Court of Appeal provides further clarity on the scope of duty of SIPP Providers, but some questions remain unanswered

On 1 April 2021, the Court of Appeal (CoA) allowed an appeal in respect of a claim brought by Mr Adams against Options UK Personal Pensions LLP (formerly Carey SIPP UK LLP and Carey Pensions UK LLP) (Carey) in relation to a sum that he put into his self-invested personal pension (a SIPP), and which he used to fund a high-risk investment that subsequently lost value. 

The CoA’s judgment provides further clarity on the scope of duty of SIPP providers, but some issues remain unanswered. 

As in the first instance, the FCA appeared as a party to the claim as an Intervener. 

Background 

Mr Adams was advised by an unauthorised intermediary, CLP Brokers Sociedad Limitada (CLP), to reinvest his pension fund into a store pod business named Store First Blackburn Limited (the “store pods”) and have the investment held in a SIPP.

As a result of the discussion, CLP introduced Mr Adams to Carey, with whom he set up a SIPP, following which he instructed Carey to proceed with the proposed investment into the store pods. Mr Adams’ investment subsequently lost value and he brought a claim against Carey seeking damages and/or to rescind his contract with them. Mr Adams based his claim on three grounds: (1) breach of  Rule 2.1.1R of the Conduct of Business Sourcebook Rules (“COBS”); (2) the unenforceability of the SIPP under section 27 Financial Services and Markets Act 2000 (“FSMA”); and (3) alleging a joint tortfeasor relationship between Carey and CLP. 

At first instance, Mr Adams was unsuccessful on all three grounds. However, he was granted permission to appeal in relation to (1) and (2). Our update covering the first instance decision can be found here. 

Appeal 

The CoA unanimously rejected Mr Adams’ appeal in relation to his COBS claim, but by majority allowed his claim seeking to rescind his contract with Carey pursuant to section 27 FSMA.

Breach of COBS Rule 2.1.1 

In the first instance, Mr Adams brought a claim under section 138D FSMA alleging that Carey had failed to act in accordance with COBS Rule 2.1.1R that “A firm must act honestly, fairly and professionally in accordance with the best interests of the client”. This was on the basis that Carey: (1) established a manifestly unsuitable SIPP on his behalf; (2) made a manifestly unsuitable investment for the fund; and (3) failed to implement the FCA’s guidance on SIPPs set out in its September 2009 thematic review. 

The High Court held Mr Adams’ loss was a result of his own desire to invest in the store pods, despite being forewarned of the investment’s higher risks. It also held that ascertaining the suitability of the investment for Mr Adams was not Carey’s role given the “execution only” nature of the agreement.

On appeal, Mr Adams made more general allegations on the basis that COBS Rule 2.1.1R gave rise to duties of due diligence that had been breached and further, in oral argument, that Carey had breached its duties by amongst other things: (1) dealing with an unregulated intermediary; and (2) admitting an investment to the SIPP that could not be realistically valued. 

In the CoA, Lord Justice Newey held that Mr Adams sought to “advance a case radically different to that found in his pleadings” and had attempted to put forward an entirely new case when there was no justification to do so. He further noted in any event that Mr Adams may have struggled to overcome the High Court finding that any breach of duty was not causative of loss. Accordingly, the appeal on this ground was rejected.

Unenforceability of the SIPP under section 27 FSMA 

Mr Adams alleged that he agreed to transfer his fund to the SIPP in consequence of something said or done by CLP in breach of the general prohibition in section 19 FSMA, which provides that no person may carry on a regulated activity unless that person is authorised or exempt. CLP was not regulated and under section 27 FSMA, transactions that arise as a consequence of the general prohibition are unenforceable, (subject under section 28 to the Court’s discretion as to what is fair and equitable) hence, Mr Adams asserted, he was entitled to recover his investment. In broad terms, Mr Adams alleged that CLP breached the general prohibition by advising on or arranging on an investment to which the legislation applied (a designated investment). 

At first instance, Mr Justice Dight rejected the claim on the grounds that the activity by CLP was only that of an introducer and was not causative of the transaction in general. Further, Mr Justice Dight stated that he would have found that as Carey was not aware of any acts that CLP were carrying out under the general prohibition and Mr Adams was aware of the risks, the Court would have exercised its discretion to allow enforcement of the agreement under section 28 in any event. 

In simple terms, the CoA had to decide three issues. First, was the relevant investment a designated investment covered by the general prohibition? If so, did the actions of the CLP amount to (a) advising on or (b) arranging the relevant transaction? 

The Investment 

The CoA found that the investment in the store pods itself was not a designated investment subject to the general prohibition but the transfer to the SIPP was. However, unlike the High Court, the CoA found that the transaction had to be looked at as a whole, and as such the entire transaction became a designated investment and subject to the rules concerning regulated advice.  

Advising 

Whilst the High Court found no evidence to suggest that CLP had advised Mr Adams to enter into the SIPP, in the CoA, Lord Justice Newey took a broader approach and concluded that “CLP's recommendation that Mr Adams invest in store pods carried with it advice that he transfer out of his Friends Life policy and put the money into a Carey SIPP”. 

Lord Justice Newey stated that advice on an unregulated investment is, in certain circumstances, sometimes capable of involving advice on a designated regulated investment. Here, CLP could only achieve an investment in store pods by Mr Adams, through having him transfer his pension to a Carey SIPP (a regulated investment) and so effectively provided advice to him on the merits of selling an investment (the Friends Life Policy) and then subsequently purchasing another investment (the store pods). As such, CLP acted in contravention of the general prohibition. 

Arranging 

Lord Justice Newey disagreed with the High Court’s decision that CLP’s actions did not amount to “arranging.”  Instead he held that pursuant to Article 26 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the “RAO”), it could be demonstrated that there was a significant causal link to show how CLP’s actions were substantial enough to “bring about” a transaction through: (1) completing the application form for the SIPP; (2) informing Mr Adams of the documents Mr Adams needed to satisfy AML checks; and (3) arranging to courier the documents required for the application.  

Lord Justice Newey was clear that CLP’s actions did bring about the transfer of Mr Adams’ pension fund to the SIPP and added that it was immaterial that CLP’s acts were administrative in nature. CLP’s steps showed its involvement and closeness to the heart of the investment transaction and it therefore breached the general prohibition. 

Section 28 FSMA 

The CoA was invited to exercise its discretion under section 28 FSMA if it thought it "just and equitable" in the circumstances to uphold the agreement between Carey and Mr Adams. It declined to do so. 

Under section 28, the court must have regard to whether the provider was aware of the breach of the general prohibition by the third party. The CoA recognised that Carey did not have actual knowledge of this but nonetheless decided not to exercise its discretion to uphold the transaction. 

The CoA’s decision not to exercise discretion was focused around five reasons: 

1. FSMA was put into place to protect consumers, including protecting consumers from acting on their own volition; 
2. Section 27 FSMA was designed to place the risk of accepting instructions from unregulated sources onto providers; 
3. The 580 investors in store pods were not "rich or financially sophisticated" so Carey should have been cautious about CLP's conduct within Article 53 RAO; 
4. The FCA issued a warning notice that unauthorised persons could be targeting UK customers regarding pensions investments; and
5. Carey requested the transfer of the Friends Life Pension after terminating its relationship with CLP and therefore could have declined to continue with Mr Adams' investment. As such, relief under such section 28(3) was declined. 

Implications 

While by no means a “get out of jail free” card, the first instance decision offered some comfort for SIPP providers operating on an execution only basis facing claims for investments that have gone wrong, particularly where they could show they had carried out some basic due diligence on the investments in question. 

The CoA decision provides some further comfort by commenting that COBS duties cannot be viewed in isolation from the contractual terms and further that a claimant must show that such duties caused their loss (i.e. that they would not have proceeded in any event). That said, the CoA was not prepared to consider many of the allegations raised in respect of breach of duty on the basis that they were not pleaded. Accordingly, there are various issues concerning the liability of SIPP providers for failed investments that are yet to be properly tested. 

Also of interest to SIPP providers is the CoA’s decision in respect of section 27 FSMA. It is now evident that transactions entered into by an authorised SIPP provider and another person may be deemed unenforceable by section 27 FSMA. where the SIPP provider is not aware that an unregulated intermediary introducer involved in the transaction was acting in breach of the general prohibition. The CoA’s view of activity that is causal to the transaction in question will need to be considered carefully. 

Overall, this decision by no means resolves all outstanding questions regarding the extent of SIPP providers’ responsibilities for failed investments. It will be interesting going forwards to see how the Financial Ombudsman Service takes this decision into account in its future decisions.