Good news for SIPP Administrators and their insurers: important clarification on the scope of SIPP Administrators’ duties
Important clarification on the scope of SIPP Administrators’ duties
Russell David Adams (Claimant) V Options SIPP UK LLP (Formerly Carey Pensions UK LLP) (Defendant) & Financial Conduct Authority (Intervener) (2020)
On 18 May 2020 the long-awaited judgment in Adams v Carey Pensions was handed down in the Chancery Division. At the heart of the case are questions as to the extent of a SIPP administrator’s responsibilities to underlying investors, particularly in relation to the performance and suitability of investments which have been selected either by the investor or their adviser. Important subsidiary issues also arise as to whether transactions can be voided where unregulated introducers are involved. What will be the impact of the decision, and will the good news be short-lived?
The claimant, Mr Adams, was a self-employed haulage contractor. His income was limited but he had built up a pension worth £52,000 which was then held in a Friends Life Personal Pension Plan (“PPP”). Carey Pensions (“Carey”) is a SIPP administrator, authorised by the Financial Conduct Authority (“FCA”) to establish, operate and wind up SIPPs. As with most SIPP administrators, however, Carey was not permitted to give investment advice and, therefore, necessarily always carried on business on an execution-only basis. Carey had an arrangement with an unregulated broker, CLP, by which CLP would introduce business to Carey’s SIPP products. CLP received no payment from Carey, but derived commission from the underlying investment funds whose products it introduced to investors.
In 2011, Carey was in contact with representatives of an entity called Store First, which was a fund offering and facilitating investment in storage pods. It was an unregulated investment, which was accepted to be high risk. After having conducted due diligence on the Store First investment, Carey was satisfied that it was bona fide and SIPP-able, and admitted it to its Permitted Investments List (“PIL”). At around the same time, the FCA visited Carey to review its processes. The FCA was aware of Carey’s arrangements with unregulated introducers, and concluded that its processes were robust and appropriate, including specifically that its due diligence on unregulated investments and introducers was suitable.
In early 2012, Mr Adams made contact with CLP, having seen an advertisement on the internet, offering investment opportunities which, they said, were qualified for SIPPs and were a means of releasing “some cash from your pension”. The advertisement specifically noted that CLP did not provide advice. Mr Adams contacted CLP, who recommended that he transfer his pension, release a lump sum, and invest the balance into Store First, who would arrange for Mr Adams to acquire 250 year leases of 6 storage pods, which would then be rented out to generate an income. Mr Adams said that CLP identified Carey as a reputable SIPP provider, but did not give him any advice as to any of Carey’s specific SIPP products. The documents signed by Mr Adams confirmed that he had not received any advice from Carey. Mr Adams instructed CLP to effect the transfer of his existing PPP to the Carey SIPP, and £53,116 was later transferred to Carey where it was invested, on Mr Adams’ express instructions, in the Store First scheme. As to the £4,000 cash which Mr Adams expected to withdraw from his pension, in fact, this was not withdrawn from his pension pot but offered as an incentive by CLP, unknown to Carey. Mr Adams’ evidence was that the “cash-back” was one of the prime reasons for his decision to enter into the transaction.
Subsequently, Carey discovered that other SIPP customers had been offered incentives direct by CLP and wrote to CLP confirming that they were not prepared to proceed with transactions where an incentive had been offered. Carey also wrote to customers of CLP to inform them that any incentives would have to be declared to HMRC, but took the view that it was for the customers to take the risk of proceeding without advice. In April 2013, Carey resolved to remove Store First from its PIL.
By 2016, Mr Adams had received only a fraction of the rental income that he had anticipated from his storage pods, and the value of the investment had plummeted.
Mr Adams claimed against Carey, relying on three causes of action: (1) that the investment in Carey’s SIPP should be unravelled pursuant to s.27 Financial Services and Markets Act 200 (“FSMA”) as it had been entered into as a result of CLP’s involvement as an unregulated introducer; (2) that Carey were in breach of the Conduct of business sourcebook (“COBS”) rules requiring them to act honestly, fairly and professionally in the client’s best interests; (3) that Carey were responsible for CLP’s negligent advice, having been allegedly involved in a joint venture with them. A short time before the trial, the FCA intervened in the proceedings, apparently in support of the claim against Carey.
The Court rejected the claim in its entirety, dismissing all three causes of action. The key findings were as follows:
- Unregulated introducers such as CLP are entitled to make introductions to authorised SIPP providers who operate an execution-only business, although such introducers are not entitled to give advice on the SIPP. The judge found that this was entirely consistent with the FCA’s comments following their review of Carey’s business in 2012.
- The judge summarised the claim under s.27 FSMA as follows “The claimant says, in the words of s.27, that the SIPP was necessarily entered into as a “consequence of something said or done” by CLP in the course of two regulated activities “carried on by [CLP] in contravention of the general prohibition”, the two activities of advising on investments and arranging investments, namely the SIPP. The two regulated activities are defined in articles 53 (advising) and 25 (arranging) of the RAOs. Therefore, he submits, the contract is unenforceable and he is entitled to recover his losses.”
- In dismissing the s.27 FSMA claim, the judge held that CLP’s interaction with Mr Adams, in introducing him to Carey and assisting him to complete the Carey application form, was not sufficiently causative of Mr Adams entering into the SIPP agreement with Carey to amount to be considered to have brought about that agreement: the investment in the Carey SIPP was not “in consequence” of CLP’s introduction for the purposes of s.27. Further, a mere introduction was not capable of constituting “making arrangements” for the purposes of Art.25 of the FSMA (Regulated Activities) Order 2001: therefore, contrary to Mr Adams’s case, CLP’s introduction to Carey was not a regulated activity.
- The judge also held that if, contrary to his decision, he had found s.27 to be applicable, he would in any event have exercised the court’s discretion under s.28, and declined to unravel the transaction on the basis that it would not have been just and equitable to do so, given Carey’s ignorance of CLP’s conduct, and Mr Adams’ admitted knowledge that the underlying investment was unregulated and high risk.
- As to the alleged breach of COBS r.2.1.1, perhaps significantly, the FCA agreed with Carey’s submission that a firm’s role in any given transaction will govern what is required to comply with COBS r.2.1.1, although they asserted that firms could not exclude their duties and did not accept that the scope of the duties under the rule were to be construed by reference to the firm’s contract. The FCA said that Carey had an obligation to undertake due diligence on both the investment and the introducer, to ensure that the investment was not a scam, and a duty not to accept into the SIPP an investment of a kind that was inappropriate for any SIPP.
- However, on the COBS r2.1.1 issue, the judge held that the extent of the relevant duty had to be construed by reference to the contracts, the facts, and the roles which each party had agreed to play. He said that this was obvious, because it is clear that not every COBS rule applies to every authorised firm or regulated activity. The COBS rules did not take precedence over the contractual agreement between the parties. Significantly, roundly dismissing the notion that a SIPP administrator could owe a duty to advise on an execution-only transaction, the judge concluded:
“The contract here expressly provides, in a number of places, that the defendant is not advising on the SIPP. Moreover, the defendant is not authorised to advise on the SIPP. In my judgment Rule 2.1.1 cannot be construed as imposing an obligation to advise which would not only be unlawful but which the parties had specifically agreed in their contract not to impose on the defendant … 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.” (emphasis added).
- The judge distinguished the earlier case of Berkeley Burke SIPP Administration Ltd v. FOS  EWHC 2878 (Admin) on a number of grounds, noting that (a) that case was a judicial review as to the FOS’s procedure in the underlying complaint, (b) that it involved a scam investment, which was not the case with Mr Adams’ investment, and (c) that different regulatory provisions were relied on in the Berkeley Burke case from those relied on by Mr Adams.
- As to the allegation that the investment was unsuitable, the judge held that the SIPP itself was not unsuitable and that, as far as concerned the claim against Carey, they owed Mr Adams no duty in respect of the suitability of the investment in Store First. As far as Carey were concerned, there was nothing manifestly unsuitable about the underlying investment and, although it was high risk, this was something that Mr Adams repeatedly accepted both in the contract documents and his instructions to Carey, and in his evidence at trial. Finally, insofar as Mr Adams relied on guidance and ‘Dear CEO’ letters issued by the FCA, the judge held that they had no regulatory effect, and that such guidance as was relied on by Mr Adams but which was published or took effect after the relevant investment was plainly irrelevant to Carey’s liability.
- Finally, insofar as Mr Adams alleged that Carey were responsible, effectively as joint tortfeasors, for negligent investment advice given by CLP, the judge again dismissed the claim. He did so on the basis that the roles and actions of CLP and Carey were entirely separate, and Carey was unware of any advice having been given by CLP, with the result that the facts were entirely inconsistent with a conclusion that Carey assisted the commission of a tort by CLP. Further, there was insufficient evidence adduced by Mr Adams to satisfy the judge that a tort had been committed at all. In any event, even if there had been a tort committed, “the loss was caused by [Mr Adams’] decision, knowing that the underlying investment was high risk and or speculative nevertheless to proceed with it because he wanted the ‘cash back’ which he had been offered by CLP.”
- In obiter the judge commented (citing Rubenstein v HSBC  EWHC 2304) that, if damages had been awarded, they would have been calculated as the difference between the value of the cash fund transferred and the value of the investment, plus interest.
In the wake of the British Steel Pension ‘scandal’, the FCA’s thematic review into the defined benefit transfer market, and the decision in Berkeley Burke v FOS (see above), the SIPP market and its liability insurers have already seen a volume of claims and FOS complaints concerning their alleged responsibility for investors’ losses. Against that background, the judgment in Adams v Carey, although distinguishable from Berkeley Burke v FOS which found against the SIPP administrator, will be very welcome news indeed to the SIPP and insurance markets, and brings welcome clarity to the role, and civil and regulatory duties of SIPP administrators. It is, to a large degree, in marked contrast to the stance increasingly taken by the FCA and FOS, and the numerous claims companies which have emerged in this sector. Insofar as the court in Adams v Carey addressed submissions made on behalf of the FCA, including the status of their regulatory guidance and ‘Dear CEO’ letters, it should give the regulator a great deal to think about in terms of the consistency and clarity of its messaging, and the need for it to apply the rules logically, fairly, having proper regard not just for the consumer but also for the financial services industry as a whole, and without fear for its own reputation as a regulator. Of course, given its import and the range of issues considered, it seems likely that we will see the first instance decision appealed. Let us hope that the outcome of any appeal will not be as long in the making as the first instance decision.
If the content of this update raises any issues for you, or you would like to discuss anything further, please liaise with Rob Crossingham, Partner on 020 7822 1991 or at firstname.lastname@example.org.