SIPP providers, due diligence and contractual primacy

In a landmark case, the High Court handed down judgment yesterday on the long-awaited Adams v Carey Pensions case, dismissing all claims against the pensions provider.

Mr Adams brought a claim against Carey, a self-invested pensions plan (SIPP) provider, for the diminution in value of an investment held within his SIPP. The claim was tried in March 2018 and principally concerned the extent to which a SIPP provider is required to undertake due-diligence on investments it facilitates.

The judgment provides helpful guidance and clarity on the level of due-diligence which a SIPP provider, which facilitates execution-only investments, is required to undertake on its introducers and investments that it facilitates.

Background 

CLP, an unregulated introducer, introduced Mr Adams to Carey in respect of a prospective investment he wished to make in a storage pod rental scheme. As a result of CLP’s introduction, Mr Adams opened a SIPP with Carey and transferred c.£55,000 from his existing pensions fund into it. Mr Adams instructed Carey to invest those funds in the scheme. Carey, which was not regulated to provide advice on the scheme, facilitated that investment on an execution-only basis. Mr Adams understood this broadly to be the scope of Carey’s appointment.

The scheme failed to perform as expected, and Mr Adams’s investment was later valued at only £15,000.

The allegations

Mr Adams claimed for the diminution in value between the sums invested in the scheme and the subsequent value of his investment. He also sought to rescind his contract with Carey. His claim was formulated on the basis that Carey:

• Breached the FCA (Financial Conduct Authority) Handbook in failing to act fairly and in accordance with his best interests. In particular, he alleged that Carey wrongly allowed an investment to be made in a SIPP and the scheme where it was unsuitable. He also alleged that Carey failed to comply with FCA guidance, for instance, by failing to identify the unusual nature of the investment and to monitor its progress
• Was liable to reconstitute the SIPP pursuant to section 27 Financial Services and Markets Act 2000 (FSMA) because CLP had advised on, and arranged the opening of, the SIPP and subsequent investment where it was not regulated to do so and
• Was in a joint venture with CLP and was therefore liable as joint tortfeasor for its alleged negligent advice.

Decision

The High Court dismissed Mr Adams’s claim on all grounds. In particular, it held that:

1. The "correct starting point" in ascertaining the scope of obligations imposed by the FCA Handbook was the contract(s) between the parties "because it is common ground that not every [FCA] obligation" applies to all firms. It held that: (i) there was no regulatory provision requiring the regulatory regime to take precedence over contractual terms and (ii) no provision within FSMA providing an investor with rights to pursue a claim based on alleged breaches of FCA guidance.
2. The applicability of the FCA Handbook should be considered in light of the contractual arrangements between the SIPP provider and its customer. In that respect, the contracts between Mr Adams and Carey made it clear that: (1) Carey was acting on an execution-only basis and was therefore not advising Mr Adams and (2) insofar as Carey was concerned, Mr Adams was responsible for his own investment decisions, including considering whether an investment in the scheme matched his appetite for risk.
3. The FCA Handbook, in this instance, could not impose a duty on Carey to advise or comment upon the suitability of the SIPP or investments in the scheme, as Carey was not regulated to provide such advice.
4. The Section 27 claim failed as the actions of CLP fell short of arranging the investment in the scheme because there was no “direct and substantial causal connection between the arrangements and the ultimate transaction”. The advice provided by CLP did not cause the transaction to proceed because there were “further steps which were necessary to establish a SIPP” which were “not within the introducer’s power to effect or direct”. The relevant date for assessing whether CLP was involved in arranging the investment was the point at which Mr Adams provided Carey with instructions to make the investment. CLP was not involved at this juncture.
5. There was no joint venture between CLP and Carey. There is a distinction to be drawn between an organisation recommending a client to a third party, and that organisation being involved in a joint enterprise with that third party. CLP and Carey performed discrete roles. For instance, Carey was not aware of any advice which CLP provided to Mr Adams.

Comment

The judgment provides helpful confirmation to SIPP providers that consideration of the contractual arrangements is crucial in assessing the extent of due-diligence and advice which a SIPP provider is required to conduct on proposed investments and the suitability of a SIPP more generally. In our experience, claimants routinely seek to subvert the clear wording of those contracts by relying on high-level regulatory principles which do not properly match the parties’ contractual intentions.

SIPP providers have recently been exposed to criticism by the Financial Ombudsman Service (FOS) in failing to undertake substantive due diligence on proposed investments. For instance, in the widely reported decision in Berkeley Burke v FOS [30.10.18], a judicial review of a FOS decision failed. In that case a SIPP provider was required to pay its beneficiary compensation in circumstances where it had, in the FOS’s view, conducted insufficient due-diligence on what transpired to be a fraudulent investment scheme. However, the FOS operates on principles of fairness and reasonableness. Therefore, it does not always reach its decision based on a technical application of the legal principles. This is where the Carey judgment has provided additional and helpful clarity.

Read others items in Professions and Financial Lines Brief - May 2020

Related item: FCA expands probe into health of beleaguered pensions transfer market