The recent High Court judgment involving Carey Pensions jars with decisions made by the Financial Ombudsman Service (FOS), despite the complainants having very similar stories.
No doubt you will have seen the coverage of the Adams v Options Sipp UK LLP judgment, known as Carey Pensions before the company changed its name.
So what is the background?
Mr Adams was a self-employed haulage contractor, born in December 1960.
He and his wife owned a house which in 2012 was worth around £380,000, with a mortgage of £170,000.
Their joint income was 'limited' - the judgment gives no further clue as to what this means other than to say Mr Adams found himself in difficult financial circumstances.
He also had a personal pension pot worth £52,000 with Friends Life.
Unaware that he was too young to release cash from his pension, Mr Adams saw this as the answer to his financial problems.
He responded to an online advert regarding releasing cash from pensions and spoke to a representative from CLP Brokers, an unauthorised introducer based in Spain.
The representative told him 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 paperwork from CLP, which included a pre-populated application to open a Sipp with Carey Pensions. The paperwork was clear that no advice was being given.
The introducer relationship
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 Blackburn, the store pods investment provider.
However, this was not the only time this scenario had played out.
Carey Pensions had around 580 clients invested with Store First, most of whom were introduced by CLP.
Between them, those clients invested around £29m over six months. This made up around 10 per cent of the assets held in Carey Pensions’ pension schemes.
It was not denied that Carey Pensions knew that clients referred by CLP would be investing in Store First.
Nor was it denied that CLP would receive a significant commission, believed to be between 2 and 5 per cent, and in some cases even up to 12 per cent.
It was also known that CLP put in place a process to manage those investments, including the use of conveyancing solicitors to complete the acquisition for clients.
Carey Pensions terminated its introducer relationship when, having been warned it could not offer or pay inducements to its clients, CLP continued to do so.
Carey Pensions did carry out due diligence into the Store First investment. It concluded it was unregulated, so had no Financial Services Compensation Scheme protection, and may be “high risk and/or speculative”.
It enquired whether the Store First investment was an unregulated collective investment scheme, and was provided with a barrister’s note opining that it was not.
Against the above background, Mr Adams’ claim against Carey Pensions alleged:
- The transaction should be unwound because it had been advised by CLP which was unauthorised (arranging investments being a regulated activity);
- Carey Pensions had breached the Conduct of Business Sourcebook (COBS) in failing to act honestly, fairly and professionally and in his best interests;
- CLP had advised him negligently and Carey Pensions should take responsibility for that because the two companies were in a joint venture together.
The claim failed on all three causes of action.
The judge accepted the relationship between Carey Pensions and CLP was one of a pure introducer and if CLP had been advising Mr Adams, Carey Pensions was not aware of that.
One of the other interesting elements of this litigation was the FCA was sufficiently concerned about the outcome to 'intervene', which meant it became an interested party in the case.
The regulator provided written submissions and gave evidence at the trial on its interpretation of the legislation and rules.
It's worth noting the judge didn't agree with the FCA.
The FCA argued the COBS rules cannot be excluded or watered down by contract.
It said any Sipp operator had an obligation “not to accept into a Sipp an investment of a kind that is inappropriate for any Sipp investment, or for any Sipp investment by a retail customer who is not known to have received independent regulated advice about the investment."
The regulator submitted that to act otherwise would be a breach of the best interests rule.
Yet the judge found that because the contract was execution-only, and the client was warned the investment may be high risk and/or speculative, the obligations imposed by COBS had to be considered in that light.
He concluded that Carey Pensions had then acted in Mr Adams' best interests.
The judge felt Mr Adams had accepted the choice of investment was his, and Carey Pensions was not obligated to refuse his instructions. There was no suggestion that Carey Pensions did not act honestly.
The contrasting FOS case
Compare this with the recent FOS decision in the complaint of a Mr T against Carey Pensions.
This decision was published just before the long-awaited decision of the court, and was based on very similar facts.
But in this case in response to FOS questioning, Carey Pensions admitted it was aware clients had been offered inducements by CLP from November 2011.
Carey Pensions also said it had not looked for or seen a 2010 warning about one of CLP’s directors on the then FSA's website.
Like Mr Adams, Mr T understood that he was receiving advice from CLP. He also received documents from Carey Pensions suggesting the investment may be high risk and speculative.
The ombudsman’s view was that the due diligence done by Carey Pensions into CLP was inadequate because it missed the FSA warning on the FSA’s website.
CLP had also failed to provide Carey Pensions with requested documents before business was accepted.
This, coupled with the knowledge that inducements had been paid, should have led to Carey Pensions to decline CLP’s business.
And so, not for the first time, we are left in a position of different outcomes for clients depending on whether they chose the FOS route or the court route.
Frustrating as it may seem, this is not particularly unusual.
The Court and the FOS have a different basis on which they make their decisions – the court on legal principles, and the FOS on what is fair and reasonable in the circumstances.
There is no obligation on the FOS to change its position on the actions of Carey Pensions, but there is every possibility that Mr Adams will take his case's decision to the Court of Appeal.
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.