In his dismissal of the Berkeley Burke judicial review, published yesterday (30 October), Mr Justice Jacobs said a Sipp provider could not rely on a perceived duty to carry out business as requested by the client without considering the outcome for the client in line with FCA client protection rules.
Berkeley Burke had argued it had a duty to abide by Conduct of Business (Cobs) rule 11.2.19R (1), which states "Whenever there is a specific instruction from the client, the firm must execute the order following the specific instruction."
Berkeley Burke argued this meant it was duty bound to execute the instruction the client had given it.
But the Financial Ombudsman Service and the Financial Conduct Authority stated that Cobs 11.2.19R (1) was subject to the FCA client protection principles, which formed the overarching framework governing the rules for the industry at all times.
This means only if it is in the client's best interests should the transaction be carried out.
The FCA had dismissed the applicability of this ruleset to Berkeley Burke's case during the hearing in October because it does not apply to the investments in question.
But it was agreed the rules would be considered during the hearing for the purposes of deciding whether Fos had erred in law when it held the Sipp provider accountable for a client's investment losses leading up to 2014.
The judge said: "Any suggestion that a Sipp provider must, as a result of COBS 11.2.19R, execute a transaction, regardless of the duties contained in the Principles, produces surprising results and in my view cannot be right."
Berkeley Burke had sought to overturn a decision from 2014, in which the ombudsman ruled the Sipp provider had to compensate a client after it failed to carry out adviser-style due diligence on his investment.
Client Wayne Charlton had brought a complaint to the Fos in respect of the loss of his personal pension which he had invested in a Sipp in 2011.
The investments included an interest in Sustainable AgroEnergy PLC, a company which purported to extract biofuel from trees grown in Cambodia and entered receivership in 2012, following intervention by the Serious Fraud Office.
Berkeley Burke maintained it had not given advice to Mr Charlton and as such could not be held liable for the client's losses.
But listing several instances in which a transaction may be stopped by a provider, Mr Justice Jacobs ruled Sipp operators had a duty to carry out due diligence on the underlying investment before accepting business.
The instances where a Sipp operator should intervene, according to the judge, are:
(1) the proposed investment was not "Sippable"; i.e. was not eligible for the tax benefits of putting an investment into a Sipp;
(2) the Sipp provider knew that although it was then Sippable, there had been a legislative change which meant that it would no longer be Sippable in a few months time;
(3) the Sipp provider had received information which cast doubt on the integrity of those who were promoting the proposed investment, or as to whether underlying assets actually existed;
(4) the Sipp provider had learnt of problems, such as a possible insolvency, which affected the proposed investment.
"In all of these situations, I consider that there is scope for the operation of the Principles, and that Cobs 11.2.19R does not mandate the Sipp provider to proceed to execute the transaction," the judge said.
Berkeley Burke's argument the Fos had been wrong in ruling differently to the Pensions Ombudsman, which had ruled on several cases with similar facts, was also dismissed.
Berkeley Burke is looking to appeal the dismissal.
Mark Smith, chief operating officer at Sipp firm Mattioli Woods, said the finding that Sipp providers had a duty to check the underlying business could have repercussions on the wider market.
He said: "[The ruling means] there should have been more due diligence carried out than there was therefore the fault lies with the Sipp operator."
Berkeley Burke is facing a number of further claims brought by law firm Anthony Philip James & Co.
Glyn Taylor, solicitor at the firm, welcomed the "clarification" brought by ruling.
He said: "The judgement has now clarified that the concept of due diligence inevitably brings to mind the concept of inquiry or investigation. They are not distinct concepts."
Martin Tilley, head of pensions technical at Sipp provider Dentons, agreed the ruling was profound but he cautioned the case may not serve as a precedent because other cases would have their own particular facts.
He said: "We will have to see to what extent the levels of due diligence now confirmed as required applied to each individual asset and whether or not the investment was a real investment that perhaps simply hasn't performed as expected or whether or not it should have been accepted at all.
"We could well find that the Sipp market for non-regulated assets contracts significantly."
A case involving Sipp provider Carey Pensions is currently awaiting judgement.
This case centres on the question of whether or not Carey was right to accept business on the insistence of a client.
The client, Mr Adams, had also suffered losses after investing in illiquid commercial property.
The client had signed an execution-only contract but his lawyers argued regulatory principles around treating customers fairly meant he should have never been allowed to open the Sipp without advice.
Mr Tilley said: "It would be very difficult and perhaps very awkward if the judge in that case were to arrive at a different ruling, however they may take into account other factors or implications of that particular case.
"As Berkeley Burke have elected to appeal, any outcome might be delayed accordingly."
carmen.reichman@ft.com
