I highlighted three aspects:
- The differing roles and views of FoS and the Pensions Ombudsman (PoS).
- A SIPP provider’s investment due diligence requirements
- The impact for “execution only” business
In the absence of any legal rulings I raised concerns that Claims Management Companies (CMCs) would take advantage of the favourable climate and pursue many more claims. I was unaware that the long-awaited judgment in the Carey Pensions case was imminent and would provide some clarification on the above issues and make some other important decisions.
Before considering the Carey Pensions judgment in more detail I should emphasise that it has been suggested that the judgment will be appealed. This could mean further months of delay before we know for sure the application of the law to this particular case.
It is important to appreciate that the judgment relates to the circumstances of this case which involved a high risk investment – not a fraud or scam - on an execution-only basis with the involvement of an unregulated introducer and with an inducement offered to the investor. Drawing conclusions that might apply to future cases without all these features is dangerous.
However, despite the caveats, I believe the judgment is a “blow” for the CMCs who have been intent on holding SIPP providers to account for just about any malfunction of a SIPP. I also believe it is a serious embarrassment for the FCA who intervened in this case.
I find it very surprising that the FCA, in acknowledging the importance of the case, have been quoted as saying that “they have been clear about our expectations for SIPP operators in a number of previous publications. Operators should continue to meet these.“
This seems at odds with some parts of the judgment where it was confirmed that there was no obligation on the SIPP operator to refuse to accept high-risk investments into an execution-only SIPP or to consider the suitability of those investments. The FCA has consistently balked at defining what was a “suitable” or “appropriate” investment. Perhaps now they will accept that such a definition would be helpful.
A significant part of the Carey’s ruling was in relation to the impact of regulation and specifically the COBS regime on contractual terms. The judge was clear that the execution-only agreement between the provider and the client in this case was crucial and that regulatory requirements did not override the contract under which the investor took responsibility for their decisions. It can be assumed that the same conclusion would be reached if the investor had taken regulated advice in that the provider could not be held responsible for an investment that failed or performed poorly.
On the issue of investment due diligence, it is important to note that inadequacies in this regard were not part of the claim.
However, during the court case it was very clear that Carey had focussed entirely on due diligence from an HMRC standpoint - and like many providers at the time had engaged a leading regulatory support firm who supported Carey’s own views and findings.
The judge rejected the argument that investment due diligence was inadequate and tellingly also quoted from an FSA letter to Carey in 2011 following a visit which highlighted the “robust processes” that Careys had in place “to ensure that customers are treated fairly.” I know of at least one other SIPP provider, which has subsequently failed, that had a similar visit around that time following which no remedial regulatory action was deemed necessary.
The judge was also quite dismissive of the argument that the guidance provided by the FSA/FCA in their thematic reviews should be viewed in the same light as the COBS rules and that the guidance “cannot give rise to a claim for failing to follow the suggestions which it makes.”
So where does this leave us? Frankly in a mess with considerable confusion over the large number of past claims and much uncertainty about the “rules” applying in the future.
Should there be an appeal then, as mentioned above, there is likely to be a further substantive delay – and remember it took 26 months for this judgment to be handed down – a delay for which the judge apologised. I think it is essential that the FCA acts now to clarify the rules that apply to future business. This case and other cases, such as Berkeley Burke, relate to the past and simply highlight what a regulatory quagmire now exists.
I suspect this judgment will simply encourage CMCs to avoid courts of law and instead seek increasing numbers of FoS determinations where, as mentioned in my previous article, the criteria are different and less demanding.
The prospect of multiple FoS claims has already pushed more than one SIPP provider into administration and I fear more will follow despite this judgment. That in turn is likely to put further demands on the FSCS. A well-known law firm in their commentary on the Carey case have said that “SIPP providers should not be judged with the benefit of hindsight but according to the applicable law at the time of the events in question. However a key concern of the SIPP industry is that FoS and FCA have done just that…”.
Perhaps the judge’s view that regulatory guidance is not law will cause the FCA and FoS to pause and review whether basing arguments on vague FCA principles and old and outdated thematic reviews is “fair and reasonable”. Whether they do that will help determine just how much significance should be attached to this judgment.
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.