In a 63-page decision issued this month, the Fos found Rowanmoor had failed to verify the integrity of an introducer firm it worked with on hundreds of high-risk self-invested personal pension investments.
It said Rowanmoor should have spotted warning signs sooner that the regulated advice firm, CIB Life and Pensions Limited, was not giving its clients the full advice it had purported to.
Failure to do this resulted in client Mr T losing his occupational pension savings on an unregulated offshore property deal.
The Fos told Rowanmoor to drum up the cash needed to compensate the client fully, as well as take ownership of the investment so the Sipp can be closed and further fees prevented.
The investment - Cape Verde-based The Resort Group - had been sold to clients in combination with Rowanmoor Sipps by regulated advice firm CIB Life and Pensions Limited and its appointed representative RealSipp.
The Fos said Rowanmoor had received 1,387 introductions from CIB, which accounted for 26.9 per cent of all business received by the provider between 2009 and 2013. A quarter of these cases involved occupational pension transfers.
A spokesperson said the Fos was currently handling 886 complaints against Rowanmoor that involve due diligence. Of those, 548 involve The Resort Group.
It has said the case involving Mr T was a "sample case" which Rowanmoor should use in handling other complaints on this matter.
CIB is also named on more than 1,000 claims at the Financial Services Compensation Scheme, which also mention TRG.
The FSCS already awarded Mr T £50,000 in compensation in 2017, putting his losses at £90,000 at the time. He will be expected to pay this back using his Fos award.
The Fos found Rowanmoor was not responsible for giving advice to its client, but it did have a responsibility to carry out sufficient due diligence on CIB before accepting business from it.
It found Rowanmoor had known of potential issues with CIB's advice, having previously worked with the introducer on Harlequin cases.
It had carried out some limited due diligence on CIB and kept records of the type and volume of introductions it was receiving. But crucially, it had not used this information to investigate or prevent further sales.
Ombudsman Ross Hammond said: "By the time of Mr T’s application, Rowanmoor should have carried out further checks on CIB, including of its business model and asked to see suitability reports.
"Had it done so, it would have discovered CIB was not providing clients with advice. It should also have concluded that most, if not all, business introduced by CIB would produce obviously unsuitable Sipps and that there was a high risk of consumer detriment."
Rowanmoor hit back, arguing Mr T had signed forms acknowledging he had taken advice from a regulated financial adviser with regard to the transfer of his pension and had considered the impact on any protection he might have.
It had further been "strongly recommended" to him that, before buying the property, Mr T take appropriate legal and other professional advice, and confirm in writing to Rowanmoor if he declined this.
Rowanmoor argued it had limited and specific due diligence obligations with regard to the business it accepted from CIB.
Regulatory obligations
Rowanmoor cited high-profile Sipp case Adams v Options Sipp (formerly Carey pensions), in which the High Court dismissed the claim that the Sipp provider had breached COBS 2.1.1R (A firm must act honestly, fairly and professionally in accordance with the best interests of its client) by taking Mr Adam's high-risk business.
Mr Justice Dight had found Options Sipp had complied with the best interests rule in that case. The Court of Appeal then rejected Mr Adams’ appeal on the grounds the case was fundamentally different to the originally brought one.
But the Fos said Rowanmoor and Options' cases were based on different claims and could not be compared.
The crux of the Options ruling, and one that Rowanmoor tried to argue in its own case, was that the contract between a Sipp operator and the client was highly relevant in determining the Sipp operator’s duties - in this case it was an execution-only relationship in which Rowanmoor had warned the client about the risks of the investment.
The provider's lawyers argued the Fos relied too much on the FCA principles to the exclusion of the firm's obligations under COBS.
But the Fos said the FCA principles never formed part of the pleadings in Adams v Options and as such the judge did not consider them. In the present case, however, they could not be ignored.
It said the principles for businesses, which are set out in the FCA’s handbook, were "a general statement of the fundamental obligations of firms under the regulatory system".
In particular the ombudsman considered principles two, three and six, which say a firm must conduct its business with due skill, care and diligence; a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems; and a firm must pay due regard to the interests of its clients and treat them fairly.
The fact that Rowanmoor was not authorised to give advice didn’t preclude it from meeting its regulatory obligations by thinking carefully about the quality of the business it was accepting, he said.
But the ombudsman clarified the case was not about whether or not Rowanmoor should have provided advice to the client on the Sipp or underlying investment, it was about its relationship with CIB.
Hammond said: "I also want to again emphasise here that I do not say that Rowanmoor was under any obligation to advise Mr T on the Sipp and/or the underlying investment.
"Refusing to accept an application because it was introduced by a firm that Rowanmoor ought reasonably to have known was not advising customers on the underlying investment, is not the same thing as advising Mr T on the merits of investing and/or transferring to the Sipp."
Hammond pointed out the high risk level of the investment and the sheer volumes of business, which should have sparked a review from Rowanmoor according to TCF principles.
There were also unregulated parties involved in promoting the TRG investment and RealSipp was misrepresenting its relationship with Rowanmoor, he said.
Hammond said Rowanmoor should have checked with CIB about how it came into contact with potential customers, what its arrangements with TRG were, what exactly RealSipp was doing as the “administrator for the packages”, how and why retail customers were interested in making these investments, whether anyone else was providing information to customers, how it was able to meet with or speak with all customers, and what marketing material was being provided to customers.
He said: "I think if Rowanmoor had carried out the due diligence I’ve set out above, it would have discovered that most if not all customers introduced by CIB had not received regulated advice about TRG from CIB or anyone else.
"It would have identified its own requirements for accepting business were not being met, and should have known there was a significant risk of consumer detriment as consumers were transferring/switching their existing pension schemes to invest entirely in TRG without the benefit of regulated advice."
He added: "Whilst I accept that CIB is responsible for initiating the course of action that has led to his loss, I consider that Rowanmoor failed to comply with its own regulatory obligations and did not put a stop to that course of action when it had the opportunity and obligation to do so.
"Rowanmoor didn’t have to carry out an assessment of Mr T’s needs and circumstances in order to meet its regulatory requirements, but it did have to treat Mr T fairly under the principles.
"I am satisfied that in the circumstances, for all the reasons given, that it is fair and reasonable to conclude that Rowanmoor should compensate Mr T for the loss he has suffered."
Th Fos is currently handling 886 complaints against Rowanmoor that involve due diligence, the majority in relation to The Resort Group.
They said the current case was one of a number of "sample cases" it was looking at, adding: "Under the DISP resolution rules Rowanmoor is required to take account of previous ombudsman decisions when considering complaints. Therefore our work on the complaints against Rowanmoor is ongoing."
Rowanmoor did not immediately respond to a request for comment.
carmen.reichman@ft.com
