Court of Appeal confirms the FOS' wide discretion in upholding complaints against SIPP providers and other FCA regulated entities

The Court of Appeal (CoA) has handed down judgment in R (Options UK Personal Pensions LLP) v the Financial Ombudsman [2024] EWCA Civ 541, a decision impacting not only SIPP providers but also other FCA regulated entities looking to challenge an Ombudsman decision.*

*To read the full judgment, click here.

In this case, the CoA rejected an application for judicial review by Options UK Personal Pensions LLP (formerly known as Carey Pensions UK LLP) (Options UK), a SIPP provider, of an Ombudsman’s decision to make an award against it in respect of a member complaint of inadequate due diligence following a failed investment.

We discuss the CoA’s findings and the wider implications of the decision.

The Background

Options UK is a SIPP operator operating on an "execution only" basis, meaning that once an application for membership is accepted it will process investment and sale instructions but it is not authorised to advise on either establishing the SIPP or the investments made through the SIPP.

In 2011, Options UK started to accept referrals from a non-FCA unregulated Spanish company, Commercial LP Brokers Sociedad Limitada (CLP), to set up a SIPP in order for individuals to transfer their pensions to invest in a store pod business. Investors were apparently told by CLP that these offered good returns for low risk. The investments failed and the sums invested were substantially lost.

This is the third of a trilogy of court decisions in respect of claims regarding these investments. In Adams v Carey Pensions [2020] EWHC 1229 (Ch) which we reported on here, the High Court decided, in so far as relevant, that Options UK was not in breach of COBS 2.1.1R (the rule which imposes a duty to act honestly, fairly and professionally in accordance with the best interests of its client) in regard to allowing an allegedly unsuitable investment in the SIPP.  This was because, as an execution only provider, Option UK’s duties to advise on investments were limited by contract. Mr Adams appealed this decision, which we reported on here. Mr Adams appealed in respect of the question of breach of COBS 2.1.1R, but the CoA found that the Claimant had impermissibly sought to widen his argument to encompass, amongst other things, lack of due diligence in respect of the investments and upheld the original decision. The CoA did, however, overturn the original High Court decision on the grounds that the SIPP was entered into by the Claimant following advice from an unregulated intermediary. In these circumstances, in accordance with the relevant legislation (section 27 Financial Services and Markets Act 2000), the SIPP was unenforceable and should be unwound, with the investment sum returned to Mr Adams.

The Current Case

Mr Fletcher is another investor who transferred his pension into an Options UK SIPP in order to invest in store pods. Unlike Mr Carey, rather than initiating court proceedings, he complained to the FOS. The Ombudsman decided that Options UK had not carried out sufficient due diligence on either the introducer or the investment itself in accordance with the regulatory requirements at the time and, had it done so, it would not have accepted Mr Fletcher’s transfer or investment. Accordingly, it was fair and reasonable to make an award in favour of Mr Fletcher.

The Application for Judicial Review

Options UK applied for judicial review of the Ombudsman’s decision on three grounds:

• (a) that the Ombudsman had failed to give adequate reasons why he had awarded compensation in circumstances where damages would not be recoverable through the courts;
• (b) that the Ombudsman erred in finding that Options UK owed duties to prospective members of its SIPP to carry out due diligence on the introducer or the investment selected, given its status as an execution only provider; and
• (c) that the Ombudsman’s conclusions in relation to alleged failures to carry out sufficient due diligence were unreasonable.

Options UK originally applied for permission to apply for judicial review to the High Court which was rejected. Permission to appeal that decision was granted and the judicial review claim was retained by the CoA.

The Judicial Review Decision

Notably, due to the wider implications of this particular ground of challenge, in respect of (a), the CoA determined that it was inherent in the legislation which gave the Ombudsman its powers that an Ombudsman can decide it is fair and reasonable to make an award in relation to a breach of the principles set out in the FCA Handbook even if such a breach would not be actionable in the courts. The CoA found that while the Ombudsman must give adequate reasons for its decisions when making an award that would not sound in damages in a court action, the Ombudsman was not required to specifically set out what might be recovered in court proceedings and reasons why it was appropriate to go beyond that. In this case, the CoA found the reasons provided by the Ombudsman were adequate.

In respect of (b), the CoA found that the required due diligence and best practice with which the Ombudsman was concerned pre-dated the contract between Options UK and Mr Fletcher so the provisions of the "execution only" contract were irrelevant (which distinguished this case from the court decision in Adams v Carey Pensions on this point).

In respect of (c), the CoA determined that the Ombudsman’s findings on the inadequacy of due diligence fell well short of a public law challenge on grounds of irrationality.

Conclusion

This decision will clearly not provide much comfort for SIPP providers and other FCA regulated entities looking to challenge an Ombudsman decision. In particular, the CoA’s confirmation that the Ombudsman may make awards based on non-actionable principles, rules and guidance provided it is explained in general terms why it would be just and reasonable to do so, without the need to provide specific reasons for going beyond what would be recoverable in the courts, is concerning. This is particularly so in the context of the ever-increasing cap on awards made by the Ombudsman (now up to £430,000 for certain claims) without any right of appeal for the respondents to the complaint. Judicial review remains the only basis of challenge.
However, all hope is not lost. The decision has not provided the Ombudsman with free reign to disregard the terms of an execution only policy when deciding what is fair and reasonable. In this respect, the decision is limited to pre-contractual obligations only and does not mean the Ombudsman can, in deciding what is fair and reasonable, simply ignore the terms of the contract with a member in respect of duties that are said to arise after the contract has been entered into.