Operators of self-invested personal pensions (SIPPs) may be feeling uneasy after the Court of Appeal partially overturned the High Court’s judgment in Russell Adams v Options UK Personal Pensions LLP (formerly Options Sipp UK LLP and Carey Pensions UK LLP) ([2021] EWCA Civ 474). The decision relates to the scope of the duties owed by SIPP operators to investors and will have significant ramifications not only in relation to pensions but also for the wider financial services industry (see box “Lessons for SIPP operators”).

The dispute centred around Mr Adams’ transfer of his existing Friends Life personal pension into a Carey SIPP. Almost all of the £56,000 transfer value was used to buy storage pod leases from Store First. Mr Adams had been introduced to the storage pod investment, and to Carey, by an unregulated Spanish-based introducer called CLP Brokers Sociedad Limitada (CLP).

Mr Adams entered into the Carey SIPP on an execution-only basis. Mr Adams accepted a £4,000 cash back inducement from CLP for entering into the investment, which was presumably a share of CLP’s commission from Store First. The investment did not perform as well as Mr Adams expected: he received hardly any income and the value of his investment was reduced to £15,000. Mr Adams brought a claim against Carey, seeking damages and to unwind his contract with Carey.

The Financial Conduct Authority (FCA) was granted permission to intervene in the trial in relation to its interpretation of rules in the Conduct of Business sourcebook (COBS), the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (RAO) and the Financial Services and Markets Act 2000 (FSMA).

Under section 27 of FSMA (section 27), a transaction can be reversed where it has been entered into as a result of something said or done in contravention of the general prohibition in section 19 of FSMA (section 19); that is, that it arose as a consequence of carrying on a regulated activity without authorisation. Mr Adams argued that CLP had undertaken the regulated activities of “arranging” under Article 25 of the RAO (Article 25) and “advising” under Article 53 of the RAO (Article 53).

The High Court dismissed Mr Adams’ section 27 claim ([2020] EWHC 1229; see News brief “Self-invested personal pensions: responsibilities and investment choices”). As a result, he was not entitled to any relief, either by having his original fund returned, being compensated for the returns he would have enjoyed if his pension had not been transferred or being awarded damages.

However, the Court of Appeal allowed Mr Adams’ appeal, holding that CLP had carried out the regulated activities of arranging and advising in contravention of the section 19 general prohibition. As a result, Mr Adams’ claim under section 27 was well-founded and he was entitled to recover the money and property transferred under his agreement with Carey.

In addition, the court took the view that it should not exercise its discretion under section 28(3) of FSMA (section 28) to disapply section 27 and enforce the agreement between Mr Adams and Carey. It concluded that to do so would be contrary to the consumer protection principles that are a key feature of FSMA and that the risk of accepting introductions from unregulated sources should fall on SIPP operators.

Arranging under Article 25. The High Court had found that, as the commercial storage pods were unregulated investments, there could have been no unregulated arranging by CLP and CLP’s activities did not constitute arranging investments because they did not “bring about” the transaction in question. It took the view that there must be a direct and substantial causal connection between the arrangements and the ultimate investment.

The Court of Appeal disagreed and instead found that in order for arrangements to “bring about” a transaction they must play a role of significance. Therefore, the test is not to be applied on a simple “but for” basis and no direct connection is required.

Giving the term “arrangements” its broad and untechnical meaning, the court concluded that CLP did make arrangements for Mr Adams to transfer his pension and put the proceeds into the Carey SIPP. It held that this was the case even though the process was out of CLP’s control and it was not determinative that the steps could be seen as administrative. The court found that there was a sufficient level of causation to satisfy the requirements of Article 26 of the RAO, which would otherwise remove the activity from the scope of Article 25.

Although not considered by the Court of Appeal, this appears to accord with the FCA’s view expressed in Perimeter Guidance manual (PERG) 2.7.7B that Article 25(2) should be interpreted as wide in scope and as including arrangements made by introducers.

Advising under Article 53. The High Court had dismissed Mr Adams’ argument that CLP had carried out regulated advice when he transferred his pension into the Carey SIPP in order to invest in the storage pods. The court took the view that any advice that CLP gave to Mr Adams was related to the underlying investments in the storage pods and not to the SIPP. The court considered that recommending the Carey SIPP fell short of advising on the merits of a particular investment.

In reversing the High Court’s decision, the Court of Appeal concluded that CLP’s recommendation to invest in the storage pods carried with it advice that he transfer his pension into the Carey SIPP. As Mr Adams’ investment in the storage pods could be effected only by transferring his pension into the Carey SIPP, by advising him to undertake these transactions, CLP was providing “advice on the merits of selling a particular investment which is a security” under Article 53, in contravention of the section 19 general prohibition.

Having found that section 27 was applicable, the Court of Appeal next had to consider whether to exercise its discretion under section 28(3). Section 28(3) empowers the court to allow an agreement to which section 27 applies to be enforced where the court is satisfied that it is just and reasonable in the circumstances of the case.

The court accepted that Carey did not have actual knowledge of CLP’s breaches of the section 19 general prohibition, however, this did not mean that the section 28(3) discretion had to be exercised in Carey’s favour. The court gave the following reasons for not exercising the discretion under section 28(3):

Mr Adams claimed that Carey had breached its duty under COBS 2.1.1R to act honestly, fairly and professionally, and in accordance with his best interests.

In rejecting Mr Adams’ COBS claims, the High Court found that the essence of the agreement between Mr Adams and Carey was that Carey’s role was execution-only and Mr Adams was to be responsible for his own investment decisions. The court held that the obligations imposed by COBS 2.1.1 must be read in that light.

The Court of Appeal dismissed Mr Adams’ appeal in relation to the COBS claim on the basis that he was seeking to advance a fundamentally different and new case at this stage of proceedings. It considered that Mr Adams’ argument turned the obligations under COBS 2.1.1R into a product due diligence duty or a non-standard investments duty and that he was seeking to advance a case that was radically different to that found in his pleadings. In addition, the court commented that, in any case, Mr Adams might have struggled to overcome the finding of the High Court that any breach of duty did not cause his loss.

Despite the FCA asking for comments on the implications of COBS 2.1.1R, the court decided that it would be more appropriate to address this in a case where these issues were live. The High Court decision on the COBS claim therefore still stands.

The key impact of the decision is that SIPP providers are at risk of being liable to their members where they accept business from an unregulated introducer. If unregulated introducers are recommending that individuals invest in unregulated investments that should be held in a SIPP wrapper, this is likely to constitute the regulated activities of arranging and advising on investments. As a result, any agreement entered into between the investor and the SIPP operator is at risk of being void by virtue of section 27.

Although the court’s decision on the use of its discretion under section 28 was fact-specific, there is a risk that the courts would now be cautious to use this discretion in a SIPP operator’s favour in any similar circumstances, especially given the court’s focus on consumer protection.

Unregulated introducers. The High Court’s decision to allow unregulated introducers to make introductions to authorised firms without breaching the general prohibition had left a gap in consumer protection. In the absence of any protection from the court, there were suggestions that Parliament should legislate for introductions to form a separate regulated activity within the regulatory perimeter.

However, the Court of Appeal’s decision has made it clear that where an unregulated introducer introduces customers to authorised firms or authorised products this is likely to fall within the regulatory perimeter. Therefore, SIPP operators must ensure that any intermediaries from which they accept business are appropriately authorised. If the SIPP operator fails to do so, customers such as Mr Adams may well be granted the regulatory protection under section 27, resulting in any agreement entered into between the SIPP operator and the customer being unenforceable.

Suitability of investments. The FCA has made it clear in its guidance, thematic reviews and Dear CEO letters that it considers that SIPP operators have a duty to carry out due diligence on non-standard investments before allowing them to be held within a SIPP (www.fca.org.uk/publications/finalised-guidance/fg13-8-guide-self-invested-personal-pensions-sipp-operators; www.fca.org.uk/publication/correspondence/dear-ceo-letter-due-diligence-requirements-for-self-invested-pension-plan-sipp-investments.pdf). The High Court had rejected this analysis and found that the 2009 thematic review of SIPP operators by the FCA’s predecessor, the Financial Services Authority, could not properly be described as a set of rules or even guidance, or give rise to a claim for failing to follow the suggestions that it made. In addition, the High Court had found that the FCA’s guidance did not act as a proper aid to the statutory construction of the COBS rules.

The FCA had hoped that the Court of Appeal would provide some comment on the implications of COBS 2.1.1R on SIPP operator obligations. However, in rejecting Mr Adams’ COBS claim, it left this to be considered in a case in which it is a live issue.

Industry participants are likely to be disappointed by the lack of a Court of Appeal ruling on this point. Unfortunately, it will take another case on this issue before the courts will be able to consider this again. In the meantime, SIPP operators should follow all of the available guidance in relation to full, detailed and ongoing due diligence in relation to non-standard assets.