Execution-only SIPP provider not liable to investor

Background

The defendant carried on business as an FCA-authorised SIPP provider and administrator. It was authorised to establish, operate and wind up SIPPs but was not authorised to provide advice on them.

From 2011, the defendant accepted investments in a store pod rental scheme, having carried out due diligence to establish that it was a legitimate investment and one that was capable of being held in a SIPP pursuant to HMRC guidelines. The due diligence included obtaining an independent report on the suitability of the scheme as an investment for a SIPP, an internal review by the defendant’s compliance team, checks on the directors and shareholders and on company reports and accounts. In September 2011, the FCA (then the Financial Services Authority) carried out a supervisory visit which did not identify any breaches of duties, obligations or authorisations.

Around 580 clients of the SIPP provider invested in the Store pod rental scheme, the majority having been introduced to the defendant by an unregulated and unauthorised broker (CLP). One of these was the claimant investor who, in 2012, transferred his existing pension into a SIPP provided by the defendant.

The value of the claimant’s investment declined significantly and became illiquid and he argued that it had been manifestly unsuitable for him.

In proceedings brought against the defendant, the investor’s case was that:

1. The SIPP agreement was void because the unauthorised broker was carrying out a regulated activity pursuant to section 27 of the Financial Services and Markets Act 2000 (FSMA); or
2. That the defendant was in breach of COBS 2.1.1 (to act honestly, fairly and professionally in accordance with the client’s best interests) for accepting a high risk investment or for not following the recommendations set out in FCA’s 2009 Thematic Review of the SIPP sector; or
3. There was a joint enterprise between the defendant SIPP provider and the broker so that defendant was liable for any negligent advice given by the broker.

Decision

The judge found, on the evidence, that the defendant did not advise the claimant on the underlying investment and that it put in place documentation to ensure that the claimant and CLP understood the limits of their role in the process. The claimant had known that the defendant was simply providing a mechanism for the transfer of his pension fund and that it was not advising on the SIPP or the underlying investment. He had been aware that the underlying investment was high risk and it had been his decision to proceed with the SIPP.

On the specific causes of action:

• Section 27 FSMA: the judge rejected the claimant’s argument that the SIPP agreement was void because CLP – when unauthorised - had been advising on and arranging investments, which are authorised activities under articles 25 and 53 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. On the evidence, the judge found that CLP had not advised the claimant on the SIPP, any advice that it had given the claimant having related to the underlying investment. When considering whether CLP had ‘arranged’ the SIPP, the judge said that the claimant would need to establish a direct causal link between the act of arranging and the transaction itself. Giving advice on the underlying transaction and effecting an introduction were not sufficient and CLP had acted as a bare introducer.
• Breach of COBS: the defendant had not breached COBS 2.1.1. Although, as an execution-only SIPP provider the defendant fell within the ambit of the rule, the extent of the duty owed had to be determined taking into account the agreement between the claimant and the defendant. It followed that the obligations imposed by COBS 2.1.1 had to be read in the light of the defendant’s role being execution-only and that the claimant was responsible for his own investment decisions. The contract expressly provided that the defendant was not advising on the SIPP and the judge was clear that COBS 2.1.1 could not be construed as imposing an obligation to advise which (as well as being unlawful) the parties had agreed in the contract would not apply.

Interestingly, the judge was not prepared to accept that the expectations set out in the FCA’s 2009 Thematic Review should be taken into account when construing the obligations imposed by COBS. The Thematic Review could not, the judge said, be properly described as a set of rules which, if breached, would allow an investor to bring a claim for breach of statutory duty under FSMA.

• Joint tortfeasor liability: Despite the volume of referrals, the judge also dismissed the claim that, as a consequence of what the claimant argued was a ‘common design’ between the defendant and CLP, the defendant should be jointly liable for any negligent advice given by the broker. The judge’s finding of fact were, he said, “entirely inconsistent” with the defendant having assisted in the commission of a tort by CLP: their roles had been separate, the defendant had had no knowledge of any advice given about the underlying investment and it had not facilitated the giving of any such advice. There had been no common design and the judge was not in any event satisfied that there had been a negligent misstatement by CLP.

Comment

The long-awaited decision provides welcome clarity on the extent of execution-only SIPP providers’ obligations to their clients. The court looked carefully at the terms of the contractual arrangement that the SIPP operator and the member had entered into and also took into account that the claimant had been aware that the investment was high-risk but had nevertheless made the decision to proceed. Although to an extent fact-specific, the decision will be relevant to the determination of FOS complaints that have in effect been on hold pending the judgment being released.