The Pensions Ombudsman has dismissed two separate complaints against the same SIPP provider where the members had lost money after investing in loan notes (Ms R CAS-58612-P1X1 and Mr Y CAS-57893-P0C6). In both cases the members alleged that the SIPP provider did not carry out sufficient due diligence before allowing the loan note investments to go ahead.

The SIPP provider was both the independent trustee of the SIPP and its operator, so the Ombudsman considered its duties in both capacities.  The SIPP’s rules provided, “The Scheme Trustee may retain such of the money of the Scheme as it may decide in such bank accounts and, subject to any terms and conditions agreed between the Scheme Administrator or any one or more providers of the administration or other services to the Scheme….and the Member, shall invest or apply the balance of that money as it thinks fit….”  A separate rule provided that the Scheme Trustee should exercise this power only in accordance with any directions given by the relevant member (or a professional person acting with the prior written authorisation of the member).  A supplemental deed provided that no trustee would be liable for any “improper investment made in good faith”.  The Key Features Document made clear that the SIPP provider could not advise on the suitability of investments and accepted no responsibility for the performance of chosen investments.  On the basis of these documents, the Ombudsman concluded that the SIPP provider had not committed maladministration in its role as SIPP trustee.

The Ombudsman also considered the SIPP provider’s duties in its capacity as SIPP operator.  The Ombudsman noted that COBS 2.2.1R imposes a duty to act in the best interests of the client, but that the High Court in Adams v Options SIPP UK LLP held that where an agreement provides for a firm to carry out an “execution only” role, the COBS duty must be read in that light, COBS does not impose a duty on SIPP operators to refuse to accept high risk investments or to consider the suitability of investments if the contract with the member provides otherwise.  This aspect of the Adams judgment was not appealed, so remains good law.  

The Ombudsman also noted that a “Dear CEO” letter issued by the FCA in July does refer to the need for due diligence to be carried out in relation to non-standard investments.  The Ombudsman therefore compared the due diligence carried out by the SIPP provider against the checks set out in the “Dear CEO” letter as follows:

• “Correctly establish and understand the nature of an investment”: the SIPP provider had reviewed the relevant information memorandums and some other documentation in order to establish and understand the nature of the loan notes
• “Ensure that an investment is genuine and not a scam, or linked to fraudulent activity, money-laundering or pensions liberation”: the SIPP provider had gone to some lengths to verify the identity of various parties at Companies House (or, where applicable, the German company register) including the identities of company officers.  It had also checked that various professional advisers involved with the loan notes were genuine.  In one instance it had checked that planning permission for a project had genuinely been obtained.  In the case of Mr Y, it had verified the tax position under German law which formed a key element of the transaction.
• “Ensure that an investment is safe/secure (meaning that custody of assets is through a reputable arrangement, and any contractual agreements are correctly drawn-up and legally enforceable)”: the Ombudsman noted that the nature of a loan note means that there is no underlying asset to be held in custody.  However, the SIPP provider had checked that there were correctly drawn-up legal charges in place with a number of borrowers.
• “Ensure that an investment is not impaired (for example that previous investors have received income if expected, or that any investment providers are credit worthy etc.)”: In Ms R’s case the SIPP provider had randomly selected clients to check that payments had been made in full and on time in respect of previous loan notes issued by the same party.  In Mr Y’s case the SIPP provider had monitored to check that payments of interest and capital were paid when due.

The Ombudsman found that the above checks were sufficient to meet the FCA’s expectations as set out in its 2014 “Dear CEO” letter regarding checks to be carried out in relation to non-standard investments.

Our thoughts

These determinations are an important indicator of the approach the Pensions Ombudsman is likely to take when faced with a complaint that a SIPP provider should have undertaken a greater degree of due diligence.  Complaints relating to a provider of a personal pension scheme can be made to either the Pensions Ombudsman or the Financial Services Ombudsman (FOS), and the tests which the two ombudsman services are required to apply in deciding whether to uphold a complaint are different.  We therefore cannot be sure that a complaint on an identical set of facts would not have succeeded before FOS.