The FOS Landscape
In 2011, Mr Wayne Charlton invested in a “green oil” scheme in Cambodia which had been offered to him by a company called Sustainable Agro Energy Plc (“the SA scheme”) .
Mr Charlton was introduced to Berkeley Burke SIPP Administration Limited as he wished to hold the investment in a SIPP. He also applied to transfer his personal pension to Berkeley Burke so he could use these funds to invest in the SA scheme.
- The SA scheme was found to be a fraud and Mr Charlton lost his investment.
- In a final decision in early 2017, the Financial Ombudsman Service (“FOS”) held that Berkeley Burke had not acted fairly and reasonably in allowing Mr Charlton to invest into the SA Scheme via his SIPP.
- In a wide ranging determination, FOS provided that Berkeley Burke had a duty to comply with the FCA’s Principles for Business and Treat Its Customers Fairly- this meant that Berkeley Burke ought to have carried out due diligence into the SA Scheme prior to the investment to include ensuring SA was appropriate for a Pension Scheme/SIPP, verifying SAs assets, ensuring the investment was genuine and not a fraud, and ensuring an independent valuation of the investment. Failure to do so caused Mr Charlton a loss. This extensive due diligence was required despite the fact Berkeley Burke was not providing advice and was acting on an execution only basis.
- On 1 November 2018, the High Court dismissed an application by Berkeley Burke for a judicial review of the decision by FOS. The High Court in dismissing Berkeley Burke’s application accepted the lawfulness of FOS’s decision and that it was entitled to reach the decision it did which was fair and reasonable in all the circumstances.
- On 18 September 2019 Berkeley Burke SIPP Administration Limited was placed into administration. The Financial Services Compensation Scheme (FSCS) is now accepting complaints against this firm.
- On 4 October 2019, the administrators of Berkeley Burke SIPP Administration Limited confirmed that the proposed appeal of the High Court Judicial Review outcome would not go ahead which spells the end of the legal challenge to the FOS determination of the matter.
Hope for Investors?
Investors sold unsuitable SIPP products now have the ability to present a claim to FOS or the FSCS on the basis of the Berkeley Burke determination.
Even where SIPP providers are not advising customers (and are acting on an execution only basis) they are still required to comply with the FCAs Principles for Business and Treat Its Customers Fairly. This means conducting appropriate due diligence to determine whether an investment was suitable to be held within a SIPP in the first place.
The Legal Landscape
The decision of the High Court in Adams v Carey  EWHC 1229 (Ch) may be seen as presenting difficulty for a SIPP investor who seeks to rely on the Berkeley Burke rationale for obtaining compensation as a result of a SIPP mis-sale.
Mr Adams, a self-employed lorry driver, saw an internet advertisement referring to CL&P Brokers (CL&P), an unregulated business set up in Malaga, Spain. CL&P were offering the chance to buy self-storage rental pods located in Blackburn, Lancashire. The self-storage pods were operated by Store First and, it was explained by CL&P, could be bought and placed by Mr Adams in a SIPP. CL&P suggested the use of a SIPP provided by Carey. Carey had terms of business in place with CL&P that expressly prohibited CL&P from advising prospective SIPP members such as Mr Adams.
Following his introduction to Carey, Mr Adams set up a SIPP with Carey, and Carey carried out the investment in the Store First rental pods on an execution-only basis, as instructed by Mr Adams.
Mr Adams’ investment in Store First did not perform as he had hoped and over time became worth less than the purchase price.
Mr Adams brought a claim against Carey, seeking compensation and rescission of his contract with Carey.
Mr Adams’ Claim
Mr Adams pursued claims under two causes of action: breach of statutory duty and negligence. In respect of breach of statutory duty the claim was two-fold: (i) breach of FSMA rendering the SIPP unenforceable under section 27 of FSMA; and (ii) breach of duty under COBS 2.1.1R to act honestly, fairly and professionally in the best interests of the claimant.
The section 27 claim
Mr Adams alleged that CL&P had “advised” him about, and “arranged” for him (both within the meanings of those activities in the RAO): (i) the SIPP and (ii) the investment in Store First, in breach of FSMA. He brought a claim under section 27 of FSMA, which gives the Court discretion to unwind an agreement if an authorised person (in this case, Carey) enters into an agreement with a client (here, Mr Adams) as a consequence of something said or done by an unauthorised third party wrongly performing an authorised activity (i.e. CL&P “advising” on and/or “arranging” the investment).
His Honour Judge (HHJ) Dight found that the actions of CL&P fell far short of ‘arranging’ the investment, and that, crucially, the point at which the issue must be considered is when Mr Adams gave his instruction to invest. Prior to that point, Mr Adams was not bound to continue, nor had he suffered any loss. The Court found that the correct ‘causal test’ was not the ‘but-for’ test, as proposed by Mr Adams and the FCA, rather the words to ‘bring about’ in Art 26 means the ‘arrangements’ must have “a positive or effective cause, not merely a set of circumstances which may be no more than the context of the transaction which eventuates”.
HHJ Dight held also that on the evidence submitted there was no case that CL&P had ‘advised’ Mr Adams to enter the SIPP and that a recommendation to consider a product was not sufficient to constitute advice.
In the light of the above, HHJ Dight dismissed this cause of action.
The COBS Claim
Mr Adams alleged that Carey failed to act honestly, fairly and professionally, in accordance with COBS 2.1.1R, in: accepting the investment in Store First; providing the SIPP; failing to implement FCA guidance; and failing to warn Mr Adams as to the risks and that the SIPP and/or investment in Store First were “manifestly unsuitable”.
The FCA (an intervening party in this case) submitted that COBS 2.1.1R imposes duties on a SIPP provider (i) to assess the proposed introducer and proposed investment and (ii) not to accept into a SIPP an investment which is inappropriate for any SIPP, or for any SIPP investment by a retail customer who is not known to have received independent legal advice. It also submitted that the requirements in COBS could not be trumped by reference to the SIPP contract (which made it clear that Carey’s provision of services was on an execution-only basis).
The Court rejected Mr Adam’s arguments and the FCA’s submissions. It found that, while COBS could not be excluded by contract, it was “obvious that the correct starting point” in ascertaining the scope of obligations imposed by COBS, and in construing those obligations, was the contract between the parties. As a result, the Court held that there was no duty on Carey to consider the suitability or appropriateness of a SIPP or the investment in Store First rental pods.
HHJ Dight found that all of the contractual documentation between Carey and Mr Adams was clear that Carey was acting on an execution only basis; that it was not advising Mr Adams; that the investment in Store First was high risk and/or speculative; and that Mr Adams was responsible for his own investment decisions. In that context COBS 2.1.1R could not be read as imposing on Carey a duty to advise or comment on the suitability of the SIPP or investment, as that would be unlawful (noting that Carey does not hold the relevant permissions to advise); or to reject a ‘high risk’ investment. The court found that Mr Adams had to take responsibility for his investment decision.
The negligence claim
Mr Adams claimed Carey should be responsible for the negligent investment advice provided by CL&P for which he sought to argue that Carey was liable as a joint tortfeasor because of a joint venture, common design or agreed common business model.
The Court rejected this claim, noting the distinction between a tortious negligent misstatement (the Court stated that it was not satisfied that CL&P had made any such misstatement) and a simple recommendation.
Implications of the Judgment on the SIPP investor
The Judge in Adams v Carey remarked:
“There is no express provision in FSMA which provides a right to an investor to make a claim based on an alleged breach of the guidance issued by the FCA from time to time”.
While on the face of it the above may seem to be unhelpful to SIPP investors it is clear that the discretion of the FOS to make decisions that are fair and reasonable pursuant to s 228 (2) FSMA is wide- while the FOS does need to consider law and regulations pursuant to DISP 3.6.4R it can consider many of things too: including regulators’ rules, guidance and standards; codes of practice and good industry standards. It is also clear that Berkeley Burke’s challenge to the wide fair and reasonable discretion of FOS failed back in October 2018 and any other such attempts would be most likely doomed to fail.
It seems unlikely that the FOS on similar facts to those presented in Berkeley Burke will be prevented from relying on FCA’s Principles for Business and Treating Its Customers Fairly notwithstanding what the High Court determined in Carey.
An imminent appeal
Further, the Court of Appeal has granted Mr Adams permission to appeal the High Court decision on the grounds that such an appeal has a real prospect of success. The appeal is expected to be heard at the Court of Appeal in early 2021.
It is widely considered that the High Court decision focuses too much on the paper documents haphazardly produced by the SIPP provider and not sufficiently on the statutory framework put in place through FSMA (via COBS) to protect retail customers such as Mr Adams.
Should the appeal succeed then SIPP investors may be able to pursue legal action as well as claims at the FOS or FSCS.