As the FCA made clear, Liberty was advised that it was insolvent based on the number of potential claims relating to high risk, non-standard investments - this followed a number of binding FoS decisions against the company.
The comments below follow my reading of one of the most recent FoS determinations involving Liberty Pensions (FoS reference DRN0206955) which involved Mr D transferring £26,000 from a personal pension to a Liberty SIPP in 2012 on an “execution- only” basis.
Mr D made an unregulated investment into a business called Ethical Forestry which was introduced to him by an unregulated introducer called Avacade. Judgement is currently awaited on civil proceedings brought by the FCA against Avacade.
The FoS determination runs to 45 pages and in this commentary I only highlight briefly three areas which I believe should cause concern to SIPP providers and may also be of interest to a wider audience. I should stress that any FoS determination is based on the circumstances of the particular complaint and is not necessarily of broader application. In particular my views should not be seen as a comment on this particular determination.
- The roles and views of FoS and the Pensions Ombudsman (PoS)
Liberty argued that Mr D’s complaint should be referred to the PoS. Historically, I believe there was an understanding that FoS dealt with complaints relating to advice and that PoS dealt with administration complaints. That distinction seems to have been blurred in recent times despite the 2017 memorandum of understanding between the two organisations.
The FoS criteria for a determination are “fair and reasonable in all the circumstances of the case” whereas PoS determinations are based on matters of fact and law. This distinction is crucial and it is easy to understand why claims management companies (CMCs) have favoured referral to the FoS.
In the past PoS have made several determinations with clear parallels to the recent case. Specifically, in Goodwin v Berkeley Burke (BBSAL) an investment was made in 2011 on an execution-only basis via an unregulated introducer in a speculative UCIS investment which failed.
The Pensions Ombudsman stated in his determination that the basic checks that BBSAL undertook were sufficient to meet the requirements imposed on them by the regulator and HMRC for such investments at the time. PoS concluded: “I cannot apply current levels of knowledge and understanding, or present standards of practice, to a past situation.”
The PoS approach seems to be at odds with the stance taken by FoS in this and earlier cases. This divergence is unhelpful and clearly encourages regulatory arbitrage which is unreasonable and arguably unfair.
- A provider’s investment due diligence requirements
Linked to the first point is the whole issue of investment due diligence. The FoS determination regarding Mr D quotes extensively from the 2009 FSA Thematic Review and also refers to the second review in 2012, further guidance issued in 2013 and the Dear CEO letter in 2014.
What it ignores is that the 2009 review failed to mention “investment due diligence” as an area of concern and indeed it was not until the 201'Dear CEO' letter that specific requirements were identified. Until the second review few SIPP providers undertook detailed investment due diligence other than from a HMRC standpoint. In the 2012 review the FSA said that providers should assess “that investments are appropriate for personal pension schemes” - without defining what was “appropriate.”
There was nothing in the 2012 report to suggest that all existing investments had to be reviewed. Indeed in an independent report for AMPS (Association of Member-Directed Pensions Schemes) in 2014 the author confirmed that he was “not aware of any firm which interpreted the FSA thematic review as requiring such a retrospective audit …..I would have expected any such requirement to have been spelled out explicitly by the FSA.”
In the light of this and an absence of any guidance on the matter from the FSA during the period 2009-2012 I would ask whether the retrospective application of what is seen as good practice today is fair and reasonable?
- The impact for “execution only” business
The determination considers in some detail the responsibilities of a SIPP provider where the application was made on an “execution only” basis. In Mr D’s case he had also signed an instruction form where he took responsibility for the transfer to his SIPP and confirmed he had been recommended to seek regulated advice but had chosen not to seek advice.
He also acknowledged the high risk and speculative nature of the investment and its illiquidity. The subject of consumer detriment receives a lot of attention with a comment from FoS that, “it’s reasonable to say that that the likelihood of consumer detriment is much higher where customers haven’t received advice from a regulated adviser.” The Ombudsman accepts that Liberty was not required to make an individual assessment of suitability but suggests that they should have concluded that the investment was “highly unlikely to be suitable for a significant part of the investment of any investor.”
Aside from the obvious potential implications for any SIPP provider that has accepted investments on an “execution only” basis I would suggest that the Ombudsman’s comments must raise concerns for all providers that have, in the past, accepted on an execution only basis “standard” investments that have failed.
In a policy paper earlier this year which was passed to regulators and other parties I suggested that all standard “assets” should be deemed “appropriate” for all investors and that “non-standard” assets should only be available to “sophisticated” investors and high net worth individuals - this would apply regardless of whether the investor had received advice. While this would not necessarily resolve past issues it would at least provide some certainty for the future.
There are other aspects of the FoS determination which are important and which I cannot include in this commentary. In particular the role of unregulated introducers and the responsibilities of providers in this context. Again, I have concerns about the application of regulation with the benefit of hindsight.
The consequence of Liberty entering into administration is that liability for claims now shifts to the FSCS the costs of which will be borne by all regulated organisations subject to the levy - including advisory firms and providers. Again, I question whether that is fair and reasonable in the circumstances? Surely there must be a better way of resolving these and similar matters through some form of independent mediation where CMCs would have a limited role and where compensation would reflect the balance of responsibilities of all parties involved.
However, my overriding concern is the impact of the latest FoS determination on SIPP providers – following on from the Berkeley Burke judicial review findings in 2018 - and the encouragement that it will provide to CMCs. It is interesting that in their notice on this case the FCA specifically warns former customers of Liberty to be “cautious if you are approached by one of these companies” as “there is no benefit in involving a third party in making a claim and you will be charged for their services.” Sound advice but I question how much impact that will have given the aggressive marketing and PR campaigns adopted by many CMCs.
In the absence of any legal rulings, including on the Carey Pensions case, I fear that CMCs will pursue many more claims on similar grounds. The overhead and administrative costs for SIPP providers of these claims is significant and growing.
If the claims and adverse determinations continue this will almost inevitably lead to more provider failures – potentially including some large players – which in turn could threaten the jobs of many employees. Is that really fair and reasonable?
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.