Adams SIPPs from the cup of victory

Summary

The Court of Appeal has overturned the High Court’s judgment (summarised in our article here) and found that, under s27 FSMA, Mr Carey’s regulated Self-Invested Personal Pension (SIPP) provider was responsible for his dealings with an unregulated introducer who illegally performed a regulated activity in advising him to open his SIPP, entitling him to compensation from the SIPP.

The judgment has potentially wide-ranging and significant implications not only for SIPP providers, but for all FCA-regulated entities who deal with unregulated introducers to establish investments for clients on an execution-only basis.

The SIPP provider has applied for permission to appeal to the Supreme Court, and the industry will be watching further developments with interest.

Facts

Mr Adams’ claim related to his decision to invest his pension in a high risk and unregulated investment via a SIPP that he opened with Carey Pensions (now Options SIPP) (Carey) on an execution-only basis (ie Carey did not give him any advice).

Mr Adams said that he transferred his pension from his previous provider 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 recover the value of his pension. Mr Adams’ main arguments were that:

• pursuant to s27 FSMA the SIPP agreement was unenforceable and he was entitled to compensation from Careys as a regulated entity, because CLP was unregulated but had been illegally performing a regulated activity (either "arranging" or "advising on" his transfer to and investment in the SIPP); and
• in accepting his SIPP application etc, Carey had breached the FCA's Conduct of Business Sourcebook COBS 2.1.1R, which required it to act honestly, fairly, and professionally in accordance with the best interests of its client (The COBS Claim).

The High Court dismissed Mr Adams' claim on both counts, finding in relation to the s27 FSMA claim that CLP had not advised on or arranged the underlying investments. The Judge also found that COBS 2.1.1R did not impose a duty on an execution-only SIPP provider to give advice of the risks of an underlying investment.

In short, the High Court considered that Mr Adams knew the investment was high-risk and went ahead anyway, and so he should take responsibility for his decision and its consequences. The Court of Appeal has in effect swung the other way and found that the SIPP provider ought to have protected Mr Adams from his decision and its consequences.

Appeal

Mr Adams appealed the Judge’s findings in relation to both the s27 FSMA claim and the COBS claim. In a decision with mixed implications for the industry, the Court of Appeal has overturned the decision on s27 FSMA, but upheld the findings regarding the COBS claim.

The Section 27 Claim

"Was CLP performing the regulated activity of "advising" or "arranging"?"

The Court of Appeal took a holistic approach to the question of whether CLP’s actions constituted "advising" (such that it was performing a regulated activity when it had no permission to do so).

First, the Court found that the simple giving of information without any comment would not amount to "advice". However, the provision of information formed by a selection process and a value judgment that would tend to influence the recipient's decision was capable of constituting advice. "Advice" did not necessarily have to apply to one product or asset, but could relate to a number of "particular investments".

In contrast to the High Court, the Court of Appeal in effect found that it was sufficient that CLP had advised and encouraged Mr Adams to open an execution-only SIPP itself (being a regulated security), even though the underlying investments themselves might be unregulated (such that advising upon those investments was not a regulated activity). In particular, CLP had encouraged Mr Adams to sell his previous pension plan and to transfer the proceeds into a Carey SIPP, and further, steering an investor in the direction of a specific SIPP provider was found to be capable of being advice on the merits of particular investment(s) offered via that SIPP.

The Court therefore concluded that CLP’s recommendation for Mr Adams to invest in the underlying investment could only have been achieved by transferring out of his previous pension plan and into the SIPP. Therefore, in proposing that he transferred to the SIPP itself, CLP was found to have given advice on a regulated product in breach of the general prohibition on unregulated persons doing so.

Similarly, the Court of Appeal adopted a wider approach in relation to the definition of "arranging" than the High Court. Whether "arrangements" are said to meet the relevant test of "bringing about" a transaction is not to be simply judged on a "but for" test, but neither is a "direct" connection inevitably required. The Court of Appeal found that CLP, in authorising the SIPP to liaise with it on Mr Adams’ behalf, in completing Mr Adams’ application and in performing AML checks on him, had “arranged” for Mr Adams to transfer into the SIPP.

"SIPP provider not absolved by exercise of Court’s discretion"

Even if there has been a breach of s27 FSMA, the Court effectively retains a wide discretion, under s28 of that Act, to order that there be no relief for a claimant if it is satisfied that it is just and equitable in the circumstances of the case not to do so. In considering whether to exercise that discretion, the Court is to have regard to whether the regulated provider knew that the unregulated person was acting illegally in performing a regulated activity.

The Court of Appeal has confirmed that this this test requires identifying actual knowledge, rather than also including facts a 'party should have known'.

Carey argued that it did not know CLP was performing regulated activities, and on the contrary had processes in place to ensure it did not do so, such that the Court should exercise its discretion in Carey’s favour. Relevantly, Carey’s Terms of Business with CLP expressly prohibited CLP from offering advice on SIPP investments, and Mr Adams had also expressly warranted to Carey in his on-boarding documents that he had not received any advice from CLP and was responsible for his own investment decisions. Carey had also informed Mr Adams that he should seek regulated IFA advice about his investment and Mr Adams in fact represented in his on-boarding documents that he had done so. Mr Adams also did not inform Carey that he had been paid an incentive by CLP under a cashback scheme for deciding to invest.

It is, in our view, difficult to see what further protections Carey could have attempted to put in place. However, despite acknowledging Carey’s position, and finding that Carey did not have actual knowledge of CLP’s breaches of FSMA, the Court did not exercise its discretion under s28, and found that the SIPP agreement was void and that Carey was liable to compensate Mr Adams. It cited the following reasons for this decision:

• a key aim of FSMA is consumer protection and to “safeguard consumers from their own folly”;
• section 27 of FSMA was designed to transfer the risks associated with accepting introductions from unregulated sources onto the regulated providers;
• the underlying investment was high-risk and non-standard, in which around 580 of Carey’s clients had invested, most of whom had been introduced by CLP and were assumed not to be financially sophisticated;
• Carey was aware that CLP was receiving a commission from the underlying investment (although not in the amounts that it was actually making from Mr Adams' investment); and
• Carey had actioned the transfer of Mr Adams' pension to it, even though it had terminated its relationship with CLP the day before due to concerns relating to CLP’s conduct.

The COBS Claim

The Court dismissed Mr Adams’ appeal on the COBS Claim. It found that, in his grounds of appeal, Mr Adams was seeking to advance a case on appeal that was radically different to that found in his pleadings and which Carey could be expected to have met at trial. In addition, the Court commented that, in any case, Mr Adams might have struggled to overcome the first instance Judge’s finding that any breach of duty did not cause his loss in this case.

The High Court’s judgment therefore remains the leading authority on the expectations on execution-only SIPP providers under COBS 2.1.1.

Remedy?

The Court of Appeal did not make a finding on the nature or quantum of the compensation payable to Mr Adams regarding the breach of s27 FSMA, which was deferred for consideration at a later hearing, or agreement between the parties. This therefore leaves some uncertainty as to what the potential remedy in such cases might be.

Implications

The judgment, while clearly relevant to potential complaints against SIPP providers who offered execution-only business via unregulated introducers, may also have far wider implications for any FCA-regulated entities who deal with unregulated providers, given the relatively broad findings about the operation of both s27 and s28 FSMA.

The Court of Appeal has signalled a focus on regulated entities being responsible for protecting consumers from the consequences of their poor decisions. Strong terms and conditions, such as Carey had in this case, may very well not offer any protection for regulated entities from the risks of dealing with unregulated persons, even if the regulated firm has acted entirely appropriately itself.

While the outcome of any Supreme Court process is awaited, regulated firms who deal with unregulated providers may wish to review their policies and contract terms for both with such parties, and with clients who are introduced through them, to ensure they are as strong as is possible. Firms may even wish to consider carefully whether or on what basis it may be appropriate to deal with such unregulated providers in future at all.