I suspect you have seen this case in the news.
It’s the one where the self-invested personal pension (Sipp) provider was found in breach of its regulatory obligations by following an instruction from an execution-only client.
Ok, I have sensationalised that a bit. Actually, this case was not about the court’s interpretation of the rights and obligations of a Sipp provider, but a challenge as to the lawfulness of the Financial Ombudsman Service (FOS) decision.
In other words, the case was about whether the FOS was entitled to make the decision it did – not whether it made the right decision.
We are awaiting the judgment in the separate Carey Pensions case which should throw light on the court’s perspective on Sipp provider obligations. But it's important to understand the Berkeley Burke decision centres on the FOS's right to make the decision it did, not on the legal interpretation of the FCA’s rules regarding Sipp providers.
The background to the case
Mr Charlton was a self-employed gardener in his early 50s when he was introduced to Berkeley Burke Sipp Administration (Berkeley Burke) by an unregulated introducer called Big Pebble.
Mr Charlton “wanted” to invest in a green oil scheme in Cambodia and to hold that investment in a Sipp. The investment was supposed to be based on Jatropha trees and involved investors leasing plots of land, along with the trees planted on them, and receiving a return either as an annual income payment or additional land plots.
According to the FOS decision, the amount transferred into the Sipp was just over £24,000, which was all of Mr Charlton’s private pension provision.
The judgment is unclear how Mr Charlton heard about the green oil scheme but the FOS decision says Big Pebble had a ‘non-regulated introducer agreement’ with Berkeley Burke.
It's my experience that when unsophisticated investors decide to invest in obscure non-standard investments in similar circumstances, it generally traces back to an introducer.
The FOS decision and judgment are silent on this point. Nevertheless, the relationship between Big Pebble and Berkeley Burke is an important factor, as is the fact Mr Charlton (as tends to be the case with these types of disastrous investments) invested in the green oil investment on an execution-only basis.
The investment was made in late 2011 but by early 2012, the green oil investment company had entered receivership after an investigation by the Serious Fraud Office (SFO). The SFO later brought charges for fraud and bribery offences and three men were given prison sentences.
Having lost his money, Mr Charlton complained that Berkeley Burke ought not to have invested him in the green oil scheme.
Berkeley Burke disagreed it was responsible for any of Mr Charlton’s losses. The firm argued there was no obligation for it to carry out due diligence on the investment beyond ensuring the investment was of a type likely to be acceptable to HM Revenue & Customs for inclusion in a Sipp.
Mr Charlton had also signed documents stating that he:
“[was] fully aware that this investment is high risk and/or speculative, may be illiquid and/or difficult to value or sell and confirm that I wish to proceed”
“…accept[ed] that the investment may be illiquid and that Berkeley Burke take no responsibility for the suitability of the investment to your personal circumstances and we strongly suggest that you take investment advice before proceeding”.
What the FOS said
The complaint was then referred to the FOS. It decided Berkeley Burke had not acted in accordance with its regulatory responsibilities to Mr Charlton and didn’t carry out sufficient due diligence on the investment.
It concluded Berkeley Burke ought to have identified that the green oil investment wasn’t an acceptable investment for Mr Charlton’s pension and so it should not have accepted his application to open a Sipp to facilitate this.
The decision was based on the two of the FCA's high-level principles (HLPs):
- A firm must conduct its business with due skill, care and diligence.
- A firm must pay due regard to the interests of its customers and treat them fairly.
The regulator has issued numerous Dear CEO letters and guidance documents and carried out various thematic reviews relating to the Sipp market.
The FOS's interpretation was when these are read together alongside the high-level principles, a Sipp provider is obliged to carry out due diligence on investments which goes further than simply checking they are 'Sipp-able'. The FOS held that, while there was no duty to advise on suitablility, Berkeley Burke ought to have:
- Identified the investment as high-risk and speculative, leading the firm to perform a higher level of due diligence;
- Ensured it was genuine and not a scam or linked to fraudulent activity;
- Independently verified the investment assets were real and secure, and the investment operated as claimed;
- Ensured the investment could be independently valued, both at the point of purchase and subsequently.
On that basis the FOS decided proceeding with Mr Charlton’s instructions and simply asking him to sign warnings absolving it of the consequences was not fair and reasonable.
The judicial review
Following a number of legal challenges by Berkeley Burke against the FOS decision, the provider sought a judicial review. At the judicial review, Berkeley Burke argued:
- The FCA's high-level principles are not rules and only rules and guidance can create obligations. The HLPs were not created after consultation, and the FOS shouldn't be able to create duties by the back door without consultation;
- The HLPs can only be used to augment the regulator’s rules, they cannot be used to create new duties;
- Rules around best execution required Berkeley Burke to execute an instruction from a client. Requiring the firm to conduct due diligence into the investment before complying with the best execution rule was contradictory;
- The FOS had a duty to consider the law and to “get it right”;
- The FOS had a duty to make decisions which were not contradictory to The Pensions Ombudsman, which had considered and rejected similar complaints.
The FOS responded:
- It was the regulator’s obligation to consult on rulemaking, not the FOS’s. It was the FOS’s obligation to decide what was fair and reasonable in all the circumstances. In making that decision the FOS was entitled to consider the HLPs;
- No new duties had been created, the FOS was simply applying the regulator's rules to the facts of the case;
- The best execution rule did not create a duty to execute a transaction regardless of the FCA principles;
- There was no error of law, the court could not and should not interfere with the FOS's decision as to how the HLPs applied on the particular facts of the case;
- The FOS and The Pensions Ombudsman had different tests to meet and the principle of consistency only applied where the same tests were to be met.
The court agreed with the FOS. It held that it was fair and reasonable to expect authorised entities to comply with the HLPs at all times and that the test of what was fair and reasonable went further than the rules and guidance produced by the FCA in any event.
So where does this leave us?
Well, Sipp providers must be feeling nervous about the prospect of more complaints, particularly with the potential increase in compensation payments on the horizon.
It must be right, in my view, that Sipp providers take some responsibility for the investments included in Sipps. They must be the gatekeepers protecting clients from rogues, particularly where the provider has a relationship with the introducer.
The way rogues operate, and the stories of those who approach me having lost their precious pension provision, are all remarkably similar. There is often no adviser, and there tends to be a cold-calling introducer, a non-standard (and often foreign-based) investment and an execution-only relationship with their Sipp provider.
Where an adviser is approached by a new client with a similar story to that of Mr Charlton, this decision gives a glimmer of hope that compensation may be forthcoming from a FOS decision.
Time will tell whether the court holds Sipp providers to the same standard.