Court upholds Ombudsman decision that SIPP administrator should have made more checks on investments

In a landmark decision for both the SIPP and wider financial services industry, the High Court has upheld a Financial Ombudsman decision that a SIPP administrator should have undertaken significantly more due diligence before accepting an investment into its SIPP, despite numerous disclaimers signed by the scheme member.  The court rejected arguments that the Ombudsman had created a new rule, holding that he had simply applied the FCA Handbook principles that require firms to "conduct…business with due skill, care and diligence" and to treat customers fairly.  It also rejected a legal challenge based on lack of consistency with Pensions Ombudsman decisions on similar issues.


The complaint which gave rise to the decision by the Financial Ombudsman Service (FOS) had been brought by a member who had sought to invest his pension fund in a "green oil" scheme.  This purportedly involved buying plots of land in Cambodia from a company called Sustainable AgroEnergy plc (SA).  The member signed various documents acknowledging that Berkeley Burke SIPP Administration Ltd (BBSAL), his SIPP provider and administrator, was acting on an execution only basis, that BBSAL had not provided advice on the investment, that BBSAL strongly advised him to take financial advice and that BBSAL could not be held responsible for any losses arising from his investment decisions.

The "investment" turned out to be a scam.  SA, which was subsequently put into receivership, had no title to the land that it had purported to sell.  The member brought a claim against BBSAL to recover the funds he had lost.  FOS held that BBSAL should compensate the member.

Key to FOS's decision were Principles 2 and 6 of the FCA Handbook, which provide respectively that:

  • a firm must conduct its business with due skill, care and diligence; and
  • a firm must pay due regard to the interests of its customers and treat them fairly.

FOS held that Principles 2 and 6 together meant that BBSAL was obliged to carry out due diligence on the investment – due diligence that went way further than simply checking that the investment was 'SIPP-able' (ie of a type that would in principle benefit from the favourable tax treatment available to SIPP investments).  It said, "For BBSAL to accept everything 'SIPP-able' that came its way and ask its customer to accept warnings absolving it of the consequences wouldn't…be fair and reasonable or sufficient."

FOS accepted that BBSAL had no obligation to give investment advice or assess the suitability of the particular investment for the member.  However, it held BBSAL should have:

  • identified the investment as high-risk, speculative and non-standard, meaning it should have carried out "sufficient" due diligence and considered whether the investment was "appropriate" for a pension scheme;
  • ensured that the investment was not a scam or linked to fraudulent activity;
  • independently verified that SA's assets were real and secure, and the investment operated as claimed; 
  • ensured that the investment could be independently valued, both at point of purchase and subsequently.

In the words of BBSAL's lawyers, this meant that the "..scope of the duty that the Ombudsman found was extensive. He had suggested that a SIPP administrator ought to have investigated and verified the foreign title in the underlying land asset. It should have travelled to the foreign jurisdiction to verify that the land was being used for its stated purpose. It should have obtained legal opinions to ensure the scheme complied with foreign law and regulations. It should have ascertained the method by which the business enterprise might be valued and realised. It should have investigated the general viability of that type of investment in crops. The administrator ought to have scrutinised the company accounts to determine whether the certified auditor (PwC) had included disadvantageous caveats. In short, the duty of a SIPP administrator was effectively to become an overseas fraud investigator."

Nevertheless, applying these factors, FOS held that BBSAL should have concluded the investment wasn’t "acceptable" for the member's pension scheme and that BBSAL should compensate the member.

The High Court case

BBSAL brought a legal challenge to the FOS decision by way of judicial review proceedings.  Its key arguments were:

  • FOS had impermissibly used the Principles in the FCA Handbook (Principles) to create "new unexpected duties";
  • FOS's decision as to BBSAL's duties conflicted with BBSAL's duty under a specific rule of the FCA Handbook, COBS 11.2.19R, which provides that whenever there is a specific instruction from the client, the firm must execute the order following the specific instruction; and
  • FOS's decision created an inconsistent approach between FOS and the Pensions Ombudsman, who had rejected similar complaints by consumers.  This contravened the principle of public law that decision-makers should act in a broadly consistent manner.

The High Court rejected these arguments.  It held:

  • FOS had not created a new rule.  The Principles were existing rules, which FOS had simply applied to the circumstances of the case, having concluded that it was "good industry practice" (not necessarily the same thing as common industry practice) to check before accepting an investment into a pension scheme that it was what it purported to be.
  • It was acceptable for FOS to apply the Principles to the facts of the case in a way that was not spelt out in specific rules.  FOS has "the widest discretion" to decide what is fair and reasonable and apply the Principles to the particular facts before it.
  • There was no conflict between (a) FOS's application of the Principles and (b) COBS 11.2.19R.  COBS 11.2.19R is concerned with the method of execution once an order has been accepted.  The Principles were applicable to the question of whether BBSAL should accept the investment in the first place and COBS 11.2.19R applied to the execution of the transaction once that decision was made.
  • BBSAL could not challenge FOS's decision based on inconsistency with Pensions Ombudsman decisions, as the two Ombudsman services operate under different statutory schemes, and the criteria prescribed for FOS decisions are different to those under the Pensions Ombudsman regime. The tenor of the judge's comments suggest he had a lot of sympathy with the member's circumstances, noting that it was not clear to him that "..the facts of any of the [PO] cases were quite as stark as Mr. Charlton's case, where the underlying assets did not exist."

What next?

It has been reported that Berkeley Burke intends to seek leave to appeal.  For Berkeley Burke it appears that a lot hinges on the outcome, as the judgment indicates that over 600 other individuals also put funds in the same "investment" scheme using Berkeley Burke SIPPs. The same is likely to be true of other SIPP providers that allowed similar non-standard investments into their schemes. Nevertheless, one of the significant challenges for BBSAL and other providers with similar issues, is the constraints on how judicial review actions and appeals from such rulings can be framed. 

A High Court judgment is also expected imminently in the case of Russell Adams v Carey Pensions UK LLP which also involves issues relating to high risk investments made via a SIPP, and which we understand is being used as a test case.

On 30 October 2018, the date the Berkeley Burke judgment was handed down, the FCA issued a "Dear CEO" letter drawing attention to the Berkeley Burke judgment and other pending civil claims dealing with SIPP operators' due diligence obligations when accepting customers' investments.  The letter states that the relevant Principles and other relevant FCA Handbook rules are not new or amended requirements, but regulatory obligations that came into force in April 2007. This was also the line taken by FOS, in response to arguments that BBSAL had complied with the published FCA standards of the time (which in fact were extremely light on detail until it published the results of its thematic reviews and further guidance in 2012 and 2013). FOS asserted that BBSAL should have known what Principles 2 and 6 required in this context when FCA wrote to it in 2009 to remind it that ""…the firm is responsible for taking the appropriate and ongoing measures to ensure that it is compliant with the FSA's principles and rules and that its clients are treated fairly." , On that basis FOS concluded that it was not judging BBSAL with the benefit of hindsight. However that is a position that many SIPP providers may not agree with. 

The FCA says that it expects SIPP operators to consider the potential implications of the Berkeley Burke judgment and other cases.  If the outcome of the case calls into question a firm's current or future ability to meet its financial commitments as they fall due, the firm is required to notify the FCA immediately.  The FCA also flags that firms may need to notify claims to their professional indemnity insurers.

There was also a warning shot across the bows from the FCA to SIPP providers who may be looking to sell or restructure their businesses ahead of potential FOS claims crystallising. FCA stated that:

"We recognise that if a firm may not be able to meet its financial commitments, it may be in the interests of some of its customers for part or all of its business to be sold to another firm. If your firm does so, we remind you that our Principles for Businesses require your firm to pay due regard to its customers’ interests and treat them fairly. In particular, in pursuing any sale, your firm should pay due regard to its implications for customers who may have compensation claims. We expect all Directors, as well as complying with the relevant provisions of the FCA Handbook, to comply with their statutory and non – statutory duties. These include, where a firm is at risk of insolvency, their duties to creditors, such as customers to whom compensation is or may be due." 

Directors of SIPP providers who are aware of the risk of contingent future FOS claims may need to tread carefully and take advice on their duties to creditors as well as shareholders.

Final thoughts

FOS has made it clear that it expects SIPP operators to take reasonable steps to ensure that an investment is genuine, that the SIPP operator or trustee has good title to the asset, and that the SIPP only accepts assets in relation to which it will be able to undertake realistic valuations.   It seems unlikely that the FCA or FOS will alter its position in relation to past or future cases, so SIPP operators will need to have extremely robust due diligence processes in place to ensure that investments accepted in the SIPP meet these requirements.  Getting members to sign disclaimers, even strongly worded ones, will not let the SIPP operator off the hook in relation to their due diligence requirements

On a broader level, this judgment is a reminder that, whatever specific rules may say on a particular subject, authorised firms should always consider whether their conduct meets the overarching requirement to treat customers fairly.  The court has confirmed that FOS does not have to be able to point to the breach of a specific rule in order to uphold a customer complaint, but has "the widest discretion" to apply the Principles in the FCA Handbook on the basis of what is "fair and reasonable". 

Given how wide the FCA's Principles are framed, some SIPP providers might legitimately ask how they can be expected to know exactly what requirements are imposed "at the coalface" in advance of customers bringing test cases to FOS and the courts? Other SIPP providers who have historically adopted a more cautious approach on SIPP investments may feel vindicated by the court's approach and may be well placed to seek to acquire the businesses of SIPP providers who are most impacted by the ruling, assuming that the appetite is there to do a deal in line with the spirit of the Dear CEO Letter. Recent press reports in connection with Embark's acquisition of Liberty SIPP's SIPP book suggest such deals are still possible[1].



Key contact

Jade Murray

Jade Murray

Partner, Pensions
United Kingdom

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Addleshaw Goddard LLP has for many years been one of the leading firms involved in acting for buyers and sellers of SIPP and SSAS businesses, both on an ongoing basis and in distressed scenarios. AG's SIPPs team, led by Jade Murray, acts both buy and sell side and includes specialists in our pensions, corporate, restructuring and financial regulation teams with long standing experience of completing transactions in this sector. The team has a reputation for combining technical acumen and a clear understanding of the expectations of FCA and other regulators, with commercial pragmatism and a focus on getting the deal done.  

Please speak to Jade if you would like to discuss the issues raised by this briefing or are interested in buying or selling SIPP books of business. 

[1]See for example