Court of Appeal's landmark Carey Pensions ruling: what does it mean for your SIPP business?

The Court of Appeal has allowed the appeal in the case of Adams v Options UK Personal Pensions LLP (formerly known as Carey Pensions UK LLP).  The ruling means that SIPP providers who accept business from unregulated introducers will largely bear the risk of the introducer having provided investment advice or made arrangements which breach the general prohibition in FSMA.  The judgment also holds that:

• steering an individual towards a particular SIPP provider can constitute regulated investment advice; and
• recommending an unregulated investment in circumstances where the purchase of it will inevitably involve a transfer from an existing SIPP will also constitute regulated investment advice.

Background

CLP was an unregulated business based in Spain. In 2012 Mr Adams responded to advertisement by CLP suggesting he could release some cash from his pension.  Mr Adams was persuaded by a CLP representative to transfer his pension fund of approximately £50,000 from his personal pension scheme with Friends Life into a SIPP with Carey Pensions in order to acquire leases of storepods in Blackburn.  Mr Adams signed a declaration acknowledging that the investment was high risk and that Carey was not providing investment advice.  He also confirmed he was not receiving any inducement, though (unbeknownst to Carey) CLP had in fact promised him £4000 in cash.  The storepod leases purchased via Mr Adams' SIPP produced just a few hundred pounds in income, and in January 2017 their market value was estimated at £15,000.

Mr Adams brought court proceedings against Carey claiming that (a) his agreement was unenforceable under section 27 of FSMA because it had been made in consequence of a third party acting in breach of the general prohibition; (b) Carey had acted in breach of the requirement in the FCA's Conduct of Business Sourcebook (COBS) to act "honestly, fairly and professionally in accordance with the best interests of its client"; and (c) that Carey was a "joint tortfeasor" with CLP and so shared responsibility for CLP's negligent advice.  The High Court rejected these arguments.  The judge in the High Court attached considerable weight to Mr Adams' acknowledgement that he knew the investment was high risk and that his key motivation was to obtain £4000 cash back.  He held that the actions of CLP were insufficient to bring it within the scope of section 27 of FSMA.  Mr Adams appealed.

Arguments on appeal

On appeal it was the arguments based on section 27 of FSMA which were key.  (Mr Adams did not pursue the "joint tortfeasor" argument, and the court rejected his COBS claim on the basis that he was seeking to raise new arguments that had not been raised before the High Court.)   

What does section 27 of FSMA say?

Broadly, section 27 of FSMA provides that an agreement made between an FCA-authorised person carrying out a regulated activity and another person, is unenforceable by the FCA-authorised person if:

• it is made in consequence of something said or done by a third party; and
• the third party was carrying out a regulated activity in breach of the "general prohibition" on unauthorised persons carrying out regulated activities.  

If an agreement is unenforceable under section 27, the non-FCA authorised party is entitled to recover money paid under the agreement and compensation for loss.  Section 28 of FSMA gives the court discretion to allow an agreement that would otherwise be unenforceable under section 27 to be enforced if the court considers this would be "just and equitable in the circumstances of the case".

When is advice regulated?

Mr Adams argued that his agreement with Carey fell within the scope of section 27 of FSMA because it had been entered into as a result of CLP providing investment advice which required FCA authorisation and was therefore in breach of the general prohibition in FSMA.  

Advice on buying or selling regulated investments is a regulated activity requiring FCA authorisation.  It was common ground that the storepods were not themselves regulated investments (so advising on buying/selling storepods alone was not a regulated activity).  It was also common ground that rights under both the Friends Life scheme from which Mr Adams had transferred and the Carey SIPP were regulated investments, so if CLP had advised on "buying" or "selling" rights in relation to either scheme, that would mean it had breached the general prohibition in FSMA.

The court held advice on exchanging one unregulated asset for another within the same SIPP would not be a regulated activity. The court expressly disagreed with the FCA's guidance in PERG 12.3 which said that rights under a pension scheme are bought or sold wherever the member instructs the operator to buy assets of any kind either from the existing cash holdings or from the proceeds of selling existing assets.   However, this did not mean that advice on the merits of an unregulated investment would necessarily be irrelevant to whether the general prohibition had been breached. If a person recommended an unregulated investment which could only be bought by selling a regulated investment, that person could be regarded as advising on the merits of the regulated investment regardless of whether he voiced criticism of the regulated investment.  The advice to buy the unregulated investment in such circumstances would convey the message that the regulated investment was less good.  Likewise, if a person praised an unregulated investment which would need to be acquired by means of a particular vehicle, it might be right to see that person as advising that the vehicle be used.  

What amounts to "advice" for FSMA purposes?

The court held that provision of information which "is itself the product of a process of selection involving a value judgment so that the information will tend to influence the decision of the recipient" is capable of constituting "advice", and that "any element of evaluation or persuasion is likely to cross the dividing line".  Whilst "generic" advice (eg advice to invest in European equities) was not covered by the general prohibition in FSMA, advice did not necessarily have to apply to just one product or asset for the general prohibition to apply.

The court said that in the present case there was no dispute that CLP had encouraged Mr Adams to invest in storepods.  CLP had encouraged Mr Adams to do this by transferring his pension fund out of his Friends Life personal pension and into a Carey SIPP, both of which were regulated investments.  The court held that CLP had therefore given advice in breach of the general prohibition.  The court also held that steering an investor in the direction of a specific SIPP provider was capable of being advice on the merits of a particular investment.  Advice did not need to relate to a specific product offered by a SIPP provider for this to be the case.

What amounts to "arranging deals in investments"?

Mr Adams alleged that CLP had also breached the general prohibition in FSMA by carrying out the regulated activity of making arrangements for another person to buy, sell or subscribe for a regulated investment.  This prohibition does not apply to "arrangements which do not or would not bring about the transaction to which the arrangements relate" so the court had to consider whether the exclusion applied in CLP's case.  The court held that arrangements must "play a role of significance" in order to fall within the scope of the term "bring about".  CLP had procured a letter authorising Carey to liaise direct with CLP, undertaken checks to verify Mr Adams' identity under anti-money laundering requirements, and completed Mr Adams' application form for joining the SIPP.  The court held that these activities brought Carey's activities within the scope of arrangements which "brought about" dealings in regulated investments.  Carey was therefore in breach of the general prohibition under this head too.

Should the court exercise its discretion to allow the agreement to be enforced?

Having found that the agreement between Carey and Mr Adams was in principle unenforceable under section 27 of FSMA, the court needed to consider whether to exercise its discretion under section 28 of FSMA to allow the agreement to be enforced on the basis that this would be "just and equitable in the circumstances of the case".

Section 28 requires the court to have regard to whether the regulated person knew that the third party was breaching the general prohibition.  The court held that this term referred to actual knowledge (rather than what a person ought to have known).  It proceeded on the basis that Carey did not have actual knowledge of the breach.  However, the court said that one factor which should be taken into account was whether Carey should reasonably have known that the general prohibition was being contravened.

The court decided not to exercise its discretion to allow the agreement between Carey and Mr Adams to be enforced.  Its key reasons were:

• A key aim of FSMA is consumer protection.  FSMA proceeds on the basis that there is a need "to safeguard consumers from their own folly".
• While SIPP providers were not barred from accepting introductions from unregulated sources, section 27 of FSMA was designed to throw risks associated with doing so onto the providers.
• Over a period of only about 6 months, some 580 of Carey's clients invested in storepods, which were high risk non-standard investments.  On average no more than £50,000 was being invested, possibly suggesting clients who were not rich or financially sophisticated, especially given that Carey's own Key Features Document warned that in general an investment of less than £50,000 in its "Full SIPP" might mean excessive fees relative to the size of fund and a lack of opportunity to take advantage of investment flexibility.  This should have put Carey on notice of the danger that CLP was recommending clients to invest in storepods and set up Carey SIPPs, as it was hard to suppose that 580 people would spontaneously decide to invest in Blackburn storepods.
• In May 2012 Carey had terminated its relationship with CLP having learned that CLP was receiving commission of about 12% from the company marketing the storepods, clients were being offered cash back in return for investing in storepods, and that the FCA had posted a warning notice about one of the individuals involved in running CLP.  However, Carey still allowed "pipeline" clients like Mr Adams who had already been introduced to them to proceed with storepods investments.

Where does this leave the COBS duty to act in the client's best interests?

Much of the High Court judgment in this case concerned Mr Adams' argument that Carey had breached its obligation under Rule 2.2.1 of COBS to act "honestly, fairly and professionally in accordance with the best interests of its client" and was therefore liable under section 138D of FSMA. This allows an individual to bring a claim for breach of statutory duty if that individual suffers loss due to a breach of an FCA rule.  Because Mr Adams was seeking to raise new arguments on appeal that he had not raised before the High Court, the Court of Appeal refused to consider his appeal on the COBS issues.  This means that the High Court judge's ruling in relation to the COBS aspects of Mr Adams' claim remains good law, in particular that:

• the agreement between the parties is key to identifying the extent of the duty imposed by Rule 2.1.1 of COBS.  Where, as in the case of the agreement between Mr Adams and Carey, the agreement provides for a firm to carry out an "execution only" role, the COBS duty has to be read in that light;
• COBS Rule 2.1.1 does not impose a duty on a SIPP provider to refuse to accept high risk investments.  The fact that an investment is high risk and speculative does not of itself make it manifestly unsuitable; and
• COBS Rule 2.1.1 does not impose a duty on a SIPP provider to consider the suitability of a SIPP or the underlying investments held in it if the contract with the member provides otherwise.

Our thoughts on key points for SIPP providers

• This judgment effectively means that where SIPP providers accept business from unregulated introducers, the risk of the introducer acting in breach of the general prohibition rests with the SIPP provider. 
• Even in cases where an unregulated introducer has not recommended what investments should be held within the SIPP, simply steering a member towards a particular SIPP provider could amount to investment advice in breach of the general prohibition (though courts might be more inclined to exercise their discretion to allow agreements to be enforced in such cases if the SIPP itself is not unsuitable for the member).  
• SIPP providers should be aware that tightly drafted contracts and disclaimers alone will not protect them against the risk of transactions being held to be unenforceable under section 27 of FSMA.  
• Situations where a significant proportion of members introduced by the same unregulated introducer all invest in the same esoteric investment is a potential red flag that the introducer is giving investment advice in breach of FSMA.  Courts are likely to be unsympathetic to SIPP providers who they consider have ignored such a red flag.  
• SIPP providers should urgently review their relationships with unregulated introducers and be aware that the SIPP provider likely to bear the risk if the introducer has encouraged members to invest in a particular way.  
• Even if the investment held within the SIPP would not of itself be a regulated investment, encouraging a member to transfer into or out of a SIPP in order to make such an investment is likely to amount to regulated advice.
• The Court held that Mr Adams' rights under the SIPP "were not fundamentally contractual", but were rights as a beneficiary under the trust by which the SIPP had been established.  Although Mr Adams had separately signed up to terms and conditions, the Court noted that these expressly stated that the SIPP was governed by its rules, and that the rules would prevail over the terms and conditions in the event of inconsistency between the two.  This reinforces our view that the Consumer Rights Act 2015 does not apply to member rights under a SIPP's trust deed and rules, though this point is not beyond doubt.  The Consumer Rights Act only applies to contracts.
• Before the High Court judgment was handed down, the Financial Ombudsman Service (FOS) had found against Carey in a case involving very similar facts to Mr Adams' case.  The FOS based its decision on Carey having conducted insufficient due diligence on CLP as an introducer, holding that the number of members transferring to SIPPs to make the same high risk esoteric investments should have been a red flag for Carey.  We think that FOS is likely to see the Court of Appeal judgment as a vindication of its current approach, leading to more decisions along similar lines.
• A key issue at the heart of the different approaches taken by the High Court and the Court of Appeal is the extent to which consumers should be expected to bear responsibility for their own decisions.  A key element of the High Court's reasoning was that Mr Adams would have invested in the storepods even if he had been warned they were high risk, as his decision-making was so heavily influenced by the desire to obtain the immediate cash payment which he had been promised.  The Court of Appeal attached little weight to this, and much more to one of the purposes of FSMA being "to safeguard consumers from their own folly".  The Court of Appeal may have been influenced by the FCA's desire to set a precedent to deter the type of conduct involved in the case.  Before the Court of Appeal, Mr Adams' counsel described the High Court judgment as "a test case gone badly wrong".
• We may well see further developments in the case law in this area, as the Court of Appeal has since heard an appeal in the case of FCA v Avacade Ltd in relation to which judgment is currently awaited.  The issues which the High Court considered in the case included what constitutes the regulated activity of making arrangements for another person to buy, sell or subscribe for a regulated investment.  We also understand that Carey has sought permission to appeal to the Supreme Court.