SIPP providers and unregulated introducers: the story continues

Adams v Options UK Personal Pensions LLP & Ors [01.04.21]

Date published

22/04/2021

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This case review was co-authored by Holly Waldren, Trainee Solicitor, London.

The Court of Appeal’s (COA) decision in Adams v Options UK Personal Pensions LLP & Ors was handed down this month and provides useful guidance for SIPP providers who accept business from unregulated introducers. This follows a High Court decision discussed in our previous article.

Background

Mr Adams transferred funds from his ceding pension into a SIPP which was operated on an execution-only basis by a pensions provider, Carey Pensions UK LLP (Carey). Mr Adams used the SIPP to purchase non-standard investments in incoming-generating storepods. The decision to open a SIPP and make the investment was facilitated via an unregulated introducer, CL&P Brokers Socieded Limitada (CLP). Unfortunately, the investment “proved very unsuccessful”. Mr Adams claimed against Carey, but was unsuccessful in the High Court. The COA was concerned with two of Mr Adams’s allegations, being whether Carey breached Section 27 Financial Services and Markets Act 2000 (FSMA) and/or COBS 2.1.1R of the Financial Conduct Authority (FCA) Handbook.

Section 27 FSMA

Mr Adams argued that he entered into a regulated agreement with Carey as a result of things said or done by CLP in contravention of Section 19 FSMA (the general prohibition), such that his SIPP should be rendered unenforceable by Section 27 FSMA. In particular, he alleged that CLP breached the general prohibition by “arranging deals in” and “advising on” his investments without proper authorisation.

The COA considered the following issues:

1. Did Mr Adams enter into a “relevant investment” (i.e. an investment to which the regulatory regime applied)?

The parties agreed that the storepods investment was not a “relevant investment”, but the SIPP was because it involved the buying and selling of rights under a personal pension scheme. The COA nonetheless considered the largely academic question of whether rights under such a scheme were bought or sold when the storepod investments were acquired through the SIPP. Having reviewed the terms of the SIPP, the COA disagreed with PERG 12.3 of the FCA Handbook and held that rights were not bought in these circumstances because Mr Adams did not acquire “different property rights as a result of a switch of investments”.

2. Did CLP “arrange a deal in” or “advise on” his investment?

The COA held that CLP:

  • Provided advice to Mr Adams in breach of the general prohibition. Whilst the storepods investment was not a “relevant investment”, the recommendation that Mr Adams invested “in storepods carried with it advice that he transfer out of his [previous pension] and put the money into a…SIPP”. The COA considered this constituted advising on the merits of a “relevant investment”; the investment being the SIPP.
  • “Arranged a deal” in breach of the general prohibition. The act of arranging requires something that “brings about” the investment. This involves the application of the causation test. The COA held that CLP’s actions, including the completion of Mr Adams’ SIPP application form, played “a role of significance”, which was sufficient for causation purposes. It did not matter that CLP’s actions did not result in the creation of the SIPP.

3. Did Mr Adams make his investment “in consequence of” that arrangement/advice?

In light of its comments on causation, the COA concluded that the establishment of the SIPP was “in consequence of” CLP “arranging deals in investments” and that the advice “played a crucial part” in Mr Adams’s decision to open the SIPP.

As such, the Section 27 claim succeeded.

Carey sought relief pursuant to Section 28 FSMA, which allows the court to enforce an agreement rendered unenforceable by Section 27 where it considers it “just and equitable”. The COA held that Carey was unaware of CLP’s breaches of the general prohibition but nonetheless refused to exercise its discretion because: (1) the aim of FSMA is consumer protection and Section 27 places the risk of working with unregulated introducers on the SIPP provider and (2) there were various flags that CLP was wrongly recommending investments, including that it was “hard to suppose that 580 people would spontaneously decide to invest in Blackburn storepods”.

COBS 2.1.1R FCA Handbook

COBS 2.1.1R provides that a “firm must act honestly, fairly and professionally in accordance with the best interest of its client”.

Mr Adams argued before the High Court that Carey breached this rule by establishing a SIPP and administering it by reference to an investment that was “manifestly unsuitable”. The High Court held that Carey operated on an execution-only basis and was not responsible for advising Mr Adams on the suitability of his investment. Furthermore, Carey was not regulated to provide such advice.

Mr Adams radically changed his position before the COA. His new position was held to resemble “little relation to his particulars of claim” and was arguably an “attempt to put forward a new case”. The COA found that Mr Adams had no entitlement to make such radical amendments and this claim was therefore dismissed.

Whilst the FCA invited the COA to discuss the merits of this argument on an academic basis, the COA decided that these issues “would be more appropriately addressed in a case where the issues are live”.

Therefore, as matters stand, the High Court decision on this issue remains applicable.

Comment

This decision should have limited impact on claims against SIPP providers who do not accept introductions from unregulated introducers. This is because Section 27 will not apply where introductions are made from an appropriately regulated firm. However, SIPP providers which do undertake such work will need to consider their business models carefully to minimise a Section 27 risk. Insurers should consider asking their insureds at the proposal stage whether they undertake such work and, if so, what processes they have in place to monitor the conduct of unregulated introducers to avoid successful Section 27 claims.

The Financial Ombudsman Service (FOS) has explained that it will “consider the [High Court] judgment…and continue to take relevant law, including case law, into account when resolving complaints”. We have not yet seen any FOS decision which applies the High Court decision in respect of a complaint against a SIPP provider. We expect to see those decisions, which have possibly been on hold pending the outcome in this case, handed down in the coming months. It will be interesting to see whether the FOS, when dealing with complaints against execution-only SIPP providers, applies the High Court decision insofar as it concerns COBS 2.1.1R, which would represent a radical change to its typical approach.

The COA did not explain when a Section 28 defence may apply. When applying this section, the court must have regard to whether “the provider knew that the third party was…contravening the general prohibition”. The judgment suggests that this will be a high hurdle to overcome but it might be possible where, for instance:

  • The SIPP provider actively audits and investigates the introducer’s business practices and discovers nothing untoward
  • There is nothing which reasonably suggests that the introducer has breached the general prohibition and/or
  • The third-party is FCA regulated but does not have correct permissions for the activities which it is undertaking.


Related item:
SIPP providers, due diligence and contractual primacy