Updated: Nov 30, 2022
Although at first glance the Carey ruling might look like a slap in the face for FCA, in practice it doesn’t provide much relief for SIPP firms because it has little impact on the powers that FOS have to apply FCA Principles and Guidance – an approach which was solidified by the Judicial Review of the Berkeley Burke case. If anything, the Carey case has underlined the importance of common sense and process that we described in a previous article.
Contract law vs regulation
The first reaction of many commentators to the Carey verdict was that the influence of FCA and FOS had, in effect, been reduced. But that’s not the case because Carey was primarily about contract law, not about the powers of FOS (who were not party to the case). Little in the Carey case has material impact on the findings of the Berkeley Burke Judicial Review, which held that FOS had a legal right to apply FCA Principles and Guidance in its findings, if necessary over and above contract law.
Given that FOS might expect court challenges in future, they will certainly need to be as rigorous as they were in Berkeley Burke in their justification for their grounds for over-reaching existing rules and common law. If they take short-cuts, they can expect to be challenged - and risk losing clout if they don’t rise to the challenge.
Carey underlines a key difference in the contract-based approach of civil law and the ‘fair and reasonable’ approach mandated for FOS. Unfortunately, SIPP companies have historically tended to take a legalistic approach to compliance, not least because their PI companies take a similar view. Although this appears to provide more protection at lower cost (as in the Carey case), the power of FOS isn’t about to be reduced any time soon.
Commendably, Carey Pensions exhibited a high level of diligence in dealing with their execution-only customer, which was material in the judge finding in their favour. From the record of the findings, it was absolutely clear that the complainant, Mr Adams, knew about the high risk of the store pod investments – but it was also absolutely clear that he was going ahead because of cash inducements. At the very least, SIPP firms will need to match Carey’s level of due diligence in future – and legacy cases without that will be at risk of attack.
Implications for SIPP firms
Whether or not the Carey case is appealed, there are some major implications for SIPP firms.
First, the application of FCA Principles and guidelines by FOS carries just as much weight as before. A key aspect of this is that SIPP firms continue to have a duty of care to their customers, including whether the investment being proposed is appropriate for the customer, not just whether it is “SIPP-able” under HMRC rules. Raising the standard of processes and documentation to that of Carey can reduce the risk of a civil suit, but doesn’t absolve firms of their regulatory responsibilities. Even under common law SIPP firms have an obligation not to knowingly permit harm to their customers (which is not the same as not giving advice) – a point which was not actually tested in the Carey case.
Ironically, if Mr Adams had gone to FOS the final result might well have been completely different. With the FCA’s recent attention on vulnerability, FOS could easily have taken the view today that Adams, although contractually explicit in his execution-only wishes, was not competent to understand the full implications of what he was doing – particularly given the financial inducement.
SIPP companies may reasonably say they have never been creators of problem investments but, if they are forcibly held liable for them in future, it doesn’t actually take a massive effort to uncover the difference between high-risk investments and rip-offs. The same goes for financial advisers and introducers: payment of 12% commission on a single £55k investment is a non-trivial clue.
There is a difference between a high-risk investment that happens to perform badly, and one which, by design, never stood a chance. Both Berkeley Burke and Carey judgments confirm that SIPP firms are not liable for genuine investment losses if they don’t provide advice, but neither judgment is a get-out-of-jail card for rip-offs.
All but a few sophisticated customers are, by definition, vulnerable by comparison when it comes to spotting bad investments and dodgy advisers so SIPP companies will need to up their game to satisfy FOS that they are exercising appropriate due diligence in future. Issuing disclaimers and following due process for execution-only cases will be the absolute minimum, but far from sufficient: a few extra steps, properly documented, are necessary.
There are two more practical issues to consider. First, all SIPP firms need to ensure that they have a robust Master Services Agreement (MSA) in place with all discretionary investment managers that they work with. This needs to be clear about who is responsible for what – but that doesn’t absolve all responsibility for the investments that SIPP firms accept into their wrapper. At the absolute minimum the SIPP needs to verify that the investments it accepts are SIPP-able: scam investments are clearly unacceptable, but there must also be a question about whether investments primarily designed to enrich intermediaries and others are valid for a pension plan. When it comes to FCA/FOS jurisdiction the HMRC minimum is no longer sufficient any more: the potential impact on the customer needs to be taken into account explicitly. So SIPP companies need to exercise initial due diligence in accepting an investment manager, and almost certainly exercise continuing due diligence to confirm that they are complying with the MSA.
Finally, at a high level SIPP firms need to pay attention to how customers walk though their door - because one way or another they have a duty of care towards them. If, for example, the customer comes through an unregulated offshore introducer, this will automatically throw up some red flags. But it’s not enough to act on these red flags by having very thorough processes to protect the SIPP firm in civil law (as in Carey), because FCA and FOS will require evidence that Principles 2 and 6 are also being actively acted upon in protecting the customer’s interests. It doesn’t matter whether the red flags come from this source, dodgy or scam investments, or transfers out of DB schemes, or elsewhere: Berkeley Burke made it clear that SIPP firms have a duty of care and the Carey case does nothing to diminish this.
So there is a lot for SIPP firms to do. At minimum they need to be raising their due diligence to the levels exhibited by Carey, but they also need to recognise that this is insufficient to deal with all of the SIPP provider duties as interpreted on a common law basis, and the obligations imposed by FCA (and FOS). Historically few SIPP firms met even the Carey level of due diligence, so they will have a legacy of high risk cases that need to be resolved pro-actively at painful (but controllable) cost or by the regulators in due course at much higher (uncontrollable and potentially ruinous) costs.