Adams v Carey Pensions: relief for intermediaries?
The judgment considers the duties and obligations of a Self-Invested Personal Pension (SIPP) provider (Financial Conduct Authority (FCA) authorised) to a new client. The judge concluded that the claimant, who chose to do business on a so-called execution-only basis and who signed a form containing, near to the signature space, a pro-forma written representation that the claimant was aware that he was making a high-risk, speculative investment, should take full responsibility for the consequences of his decision. The judgment provides a rare judicial view on the scope of the statutory just and equitable defence in the context of the enforceability of contracts entered into in contravention of the general prohibition in section 19 of the Financial Services and Markets Act 2000 (FSMA) and reinforces the preference from a judicial perspective to look at the black letter of the agreement between a SIPP provider and its client in determining the provider’s duties rather than simply imposing regulatory conduct standards in a more purposeful manner.
Although this judgment may be appealed, for the time being it represents a statement of the law applicable to SIPP providers. The judgment sets out legal principles concerning the extent of obligations owed to clients which may be of interest to FSMA regulated intermediaries and execution only service providers beyond the universe of SIPP providers.
Mr Adams, a self-employed lorry driver from South London, 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. The investment in Store First performed badly, with the investment ultimately being worth very little.
A matter of weeks before the trial, the FCA intervened. The FCA was granted permission to make written and oral submissions at trial as to its interpretation of the Conduct of Business Rules (COBS) of the FCA Handbook, FSMA and related legislation including the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO).
Mr Adams pursued claims under two heads: breach of statutory duty and negligence. The former is of particular relevance from a financial services regulatory perspective, and was dealt with by two of the three pleaded causes of action: (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.
Findings in relation to 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). The FCA supported Mr Adams’ position that the activities carried out by CL&P fell within the regulated activities of advising on and arranging investments.
The Court disagreed with the FCA and Mr Adams, and dismissed the section 27 claim. It found that the actions of CL&P fell short of “arranging the investment” and that, crucially, the point at which this issue must be considered was when Mr Adams gave his instruction to invest. Before that point, Mr Adams was not bound to continue with the proposed SIPP investment, nor had he suffered any loss. In addition, the Court did not accept that encouraging an investor to select a specified SIPP provider would amount to a recommendation of a specific SIPP nor amount to “advising” on the merits of that SIPP.
The Court also found that, even if it had ruled against Carey on the section 27 claim, it would not have been just and equitable in the circumstances to deem the SIPP contract unenforceable by Carey. This is because the evidence that the judge relied on demonstrated to his satisfaction that Carey did not know what CL&P was doing (offering Mr Adams an inducement in breach of HMRC rules of £4,000 to enter into the rental pod SIPP) and, given Mr Adams had signed a document which included a representation as to the high risk and speculative nature of the investment in rental pods, the SIPP contract should be upheld. The judge identified a number of contractual provisions which demonstrated to his satisfaction that Carey had systems and controls in place to ensure it was clear that no advice was being provided to a prospective client.
This is, on the face of it, good news for SIPP providers – it shows to a certain extent how the vulnerability of execution-only SIPP providers receiving business from unregulated introducers to a section 27 claim may be mitigated. The section 27 claim failed because the activities of CL&P were held not to constitute advising or arranging (although the Court said that the facts at hand would lead to the conclusion that it was just and equitable to enforce the SIPP contract in any event).
COBS 2.1.1R and SIPP providers’ duties
Mr Adams alleged that Carey breached COBS 2.1.1R of the FCA Handbook, which requires a regulated entity to act “honestly, fairly and professionally in accordance with the best interests of its client”, by allowing Mr Adams to establish the SIPP for the purposes of the investment in Store First rental pods.
The FCA 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 overridden 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.
The Court further noted that, under FSMA, the FCA is required to have regard to the general principle that consumers should take responsibility for their decisions when the FCA is pursuing its consumer protection objective. Mr Adams, when cross-examined, confirmed that he knew the investment was high-risk and also confirmed that this did not impact his decision to invest, and the Court’s view was that there was nothing on the facts to show that he should not take responsibility for his decision.
This finding is also good news for SIPP providers as COBS 2.1.1R was not read as imposing on SIPP providers who provide execution-only services a duty to advise or comment on the appropriateness or suitability of the SIPP or investment. However, we comment further below on the extent to which SIPP providers may choose to rely on this finding, and we note that the finding was based on the FCA materials published at the time of the events which formed the factual matrix for the claim (2012), and so did not take into account the reviews, guidance and alerts published by the FCA in 2013 and thereafter.
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.
This is also to be welcomed as it demonstrates that a SIPP provider in similar circumstances will not be held to be liable in tort for the actions of a third party.
Possible next steps for the FCA
The FCA’s submissions in the main supported Mr Adams’ position, and so it will be interesting to see how the FCA responds to this case (and any appeals).
The Court found in particular that Mr Adams was unable to rely on the FCA’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.
Whilst this may be of comfort to SIPP providers, we would highlight that the Court deliberately excluded from its consideration materials published by the FCA since the events that gave rise to the claim, and disregarded notices and guidance published from 2013 onwards. In light of the statements made around the scope of COBS 2.1.1R duties, we would expect the FCA to take steps (to the extent that these matters are not further dealt with on appeal) to update specific rules and guidance to ensure their views, as stated in their submissions, are more clearly implemented.
As such, it is unlikely that this will be the end of the matter, given the potential regulatory areas that this also raises questions around – including for example the Financial Ombudsman Service’s approach to assessing complaints as far as it relies on FCA guidance and thematic reviews.
Next steps for SIPP providers and other firms
For now, and pending any appellate proceedings, SIPP providers may take some comfort that there has been no immediate finding that, in acting in the best interests of SIPP members, SIPP providers are required to assess the appropriateness of underlying investments for those members.
Furthermore, the judgment is helpful in underlining the starting point of the scope of the COBS 2.1.1R duty as being the contractual arrangement between the parties. SIPP providers may want to take the opportunity to consider whether their contractual documents are in good order and are absolutely clear on the non-advisory nature of execution-only services.
However we do not expect this to be the last word on the issue of appropriateness of underlying investors, particularly in light of the FCA’s consumer protection objective. We query whether the FCA would have the appetite, in making any regulatory changes, to consider implementing new guidance not only in the context of SIPP operators but also across other execution-only service providers (especially where business may be received via an unregulated introducer).
In addition, we would emphasise again that the case was heard on the basis of FCA rules, guidance and notices published as of 2012 when the events giving rise to the claim occurred. The FCA has issued numerous further publications around reliance on introducers and other relevant issues that have made its regulatory position very clear.
We expect that Mr Adams will appeal, not least because the judgment has taken over two years to be handed down for reasons not explained in the judgment. It will be interesting to see how firms providing execution-only services will use the principles expressed in this case, the outcome of any appeal, and the FCA’s response to the Court’s treatment of its submissions.