Self-invested personal pension providers are likely to no longer permit non-standard investments in the wake of the Berkeley Burke court ruling, it has been claimed.
The case saw Berkeley Burke fight a decision from 2014, in which the Financial Ombudsman Service ruled the Sipp provider had to compensate a client after it failed to carry out adviser-style due diligence on his investment.
Last week's dismissal means the ombudsman's ruling stands, though it is now open to appeal by Berkeley Burke.
In his ruling, Mr Justice Jacobs listed four instances when he felt a Sipp operator should intervene;
1) when the proposed investment is not eligible for the tax benefits of being put in a Sipp.
2) when the rules on what can be put into a Sipp change.
3) when the provider receives information which casts doubt on the integrity of those promoting the investment.
4) when the Sipp provider has learnt of problems, such as a possible insolvency, which affect the proposed investment.
Martin Tilley, director of technical services at Dentons, said providers were likely to step away from allowing non-standard investments in Sipps, following in the footsteps of James Hay, which stopped accepting non-standard investments in May 2017.
He said: "Loans to unconnected third parties and intellectual property are also assets accepted by only a few providers who themselves will also have to consider their future business strategy.
"I think there will remain some financially strong providers with robust due diligence processes in place. Numbers will be fewer.
"But with the potential for 'retrospective judgements' on due diligence processes, the pack would appear to be stacked against those providers."
Mr Tilley also warned providers may continue to accept certain types of assets, but force investors to pay more to cover the significant due diligence they will have to carry out.
But Tobias Haynes, a solicitor at FS Legal, warned against taking "as gospel" that the four scenarios listed in the judgement was an exhaustive list of when providers must look more closely at an investment.
He said Mr Justice Jacob's list should be taken as examples of when greater due diligence is needed instead.
He said: "This fits with the broadness of a principles-based regulatory regime – not to prescribe all possible scenarios.
"The question of due diligence is therefore likely to involve a factual analysis in each case, with reference to the FCA's principles; [the judge's] decision however highlights that Sipp providers ought always have been wary of, and taken extra care in respect of, instances where investments were potentially illegitimate or fraudulent."
Glyn Taylor, financial mis-selling solicitor at Anthony Philip James & Co, said: "My understanding is that the level of investigation and inquiry will depend upon the nature of the investment.
"Therefore a high risk unregulated investment will require a greater level of due diligence than a FTSE 100 investment, where the level of inquiry would be proportionate with the lower risk associated with a standard investment.
"Once a red flag is raised on the type of investment, there is then a duty to investigate the investment to a higher level to avoid consumer detriment, assessing things like risk of insolvency.
"This would also apply to investments of a similar type to the specific one that had been flagged.
"If the information on an investment type being high risk is in the public domain, providers would not be able to claim ignorance and reduce their liability by avoiding doing additional due diligence."
The issue in the Berkeley Burke case stems from client Wayne Charlton bringing a complaint to the Fos in respect of the loss of his personal pension which he had invested in a Sipp administered by Berkeley Burke in 2011.
The investments in the Sipp included an interest in Sustainable AgroEnergy PLC, a company which purported to extract biofuel from trees grown in Cambodia.
In 2012 Sustainable AgroEnergy PLC entered receivership following intervention by the Serious Fraud Office as part of a criminal investigation.
Berkeley Burke maintained it had not given any advice to Wayne Charlton and said it intended to seek judicial review of the ombudsman's decision.
An initial decision by the Fos upholding the complaint had conflicted with a decision previously provided by the Pensions Ombudsman which had similar facts.
Berkeley Burke had argued the Fos had erred in law by finding the firm had not been required to execute Mr. Charlton's specific instructions in accordance with Cobs rules and by failing to follow previous decisions of the Pensions Ombudsman.
The case was heard in the High Court over three days earlier this month. The judge ultimately ruled the Fos was right in considering the merits of the case independently of previous cases heard by other ombudsmen.
He also said the Fos was right in its interpretation of FCA rules and principles to come to its decision of what is 'fair and reasonable'.
A judgement is still pending on the Carey case, where the judge is considering the same issue of due diligence.
A spokesman for James Hay said: "We undertake appropriate due diligence consistent with regulatory requirements and guidance. Our approach to due diligence remains under continuous review and we will take into account industry best practice and other developments including FOS adjudications and court decisions.
"It’s important to note that we stopped accepting new non-standard investments in 2017."
damian.fantato@ft.com
