Indeed the speed of publication in under a month might suggest that the legal arguments were simple and the outcome clear cut but that would be a mistake.
The issues are complex and even now there is a possibility that Carey, their advisers and their PI insurers may seek permission from the Supreme Court to appeal one of the crucial decisions announced by Lord Justice Newey on behalf of the Appeal Court’s three judges.
I am not going to repeat the legal arguments and detailed conclusions – these are widely available. In summary the Appeal Court considered two issues:
- The claim that the contract between Carey and Mr Adams which established his SIPP and was invested in a storepod was unenforceable under Section 27 of FSMA as it had been “advised” on and “arranged” by an unregulated introducer (CLP) and that as consequence the SIPP should be unwound.
- The claim that Carey had breached COBS 2.1.1R by failing to act “honestly, fairly and professionally” in accepting the storepod investment.
Of the 93 paragraphs in the judgment considering the above two issues just 10 are devoted to the COBS claim. This gives an indication of the complexity of the legal arguments regarding the Section 27 claim. It is also worth noting that, as for the original hearing, the FCA was given permission to intervene in the Appeal.
The Court concluded that CLP’s actions meant that Section 27 had been breached. The Court could still have exercised discretion under Section 28 and upheld the contract on the grounds that it was “just and equitable” to do so. However the Court chose not to do so and the judgment includes a non-exhaustive list of reasons for its decision:
- Consumer protection and the need to safeguard consumers from their own folly;
- Section 27 of FSMA was designed to throw the risks of accepting business from unregulated introducers onto SIPP Providers;
- Over a period of about 6 months Carey set up some 580 SIPPs invested in storepods with an average value of not more than £50,000 - possibly suggesting that the clients were not rich or financially sophisticated.
- That Carey learnt before accepting Mr Adams SIPP that CLP was taking significant commissions and there were FCA warnings about CLPs activities, including possible involvement in pension liberation arrangements, and yet it still allowed pipeline arrangements such as Mr Adams to proceed.
Tellingly the Court agreed that it was reasonable to assume that Carey did not have actual knowledge of the breaches by CLP of the general prohibition but despite that, for the reasons given above, it did not consider it appropriate to grant relief and exercise its discretion. It gave no indication of the weight it attached to the above items.
The Court of Appeal upheld the original judgment on the COBs claim and was critical of Mr Adams lawyers and presumably the FCA for advancing a case on appeal which was “radically different to that advanced at the trial”.
The FCA had argued that it would be helpful if the Court was able to comment on the implications of COBs 2.1.1R and issues such as “product and intermediary due diligence”, “duties in respect of non-standard and non-allowable investments”, “custodial duties” and “valuation requirements”. It was a dog’s dinner of a list and the Court, rightly in my view, felt the issues “would be more appropriately addressed in a case where the issues are live”.
The judgment was issued by Lord Justice Newey but the Appeal Court included two other judges - Lady Justice Andrews and Lady Justice Rose. In agreeing with Lord Justice Newey, Lady Justice Andrews added some of her own comments at the end of the judgment.
One in particular I found interesting viz: “… the liberalisation of the pension regime in 2006 brought with it fresh opportunities for unscrupulous entities to target the gullible, the greedy or the desperate. There is nothing to prevent a regulated SIPP provider such as Carey from accepting instructions from clients recommended to it by an unregulated person, and from doing so on an “execution only” basis. But the basis on which they contract with their clients will only go so far to protect them from liability.”
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That comment should ring alarm bells for many providers – not just of SIPPs - operating on an “execution only” basis. It also prompts a couple of other observations:
- SIPPs were given a significant boost through the pensions simplification changes in 2006 – but the regulation of the operation of SIPPs was not introduced until 2007 - and to be frank its introduction was shambolic and the FSA (the FCA's predecessor) was clearly ill-prepared to regulate this market of which they had, by their own admission, little knowledge.
- I found it very strange that there was no attempt at the original hearing to put the operation of the regulatory framework at the time relevant to this case into context. Consequently I believe the Appeal Court decision may be based more on the standards that apply today than on those that applied when the events in this case occurred. Little weight appears to have been given to the evidence in the original hearing that Carey, following a visit by the FSA in September 2011, had been provided with a letter by the FSA that confirmed “the firm appear to have a number of robust processes that had been put in place or are continually being implemented to ensure the culture and ethos that you have embedded into the Firm allows you to ensure that your customer’s are treated fairly.”
On this point I am aware that many SIPP providers had visits from the FSA during the period 2010-2012 and received similar apparently positive comments. If those feedback letters cannot be relied upon then surely the FSA/FCA have at least a shared responsibility for contributing to this and similar situations. It was only with the publication of their second thematic review in 2012 and subsequent guidance that the regulator started to raise serious concerns about the activities of unregulated introducers– by which time much of the “damage” had been done.
I think this judgment has several implications, some quite worrying, for the SIPP and wider markets and providers.
- It will encourage more claims against SIPP providers and others in respect of failed investments which have been introduced via an unauthorised party. Claims Management Companies (CMCs) in particular are likely to see this as the green light for pursuing many such outstanding claims.
- PI cover for SIPP providers is likely to become more expensive and may prove difficult for some firms to obtain.
- Some of the issues raised by this judgment, particularly in relation to determining what constitutes a regulated activity, have ramifications which extend far beyond SIPPs.
- The upholding of the original judgment that the scope of COBs rules must be considered in the context of contractual arrangements suggests that the FOS may need to reconsider its approach to its findings in cases, particularly where business has been introduced through regulated advisers. This may represent some good news for SIPP providers.
Some three years ago I estimated that there were over 10,000 potential claims as a result of “toxic” investments with an aggregate value in excess of £1bn. Many of those investments were introduced by unregulated entities. That estimate was made before the Berkeley Burke and Carey court cases - and before several providers went into administration with claims falling on the FSCS.
In the light of the most recent FSCS report, with a forecast of £336m of SIPP-related claims in 2021/22, my estimate may well be too low. The implications for FSCS levies – unless there is a change in the funding methodology – is obvious and may be exacerbated if, as seems likely, there are further SIPP provider casualties.
While this judgment may well largely eliminate the role of unregulated introducers in establishing SIPPs in the future I feel the collateral damage caused in the past by their activities and by a minority of unscrupulous financial advisers and a few, mainly naïve, providers could and should have been avoided with greater and more prescient and expeditious regulatory oversight and action.
John Moret is principal of MoretoSIPPs consultancy and one of the UK's most experienced SIPPs experts, commentators and speakers. He has worked for Suffolk Life and several other SIPPs providers. He is chair of advisory business Intelligent Pensions and CX insight business Investor in Customers.