The Court of Appeal has now handed down its judgment in the Carey Pensions case (now known as Options UK Personal Pensions).
As you may recall, this case centres on whether the Sipp provider ought to bear some liability for the losses suffered by investors in a store pod investment scheme with Store First Blackburn, an investment which went on to fail.
This is because Carey Pensions accepted a significant number of execution-only client referrals from an unregulated introducer.
The brief background to the case is that the claimant, Mr Adams, found himself in financial difficulty.
He saw his £52,000 pension pot as the answer to his problems, unaware that at 51 years old he was too young to access this.
After seeing an online advert about releasing money from pensions, Mr Adams spoke to a representative from CLP Brokers Sociedad Limitada (CLP), an unauthorised introducer based in Spain.
The representative told him that he could take £4,000 from his pension and invest the rest in store pods, which would generate an income for his pension pot.
Mr Adams understood this to be advice, and returned the CLP paperwork which included a pre-populated application to open a Sipp with Carey Pensions. The paperwork was clear that no advice was being given by Carey Pensions.
No monies were paid between Carey Pensions and CLP. Carey Pensions benefitted from a new client to whom it charged a fee, and CLP received commission from Store First.
However, CLP had introduced over 500 clients, all of whom Carey Pensions was aware would be directed to the Store First investment.
Carey Pensions even put in place a system for handling such investments, including the use of conveyancing solicitors to complete the acquisition of the underlying investments.
The provider was also aware that CLP typically received commission from Store First of between 2 per cent and 5 per cent of the amount invested.
Between them those clients invested around £29m over a six-month period.
This made up around 10 per cent of the assets held in Carey Pensions’ pension schemes. It also accounted for 20 per cent of Carey Pension’s income in 2011 and nearly 30 per cent of its income in 2012.
Who bears responsibility?
In the initial judgment, the High Court decided that Carey Pensions bore no responsibility.
It held that the relationship between Carey Pensions and CLP was one of a pure introducer and that, if CLP had been advising Mr Adams, Carey Pensions was not aware of that.
The agreement between the two parties required CLP not to provide advice to any client referred to Carey Pensions.
CLP also had to inform Carey Pensions if it did carry out any regulated activities, or believed that it may have done so.
However, the Court of Appeal that Carey Pensions should be held responsible. It said:
“As the unhappy history of the transfers of small personal pensions into SIPPs holding high risk investments related in that judgment illustrates, the liberalisation of the pension regime in 2006 brought with it fresh opportunities for unscrupulous entities to target the gullible, the greedy or the desperate.
“There is nothing to prevent a regulated Sipp provider such as Carey from accepting instructions from clients recommended to it by an unregulated person, and from doing so on an 'execution-only' basis.
“But the basis on which they contract with their clients will only go so far to protect them from liability. If they accept business from the likes of CLP, they run the risk of being exposed to liability under s.27 of the FSMA."
This section of the Financial Services and Markets Act (FSMA) applies where an authorised person (in this case, Carey Pensions) makes an agreement in the course of carrying on a regulated activity, but the agreement was made following a third party’s breach of the general prohibition (in this case, CLP).
Section 27 renders such an agreement unenforceable against the other party, and entitles the customer (Mr Adams) to recover money or other property paid or transferred under the agreement and compensation for any loss.
The legislation gives the court discretion to refuse to allow the agreement to be unwound depending on
“whether the person carrying on the regulated activity concerned reasonably believed that he was not contravening the general prohibition by making the agreement”.
So one of the factors to take into account here is whether Carey Pensions should reasonably have known that the general prohibition was being contravened.
One of the issues was whether the advice by CLP to invest in store pods (an unregulated investment) was given in breach of the general prohibition.
The court held that the advice to invest in store pods was inextricably linked with encouraging Mr Adams to sell his pension policy and to transfer the proceeds into a Carey Sipp.
What's more, by sending Mr Adams the pre-populated Sipp application CLP was also 'arranging deals in investments'.
Given these two findings, the court had no trouble in concluding that Mr Adams entered into the investment as a consequence of CLP’s breaches.
What else have we learned?
The Court of Appeal judgment also highlighted several interesting points:
- A key aim of FSMA is consumer protection and there is a need for regulation to safeguard consumers from themselves;
- While Sipp providers weren't barred from accepting introductions from unregulated sources, financial services legislation was designed to put the risks associated with doing so onto the providers;
- Over a period of only six months, some 580 of Carey’s clients invested in store pods, despite these being high risk and non-standard investments, and most of those clients came via CLP. On average, no more than about £50,000 each was invested, perhaps suggesting clients weren't rich or financially sophisticated. This must have been a red flag for Carey Pensions that CLP was giving advice – it's hard to imagine 580 people would spontaneously decide to invest in Blackburn store pods.
- The transfer of Mr Adam’s pension was processed after Carey Pensions had terminated its relationship with CLP after becoming aware it was receiving commission of 12 per cent (not 2 per cent - 5 per cent), and it had seen a warning from the FSA about one of the people running CLP.
This judgment now aligns with the approach being taken by the Financial Ombudsman Service.
As I said in response to the initial judgment:
“For my part I can't help thinking that if we truly want to make the financial world a safer one, we must expect Sipp providers to take some responsibility for the business they accept.”
It seems the Court of Appeal agrees.