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Speaker
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Transcript
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Helen Cracknell, Solicitor, Burges Salmon
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Hi everyone. I'm Helen Cracknell, a solicitor in the pensions team here at Burges Salmon. Welcome to episode five of season two of the Burges Salmon Pensions Pod. In this episode, we'll be discussing personal pensions including the Carey judgement and key takeaways for SIPP operators.
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Chris Brown, Director, Burges Salmon
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Hi everyone, I'm Chris Brown in Burges Salmon's pensions team and in today's episode we are joined by Anna Davis, a director in our funds and financial regulation practice. Thanks for joining us Anna.
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Anna Davis, Director, Burges Salmon
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Thank you, it's my pleasure.
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Chris
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So, Anna, welcome to the podcast. Tell us a bit about yourself please and your work in the pension sector.
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Anna
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So, like you said, I'm a director in our financial regulatory practice at Burges Salmon. I joined Burges Salmon from an in-house role at AXA wealth and I was a compliance manager there for many years before I retrained as a lawyer, so my background's really in the regulation of insurance and wealth management and personal pensions and SIPPS have been a key focus area for me since about 2006/2007.
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Helen
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So, Anna, on that timeline obviously SIPPS have had a very interesting journey since they were first FCA regulated in 2007. Could you remind us briefly what happened?
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Anna
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Of course so as you say operating a personal pension scheme including a SIPP came within the regulatory perimeter in April 2007 and then we had the first publication from the FCA around how it thought SIPP operators were performing in that sense in 2009 and at that time they reported that as a whole they didn't see that SIPP operators posed a significant risk to their statutory objectives.
So all good for the first couple of years but by 2011 the FSA's view of the sector was changing and it noted in its retail conduct risk outlook that year, that it had concerns about poor firm conduct and the potential for significant consumer detriment so they did a thematic review which they published the results of in 2012 which unfortunately confirmed its concerns.
Generally it found poor firm compliance with regulatory requirements. There were CASS issues - that is issues with safeguarding of client money and assets within the SIPP, they found firms being used as a conduit for financial crime, they found that firms had insufficient capital, they found evidence of conflicts of interest but importantly they found a lack of adequate due diligence being undertaken for introducers and non-standard investments within the SIPP and they also found a relatively widespread misunderstanding among SIPP operators that they bear little or no responsibility for the quality of the SIPP business that they were administering and that a lot of SIPP operators saw that as the responsibility of clients and client's advisors or at least that's what the FCA thought at the time. So they uncovered widespread concerns I suppose across a number of regulatory areas but this issue around non-standard assets, due diligence and SIPP operator duties in that area was starting to come through at this time.
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Chris
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Speaking as a pensions lawyer, that's really interesting background and I know we're going to lead on to 2013/2014 and leading up to the Carey judgments.
What happened next then? You talked about a thematic review - did other materials come out guessing a good practice and things like that looking at good practice.
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Anna
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Yeah, absolutely, so FSA was replaced by the FCA in 2012/2013 and in 2013 the FCA published this guide for SIPP operators which focused on all the regulatory requirements that applied to SIPP operators - client money, client assets, that kind of stuff and it was really a different tone from what come out from the FSA. They were clearly trying to take a different tack but still probably having the same level of concern so they were publishing good practice statements of what SIPP operators should be doing and trying to encourage firms I guess that way to improve their standards.
But in 2014 FCA then followed up with a Dear CEO letter to SIPP operators. They'd done a further thematic review following the 2013 guidance focusing on due diligence and non-standard assets but they were finding widespread failings continuing at that time so they started to take a tougher tone at that point again.
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Helen
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And then how did this progress? It all sounds like it's reaching a bubbling point at this time.
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Anna
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Indeed, but that was really it after 2014 until the FCA published a portfolio letter in 2020 for SIPP operators but that's something that they published for all sub-sectors so there's nothing unusual in there but interestingly what interjected I suspect here in the bubbling point as you say Helen is that between 2014 and 2022 there were these two key cases Berkeley Burke and Carey that were traveling through the Pensions Ombudsman, the FOS and the courts and so there was a period here of real ongoing uncertainty and a lot of debate in the industry as to what SIPP operators duties really were particularly focusing on this non-standard asset and due diligence area.
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Chris
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And that takes us nicely up to Carey then. Well Anna you'll take us through it in a minute but the Supreme Court has recently denied Carey, now Options UK Personal Pensions I think, the right to appeal in April this year so it's the Court of Appeal isn't it, so the Court of Appeals judgment in Carey is now settled law?
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Anna
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That's right.
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Chris
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So we're going to talk about what SIPP operators can take from the judgments and what you think might happen in the space next but can we start with a brief reminder of what Carey is all about?
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Anna
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Of course, so the case centred around Mr Adams' transfer of his existing Friend's Life personal pension into a Carey SIPP. He transferred about £56,000 and almost all of that transfer value was used to purchase storage pod leases from Store First and Mr Adams was introduced to Store first and to the Carey SIPP by a Spanish-based unregulated introducer called CLP Brokers.
So unlike some of the other cases the Store First investment wasn't a scam but it did very poorly, probably pretty liquid and he was very concentrated because he put all his all his investment into that investment and it did really poorly and essentially he lost most, if not all, of the value of that transfer value of his pension.
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Chris
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But it wasn't a scam as you say so what were Mr Adams' claims?
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Anna
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Well in High Court he pleaded three courses of action. There was a talk claim which relates to because of Carey's relationship with CLP the argument was that Carey was essentially liable for any negligent advice that was provided by CLP but we don't need to worry too much about the talk claim.
The more interesting of the claims are the COBs claim, I'm calling it, so this was the COBs, Conduct of Business rules, this is the FSAs and FCA Conduct of Business rules, in particular what's known as the client's best interest rule. So this claim was that Carey had breached its duty under that rule and that rule says that you should act honestly, fairly and professionally in accordance with the best interests of your client so that was the second claim. And the third claim, we're calling it the section 27 claim, so this is section 27 of the Financial Services Markets act and this runs that due to the acts of CLP the agreement for the SIPP should be unenforceable as a result of section 27.
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Helen
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So Anna what did the courts decide in relation to all of these claims?
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Anna
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Well the High Court found wholly in favour of the SIPP provider Carey. The most important part of the High Court judgment for present and ongoing purposes is that in relation to the COBs claim.
So here the judgment was that Carey wasn't responsible for Mr Adams' investment decisions and this was because the Ts and Cs between Carey and Mr Adams were really clear that the SIPP was operated on an execution-only basis. That is that Mr Adams made his own investment decisions and Carey would just accept those without needing to make any assessment as to whether they were the right decisions or not. So the call found, yep, that was really, really clear that was the basis on which you were acting but also that regulatory obligation that we talked about in COBs, the client's best interest rule, didn't introduce a different or wider obligation. So the judgment was that that duty didn't put an obligation on Carey to assess the suitability or appropriateness of Mr Adams investment decision, it was just purely up to him.
So what this really showed us is that that agreement between the SIPP operator and the member is really important but the regulation doesn't come in and take precedence over it, that's the legal position at least.
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Chris
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At the high court and then what about the Court of Appeal?
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Anna
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So Mr Adams appealed to the High Court. His appeal on the COBs claim wasn't successful so that High Court judgment remains good law on that point. But his appeal under section 27 claim was successful.
So to flesh this out a bit more from what we talked about earlier, that claim turned on whether CLP, the broker, was in breach of the general prohibition in the Financial Services Markets act. So that prohibition says you may not carry out a regulated activity in the UK unless you're authorised or exempt. So section 27 applies where an authorised person, so that would be Carey here, makes an agreement in the course of carrying on a regulated activity here operating a SIPP but the agreement was made in consequence of a third party's breach, so CLP's breach of the general prohibition, so it all turned on - was CLP in breach of the general prohibition? Were they carrying out a regulated activity in the UK for which they were not authorised? And the Court of Appeal decided that yes they were carrying on regulated activities in the UK. They should have been authorised, they weren't and the consequences of that were that the agreement between Carey and Mr Adams was unenforceable and Mr Adams was entitled to recover the transfer value paid into the SIPP along with compensation.
So, essentially, Carey became on the hook for the CLP introduction because they shouldn't really have accepted it because they weren't authorised.
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Chris
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So Carey's essentially on the hook for CLP not being FCA authorised but I suppose what are key takeaways for SIPP operators Anna?
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Anna
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Two things - I would say firstly that it's really important that your agreement with your customer is clear about the basis on which you're acting. So if you're an execution only service provider then it needs to be really, really clear that your SIPP member is taking responsibility for their own investment decisions and that needs to be cleared right the way through the piece, probably not enough for it to be clear in the terms and conditions, you want to be clear through all your comms so that's the basis on which you're acting and secondly I would say don't accept business from an unregulated third party unless you're really sure that they don't need to be authorised for the activities that they're carrying out because if you get that wrong you stand to be on the hook for any problems later down the line.
Actually those points probably apply equally to all financial services firms not just SIPP operators.
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Helen
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What do you think will come of this in the future?
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Anna
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Well as a regulatory lawyer what I find quite interesting about all this and having sort of lived through all of it if you like is that following those five years of really key concerns and focus from the FSA and the FCA, you'd normally start to see firms being put into enforcement action being taken. What normally happens is lots comes out and then the regulator feels like they've told the industry enough times, enough is enough and then they start putting firms into enforcement but that didn't really happen here and I can only assume that sort of pause from the regulator, if I can call it that, was because they were waiting to see what would happen from the Berkley Burke and the Carey cases that straddled that period and the judgments probably took a lot longer to come out than anyone thought they were going to in 2014 and during that time of course lots of SIPP operators that might have been the ones that got put in enforcement, because of course not all SIPP operators by any means will have had these problems and these concerns, those ones that would have gone into enforcement may well have gone into administration by now, sold their books, closed their door so the time for FCA to kick a load of firms into enforcement has probably passed by now.
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Helen
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So do you think that means that the FCA will turn their attention back to SIPP operators or do you think things will remain quiet on that front for now?
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Anna
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I think they probably will re-train their focus to SIPP operators at some point and I wonder whether the new consumer duty that they're consulting on at the moment might just give them that platform to look at it again.
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Chris
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Anna, can you tell us about the new consumer duty please?
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Anna
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Of course, so it's a set of new outcome-focused rules and guidance and the idea is that they will result in a higher level of consumer protection in retail financial services, so across the retail board not just SIPP operators.
In a nutshell, it's made up of three elements. There's a consumer principle, which is an overall standard of behaviour that the FCA wants to see from firms and it's probably going to read along the lines of 'a firm must act to deliver good outcomes for retail clients' so that's quite similar to the customer's best interest duty that we talked about in relation to Carey in the COBs claim but it's more outcome focused.
Then underneath that there'll be some cross-cutting rules and that's the FCA's overarching expectations that will apply across all areas of the firm relationship so the requirements are probably going to be that you must act in good faith towards your retail customers, you must avoid foreseeable harm to those retail customers and you must enable and support those retail customers to pursue their financial objectives.
And then underpinning all of that there will be four outcomes which are the more detailed expectations which apply against the key elements of the firm consumer relationship. So products and services and their design, consumer understanding, communications, price and value and customer support/customer service. So, on its face, that all looks quite similar to the current regime but I think there's probably a lot in the detail there that's going to require a lot of change and a period of implementation for firms. For some firms it will probably be a continuation of what they've been doing for a long time but for others it will be quite a lot of change and a lot of work.
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Helen
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Do you think that the FCA will look to follow the Carey judgment closely when applying the new duty?
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Anna
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That's an interesting question. So as we said earlier the High Court judgment was that your contract is key and the regulation doesn't take precedence over that. So if you say that you're not going to look at suitability or appropriateness of your SIPP member's investment decisions then you don't have to do that. So that's the legal authority, that's the legal position but I wonder if there still is a question mark about whether the FCA will expect a higher standard there, particularly in the context of that new consumer duty and whether they might expect firms to be challenging customers more or taking decisions about whether to accept these sort of esoteric investments on the basis that that might not result in a positive customer outcome and therefore isn't in line with the new consumer duty but only time will tell.
I suspect if you're a SIPP operator with a low tolerance for regulatory risk you might want to do more than just that legal duty but you know the important thing is that you've got a baseline really clear agreement with your customer about what you are going to do and what they as the consumer are responsible for and you go from there.
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Chris
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Oh thanks Anna, that's really interesting and I think a really interesting run through Carey with some really interesting takeaways for SIPP operators there as well. So just to wrap up this podcast, are there any other hot topics or hot issues/hot spots for SIPP operators to be mindful of?
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Anna
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I think preparing for the new consumer duty is going to be more than enough for the sector to be getting on with now. Those four outcomes are pretty all encompassing but I think there are probably some key areas of focus just not to take your eye off or think about afresh perhaps when you're looking at the consumer duty and how you're going to implement it.
I think the issue and concerns around non-standard assets is going to continue to be a really hot topic for the regulator and I think that will be important in a platform context as well so a lot of our SIPP operator clients are actually platform providers as well and they've got their SIPPs on the platform and I think the issues around non-standard assets could have a read over, personally, to investment platforms even where you're not holding those assets within a SIPP.
Scams of course are bound to continue unabated, that seems to be the way of things unfortunately.
I think conflicts of interest are going to stay on the FCA's agenda, as well as capital adequacy, sort of technical points around that and probably international SIPPs as well, especially those that are investing through offshore bonds and the value for money around those structures which again is going to link in with the consumer duty so I think these are all things to be perhaps mindful of and looking at afresh when you're thinking about complying with the consumer duty.
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Chris
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Thanks Anna, that's really interesting so I think there's lots then for SIPP operators to be thinking about at the moment whether that's coming out of Carey or the new consumer duty and focusing on those particular areas as well. So lots for SIPP operators to be thinking about.
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Helen
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Thanks Anna.
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Chris
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Thank you for listening to the Burges Salmon Pensions Pod. If you would like to know more about our pensions or financial regulations teams and how our experts can work with you, then you can contact me, Helen, Anna or any of our teams via our website.
This episode is the fifth of our second season of the Burges Salmon Pensions Pod. All of our episodes are available on Apple, Spotify or wherever you listen to your podcasts. So thanks Anna for joining us today and to our listeners don't forget to subscribe and thanks for listening.
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