Judgment from the Court of Appeal
Mr Adams has partially won his appeal against Options UK Personal Pensions LLP (formerly Carey Pensions UK LLP) in a judgment handed down on 1 April 2021.
This was the appeal from the decision of the High Court relating to the obligations imposed by COBS Rule 2.1.1 having to be read in the light of the execution-only role of Options; this element of the appeal was not successful. The High Court decision therefore remains good law (please see our briefing on that decision here).
The successful element of the appeal was that Mr Adams can unwind his investment and obtain damages under section 27 of FSMA, and Options were not entitled to relief which might have been available under section 28 of FSMA.
In partially allowing the appeal, the Court of Appeal has, on the one hand, stressed the importance of assessing the relationship between the provider and an unregulated introducer, which does put SIPP providers on notice of risk in accepting those introductions. On the other hand, it has allowed the decision of the High Court to stand in relation to the COBS claim, and has not provided any further clarity that the industry may have been expecting about the extent to which the client’s best interests rule in COBS 2.1.1R requires SIPP providers to assess the suitability of a proposed investment.
Liability under section 27 FSMA
The first part of Adams’ case was that he agreed to transfer his pension fund to the Carey SIPP because of what was said and done by the unregulated introducer (CLP) in contravention of the general prohibition on carrying on a regulated activity unless authorised or exempt in section 19 of FSMA. Therefore, he argued that he was entitled to recover his investment under section 27 of FSMA.
Section 27 applies where an authorised person (here, the SIPP provider) makes an agreement in the course of carrying on a regulated activity, but the agreement was made in consequence of a third party’s breach of the general prohibition. The agreement is unenforceable against the SIPP member, who is entitled to recover money or other property paid or transferred and compensation for any loss. The issue was, therefore, whether CLP had breached the general prohibition.
The Judge in the High Court had noted that articles 25(1) and 26 of the Regulated Activities Order 'contemplate the need for a causal link between the act or acts of arranging and the transaction itself' and concluded that CLP acted as a bare introducer and: 'effecting an introduction are not sufficient because those acts do 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'.
The Court of Appeal disagreed and found that section 27 was applicable. In addition to recommending investment in storage pods, CLP was also encouraging Mr Adams to achieve that end by transferring out of a Friends Life policy and buying a Carey SIPP, both of which were regulated activities. Therefore, the transfers into the Carey SIPP were brought about by arrangements undertaken by the broker; in consequence of CLP’s arranging deals in investments (within the meaning of article 25(1) of the RAO). The Court of Appeal adopted a holistic rather than a compartmentalised approach to assessing whether advice was regulated or not. CLP’s actions had therefore contravened the general prohibition in section 19 FSMA. As such, Adams would be able to recover money transferred to Carey unless the Court exercised its discretionary powers under section 28(3) of FSMA.
The court’s discretionary power under section 28
On the exercise of this discretion, in a situation involved three parties, FSMA requires the Court to have regard to whether the provider knew that the third party was (in carrying on the regulated activity) contravening the general prohibition. The Court held that this meant that the provider must have actual knowledge and was not a question of what it should or reasonably ought to have known.
Carey did not know about the contravention of the general prohibition by CLP, but the Court still refused to exercise the discretion for a number of reasons including:
- that a key feature of FSMA is consumer protection and to a certain extent this includes protecting consumers 'from their own folly';
- that the point of section 27 is to put regulatory risk on the provider when they choose to accept introductions from unregulated entities;
- the court also noted that Carey had terminated the relationship with CLP after alarm bells had started ringing (including an FCA warning notice), but it nevertheless allowed pipeline cases such as that of Mr Adams to proceed; and
- in reaching the decision the Court also took into account the number of clients Carey had taken on, the level of their investments and in all the circumstances there was reason for Carey to be concerned about CLP advising on investments.
Whilst this is, of course, a point around the exercise of judicial discretion (and a subsequent Court could exercise that discretion differently) this does appear to be a clear steer from the Court that if a firm accepts introductions from an unregulated introducer, they will find it hard to escape section 27 liability. Although the specific facts in each case will be very relevant to how far the Court moves towards consumer protection and away from the opposing principle in FSMA which consumers should take responsibility for their own decisions.
The implication is that a firm will need to conduct a careful analysis of the processes carried out by an unregulated introducer to satisfy itself that the introductions fall outside the scope of section 27.
Breach of COBS 2.1.1R
The second part of Adams’ case was that Carey acted in breach of the FCA’s Conduct of Business Sourcebook COBS 2.1.1R, which required Carey to act 'honestly, fairly and professionally in accordance with the best interests of its client'. In the High Court, this claim failed mainly on the basis that the Judge found that the contract between Carey and Adams was ‘execution only’ and that the Judge did not consider that the regulatory regime was intended to take precedence over contractual terms.
In the Court of Appeal, Mr Adams tried to develop his case to include allegations of breaches of various specified duties which he said arose from COBS 2.1.1R including a 'product due diligence duty', a 'non-standard investments duty' or a 'financial crime duty', amongst others. Whilst in the High Court trial the FCA had suggested that COBS 2.1.1R could include some of these duties, they had not appeared in Mr Adams’ particulars of claim.
This therefore amounted to a 'radically different' case – in effect, it was an attempt to put forward a new claim and was dismissed by the Court of Appeal. Despite requests from the FCA, the Court of Appeal also declined to comment in a general sense on COBS 2.1.1R, leaving it to a future case where this point may be live.
The High Court decision therefore remains current law and SIPP providers should continue to make sure their agreements with members are abundantly clear about the roles and responsibilities of the firm, the member and any third parties.
Other points from the judgment as to the nature of rights in a SIPP
Some further decisions of the Court of Appeal will be of wider interest to SIPP providers because many SIPPs are constituted with a similar structure:
- Rights under the Carey Pension Scheme are not 'rights under a contract', but rather the scheme is governed by the rules established under a trust. Members essentially acquire rights under those trusts. If the terms and conditions can be said to have given a member a contractual right to direct how Carey invested, it was merely a right to control the way in which Carey exercised its powers under the rules. It remains the case though that a member’s rights under the Carey pension scheme were not fundamentally contractual.
- A member of the pension scheme may have a right to receive sums determined by reference to the value or performance of the underlying SIPP property, but he is not the property’s owner. The member does not acquire different property rights as a result of a switch in investments. The rules give a member and dependants rights to certain benefits the value of which will be a function of the value of the investments, but the rights are not themselves transformed by changes in either the value or the make-up of the relevant investments. As a result, the court decided that Q17 of PERG 12.3 is not correct where it says that rights under a personal pension scheme are bought or sold wherever the member instructs the operator to buy assets of any kind and it can be expected that this will be amended.
This article was written by Leonardo Robinson from our Pensions team and Suzanne Padmore and Christopher Wenn from our Pensions Disputes team.
We have significant experience in supporting SIPP and SSAS providers with a range of legal matters. If you have any questions on the topics raised in this article or if we can assist with any other matters, please contact Leonardo Robinson or your normal Burges Salmon contact.