The impact of Carey pensions case on the Sipp market

Following the judgment, apparently, the Financial Conduct Authority has been quoted as saying that Sipp operators must continue to follow the guidance issued in its ‘Dear CEO’ letter of July 2014.

This guidance stated that in undertaking due diligence on NSIs, operators should assess if “assets allowed into a scheme are appropriate for a pension scheme”. But what is ‘appropriate’ has never been defined.

In considering the recent judgment, it is important to understand the circumstances of the case.

The FCA has consistently balked at defining what is a “suitable” or “appropriate” investment

It involved a high-risk investment – a store pod arrangement that was not a fraud or scam – on an execution-only basis with the involvement of an unregulated introducer and with an inducement offered to the investor.

Drawing conclusions that might apply to future cases without all these features is dangerous. 

The Berkeley Burke case

Comparisons have been made with the Berkeley Burke ruling in 2018. This case was different in that it dealt with a judicial review by Berkeley Burke Sipp Administration against a Financial Ombudsman Service decision.

The Sipp investment involved was made in 2011 and was an unregulated ‘green oil’ property scheme in Cambodia offered by Sustainable AgroEnergy. The claimant, who was introduced to BBSA by an unregulated introducer, lost all of his investment as it turned out to be fraudulent.

Key Points

• The recent case regarding Carey Pensions will have a big impact on the Sipp sector
• The judge appeared to disagree with the FCA's stance on Sipp operators
• It may also have an impact on Fos rulings

Importantly, the criteria used by the Fos in its determinations is what is “fair and reasonable in all the circumstances of the case”. This is different from a court of law. 

The Carey Pensions judgment confirmed that there was no obligation on the Sipp operator to refuse to accept high-risk investments into an execution-only Sipp or to consider the suitability of those investments.

A significant part of the ruling concerned the impact of regulation and specifically the FCA’s Conduct of Business Sourcebook on contractual terms. This is potentially the most critical and, for some, surprising aspect of the judgment.

Cobs rules

In its deposition to the court in the Carey Pensions case, the FCA argued that what is required under the Cobs rules 2.1.1R “depends on what function the firm (operator) actually carries out”.

But it also argued that if there is any inconsistency between the obligations in the Cobs rules and the contractual terms the duties implied by Cobs should prevail.

The judge did not agree and was clear that the execution-only agreement between the operator and the client was crucial and that regulatory requirements did not override the contract under which the investor took responsibility for their decisions.

It is this aspect that may have the biggest impact.

Due diligence 

On the issue of investment due diligence, it is important to note that inadequacies in this regard were not part of the claim against Carey Pensions.

However, from Carey’s evidence it was very clear that it had focused entirely on due diligence from an HM Revenue & Customs standpoint.

The judge rejected the argument that the investment due diligence was inadequate and tellingly also quoted from a then FSA letter to Carey Pensions in 2011 following a visit that highlighted the “robust processes” that Carey Pensions had in place “to ensure that customers are treated fairly”.

The judge was also quite dismissive of the argument that the guidance provided by the FSA/FCA in its thematic reviews should be viewed in the same light as the Cobs rules and said the guidance “cannot give rise to a claim for failing to follow the suggestions which it makes”.  

Future of Sipps

So where does this leave the Sipp market?

Both the Carey Pensions case and the Berkeley Burke case deal with events that took place more than eight years ago.

The issues raised do not necessarily apply to future investments within Sipps. However, it is important now that the FCA engage with Sipp operators and the advice community to clarify matters.

The FCA has consistently balked at defining what is a “suitable” or “appropriate” investment.

Perhaps now it will accept that such a definition would be helpful.

Some time ago I suggested that a simple approach would be to limit the availability of NSIs to ‘sophisticated investors’ or ‘high-net-worth individuals’ – similar to the regime applicable to Ucis.

‘Standard’ investments should be deemed appropriate for all. I also believe some more detailed guidance on the due diligence requirements would be helpful. Under my proposal that would only be needed for NSIs.

Of course, these proposals would not help solve the problems of the past.

Shortly before the Carey judgment was published a claims management company brought a complaint against Carey Pensions to the Fos. The circumstances of the Fos determination (decision reference 2076425 April 8 2020 Mr. T v Carey Pensions) were very similar to the Adams case, and yet the Fos found in favour of Mr T on the basis of the “fair and reasonable” criteria. 

Reading the Fos determination the conclusions reached in a number of areas were at odds with the judge’s comments in the Adams case. I can only conclude that in reaching their determination the Fos concluded that regulatory requirements did override the contract terms.

 I am also concerned the Fos has been judging Sipp providers with the benefit of hindsight, ignoring the applicable law and industry practice at the time the events occurred.

CMCs

All of this leads me to conclude that CMCs, who have been actively encouraging multiple Sipp claims, will look to avoid courts of law and instead seek increasing numbers of Fos determinations where as mentioned above the criteria are different and less demanding.

The prospects of multiple Fos claims have already pushed more than one Sipp provider into administration and I fear more will follow despite this judgment.

That in turn is likely to put further demands on the Financial Services Compensation Scheme.

Recently Liberty Sipp has gone into administration apparently on the back of the weight of the potential Fos claims. Interestingly, in April, I noted on the FSCS website regarding Liberty the following warning: “For FSCS to be able to pay your claim we must prove that Liberty Sipp Ltd failed in its due diligence – in other words, did Liberty Sipp Ltd do certain checks on the non-standard investments that would hold their customers’ pension funds before accepting them into its Sipp investment portfolio?

“Did it make sure they were appropriate for a Sipp, and did it identify any potential issues with them? Also, if it did identify potential issues, did it tell the customer?”

How does that square with the Carey judgment?

It appears to me that the FCA may have found it convenient for CMCs to pursue providers via the Fos and then the FSCS, so that the whole industry, including the adviser community, ends up paying.

It will be interesting to see if in future determinations the Fos reassesses what is “fair and reasonable”.

However, much will depend on the outcome of the expected appeal in the Adams case.  

Watch this space.

John Moret is principal of MoretoSipps