THE CAREY CASE: A RESET FOR SIPP PROVIDER LIABILITY OR A CASE CONFINED TO ITS FACTS?

Whether the SIPP provider, acting on an “execution-only” basis, was liable to the claimant investor for damages and a return of funds for investment losses alleged to stem from allowing him to invest via the SIPP in an unsuitable property investment (store pod rentals) over the February to June 2012 period. 

Claims were brought for breach of statutory duty and negligence, alleging amongst other things that:

• the SIPP provider conducted a "joint enterprise" with an overseas, unauthorised, unregulated introducer to procure new customers using its SIPP as a vehicle for unsuitable investments, and because of the "joint enterprise" aspect the SIPP provider was liable for the introducer's negligent investment recommendations;
• there was a breach of the regulatory regime in establishing the SIPP as a result of the acts of the introducer, rendering the SIPP unenforceable under s.27 of FSMA and justifying a return of the claimant's original SIPP fund plus compensation; and
• there was a breach of COBS Rule 2.1.1 to act honestly, fairly and professionally in accordance with the best interests of the claimant, due to a failure to put in place systems to prevent unsuitable investments within the SIPP facilitated by unsuitable introducers.

The court dismissed all the claims and found in favour of the SIPP provider.

1.  Was the SIPP provider at fault for accepting "execution-only" business? 

No. The claimant criticised the provider's execution-only model but the court held he was the author of his own misfortune. The claimant admitted that:

• he knew the investment was high risk and he would still have made the investment even if he had obtained financial advice, and despite the fact that the investment related to a significant part of his wealth and was highly important to him;
• the risk warnings in the SIPP provider's literature were sufficiently clear and prominent about that and so he was held to have willingly accepted the risks of his investment decision; and
• he had accepted a £4,000 inducement payment from the introducer for choosing the investment (contrary to a declaration he gave to the SIPP provider and even though he knew this might breach HMRC rules) and his ability to "extract" as much money from his pension as possible was why he was so keen on the investment despite it being high risk.

In contrast the provider:

• always recommended in its literature that customers obtain financial advice before investing in a SIPP even though it was prepared to accept new "execution-only" customers;
• didn't know what advice, if any, the introducer may have given beyond recommending the underlying investment and recommending the defendant as a SIPP provider;
• stated clearly in its customer literature (application form, declarations form and customer terms) that it did not provide advice and acted "execution-only" and that customers were responsible for their investment choices, and the judge held that the claimant understood that; and
• once it realised that customers were receiving inducement payments to take out the investments (contrary to what it had been told by the introducer) it terminated the introducer agreement and ceased to accept new investments from it.

2.  Did the SIPP provider carry out inadequate introducer due diligence?

It was argued that there were enough red flags about the introducer to mean that the provider should not have dealt with it. Reference was made to provider discussions about the level of commission received by the introducer from the store pod company.

Rather helpfully however the provider was subject to an FSA visit in September 2011. The FSA found (and confirmed in writing to the provider) that:

• the provider had conducted appropriate due diligence on regulated introducers to satisfy itself that they were qualified to introduce SIPP business;
• the provider was in the process of extending its introducer vetting to include a non-regulated introducer checklist and enhanced monitoring processes and FSA supported that approach, noting that the enhanced processes needed to be completed before the provider accepted business from such firms; and
• the provider appeared to have adequate processes in place and was committed to their continual review and improvement.

The judge held this demonstrated that the FCA was fully aware that unregulated introducers were introducing investors so that SIPPs could be established on an execution-only basis. Had the FCA formed the view that this was in breach of SIPP provider duties, it would have said so.  The judge concluded that it was as a result of the FSA's review and conclusions at that time that the provider introduced its terms of business for unregulated introducers and did business on that basis. 

The claimant also argued that the provider's decision in May 2012 to stop accepting new business from the introducer (once it became aware that inducement payments were being made) should have happened much earlier. In 2010 the FCA had issued a warning about one of the directors involved with the investment who was not authorised to carry out regulated activity. The provider accepted it didn't check this until May 2012 shortly after which it ceased to accept new introductions, and that if it had checked this earlier it would not have dealt with the introducer. However the judge held that the provider was not at fault for allowing the claimant's investment to proceed in circumstances where he had already signed all the paperwork and the investment process was near to completion.

3.  Did the SIPP provider carry out inadequate investment due diligence?

In our view an important aspect of this case (including as to its "precedent" value) relates to the fact that inadequate investment due diligence was not pleaded by the claimant as part of the provider's failings. An attempt was made at trial to argue that the provider failed to conduct adequate investment due diligence but because this wasn't pleaded by the claimant's lawyers the judge gave this short shrift. Nevertheless, to the extent that he could form a view, he still held that the allegation was contradicted by the evidence.

The provider had concluded that although the investment could be high risk and / or speculative, it was legitimate and permitted by HMRC guidelines i.e. it was not tangible moveable property and would not trigger tax charges. It had obtained a report from a SIPP compliance consultant on the investment's suitability to be held within a SIPP but it did not consider the investment's suitability in any other contexts. It internally reviewed the legal documents relating to the investment and conducted "significant research" on the investment including checks on directors, shareholders and company reports and accounts. 

In common with the standards of the SIPP industry in 2011 (and the standards found to be adequate at that time in some Pension Ombudsman rulings), the provider's investment due diligence was wholly focused on HMRC pensions tax rules and avoiding triggering tax charges, and not on any wider or customer specific suitability requirements. On the limited evidence and arguments raised, and in stark contrast to the tenor of the court's views in the Berkeley Burke case, the judge held this was compliant.

4.  Was there a joint enterprise between the provider and the introducer to give negligent advice?

The court found no evidence to support this argument. There was no joint enterprise arrangement, either to provide advice to the customer or otherwise, and no payments were made between the provider and the introducer. The terms of business between the provider and introducer clearly described their respective roles as such and expressly excluded any partnership, joint venture, employment, agency or client agreement between them. They operated independently of one another and the introduction of a customer by the introducer to the provider did not automatically mean they would be accepted into the SIPP – that was still subject to provider discretion. 

The provider's focus was on acceptance of the investment, and its business model was that customers could choose to access accepted investments on an execution only basis through its SIPP. It was not aware of any negligent advice being given by the introducer (if any such advice was given, as distinct from a recommendation, which wasn't proved) and it therefore did nothing to facilitate it. There was no common design.

5.  The "Section 27 claim"

Section 27 of FSMA states that an agreement made by an authorised person in the course of carrying out regulated activity but in consequence of something said or done by an unauthorised third party carrying out regulated activity is unenforceable against the customer of the authorised person.  The claimant raised a number of technical arguments to contend that:

• the introducer had given regulated investment advice to the claimant; and
• the SIPP provider had delegated part of the arrangement of the SIPP including an explanation of the SIPP product to the introducer
• and in both cases without the introducer having the necessary permissions. Consequently the SIPP provider's customer terms were said to be unenforceable against the claimant and he was entitled to recover his original pension pot and be compensated for lost investment return. 

This was an area of particular interest for FCA, which submitted arguments on these points in support of the claimant's position. Thus these issues assumed more importance at trial than was suggested by the pleadings.

The court upheld the SIPP provider's arguments, finding that the introducer acted as a "bare introducer" and not as an "investment arranger" within the meaning of the regulated activity. In order for the s.27 claim to succeed there had to be regulated "arrangements" made by the introducer that directly and substantially brought about the decision to take out the SIPP. However the introducer's actions, such as advising on the underlying store pods investment, making introductions to the SIPP provider, procuring letters of authority and transfer discharge forms, assisting with anti-money laundering compliance and completing the SIPP provider's application forms, were not enough. Further steps were necessary to establish the SIPP for the customer and these were beyond the introducer's control. 

The court also held that the claimant had not pleaded sufficient arguments or provided enough evidence to make its case on some of these points, including on the question of whether the introducer had provided regulated advice on the SIPP (as distinct from giving a brief recommendation relating to a particular UK pension provider).

Furthermore even if the court was wrong about that, in all the circumstances and particularly given the claimant's determination to go through with the investment no matter what, it would have been "just and equitable" for the SIPP provider's terms to remain enforceable without requiring any return of funds or compensation.

6.  The "COBS claim"

It was argued that the provider failed to have systems to prevent unsuitable investments within its SIPP facilitated by unsuitable introducers and thus breached COBS Rule 2.1.1 (the 'client best interests rule'). Such failures included:

• failing to follow FCA's guidance and expectations set out in its 2009 thematic review on SIPP operators and its 2011 retail conduct risk outlook;
• dealing with an unregulated introducer that was carrying out regulated advice activity without permission;
• failing to check that the claimant has received advice in respect of the SIPP and the underlying investment and request a copy of the relevant suitability report;
• failing to spot or monitor the unusual nature of the underlying investments being recommended by the introducer in time to prevent the claimant from contracting;
• failing to identify that execution only clients of the introducer routinely signed disclaimers taking responsibility for their investment decisions; and
• failing to identify why the application form signed by the claimant recorded that he had waiver his cancellation rights. 

In summary the provider had to take responsibility for the quality of its SIPP business and investments and should have had processes and controls for identifying consumer detriment and unsuitable SIPPs. It should never have accepted the store pods investment in the first place. 

The FCA also argued that COBS Rule 2.1.1 imposed obligations on the provider:

• to assess both the introducer and the proposed investment and that a provider could refuse to proceed with an investment without crossing the line into giving regulated advice;
• not to accept an investment of a kind that is inappropriate for any SIPP investment;
• not to accept any SIPP investment by a retail customer who is not known to have received independent regulated advice about the investment.

In essence, both the claimant and the FCA argued that a SIPP provider had a duty to refuse to accept high-risk investments into an execution-only SIPP.

The court disagreed. In what may prove to be the most significant part of the ruling, the judge held as follows:

1. Factual context mattered when construing the scope of the client best interests rule. Here, and consistent with the general principle that consumers should take responsibility for their decisions, the most important context was the execution only agreement between the provider and the claimant.
2. Nothing had been drawn to the judge's attention to demonstrate that the COBS regime was intended to take precedence over the contractual terms between the claimant and the provider or that the execution-only contract between them was unenforceable.
3. The claimant's arguments were inconsistent with the execution-only contract with the provider whereby he was responsible for his own investment decisions and the provider was clearly not advising him.
4. There was no duty on the SIPP provider to refuse to accept high-risk investments into an execution-only SIPP or consider the suitability of the SIPP or the investment. A duty to act honestly, fairly and professionally in the best interests of the client, who has agreed to take responsibility for his own decisions, cannot be construed as meaning that the terms of the contract should be overlooked, or that the client is not to be treated as able to take responsibility for his own decisions and that his instructions are not to be followed. 
   No reference was made in the judgment to any arguments about applicable trustee or fiduciary duties. However the provider's customer terms were construed as limiting its investment discretion and held not to confer a positive obligation to choose particular investments or refuse investments on the grounds the customer had made an unsuitable choice. The provider had given sufficient risk warnings to comply with any duty that it may have had.
5. The ruling in the Berkeley Burke case (to which the judge's attention was drawn after the trial) was to be distinguished because key features of that case were different. In particular:
   (a)  that case involved a judicial review of an ombudsman ruling;
   (b)  it also concerned a scam investment whereas here, it had not been pleaded or evidenced that the store pods were a scam investment;
   (c)  the nature of the claims, the way they were pleaded and the alleged breaches of law were different; and
   (d)  here the judge did not have to rule on the question of investment due diligence prior to the provider's acceptance of the store pods investment – although as noted above the judge still held that even if he had had to consider that, he would have decided that the provider did conduct adequate due diligence.  
6. No evidence had been provided to suggest the provider didn't act honestly or that the SIPP was inherently an unsuitable SIPP.
7. As to whether the investment itself was unsuitable, the claimant alleged that the investment in store pods was manifestly unsuitable for pension fund investment for various reasons, including uncertainty and contingencies relating to likely investment return; the erosion of value by charges; illiquidity; weak legal rights; lock-in period; and market / valuation risk. However the judge held that insufficient expert evidence and analysis had been given to sustain that claim. It was acknowledged that the investment was speculative and high risk but that was not the same as saying it was manifestly unsuitable for the claimant. To the extent that the investment had features that made it high risk, these appeared typical of real property investments of the type in question.   
   The claimant's SIPP was established with a pension transfer of c.£50,000 and he alleged that the size of that fund should have put the provider on notice that the store pods investment would be unsuitable. The court disagreed, holding that was insufficient information on which the provider could have formed such a view. 
8. There was no causal link between any alleged breach of COBS and any losses sustained because the claimant was determined to go through with the investment.   
9. In contrast with the express right to seek damages for breach of FCA handbook rules under section 138D(2) FSMA, there was no equivalent right to bring a claim for breach of FCA guidance. FCA's thematic review did not amount to FCA rules or even guidance and therefore failure to follow it could not found a claim for damages under FSMA. Nor was it a proper aid to statutory construction of the COBS rules, which fell to be determined in accordance with usual legal principles of construction applied by the courts. The same was true of other reviews, guidance and alerts published by the FCA in 2013, 2014, 2016 and 2017 all after the events in question.

It was mentioned in the course of submissions that the SIPP's investment might have involved a UCIS which in turn might have triggered a breach of separate duties. However as with other potential types of claim the claimant might have made, because this was not specifically pleaded by the claimant the court didn't engage with it. 

Nor was any claim made for breach of contract based on the SIPP provider's customer terms (i.e. the application form, T&Cs, declaration and indemnity and the scheme rules). Consistent with the tenor of the rest of his ruling however the judge said that even if that had been asserted, on the facts he would have rejected such a claim. 

This is a case in which the High Court has upheld a view of SIPP business models shared by SIPP operators themselves. That is, that a SIPP operator is legally responsible for the pension wrapper and compliance with tax rules but not member investment decisions; and that providers should be able to do "execution-only" business without becoming culpable on a "with the benefit of hindsight basis" for customers who deliberately and knowingly choose high risk speculative investments. The clue is in the name after all – "self-invested personal pensions". 

That view has been under sustained attack in recent years by customers who have experienced failed high risk investments within their SIPPs. With limited or no effective recourse available against the unregulated introducers and the underlying investment providers, customers have increasingly sought to blame the SIPP provider, encouraged by CMCs and FOS, and with the implicit (or sometimes explicit) support of the FCA. Claimants have been able to play regulatory arbitrage with different Ombudsmen and providers have increasingly been held liable by FOS for their customers' investment choices when things go wrong.  

The high watermark of this trend was 2018's controversial Berkeley Burke case, which is well known to the SIPP industry and which could justifiably be said to have caused more than one SIPP provider to go out of business. But the Carey case goes the other way, is almost the polar opposite in tone and approach from Berkeley Burke, and shows complete sympathy for a SIPP provider whose documents and risk warnings made crystal clear that the real risks of investing in store pods lay firmly with the client. 

Whilst this is an extremely welcome "win" for the SIPP industry and the SIPP provider in question, it does not as a matter of law overrule Berkeley Burke and we are cautious as to whether it can be seen as "resetting" the trend of SIPP provider liability more generally. Whilst all cases depend on their facts, there are features of this case that would make it very easy indeed for another court looking at a similar case to decide against the SIPP provider. We say that for a number of reasons:

1. Unsympathetic claimant: the judge was heavily influenced by the evidence given by the claimant, who admitted in cross-examination that he was determined to go ahead with the investment despite all the red flags and risks because he wanted the inducement payment that came with it. In effect, it was irrelevant that he was allowed to access a store pod investment through a SIPP without financial advice. He wouldn't have done anything differently even if he had had financial advice. 
   On the facts, this was a claimant whom the judge clearly felt should be required to take responsibility for his own choices. However query where another judge's sympathies would lie in a similar case if there was no inducement payment and a more vulnerable customer gave evidence that they were pressured into an execution-only investment and would have acted differently if they had been forced to take advice, or that they did not understand the separation of roles between the regulated and unregulated entities?
2. The way the claim was pleaded and argued: the claimant's case appears to have been pleaded on quite narrow grounds and then presented at trial with a minimum of supporting argument and evidence (noting that the FCA felt compelled to intervene in the proceedings and raise its own arguments). In our view, there were other types of legal claim and arguments that could have been run but weren't, and the judge alluded to this as well. Not all of the Berkeley Burke arguments were raised for example, including the fairly fundamental issue of investment due diligence duties (see below). This would provide an easy way to distinguish this case from other cases where there was a greater focus on investment due diligence.  (The judgment records that the SIPP provider ultimately had approximately 580 clients who invested with the company providing the store pods, investing something in the order of £29 million over 6 months. Most had come via the introducer.) 
   No evidence of substance appears to have been provided to support a number of the claimant's arguments, including on: the "joint enterprise" allegation and that the introducer had given negligent advice; that the SIPP itself was unsuitable;  why store pods were manifestly unsuitable for SIPPs; why the provider had not acted honestly and so on. Of course, it may be that there was no such evidence to present, but one is left with the impression that this was a long way from being a strong example of a case that could be brought against a SIPP provider in this context. 
3. Investment scams and investment duties: one of the reasons the judge distinguished Berkeley Burke was because that case involved a scam investment whereas this case involved a store pods investment that was accepted was high risk and speculative but where no evidence was presented to justify a finding that it was a scam. The evidence before the court was that the store pod leases did have a value of approximately £15,000 in January 2017.  This was much less than the claimant's SIPP had paid for them, but this was not a case where the investment had no value.  Query whether the courts' sympathies will incline more to claimants in "scam" cases rather than non-scam cases? Quite possibly. But should they?
   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, and that the court in Berkeley Burke endorsed that approach when it drew its conclusions about the level of investment due diligence that providers should apparently have known was required based on vague FCA Principles and early FCA thematic reviews. 
   The judge's ruling that an alleged failure to follow FCA's guidance (which is not law) cannot found a damages claim under FSMA is to be welcomed. But that is a completely separate issue to the point at the heart of the decision in Berkeley Burke, where investment due diligence duties were held to exist under FCA Principles 2 and 6 of the FCA Handbook. Therefore this ruling will not in our view force FOS to approach failed SIPP investment complaints differently to how it currently deals with them. It doesn't "overrule" the line of reasoning in Berkeley Burke because the judge here only considered the effect of COBS Rule 2.1.1 and not the FCA Principles.  Remember that the court in Berkeley Burke commented that FOS has "the widest discretion" to decide what is fair and reasonable and apply the Principles to the particular facts before it. One could argue that this ruling has no impact on FOS's current approach at all. 
4. FCA warning: the FCA has warned SIPP providers that they should continue to assess non-standard investments for suitability as outlined in its July 2014 "Dear CEO" letter notwithstanding the ruling in the Carey case.  The Financial Ombudsman Service has reportedly defended its approach to SIPP complaints, commenting that the High Court upheld its approach in the Berkeley Burke case.  It has been reported that the claimant has sought permission to appeal, and we need to see whether an appeal goes ahead  before we can draw any final conclusions on the technical legal issues or its true precedent effect. We do think it is helpful that the judge reiterated that regulatory guidance is not law and (in effect) should not be treated as such. There has been a huge trend in pensions in recent years to try to legislate through guidance, and for regulators to treat guidance as if it were law, when it only represents their view of the law or the law as they wish it to be. The judicial reminder that that is not the case is helpful. But how much real long-term help this case will prove to be for the SIPP industry remains to be seen. We are unlikely to have seen the end of court cases concerning SIPP provider investment duties.