This article was written by Christopher Walker.
The outcome represents a further development for SIPP operator liability, particularly in light of various Financial Ombudsman and Pensions Ombudsman decisions over the years and the recent judicial review (and high-profile collapse and administration) of Berkeley Burke.
Background
Originally, Mr Adams was contacted by an unregulated introducer based in Spain, CL&P Brokers, regarding a potential investment in a storage pod company – the introducer suggested the investment should be made via a SIPP provided by Carey, operated on an execution only basis. Following his introduction, Mr Adams proceeded to set-up a SIPP with Carey, into which he transferred his entire existing FriendsLife personal pension (#56,000) and instructed Carey to make the investment (£50,000). It seems Mr Adams was in some financial difficulty and accepted a £4,000 ‘cash back’ inducement from CLP for entering into the investment (presumably a share of CLP’s commission from Store First).
When the investment’s value dropped significantly (and failed to generate precious little in income), Mr Adams brought a case against Carey in relation to his losses.
The Court’s decision
The Court found in favour of Carey and dismissed all three of Mr Adams’ claims. Two of the claims are of particular interest from a financial services regulatory perspective:
- The Section 27 claim: Mr Adams argued that his contract with Carey should be deemed ‘unenforceable’ under section 27 FSMA, since CLP was in breach of the general prohibition (s.19 FSMA) in arranging and/or advising on investments within the meaning of articles 25 and 53 of the RAO. In summary, the Court concluded that the broker was not arranging and/or advising on investments within the meaning of articles 25 and 53 of the RAO. In particular, Judge Dight did not consider that the introduction CLP made to Carey would amount to regulated arranging (in contrast with FCA Handbook guidance on this point).
- The COBS claim: Mr Adams argued that Carey breached its duty under COBS 2.1.1R to act honestly, fairly and professionally in accordance with his best interests by accepting his investment choice into store pods. The Judge concluded that when considering the scope of this duty, the underlying contract between the parties that detailed their roles and functions should be a key consideration. The Judge’s decision was that the contract was clear in this regard and that Mr Adams must have understood the execution-only nature of the relationship. It appears the Judge thought that Mr Adams’ financial situation (and the inducement offered by CLP) motivated him to proceed with a speculative and high risk investment, and would have done so regardless of Carey’s actions and warnings. Furthermore the Judge gave short shrift to the FSA’s 2009 guidance following its thematic review of SIPP operators and did not appear to consider it relevant to interpreting Carey’s duty under COBS 2.1.1R.
A third ground – a tort claim – was considered briefly and dismissed.
Conclusion
The ruling is positive news for SIPP operators (or other firms) transacting on an execution only basis.
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.
For more analysis and our thoughts on future regulatory changes as a result of the judgment, please see our full article here.