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Summary
The English High Court has recently handed down a long-awaited judgment concerning a claim for damages against a provider of Self Invested Personal Pension schemes (“SIPPs”).
In the U.K., following various reforms, so-called SIPPs (personal pension ‘wrappers’) have become popular, particularly among employees and the self-employed, where pension savers wish to have greater control over the assets they invest in. Personal pensions provided by employers are not SIPPs, but pension savers may transfer their assets between different kinds of accounts and providers, including from employer personal pensions into SIPPs or vice versa, or may make one-off payments into SIPPs. SIPPs tend to have high transaction fees but lower management fees than personal pensions, and so can be more attractive to those looking to make particular long-term investments.
Many SIPP schemes (including the scheme in the present case) are operated by a SIPP provider, which takes in and invests pension assets and provides reporting to investors, but which does not offer to provide advisory services. The investor is typically expected either to make his own investment decisions without taking advice or separately to seek any advice they wish to from an investment advisor. SIPPs permit investment into a very wide range of asset classes, some of which may include high-risk investments. We discuss below some of the broader and thematic impacts arising following reforms to the pensions industry, which the present case highlights.
In Russel David Edward Adams v Options Sipp U.K. LLP (formerly Carey Pensions U.K. LLP) [2020] EWHC 1229 (Ch) the claimant requested that certain high-risk investments be made via his SIPP, which resulted in losses. He sought damages from the SIPP provider. The Court held that there was no duty on the SIPP provider to advise—the contract between the provider and the claimant was expressly on an “execution-only” basis and the provider was not authorised to give advice. The case illustrates that investors in “execution-only” SIPPs will face barriers to claiming that the scheme operator owes them a broader duty of care as regards the suitability of the underlying investments or the SIPP itself. In this case, the SIPP provider’s role was set out expressly in the contract, which included risk warnings to the claimant and excluded any advisory relationship.
The Claimant has indicated that he intends to appeal the judgment.
Carey Pensions U.K. LLP (“Carey”), since renamed Options SIPP U.K., is a U.K.-based “execution-only” SIPP provider[1]. The Claimant, a private individual investor, transferred funds from his existing personal pension into a SIPP. The SIPP was established and operated by Carey, following an introduction by an unregulated entity established in Spain (known as “CLP”). The Claimant instructed Carey to purchase rental units from Store First (a storage pod lease in Blackburn) with the monies held in his SIPP. Carey carried out the transaction on an execution-only basis. The rental units subsequently lost value, rendering the Claimant’s SIPP essentially worthless.
The Claimant brought proceedings against Carey, which was the only regulated entity in the investment chain. He advanced three main grounds of claim against Carey:
The FCA intervened and made submissions on the interpretation of various regulatory provisions considered in the case (as discussed below).
Section 27 FSMA renders unenforceable an agreement made with an authorised person carrying out a regulated activity (such as Carey), where the agreement is made as a consequence of something said or done by a third party in the course of carrying out a regulated activity (such as CLP) in contravention of the section 19 FSMA general prohibition on unauthorised persons carrying out regulated activities. Where a contract is unenforceable under section 27, section 28 of FSMA nevertheless allows the Court to enforce a contract (or the retention of money or property transferred under it) if the Court is satisfied that that is just and equitable.
There was no dispute that establishment of the SIPP by Carey in February 2012 was a regulated activity, and that the subsequent investment in Store First was not. The Claimant’s case was that CLP had advised him (in accordance with Article 53 of the Regulated Activities Order 2001, the “RAO”) in relation to, and made arrangements (in accordance with Article 25 of the RAO) leading to, the establishment of the SIPP, in each case in breach of the general prohibition on non-authorised entities carrying out regulated activities.
The Court held that CLP did not advise or make arrangements in contravention of section 19 because 1) as CLP was a bare introducer, there was no relevant causal link (being “a positive or effective cause,” not merely a ‘but for’ cause) between the act of arranging and the transaction and 2) there was no evidence that CLP had advised the Claimant—a general recommendation that he use a SIPP was insufficient. Therefore, the contract was not unenforceable under section 27.
Although it was unnecessary to decide it, the Court indicated that it would have found that, in any event, it would have been just and equitable in all the circumstances to enforce the contract under section 28 FSMA.
Any breach of an FCA rule by an authorised firm is actionable as a damages claim by a private person who has “suffer[ed] loss as a result of the contravention…” under section 138D of FSMA.
The Claimant alleged breach of COBS 2.1.1R, which provides that:
“A firm must act honestly, fairly and professionally in accordance with the best interests of its client (the client’s best interests rule).”
The Claimant claimed that accepting the investment in Store First was, among other reasons, a breach of the rule because the underlying investment and the SIPP itself were unsuitable for him and that Carey should have had systems in place to prevent unsuitable, high-risk investments being introduced by third parties such as CLP.
The Court held that the contract between the claimant and Carey was the correct starting point in ascertaining and construing the scope of Carey’s COBS obligations, because not every COBS obligation applies to all firms. The Judge also noted that, at least in relation to the COBS duties in this case, the regulatory regime was not intended to take precedence over the contractual terms[2].
The Court held that the alleged duties owed to the Claimant were inconsistent with the contractual documentation. The latter made clear that Carey was acting on an “execution-only” basis, not as an advisor, that the investment was high risk and that the Claimant was responsible for his own investment decisions.
Against that contractual background and factual context, COBS 2.1.1R could not be interpreted as imposing on Carey a duty to advise in relation to the underlying investment or the SIPP itself, or to reject the underlying investment on the basis of its suitability. Neither the contractual framework nor COBS required that; moreover, Carey did not hold an “advising” permission. The Court also noted the general principle stated in section 1C of FSMA that consumers should take responsibility for their investment decisions (as reflected in the contract between the parties) as being relevant in this context.
Some interesting observations were made in this case on the status of FCA publications as formal “guidance.”
The FCA is entitled under section 139A of FSMA to issue guidance: “with respect to… any rules made by the FCA”. FCA guidance is set out in the handbook (marked “G”) alongside the rules (marked “R”) to which it relates. Under GEN 2.2.2G of the FCA Handbook: “The guidance given on the purpose of a provision is intended as an explanation to assist readers of the Handbook. As such, guidance may assist the reader in assessing the purpose of the provision, but it should not be taken as a complete or definitive explanation of a provision’s purpose.” Breach of FCA guidance is, however, generally regarded as strong evidence of a breach of the rule to which it relates.
The Court discussed the status of certain FCA conclusions that were published in a 2009 SIPP Thematic Review Report, including their conclusion that: “some SIPP operators have not been taking basic measures such as checking, on an ongoing basis, that advisers who introduce clients to them are FSA authorised and have the appropriate permissions.” While this statement relates to due diligence and falls short of requiring SIPP providers to give investment advice, the Court in any event found that the statement did not constitute formal guidance (within the meaning of section 139A of FSMA) nor was it a proper aid by which to interpret the COBS rules; the statement did not therefore provide any basis for a claim for failing to follow it. The Claimant also referred to FCA reports, guidance and alerts issued after the Claimant invested, which the Court found could have no direct bearing on the case.[3] The finding that the FCA’s conclusions in its Thematic Review Report did not constitute guidance or rules may be of broader relevance to the interpretation of FCA statements published outside its rulebook.
In any event, any alleged breach of COBS 2.1.1R could not be said to have caused the Claimant loss because, in the Court’s view, the Claimant’s evidence pointed towards a conclusion that he would have proceeded with the investment anyway. The FCA rules claim, therefore, failed at each stage.
The Claimant alleged that the Defendant was a joint tortfeasor in respect of CLP’s allegedly negligent advice to the Claimant.
The Court held that mere facilitation of a tort will not suffice to impose joint liability. The three limbed test set out in Fish & Fish Ltd v Sea Shepherd U.K. [2015] UKSC 1 must be satisfied. The Court found that none of the three limbs was met, as follows:
In any event, the claim would have failed on causation grounds for the same reason that the COBS claim failed.
The FCA intervened and made its own submissions about the interpretation of FSMA, COBS and the RAO. The positions it took, as reflected in its submissions, and the Court’s treatment of them, may be of interest to regulated firms. It is particularly unusual that the Court did not accept a number of propositions made by the FCA in the case.
The FCA submitted that a “but for” causation test was sufficient for the purpose of section 27 of FSMA and that the activities carried out by CLP fell within the regulated activities of arranging or advising on investments. As described above, the Court rejected these submissions.
The Court also disagreed with the FCA’s submission that, even where a SIPP firm provides services on an “execution-only” basis, COBS 2.1.1R imposes a duty of care on the firm to ensure that the underlying investment is not of a kind that is inappropriate for SIPP investment at all or for any SIPP investment by a retail customer who is not known to have received independent regulated advice about the investment. As noted above, Carey’s very limited role under the contract delimited the scope of COBS in this case, such that the obligations referred to by the FCA did not arise.
The judgment is likely to be belated but welcome news for SIPP providers with a non-advisory business model, who are concerned about complaints or claims from retail investors in the context of the present economic downturn, and especially where losses have arisen on higher-risk pension investments.
More broadly, the judgment follows more than a decade in which the SIPP industry has adapted to the transformative changes to the SIPP regime enacted in 2007, which permitted investment into a wider variety of investments and asset classes (prior to the changes, SIPP investments could be made only into asset classes pre-approved by HMRC) and a corresponding increase in SIPP popularity with retail investors.
Indeed, that move could be seen as part of a broader trend over the past decade to increase investor choice and promote competition by removing statutory and regulatory barriers that limited investor choice or their ability to switch operators.[4] These changes have undoubtedly, on the one hand, led to greater flexibility and investment choice for investors and, on the other, encouraged the entry of smaller and more innovative regulated firms providing competition for relevant financial services. However, to a greater degree than under the prior regimes, less sophisticated investors run the risk of losing their savings through 1) investments in inherently risky products to which the barriers have been removed and 2) falling prey to fraudsters taking advantage of the more liberal investment rules and the grey areas in which certain unregulated introducers operate. Payouts for failures of SIPP provider firms by the Financial Services Compensation Scheme are on the rise, as are SIPP-related payouts in general[5]. This case does not involve any failure by the SIPP provider, but is a good example of the risks that can arise if investors direct that their pension savings be placed into high-risk or illiquid investments, and the lack of comfort that should be taken from the placement of such investments in a SIPP wrapper.
Therefore, against that background, this judgment may serve as a stark reminder to retail investors: where they choose to invest in high-risk products through government-approved SIPPs, they will generally have to take responsibility for their own investment decisions by undertaking appropriate due diligence or seeking independent investment advice. The Financial Services Compensation Scheme may step in, where cases of firm failure of the SIPP provider (e.g. due to insolvency or fraud) arise, but this does not cover most kinds of investment losses. Where in doubt, investors should consider seeking out a reputable FCA-regulated financial advisor if they are concerned about the risks of particular investments.
That being said, the impact of Adams should not be overstated, because it is to a degree, fact-specific. Other claimants who have suffered losses on SIPP products might be able to distinguish their claims from Adams by, for example, framing them more around the SIPP provider’s systems and controls and the firm’s own due diligence on the underlying investment (for example, due diligence as to the investment’s compatibility with the SIPP scheme rules or where the investment is fraudulent[6]).
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