated as able to reach and take responsibility for his own decisions and that his instructions are not to be followed.” Further, the Claimant’s evidence at trial showed that he would have proceeded with the underlying investment as he was keen to release cash from his pension pot (he had received £4000 cash).

As a consequence, the Court held that the Defendant had complied with the best interests rule. Further, there was no causal link between the alleged breach of duty and the losses that the Claimant is alleged to have sustained given that the Claimant would have proceeded in any event.

Wrapping up discussion on this head of claim, Mr Justice Dight rejected the Claimant’s argument regarding the FCA’s thematic review/risk outlook. The contents of these documents could not be considered rules or guidance and, further, there is no rule like s.138D FSMA, which would provide a right to an investor to make a claim based on an alleged breach of the guidance issued by the FCA from time to time.

The Tort Claim

The Claimant alleged that Defendant had liability as a joint tortfeasor with CLP on the grounds that it had acted in joint enterprise with CLP.

Mr Justice Dight confirmed that the correct test to determine whether joint tortfeasor liability could be established between the Defendant and CLP was the test set out in Sea Shepherd UK v Fish & Fish Ltd [2015] AC 1229 at para 37, namely, that a defendant will be liable as a joint tortfeasor if (i) it has assisted the commission of the tort by another person, (ii) pursuant to a common design with that person, (iii) to do an act which is, or turns out to be, tortious.

Limbs (i) and (ii) were not satisfied as he had clearly found from an analysis of the facts and evidence that the Defendant and CLP were not operating a joint enterprise or common design. The Defendant’s testimony at trial, which the Judge accepted, and the contemporaneous documentation, supported this conclusion. In particular, the agreement between the Defendant and CLP created a very clear dividing line between their roles, with CLP being the introducer and the Defendant acting on an execution-only basis in setting up the SIPP. The agreement further contained express undertakings by CLP that it would not suggest to clients that financial advice would be given by the Defendant and that CLP would itself not give advice.

In relation to limb (iii), the evidence (which was limited on this point) did not suggest that there was a tortious negligent misstatement.

In any event, the Judge reiterated that the loss was caused by the Claimant’s own decision to go ahead with a high risk speculative investment.

Comment

This case will come as a comfort to SIPP providers operating on an execution-only basis that have any exposure to unregulated investments. Given the volume of complaints and claims that have arisen in recent years , this case will serve as useful guidance in determining those complaints/claims, although a careful analysis of the facts will have to be carried out in each case.

However, it has been reported that the Claimant has confirmed his intention to seek permission to appeal the ruling so we shall have to wait to see if this decision will be the subject to further challenge.

It should also be noted that the FOS have historically taken a harsher line with SIPP providers, and the approach by the FOS may not follow this judgment (although are likely to be influenced by it in the future) as FOS decisions are determined with reference to the facts of the complaint and the opinion of the ombudsman as to what is fair and reasonable in all the circumstances.   Indeed the financial press are reporting the FOS to have commented on the case in the following terms: “the High Court has already upheld our approach to SIPP complaints in the Berkeley Burke case. We will consider the judgment in the Carey case and continue to take relevant law, including case law, into account when resolving complaints. If customers are unhappy with how their financial provider has handled their complaints, they should come to us and we'll see if we can help.”

Nonetheless, the Judge’s analysis of COBS Rule 2.1.1 provides welcome clarification on the interpretation and boundaries of the COBS rules and the extent of the obligations imposed on a SIPP provider when acting on an execution-only basis and dealing with unregulated and unauthorised brokers. The fact that the Court concluded that the contract was the starting point from which to assess the obligations imposed on the SIPP provider is important not only for these types of cases but also, more broadly, in determining the extent of obligations on all financial institutions.

The case also provides the first substantive judicial consideration of s.27 FSMA, allowing clearer understanding of how the provision, and the RAO, are to be interpreted. In addition, the decision also demonstrates the importance of robust policies and procedures and clear contractual documentation to define the relationship between the introducer and the SIPP provider and the between the investor and the SIPP provider.

1 This was because: (i) it was a judicial review challenge to an ombudsman’s decision; (ii) the facts were different as the underlying investment in that case was a scam; (iii) he had not been asked to determine the question of due diligence regarding accepting the store pod investment into the SIPP; (iv) in any event, he had already found that the defendant had carried out proper due diligence; and (v) different regulatory provisions were in issue.