Some self-invested personal pension providers will be contemplating the closure of their business following the recent High Court judgment involving the Sipp provider Berkeley Burke.
The judgment has been well reported, but essentially Berkeley Burke appealed a final decision by the Financial Ombudsman Service in favour of an investor, Mr Wayne Charlton, who in 2011 made an investment via a Berkeley Burke Sipp in a ‘green oil’ scheme in Cambodia, which turned out to be a huge scam.
The ombudsman, while agreeing that it was not the provider’s responsibility to ensure the suitability of the investment, concluded that Berkeley Burke had not acted with due skill, care and diligence in accepting ‘green oil’.
The judgment also confirmed Fos was correct in not necessarily following previous precedents set by the Pensions Ombudsman as the two organisations had different statutory frameworks for reaching their decisions. Basically, Fos uses a “fair and reasonable” test, whereas Pos determinations are based on matters of fact and law.
Pos deals with administration and management issues and it seems possible that it would have reached a different decision with regard to the due diligence requirements – as in previous cases it has taken into account industry practice at the time.
There seems to be a need for greater clarity over claims of this type as there is a risk of regulatory arbitrage, with individual investors and their legal advisers approaching Fos or the courts, rather than Pos.
The judgment in favour of Fos was not a total surprise. But the implications of the decision – particularly a Sipp provider’s historic regulatory responsibilities regarding the undertaking of due diligence on investments – are significant.
What has caused jitters among Sipp providers is the chief executive letter sent to all Sipp operators by the Financial Conduct Authority. This was sent concurrently with the judgment being published – suggesting the FCA either had advance knowledge of the decision or was confident in the outcome. Given the judgment is to be appealed, the letter seems to be a little premature.
The letter emphasises that the FCA considers “investment due diligence” requirements have applied since the operation of Sipps was first regulated in April 2007. It stresses that Sipp operators should consider the implications of this and it goes on to talk in some detail about the possibility of some businesses having to be sold and the need to communicate any such intentions to the FCA at an early stage.
The letter ends by warning any senior managers involved in such matters abouttheir behaviour.
The letter seems to be an open invitation to “claims chasers” to lodge claims relating to any investment that has underperformed or failed since 2007. As the FCA must know, the majority of Sipp providers did not have any formal due diligence procedures for vetting investments in place untilafter their first thematic review in 2009.