Russell Adams v Carey Pensions: What does it mean for SIPP operators?

Judgment in the eagerly anticipated case of Russell Adams v Options SIPP UK LLP (originally known as Adams v Carey) has now been handed down, with the Court finding wholly in favour of the SIPP provider Carey and the investor’s claims dismissed on all grounds.

A recap on the background

The claim, heard in Court in March 2018, centres around Mr Adams’ transfer of his existing FriendsLife personal pension 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 Limitada ('CLP').

Mr Adams entered into the Carey SIPP in June 2012 on an execution-only basis in order to access the investment with Storage First (it being known to CLP that Carey was one SIPP operator prepared to accept Store First leases into its SIPPs).

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).

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’ claims

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').

Mr Adams identified this as his primary case at trial arguing he would be entitled to have the transaction reversed, his original fund returned and compensation equal to the returns he would have enjoyed if his pension had not transferred, along with damages.

For this claim to succeed, he needed to establish that the SIPP agreement was made in consequence of something said or done by CLP in the course of a regulated activity carried on by CLP in contravention of 'the general prohibition' in s.19 FSMA (i.e. that CLP had been carrying on regulated activity without authorisation). The two alleged regulated activities were ‘arranging’ (article 25 of the Financial Services and Markets Act 2000 (Regulated Activities) Order ('RAO')) and ‘advising’ (article 53 RAO).

The Court dismissed this action entirely.

Not unsurprisingly, the Judge swiftly decided that CLP had not provided advice in breach of the general prohibition. It was common ground that advising on commercial property such as the storage pod leases is not a regulated activity under article 53 and it seemed clear on the facts that CLP had not provided advice in relation to the SIPP; CLP had merely introduced Mr Adams to Carey but had not recommended the Carey SIPP product itself.

We consider that the Judge’s consideration of whether CLP had undertaken regulated arranging of investments was more complex and interesting.

Again, it was accepted that there can be no regulated arranging in relation to an unregulated investment such as commercial property. So the focus of the arguments was on whether CLP arranged Mr Adams’ purchase of the Carey SIPP. Mr Adams’ case seems to have been that CLP was making arrangements for him to buy the SIPP pursuant to article 25(1) RAO. In order for such activity to be regulated, it is necessary that such arrangements “bring about” the transaction in question. This is by virtue of the exemption in article 26 RAO, which only applies to article 25(1) arranging activity, and provides that arrangements which do not bring about a transaction are not regulated. 

The Judge found that 'there must be a direct and substantial causal connection between the arrangements and the ultimate transaction and that simply giving advice on the underlying investment and effecting an introduction are not sufficient'. We do not consider this a surprising outcome from the regulatory perspective.

Arguably more unexpected was the Judge’s dismissal of the possibility that CLP’s introduction of Mr Adams to Carey might amount to making arrangements with a view to transactions in investments pursuant to article 25(2) RAO. Such arranging activity need not bring about the transaction in question and as such is broader in scope. Although it does not appear that Mr Adams pleaded that CLP was carrying on this activity, the Judge did consider it briefly and dismissed the possibility. 

Article 25(2) seems to us a clearer potential regulated activity applicable to CLP’s relationship with Mr Adams. In this regard however the Judge decided that '"arrangements" should be construed in the same way as in Article 25(1) and a mere introduction would not suffice and the steps taken “with a view” to a transaction would have to be capable of satisfying a notional causation test. Thirdly, as a matter of fact, the steps taken by CLP are not capable of satisfying any such test.'

Not for the first time, this appears to be in contrast to the FCA’s guidance in PERG 2.7.7B G which expressly states that article 25(2) is wide in scope and would include arrangements made by introducers. The FCA goes on to say (in PERG 2.7.7BD G) that previous case law which has decided that introducing does not amount to the article 25(2) activity has been decided without the Court having the benefit of a relevant argument; namely that certain types of introductions (those made to regulated financial advisers or DFMs) are excluded from amounting to arranging under article 25(2) and therefore that other types of introduction can amount to that regulated activity. As the Judge does not appear to have considered this point the Carey judgment goes little way in settling this apparent disagreement between the FCA and the Courts

The COBS Claim – that Carey breached its duty under Conduct of Business Sourcebook ('COBS') 2.1.1R - to act honestly, fairly and professionally in accordance with the best interests of the claimant

There was no suggestion that Carey acted dishonestly, and the investment was not a fraud or a scam. The question the Court considered was therefore whether Carey failed to act fairly and professionally in accordance with the best interests of its client. Notably, in considering the COBS claim the Judge looked not only at COBS 2.1.1R but also the FSA 2009 guidance in its thematic review of SIPP operators and FSMA’s general principle that consumers should take responsibility for their decisions (section 3B(d)) (as a proportionality measure to the FCA’s consumer protection objective). 

The Judge considered the terms of the contract between Carey and Mr Adams as more important than the regulation itself. In fact he stated that '[no] provision [was] drawn to my attention at trial to demonstrate that, so far as the COBS duties which I am considering are concerned, the regulatory regime is intended to take precedence over the contractual terms'.

The Judge found that 'The essence of the contract, … was that the role of the defendant was execution-only and that the claimant was to be responsible for his own investment decisions. In my judgment the obligations imposed by COBS Rule 2.1.1 have to be read in that light.' This is not to say that it is possible to use client agreements to exclude regulatory duties otherwise owed to clients, rather that the extent of the duty owed will be interpreted in the context of the contractual agreements.

A large portion of the judgment is dedicated to demonstrating that Carey had made its role and responsibility (and that of CLP) to Mr Adams 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 that he had followed CLP’s advice and clearly 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. Consistent with that, the Judge found there to be no causal link between the alleged breach of duty by Carey and the loss Mr Adams suffered. Overall the Judge found 'There is no reason in the circumstances why [Mr Adams] should not take responsibility for his own decision.'

The Court dismissed the allegation that the investment was in some way inherently unsuitable as the contract between Carey and Mr Adams made it clear there was not a duty on Carey to consider the suitability or appropriateness of either the SIPP or the underlying investment.

Crucially it was not in dispute that the underlying investment was high risk and speculative, something Mr Adams was warned of but proceeded with in any event, and the Court held this to be entirely different to saying that the investment was manifestly unsuitable. We note, out of interest, that Mr Adams set out four reasons why the store pod investment was manifestly unsuitable, but did not include the fact that almost the whole of Mr Adams’ SIPP portfolio was to be invested in the store pods, with the consequential lack of diversification and increased risk that decision brought with it.

To ascertain suitability of the investment for Mr Adams, it was held that Carey would have had to have made detailed enquiries about Mr Adams’ financial circumstances, taken advice on the value of the investment, evaluated the inherent risks and lastly make a judgement call on whether those risks were appropriate for him. Again the contract between the parties made it clear this was not the role for Carey. Nor did Carey have the authorisation or expertise to undertake such a role.

Additionally, the Judge ruled that the FSA’s 2009 thematic review of SIPP operators 'cannot properly be described as a set of rules or even guidance' and therefore 'cannot give rise to a claim for failing to follow the suggestions which it makes. Nor in my judgment is it a proper aid to statutory construction of the COBS rules.' As such it seems clear, in the Judge’s view, that the thematic review does little to support the argument that the SIPP operator’s duty pursuant to COBS 2.1.1R extended further than as set out in the contract for the SIPP. We understand the FCA has since clarified (through the FT) that it still expects SIPP operators to comply with its expectations in the 2009 thematic review and other publications, despite the judgment.

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 from the relative safety of a fund held by FriendsLife to an unsuitable investment in store pods, and furthermore that Carey is liable for the shortcomings of CLP because of a joint venture or common design which they shared.

The decision was that there could be no allegation of negligent investment advice by CLP in this matter because there was no suggestion that CLP were instructed to advise, and there was no joint venture or common design between CLP and Carey.

In any event, it was ruled that the loss was caused by Mr Adams’ decision, made in the knowledge that the underlying investment was high risk and or speculative - a decision the Judge believed Mr Adams made in order to receive the cash-back inducement from CLP.

Conclusion

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

Although the Judge seemed to have little sympathy for his case, 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 his argument that he had not understood the high risk and speculative nature of his investment choice, and in fact confirmed he was driven to go ahead anyway by the inducement offered by CLP. The Judge clearly had little sympathy for this. 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?

As we outline above, the apparent disagreement between the Courts and the FCA on whether introducing amounts to regulated arranging pursuant to article 25(2) remains unsettled following this judgment. In the absence of any change in approach from the FCA the position is likely to remain that if introductions are made by unauthorised entities to firms other than financial advisers and DFMs, there is a risk of a breach of the general prohibition and therefore the commission of a criminal offence. Ordinarily we might have expected CLP to be caught by this (which would have given Carey an issue under s.27 FSMA). However, this point was given short shrift here, and as it was not fully pleaded, and we wait to see whether this forms a potential ground of appeal.

Could Carey have done anything differently?

Carey was the only FCA authorised entity in the chain, and so the spotlight settled on them. This is a scenario we see across a range of sub-sectors, not only SIPP operators, and is one in which we still feel 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 permitted by the statutory framework, consideration should be given to what would happen in the event that something goes wrong which is detrimental to the end client. Where else could the FOS or the FCA turn but that firm?

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:

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 introductions (perhaps other than those to regulated advisers and DFMs) to form a separate regulated activity and therefore within the regulatory perimeter. This might at least give 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 state his view of the differences of Carey to that of the high profile Berkeley Burke case (Berkeley Burke SIPP Administration Ltd v Financial Ombudsman Services Ltd [2018]). In the main, he stressed the very different facts in Berkeley Burke and Carey, in particular that Berkeley Burke was concerned with an investment into a fraudulent scam and the key point at 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. We think the two cases are unlikely to be seen as contradictory as a result.

Finally, what are the key take-aways for SIPP operators?

In our view SIPP operators should:

1. Make sure their agreements with members, and all supporting materials, are abundantly clear about the roles and responsibilities of the firm, the member and any intermediaries. This should be clear in all documentation signed by members in particular.
2. Continue, following Berkeley Burke and the FSA/FCA guidance, to ensure full, detailed and ongoing due diligence is undertaken in relation to non-standard assets. Make sure all due diligence and decisions are documented and good, complete records are made and retained.
3. Check intermediaries are authorised and if not, consider carefully whether you are prepared to accept business from them. Keep good records of these checks and decisions so you can demonstrate your thought process if challenged later.
4. Keep up to date with the FCA’s response to the judgment.

If you have any questions or we can assist with any of the topics raised in this article, please contact Suzanne Padmore.