Russell Adams v Carey Pensions UK LLP

Summary

The High Court has handed down its long-awaited judgment in this matter, finding in favour of the self-invested personal pension (SIPP) administrator, Carey Pensions (Carey). The decision will be of interest to those in the SIPP industry, and also to regulated firms which do business with private persons and /or on an execution only basis.

Facts

Mr Adams’ claim related to his decision to invest his pension into a high risk non-standard investment via an execution-only SIPP held with Carey. Mr Adams said that he transferred his pension to the SIPP and made the investment because of advice he received from an unregulated introducer firm, CLP Brokers (CLP). The investment performed poorly, and Mr Adams sued Carey to try to recover the value of his pension. He raised three grounds:

• a breach of s27 of the Financial Services and Markets Act (“FSMA”) 2000. s27 gives the Court a discretion to unwind an agreement if an authorised person (Carey) enters into that agreement with a client (Adams) on the basis of something said or done by an unauthorised person wrongly performing an authorised activity (eg CLP giving advice);

• a breach by Carey of FCA COBS Rules when accepting his execution-only business to open the SIPP and invest into the high-risk investment; and/or

• that Carey was vicariously liable for CLP’s negligent advice to Mr Adams about the investment, because it was in a joint enterprise with CLP.

Decision

All three of Mr Adam’s claims failed.

Section 27 FMSA claim: Mr Adam’s claim under s27 was dismissed because the agreement in question was the establishment of the SIPP itself, and CLP was not performing a regulated activity in relation to the creation of his SIPP. While CLP may have been recommending the underlying investment, CLP was not arranging or advising about (as the relevant regulation requires) opening the SIPP – at most, CLP was introducing Mr Adams to Carey, and “steering” an investor to a specific SIPP provider was not enough to meet the test. It was also relevant that Mr Adam’s instruction to Carey to invest occurred after the SIPP had been established and therefore after CLP’s involvement had ceased. Further, even if there had been a breach of s27, the Court would not have exercised its discretion to unwind the agreement, because Carey did not know CLP was wrongly performing a regulated activity: Carey had robust processes in place to satisfy itself that CLP was not doing so, and was entitled to assume its system was working.

COBS: The only applicable Rule was that Carey was to act honestly, fairly and professionally and in accordance with the best interest of its client (COBS 2.1.1). Mr Adams said that Carey did not act in his best interests, as it should have had a system in place to protect him (and thus have rejected his application to open a SIPP) when he sought to make an unsuitable investment, via an unsuitable introducer. However, the Court found that COBS 2.1.1 did not impose any such duty on Carey as an execution-only provider: there was a plain inconsistency between what Mr Adams now said Carey should have done, and the terms of his contract with Carey. Carey’s due diligence on the investment itself (which was to check that it was legitimate, and met HRMC requirements), was also appropriate. On the evidence before the Court, the Judge decided that Mr Adams knew the investment was high-risk and went ahead anyway, and that he should take responsibility for his decision and its consequences.

Joint Enterprise: the Court found that even if CLP had made a negligent mis-statement Carey did not know CLP was giving advice, and the parties did not have a common design, so there was no joint enterprise and no vicarious liability.

What does this mean for the SIPP industry?

Overall, while the case is to an extent fact specific, it is likely to be more difficult for execution-only SIPP clients to succeed with claims against SIPP providers based on a breach of s27 FSMA, COBs or a joint enterprise with the introducer. A further thread running through the decision is that consumers who choose to do business on an execution-only basis, and are aware they are making a high-risk investment, should take responsibility for those choices; and the Court also provides some welcome clarification on the interpretation and application of relevant COBS Rules and the FSMA provision.

However, we can expect that SIPP clients whose pension investments have underperformed may still seek to distinguish their situation from Mr Adams’, and may also turn to alternative grounds of claim, such asserting a lack of due diligence by the SIPP provider on the underlying investment itself. Mr Adams may also appeal (especially because the judgment has taken over 2 years to be issued, for reasons not explained in the judgment).

A large number of FOS complaints (or claims to FSCS, where providers are now insolvent) are understood to have been effectively “on hold” pending this judgment. The judgment will, in general terms, be unhelpful to those bringing such complaints or claims, particularly where the contracts contain equivalent provisions to those upheld in Carey Pensions. If there is an appeal, that can be expected to take at least a year, so a decision will have to be made by FOS and FSCS as to whether to progress the existing backlog of complaints or claims and on what basis.

Other noteworthy points

The Court’s findings also have a broader relevance for all regulated firms who perform execution-only business with private persons. It was a notable feature of the case that the FCA intervened at a late stage as a non-party and provided submissions in writing and orally at trial about the interpretation of COBS, FSMA and the Regulated Activities Order. The Court’s treatment of those submissions will be of interest to firms.

The FCA submitted that COBS 2.1.1 imposed certain duties on a firm to ensure the appropriateness of underlying investments, even where that firm is providing services on an executory or non-advised basis. It also submitted that the requirements in COBS could not be read down by reference to the parties’ contract. The Court disagreed and found, while it was correct that the provisions of COBS could not be excluded by contract, that did not mean that the contract was irrelevant when considering COBS and their application. On the contrary, in determining the scope of a firm’s obligations and duties to its customer under COBS in any given case, the starting point must be the relevant contract, and the regulatory regime was not intended to take precedence over that contract. The regulatory obligations should therefore be read in light of what the contract says and any other relevant factual context (which in this case included the fact that the relationship was execution-only; and the general principle that consumers should take responsibility for their own decisions, for example).

The Court also rejected Mr Adams’ position that the FCA’s 2009 “Thematic Review” document relating to SIPPS reflected a list of binding requirements that a provider had to follow. Subject to successful appeal, this serves as a welcome confirmation that non-compliance with FCA publications that do not amount to COBS Rules should not be actionable by a private person under FSMA.

Finally, regarding the s.27 claim, the FCA supported the claimant’s position that the activities carried out by CLP fell within the regulated activities of arranging or advising on investments. In the case of the former, the FCA argued that the simple “but for” test should be used for determining a causal link between the act of arranging and any subsequent transaction. The Court disagreed with the FCA on these points, and in relation to the causative link required for “arranging deals in investments”, found that the arrangements have to be a positive or effective cause, not merely a set of circumstances which may be no more than the context in which the transaction eventuates.

These general findings of principle reaffirm the Court’s approach to interventions by the executive function on matters of construction: the Courts will apply the ordinary rules of statutory interpretation, even where that outcome contradicts submissions made by a regulator about what its regulations mean. The case also provides useful guidance about the extent of the regulatory duty imposed by COBS 2.1.1, particularly in relation to firms providing execution-only services.