The regulation of SIPP providers is an area that would welcome greater clarity. While SIPP providers are Financial Conduct Authority (FCA) authorised, their regulatory duties are relatively light touch, with most material on their duties contained in a number of guidance papers issued both by the Financial Services Authority (FSA) and the FCA. The Financial Ombudsman Service (FOS) is frequently dealing with complaints in this area, and looks to case law to assist with its interpretation of SIPP provider duties. Since there is not much material on this subject, the decision in Adams v Carey has been long awaited; in fact it took a number of years for the Court to hand down its decision.
The claim was brought by Mr Adams, who saw an advertisement for C&P Brokers (an unregulated firm), who were offering an investment into self-service rental storage pods. CL&P recommended that Mr Adams place his storage pod investment within a SIPP provided by Carey. Mr Adams went on to set up a SIPP with Carey and instructed Carey to purchase the storage pod investment be held within his SIPP. Unfortunately, the storage pod investment did not perform well and effectively became worthless. Mr Adams took action against Carey as the only regulated entity in the arrangement and argued a number of claims, the key aspects of which are highlighted below.
What was particularly interesting with regard to this case is the fact that the FCA made their own submissions to the Court relating to their interpretation of various FCA rules and pieces of relevant legislation. As a general point, in issuing its judgment, the Court largely disagreed with the FCA's interpretation. However, it is worth mentioning that the Court deliberately excluded from its consideration guidance materials published by the FCA since the events that gave rise to the claim (from 2013 onwards). This meant that important FCA guidance as to the duties of SIPP providers was excluded. The Court also found that Mr Adams was unable to rely on the Financial Services Authority's recommendations in its 2009 report on the findings of a thematic review of SIPP operators in order to interpret the scope of Carey's duty under COBS 2.1.1R. As a consequence, much of the material as to the duties of SIPP providers was carved out.
Section 27 of the Financial Services and Markets Act 2000
S.27 of FSMA allows a court to effectively "unwind" an agreement entered into as a result of something said or done by someone carrying on a regulated activity (such as "advising on investments") without having authorisation from the FCA to do so (or relying on a relevant exemption).
Mr Adams argued that CL&P advised him to enter into the storage pods investment via a SIPP with Carey, and arranged for this to take place. The Court found that the SIPP was not entered as a result of CL&P “making arrangements”, while CL&P's actions also fell short of “advising” on a SIPP, since CL&P simply directed Mr Adams towards a specific provider (which in the Court's view did not constitute “advising” on the SIPP).
Further, the Court concluded that the contract at issue was that between Mr Adams and Carey and that it would not be fair in the circumstances to unwind this contract. This was on the basis that Carey was unaware of CL&P's advice and also that Mr Adams had signed a document acknowledging that the storage pods were a high-risk and speculative investment. The Court further found that there were systems and controls in place on Carey's side to ensure that Mr Adams as an execution-only client had not been advised.
Breach of FCA Handbook Rules
Mr Adams argued that Carey had breached the general principle at COBS 2.1.1 R of the FSA Handbook (at the time) which stated that Carey must act "honestly, fairly and professionally in accordance with the best interests of the client”. As a consequence, Carey had a duty to ensure that systems were in place to ensure unsuitable investments were not placed within SIPPs. Mr Adams also argued that Carey were required to ensure that investments were not introduced by unregulated introducers (like CL&P). Again, the FCA was in support of Mr Adam's position.
The Court rejected Mr Adam's submission. The Court found that the starting point should be the contract between Mr Adams and Carey, which made clear that Mr Adams was acting on an execution only basis. The Court's position was that Carey did not have a duty to consider whether the storage pods investment was appropriate for Mr Adams' SIPP, since investors should be taking responsibility for their investment decisions; Mr Adams was aware the investment was “high risk” but still decided to invest.
Claim in Negligence
Mr Adams also brought a claim in negligence which the Court rejected (Carey was not liable as a joint tortfeaser for the unsuitable investment advice provided by CL&P, on the basis that CL&P's recommendation fell short of a negligent misstatement).
What does this mean for SIPP providers?
While SIPP providers may welcome the decision, the judgment causes some confusion. It sits at odds to the decision in Berkeley Burke and runs contrary to the position of the FCA on the matters considered. It seems that the Court was making a statement as to retail investors taking more responsibility for their investment decisions, which to a certain extent cuts across the consumer protection objective of the FCA. We consider that there is a good chance Mr Adams will appeal and it will be interesting to watch how the case progresses. It will also be interesting to see how the FOS interprets the case, with so many of its complaints relating to the duties of SIPP providers.
However, perhaps this inconsistency means that it is time for the FCA to encode the duties of SIPP Providers more formally in its Handbook, rather than this sitting in various guidance papers. Their “Retirement Outcomes Review” looks to be introducing rules around non-advised drawdown, however some certainty when investments become placed within a SIPP could be very helpful to the industry and to consumers alike.
Originally published 30 July, 2020
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