I feel obliged to return to the subject having read the FOS determination in the case of Mr I and bdhSterling Limited (case reference DRN-3077184). I should add that my comments are based on the published decision without any other information.
For those unfamiliar with this case Mr I was aged 57 when he sought advice about transferring a pension, which was invested in traditional global investments and worth £130k, into a SIPP.
Mr I had assets including two houses valued at around £1.25m, other investments of just under £0.5m, a DB pension of £40k per annum payable from age 60 and another pension worth almost £100k. That suggests a total worth in excess of £2.5m.
No information is provided on his personal situation other than that he was an investment manager at a VC company on a salary of £170k per annum. Mr I had signed a Sophisticated/HNW investor statement - he certainly satisfied the COBS handbook criteria for a HNW individual but FOS were not convinced that he was a “sophisticated investor”.
In 2012 Mr I was recommended to invest £123k via his new SIPP into timber plantations in Brazil via a company called Global Forestry Investments (GFI). The directors of GFI were investigated for fraud by the SFO a few years later. Investment returns were not paid as expected and at the time of the FOS decision the SIPP provider had recorded that the investment had nil value. FOS determined that the investment recommended was unsuitable for Mr I and ordered bdhSterling to pay compensation based on what his investment would be worth if it had been invested in the FTSE UK Private Investor Growth Index.
I don’t think there can be any debate about the unsuitability of the investment. However my concern is that Mr I was clearly a wealthy and presumably educated individual who should have been aware of the risks when he signed the HNW declaration. This decision suggests that the declaration cannot be relied on - certainly for HNW investors. Is that fair and reasonable?
I’ve seen other FOS determinations involving complaints against SIPP providers and FOS appears to be relying on the judgment in the Berkeley Burke/FOS/Charlton & FCA case. That case involved a fraudulent investment in a Cambodian “green oil” scheme.
Berkeley Burke challenged this decision in the courts but lost. Subsequently the courts considered another case, Adams v Options SIPP (often referred to as the Carey Pensions case), involving a genuine investment in storepods. I wrote about the implications of the Appeal Court decision in this case in an article in Financial Planning Today last April. As far as I am aware it is still unknown if Options will be granted the right to appeal to the Supreme Court.
In justifying some of their recent decisions the FOS is quite dismissive of the Carey Pensions case. It argues that FCA principles need to be taken into account and that for Carey Pensions the application of the principles was not considered either in the original judgment or in the appeal. FOS claims that FSA/FCA guidance and thematic reviews regardless of when issued are a reminder that the principles applied from the time that the operation of SIPPs was first regulated.
They consider that investment due diligence should be taken as indicative of industry good practice even though, to the best of my knowledge during the period 2007-2012 when many of these investments were made, almost all SIPP providers limited their investment due diligence to the tax implications of the HMRC rules with perhaps some rudimentary checks on title and potential frauds. Providers genuinely believed that was all that regulation required and, as far as I am aware, prior to 2013 FSA never mentioned investment due diligence in any guidance.
In the original Carey judgment there was limited evidence and argument on the investment due diligence point but the judge found this was compliant – in contrast to the Berkeley Burke judgment. The Appeal Court also left intact the original judgment that the COBS regime did not take precedence over the contractual terms and that there was not a causal link between a breach of the FCA handbook and any financial loss. Of course FOS determinations are based on what they deem to be “fair and reasonable” not necessarily what a court would conclude.
As an aside it is interesting to note that in their recent Consultation Paper CP21/36 on “A new consumer duty” the FCA says that it and the FOS “work on the basis that firms should be held accountable against the standards that prevailed at the time of the problem.” I suspect it will need another court case to determine whether that was the case with SIPPs and investment due diligence. These SIPP cases are of course in the past - and it’s important to note that the circumstances of each case are likely to be different leading to courts reaching different conclusions – and one would hope the same applies to every FOS determination.
While claims relating to past events are still of real concern given the growth in the number of claims I have an even greater concern about the future. It is very clear that the FCA is intent on introducing the new consumer duty regime with full implementation scheduled for April 2023. Others have already raised worries about the subjectivity of the new proposals and the scope for confusion and different interpretations. That seems particularly true in the context of what is fair and reasonable.
I am broadly supportive of the proposals and will look in more detail at some of the practical implications in a future article but at the moment I am not alone in being fearful of a repeat of the SIPP market’s problems – but on a much larger scale.
Further clarification of the interaction of the regime with the FCA’s principles is essential and greater quantification of the measures that are to be employed for assessing compliance with the new duty would be very helpful. Perhaps most of all I would welcome more guidance on just what a fair and reasonable outcome will look like.
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.