Trials and tribulations for Carey Pensions as it grapples with a Court of Appeal decision on 1 April 2021 that partially overturned an earlier High Court judgment in its favour.
Background
Mr Adams claimed the SIPP operator, Options SIPP (formerly Carey Pensions (“Carey”)) used an unauthorised introducer in Spain (CLP Brokers (“CLP”)) to facilitate unsuitable investments in “storepods” in Mr Adam’s SIPP. These were sub-lets of units in a storage facility in Blackburn and were not regulated investments. The storepods were unsuccessful. Not all of them had been rented out and those that had, generated no more than a few hundred pounds in rental income.
The Hight Court dismissed Mr Adams’ claim. The High Court judge held that CLP did not make arrangements or advise in relation to the Carey SIPP investments and Carey acted on an “execution” basis only. However, the Court of Appeal disagreed and unanimously held that CLP had arranged deals in and advised on specified investments without proper authorisation and that Carey was tainted with this.
So how did it all go wrong for Carey?
Judgment
A person cannot carry out regulated activities in the UK unless they are authorised or exempt. This is known as the “general prohibition” under section 19 of the Financial Services and Markets Act 2000 (“FSMA”). The legislation sets out a range of specified activities and specified investments that are regulated activities which include advising on or arranging deals in investments such as rights under a personal pension scheme.
Unlike Carey, CLP, was never authorised by the FCA to carry on a regulated activity. The Court of Appeal held (contrary to the High Court) that CLP had taken steps which had brought about the transfers into the Carey SIPP. The Court described acts such as filling in the transfer application form as “significantly instrumental in the material transfers“. CLP had also advised on the merits of Mr Adams transferring into the Carey SIPP. The Court, therefore, unanimously held that CLP had contravened the general prohibition by arranging deals in and advising on specified investments.
Mr Adams claimed that his agreement with Carey was thus rendered unenforceable under section 27 of FSMA. Section 27 applies when an authorised person (here, Carey as the SIPP provider) makes an agreement in consequence of contravening the general prohibition under FSMA by a third party (here, CLP). The Court of Appeal agreed that section 27 did apply as CLP played a crucial part in Mr Adams’ transfer decision. This meant that Mr Adams could unwind his contract with Carey and would be able to recover money transferred to Carey, unless the Court decided otherwise in exercise of its powers under section 28 of FSMA.
Section 28 empowers the Court, at its discretion, to permit the enforcement of an agreement caught by section 27 if the Court is”satisfied that it is just and equitable in the circumstances of the case“. In considering whether to exercise its discretion, the Court looked at whether Carey had actual knowledge that CLP was contravening the general prohibition.
It was argued on behalf of Carey that the Court should exercise its discretion on grounds that Carey (amongst other matters):
- did not know that CLP was contravening the general prohibition;
- did not itself commit any breach of duty; and
- had established proper systems and controls.
The Court dismissed these arguments on the basis that a key aim of FSMA is consumer protection. The Court held section 27 was designed to throw the risks associated with accepting introductions from unregulated sources onto regulated SIPP providers. The Court suggested Carey should have done more to cease investments with all its clients who had been introduced by CLP after receiving warnings from the FCA. The Court, therefore, did not exercise its discretion and Mr Adams was able to recover from Carey.
The Court of Appeal did, however, uphold the High Court’s decision that Carey had met its obligations under the Conduct of Business principles. The High Court held that, in this case, given the execution only nature of the contract with Carey, Mr Adams bore responsibility for his investment decisions. This aspect of the High Court decision is, therefore, still good law.
Comment
The judgment is likely to send the hairs raising of many UK regulated financial businesses when it comes to dealing with unauthorised third parties. After all, (as the High Court highlighted) Carey was not aware that CLP was acting in breach of the general prohibition. In fact, Carey terminated its relationship with CLP when it did become aware (except for ‘pipeline’ clients such as Mr Adams).
Section 28 is a discretionary power, which means that each case will turn on its particular facts. However, the Court’s decision is a clear move towards consumer protection. Many regulated businesses will no doubt find the decision harsh that they might not receive the Court’s blessing to enforce agreements in cases where they aren’t aware of a third party’s breach.
The case is a reminder to SIPP operators and others of the importance of conducting due diligence on any introducers and unauthorised third parties that arrange deals in or advise on rights in connection with a personal pension scheme. Practical difficulties lie in establishing exactly what is meant by arranging deals in or advising on specified investments which, as the judgment demonstrates, can have a very broad application. If an authorised person does become aware of an unauthorised third party’s breach of FSMA then they should be sure to obtain professional advice as to the steps to take.
It remains to be seen whether Carey will seek permission to appeal to the Supreme Court.
FCA v Avacade & Others
Avacade is another example of where the High Court handed down a judgment on 30 June 2020 that introducers had unlawfully engaged in the regulated activities of arranging and advising on investments. Third party introducers and SIPP operators should look out for the appeal due to be heard by the Court of Appeal on 7 July 2021.
In Avacade, the judge observed that the Court’s approach was supported by the FCA’s Perimeter Guidance Manual (PERG 12.3) which suggested that rights under a personal pension scheme are bought and sold wherever the member or his agents instructs the operator to buy or sell assets or switches investments. However, in the Options SIPP case the Court of Appeal judge disagreed that a member of a personal pension scheme converts or sells his rights merely by altering the underlying investments.
It follows that rights under the Carey SIPP were not “rights under a contract”, but rather the Carey SIPP is governed by the rules established under a trust operated by the SIPP Trustee. Where a member is given a contractual right to direct the Carey SIPP how to invest, it is merely a right to control the way that right is exercised under the scheme rules. These points are of interest both to financial services and pensions lawyers.
Implications of Adams v Options SIPP for employers and trustees
Employers and trustees will generally only need FCA authorisation if they provide investment advice whilst receiving a “commercial benefit” for helping employees or members. In most cases, employers and trustees should be able to help to their employees or members on financial matters relating to pensions by communicating factual information without needing to be FCA authorised.
However, employers and trustees need to take care when it comes to promoting pensions. In general, any material that promotes pension scheme products needs to be issued by someone authorised by the FCA (for example, encouraging the switching to a new pension scheme or persuading individuals to join a pension scheme).
Employers and trustees should also avoid providing detailed advice on questions such as:
- Which investment funds should I choose under the pension scheme?
- Is it a good idea to transfer my pension scheme?
These types of questions would need a detailed understanding of an individual’s financial circumstances. The FCA advises against advising on these areas. Even if they are not in the business of giving investment advice, employers or trustees may risk becoming liable for any losses incurred.
The gold standard for employers and trustees then, is to provide more general information and support to help staff make their own financial decisions, particularly, by sign-posting them to resources such as The Pensions Advisory Service and The Money and Pensions Service.
For more information on the FCA’s guidance for employers and trustees on providing support with financial matters (issued in March 2021 jointly with the Pensions Regulator).
This article was originally published in Law360 and can be found here.