The Court of Appeal has today dismissed Mr Adams' appeal against Carey in respect of COBS 2.1.1R. However, the appeal in relation to s.27 FSMA has been upheld. We discuss the background to the proceedings, the Court of Appeal decision and where it takes the SIPP (and wider financial services) market.
Mr Adams transferred an existing personal pension into a SIPP administered by Carey (now t/a Options) following the involvement of CLP Brokers Socieded Limitata (CLP), an unregulated introducer.
Mr Adams instructed Carey to open a SIPP, transfer his existing personal pension and purchase rental units from Store First (a storage pod lease in Blackburn) with the monies held in his SIPP. Mr Adams received an incentive as part of the transaction (unbeknownst to Carey).
Mr Adams' investment in Store First did not perform well. As the only FCA regulated entity in the chain, Mr Adams issued proceedings against Carey.
Three key allegations were made against Carey:
- Breach of s.27 of the Financial Services and Markets Act 2000 (FSMA) rendering the SIPP unenforceable;
- Breach of COBS 2.1.1R which requires any FCA regulated entity to act 'honestly, fairly and professionally in accordance with the best interests of the customer'; and
- Carey should stand responsible for the negligent investment advice provided by CL&P for which it was said Carey was liable as a result of a joint venture, common design or agreed common business model as between Carey and CL&P.
The High Court Decision
The proceedings came before HHJ Dight in March 2018, with the judgment following some 26 months later in May 2020. The High Court dismissed the claim against Carey on all three counts. We reported previously on the High Court decision and an analysis of that can be found here.
Mr Adams appealed in respect of s.27 and COBS but did not appeal the joint enterprise allegation.
Court of Appeal Decision
The appeal came before LJ Newey, LJ Andrews and LJ Rose. After a 3-day hearing, the Court of Appeal dismissed the appeal in respect of any alleged breach of COBS 2.1.1R but upheld the appeal in respect of s.27 FSMA.
The s.27 Allegation
Mr Adams alleged that his Carey SIPP was necessarily entered into as a consequence of something said or done by CLP in the contravention of the "general prohibition" rendering the SIPP unenforceable. In effect, the allegation was that CLP had done something that they were not authorised to do in either advising on or arranging Mr Adams' SIPP with Carey and as a result the transfer to the Carey SIPP and investment in Store First had to be unwound.
In deciding whether to uphold the allegation, the Court of Appeal had to consider whether CLP breached the general prohibition by carrying on regulated activities. Two regulated activities were relied upon (1) advising on investments (defined in Article 53 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the RAO)) and (2) arranging investments (defined in Article 25 of the RAO).
This raised a number of issues – (1) what was the designated investment – was it the Carey SIPP and/or the Store First investment, (2) did CLP arrange or advise on that designated investment and (3) did Mr Adams enter in to the designated investment as a consequence of what CLP did?
What was the designated investment?
Mr Adams sought to argue that converting rights under the Carey SIPP into an investment in Store First was a designated investment.
The Court of Appeal found that the investment in Store First did not fall within the definition of designated investment. That said, they took a different approach to the High Court by finding that the transaction must be looked at as a whole (from disinvestment of Mr Adams' personal pension plan all the way to the investment in Store First). Unlike the High Court, that focussed on actions related to the creation of the Carey SIPP.
In making this finding the Court of Appeal referred to and expressly approved the reasoning in TenetConnect. In particular, the concept in TenetConnect of a "single braided stream of advice". The Court of Appeal said that advice given about regulated and unregulated investments where the advice on the unregulated investment justifies the advice on the specified investment, leads to the advice on the regulated investment becoming part of the regulated advice.
Did CLP provide advice?
Mr Adams argued that three parts of the transaction involved regulated advice – the sale of his existing personal pension with Friends Life, the Carey SIPP and investing in Store First. As above, although the designated investment when looking at Article 53 was not the Store First investment, advice on Store First was still capable of being advice on the designated investment if it formed part of a "single braided stream of advice".
The Court of Appeal found that the "simple giving of information without any comment will not normally amount to 'advice"', but "the provision of information which is itself the product of a process of selection involving a value judgment so that the information will tend to influence the decision of the recipient was capable of constituting advice". Also "advice on the merits need not include or be accompanied by information about the relevant transaction. A communication to the effect that the recipient ought, say, to buy a specific investment can amount to advice on the merits without elaboration on the features or advantages of the investment".
The Court of Appeal found that Mr Adams had been advised to switch his pension to the Carey SIPP, as "steering an investor in the direction of a specific SIPP provider is certainly capable of being advice on the merits of a particular investment" although the recommendation was to invest in Store First, that carried with it advice to switch to the Carey SIPP and with it advising on a designated investment.
Did CLP arrange the Carey SIPP?
This issue involved two questions (1) did CLP arrange the Carey SIPP and (2) did that "bring about" the transaction to which the arrangements relate. There were 6 steps relied on by Mr Adams as constituting "arranging": procuring a letter of authority, procuring a discharge from the existing personal pension, undertaking money laundering investigations, completion of the Carey SIPP application form, instructions to Store First and explanations that CLP were expected to provide in relation to key features and terms of business.
The Court of Appeal first considered what "bring about" required in practice. The Court of Appeal found that the words were not consistent with the "but for" test for causation and did not mean there needed to be a direct connection; instead the arrangements "must play a role of significance". The Court of Appeal then referred to the 6 steps relied upon by Mr Adams and, in light of the "bring about" test, found that those that met the test were: procuring the letter of authority, undertaking money laundering investigations and completing the application form. In rejecting the High Court analysis that CLP's acts did not necessarily result in any transaction, that the process was outside of CLP's control and the fact the steps were administrative, the Court of Appeal said that "... what CLP did was thus significantly instrumental in the material transfers" with "sufficient causal potency".
Did Mr Adams enter the transaction as a consequence of what CLP did?
Having found that the arrangements brought about the transaction, the Court of Appeal simply stated that the "in consequence of" test (relevant to both advice and arrangements) had also been met without further analysis.
As a result, Mr Adams' s.27 claim succeeded.
s.28 FSMA – a defence to s.27?
Although the Court of Appeal found that CLP had acted in way that breached s.27, that did not mean that the Carey SIPP had to be unwound. Carey relied on s.28 which allows a court to uphold an agreement – here the Carey SIPP - if the court considers it just and equitable to do so. When considering whether it is just and equitable to uphold the agreement, the court had to have regard to whether the provider "knew" that the third party was doing something it was not authorised to do.
Here the Court of Appeal found that "knew" meant actual and not constructive knowledge, and that Carey did not have actual knowledge of CLP's unauthorised acts. That said, the Court of Appeal went on to find that it was appropriate to take in to account, when performing the balancing act of what is "just and equitable", to consider whether the provider should reasonably have known that the unauthorised party was doing something they were not authorised to do. On balance, the Court of Appeal decided not to exercise their discretion citing the following reasons (albeit the reasons do not appear to be an exhaustive list as it was said to "include" the following factors):
- One of the main aims of FSMA is consumer protection and consumers should be protected even against their "own folly" (including the fact Mr Adams had decided to make the investment despite acknowledging he understood the risks and had himself misled Carey);
- Section 27 was "designed to throw the risk associated with doing business with unregulated sources onto the providers";
- The volume of introductions from CLP put Carey on notice of the danger that CLP was recommending clients to invest in storepods and to set up Carey SIPPs for that purpose;
- By May 2012 Carey was aware that CLP had misinformed them about incentives customers were receiving; and
- Carey actioned Mr Adams' investment after it had become aware of the problems with CLP, including that one of the directors was on an FCA blacklist.
Breach of COBS 2.1.1R
Mr Adams' pleaded case was that Carey had acted in breach of COBS 2.1.1R on the basis that (1) establishing a SIPP was manifestly unsuitable given the modest size of the transfer value, (2) the investment in Store First was manifestly unsuitable for Mr Adams' pension fund as it was illiquid and subject to valuation risk and (3) it had breached the guidance and expectation of the then FSA in the September 2009 thematic review. On appeal Mr Adams moved away from his pleaded case to allege more broadly that Carey breached COBS 2.1.1R in dealing with an unregulated intermediary, admitting in to Mr Adams' SIPP an asset that could not realistically be valued and proceeding with the investment despite what it learned in May 2012.
Given the way Mr Adams sought to argue his case before the Court of Appeal bore "little relation to the Particulars of Claim" the Court of Appeal found that the COBS claim "must fail" and that "... Mr Adams might anyway have struggled to overcome the Judge's finding that any breach of duty was not causative of loss".
Where does the decision leave the SIPP market?
The SIPP industry has faced a lot of pressure in recent years, in large part as a result of the uncertainty over whether they could rely on the scope of their duty defined in their contractual arrangements, or if the various FSA/FCA publications expanded that duty.
Whilst the High Court decision provided somewhat of a reprieve, will it last in light of the Court of Appeal decision?
First, the helpful High Court findings remain intact with respect to the application of COBS 2.1.1R. Namely that COBS 2.1.1R must be seen through the prism of the contract; COBS 2.1.1R does not expand the contractual duties. Further, causation is relevant and must be tested for breaches of the FCA Handbook. A point often overlooked by the Financial Ombudsman Service.
That said, the Court of Appeal decision makes it clear that wider duties in tort were not tested or considered. There was no allegation in negligence against Carey and as a result no expert evidence at trial.
So, this is the good news. The bad news is that the Court of Appeal's judgment is unhelpful when it comes to business introduced from an unauthorised party. The Court of Appeal decision arguably sets a low bar when testing whether the actions of the unauthorised party are enough to qualify as "advising" or "arranging". Further, the finding that even where a regulated party has no actual knowledge of what is happening, that that lack of actual knowledge is not enough to save a regulated party under s.28 is potentially far reaching. In circumstances where the FSA/FCA has not at any point prevented regulated entities from dealing with unregulated parties, to push the risk on to regulated parties could have far reaching consequences within and beyond the SIPP market. This is particularly the case if merely arranging money laundering documents is enough to cross the threshold into engaging in a regulated activity.
It is difficult to unpick how the Court of Appeal came to their decision under s.28. First, the factors listed in the application of s.28 appear to be some but not all of the factors taken into consideration – we do not have the exhaustive list. Second, we do not know what factor tipped the balance or if we should look at the factors cumulatively. Third, the reference to business volume is a nebulous concept as when does that kick in – customer 3 or customer 300?
Will the unanswered questions be answered? We await to see if there is an appeal to the Supreme Court and if permission to appeal is granted.
However, in the meantime, regulated entities may well start to sever ties with unregulated parties given the risks raised with the judgment. Further, we wait to see the reaction of FOS given the COBS 2.1.1R position remains intact from the High Court decision and the comments made by the Court of Appeal around causation – this may well raise difficulties for FOS in finding against SIPP providers on IFA advised business.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.