The Carey decision has taken the self-invested personal pension industry on a rollercoaster ride with diametrically opposed decisions between the High Court and the Court of Appeal.
The refusal means the Sipp industry should now revisit and carefully reflect on the Court of Appeal’s decision and what it means for the industry and regulated businesses more generally.
A long-running saga
The facts of the long-running proceedings are by now well-known.
Looking to release cash from his pension, on a recommendation from Spain-based introducer CLP Brokers Sociedad Limitada, Russell Adams transferred his Friends Life pension pot into a Sipp administered by Carey Pensions UK LLP, and instructed Carey to invest his fund into unregulated investments (leases of store pods), which performed very poorly.
Adams brought proceedings in March 2015 against Carey, which is regulated by the Financial Conduct Authority, to recover the losses on his investment.
Adams claimed that:
- There had been a breach of section 27 of the Financial Services and Markets Act 2000 that rendered the Carey Sipp agreement unenforceable;
- That Carey had breached its duty under Cobs 2.1.1R to act “honestly, fairly and professionally in the best interests of the client"; and
- That Carey shared responsibility for CLP’s negligent advice as a joint tortfeasor.
In a judgment issued some 26 months after the proceedings in the High Court, Judge Dight found for Carey, rejecting all three of Adams' arguments.
Sipp providers must note that they bear the risk in their arrangements with unregulated introducers.Leave to appeal was then granted to Adams on the first two points. Adams’ allegation of a breach by Carey of its obligation under COBS 2.1.1R failed, as the Court of Appeal found that he was trying to raise broader allegations on appeal than had been relied on in the original hearing.
However, the Court of Appeal unanimously found for Adams that there had been a breach of section 27.
Breach of section 27 entitles the non-FCA-authorised person to recover money paid under the agreement and to seek compensation for loss.
Breach of section 27
Adams had argued that his Sipp arrangements with Carey came about as a result of CLP carrying out the regulated activities of advising on investments and arranging deals in investments.
Section 27 of FSMA can render an agreement unenforceable if the agreement comes about as a result of an unauthorised third party carrying on regulated activities. CLP was the unauthorised third party in this case, bringing about the arrangements between Adams and Carey.
Adams argued that CLP’s unauthorised advising and arranging activities breached section 27, with the result that Carey could not enforce the Sipp arrangements with Adams.
In weighing Adams’ argument, the Court of Appeal first had to consider what amounts to 'advice' and whether CLP provided regulated investment advice for FSMA purposes.
While Adams’ Friends Life policy and the Carey Sipp were regulated investments, the investment in store pods was not. Did the fact that CLP advised on unregulated investments mean that it did not give regulated advice?
The court agreed that advice on an unregulated investment could form part of a "single braided stream of advice" where the unregulated investment could only be bought by selling a regulated investment.
Businesses should bear in mind the court’s emphasis on the consumer protection aims of FSMA. Similarly, if an unregulated investment were recommended, when that investment could only be acquired by means of a particular investment vehicle (such as a Sipp), then that could be seen as advice that the particular vehicle be used. In Adams’ case, the advice to switch to the Carey Sipp was part and parcel of the advice to invest in the store pods.
As to whether CLP was carrying on the regulated activity of arranging, among other things CLP had procured a necessary letter of authority, undertaken anti-money-laundering investigations, and completed the Carey Sipp application form for Adams to sign.
The Court held that these actions played a significant role and had “sufficient causal potency” to be able to be said to have brought about Adams’ arrangements with Carey. CLP’s actions were therefore in breach of section 27.
Section 28
Section 28 of FSMA provides a discretion to the court to uphold an agreement that has resulted from a breach of section 27, if it is “just and equitable in the circumstances”.
The court declined to uphold the arrangements, for a number of reasons. These included:
- One of the aims of FSMA is consumer protection, including that customers should be protected even against their own “folly”.
- Section 27 of FSMA throws the risk of dealing with unregulated introducers onto providers.
- The volume of introductions from CLP meant that Carey should have been on notice of the danger that CLP was recommending clients invest in high-risk, non-standard investments (that is, the store pods) via Carey Sipps.
- Carey terminated its relationship with CLP after it became aware that CLP was receiving commission from the store pods manufacturer; that CLP was offering customers cash back on their investments; and that the FCA had issued a warning notice about one of CLP's directors.
- Despite terminating the CLP relationship, Carey went ahead and allowed Adams (and other ‘pipeline’ customers who had already been introduced by CLP) to proceed with the store pods investment.
Key takeaways for the industry
1. The fact there will be no further appeal from the Carey judgment may result in more Financial Ombudsman Service decisions that Sipp providers are liable in cases where they are deemed not to have carried out sufficient due diligence on unregulated introducers.
2. Sipp providers must note that they bear the risk in their arrangements with unregulated introducers. The Court of Appeal’s approach has since been followed in the case of Financial Conduct Authority v Avacade Ltd and others (2021), which adds further weight to the question of commercial risks for businesses using unregulated introducers.
3. Carey had made every effort to ensure its introducer agreement and member declaration were tightly drafted, but agreements may still be held unenforceable under section 27 of FSMA despite careful documentation.
4. The Court of Appeal judgment disagreed with the High Court’s reasoning as to the extent to which Adams should bear responsibility for his own decisions (given his motivation to receive a cash payment on making the store pod investment). Businesses should bear in mind the court’s emphasis on the consumer protection aims of FSMA.
5. Encouraging a member to transfer into or out of a Sipp in order to make an unregulated investment may amount to regulated advice.
6. Businesses should consider tailoring their product monitoring to catch the type of red flags the Court of Appeal considered Carey should have been aware of. The incoming consumer duty will be an opportunity for businesses to enhance their monitoring capability, including the tracking of regulatory announcements and warnings.
7. Since the Supreme Court declined to hear an appeal, the High Court’s findings on COBS 2.1.1R remain good law.
Noline Matemera is a partner at law firm TLT
