Court of Appeal holds SIPP provider liable for execution only client's investment losses

28 April 2021

The Court of Appeal has upheld an appeal by an investor, Mr Adams, which paves the way for him to receive compensation from SIPP provider, Options UK Personal Pensions LLP (formerly Carey Pensions UK LLP), arising from his failed investment in “storepods” via a self-invested personal pension (SIPP) operated by Carey.

Mr Adams’ contract with Carey, entered into on an execution only basis, was held to be unenforceable as a result of the actions of an unregulated introducer that was held to have carried out regulated activities without authorisation. In upholding Mr Adams’ appeal, the Court unanimously rejected Carey’s argument that the pension contract should be enforced on the basis that Carey was not aware that the introducer was carrying on regulated activities.

As a result, Carey will now be required to compensate Mr Adams for his losses. The outcome of this case might also have implications for other similar complaints that had been put on hold by the Pensions Ombudsman. It may also have implications for other SIPP providers and financial services firms that deal with unregulated third parties.

Key facts

The defendant SIPP provider was incorporated in 2009 and until last year, prior to a change of ownership, was known as Carey Pensions UK LLP. Carey works on an “execution only” basis meaning that the company does not provide any advice to its members and only acts on their express instructions.

In 2011, Carey started to accept investments in “storepods” into its SIPPs. The investments comprised long leases of units in a storage facility in Blackburn, Lancashire granted by a company called Store First Limited (“Store First”). Income was to be generated by the sub-letting of the units.

Most of the clients who invested in storepods were introduced to Carey by CLP Brokers Socieded Limitada (CLP), which operated from premises in Spain. CLP was never authorised by the Financial Conduct Authority. Carey first accepted a referral from CLP in August 2011.

The claimant, Mr Adams, was in need of some money due to having a judgement made against him and he was looking for ways to meet that liability. Having seen an advert online, Mr Adams contacted CLP who persuaded him to transfer his pension into a Carey SIPP and invest the funds in storepods.

CLP took various steps to assist Mr Adams with the transfer, including:

sending him an application form, a letter of authority and a schedule listing Carey’s fees and a “Key Features Document”
arranging for a courier to collect the completed forms and Mr Adam’s money laundering documents, and
completing the application form on Mr Adam’s behalf.

At the end of the form, Mr Adams signed a declaration by which he applied for “membership as a direct client of the Carey Pension Scheme”, confirmed that he was “establishing the Carey Pension Scheme on an execution only basis” and understood that “Carey Pensions UK LLP and Carey Pension Trustees UK Ltd are not in any way able to provide me with any advice”.

On 17 July 2012, Carey notified Mr Adams that £53,116 had been sent to Store First in accordance with his instructions. The purchase of the storepods was completed on 5 October for a premium of £52,500 at an initial annual rent of £175. At some stage, Mr Adams received a £4,000 payment from CLP.

The storepods were not a successful investment. Some of the storepods were rented out in the course of 2016, but they generated no more than a few hundred pounds in rental income. Having heard expert evidence, the Judge concluded that the market value of the leases in January 2017 was £15,000.

In his claim, Mr Adams advanced three heads of claim, namely that:

his agreement with Carey was rendered unenforceable under section 27 of the Financial Services and Markets Act 2000 (FSMA) because it had been “made in consequence of something said or done by another person (‘the third party’) in the course of … a regulated activity carried on by the third party in contravention of the general prohibition”
Carey was said to have acted in breach of the FCA’s Conduct of Business Sourcebook COBS 2.1.1R, which required Carey to act “honestly, fairly and professionally in accordance with the best interests of its client, and
Carey was a joint tortfeasor with CLP and so shared responsibility for negligent advice given by CLP.

The Section 27 claim

It was Mr Adam’s case that he only agreed to transfer his pension fund into the Carey SIPP in consequence of things said and done by CLP in contravention of the “general prohibition” imposed by section 19 FSMA and, hence, that he was entitled to recover his investment pursuant to section 27 FSMA. He alleged that CLP breached the general prohibition by carrying on activities specified in articles 25 and 53 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the RAO), namely “arranging deals in investments” and “advising on investments”. According to Mr Adams, CLP contravened the general prohibition in relation to, first, the transfer of his existing pension away from Friends Life, secondly, the transfer of the proceeds into the Carey SIPP and, thirdly, the investment of the money in storepods.

Carey denied that CLP contravened the general prohibition in any of the respects which Mr Adam’s alleged. It disputed that the investment in storepods can be a relevant transaction for this purpose, maintained that there was no breach of either article 25 or article 53 of the RAO and contended that there was in any event no sufficient causal link between any breach and Mr Adams’ entry into the SIPP.

Section 28 relief

In the alternative, Carey argued that the Court should exercise its discretion under section 28 FSMA and allow it to enforce its agreement with Mr Adams and to retain the money that it received pursuant to it on the basis that Carey had no knowledge that CLP was carrying on regulated activities and, in doing so, CLP was in breach of its Introducer Agreement with Carey.

Decision

At first instance, the Judge dismissed Mr Adams’ claim on all three grounds.

However, the Court of Appeal unanimously overturned the High Court’s decision in respect of his claim under section 27 FSMA rendering his contract with Carey unenforceable (subject to the outcome of Carey’s request for relief under section 28). In particular, the judges accepted that CLP breached the general prohibition by carrying on the regulated activities of “arranging deals in investments” and “advising on investments” without authorisation.

In relation to the first, the Court held that that the steps taken by CLP could fairly be said to have been such as to “bring about” the transfers from Friends Life and into the Carey SIPP. “Arrangements” being a “broad and untechnical word” in article 25 of the RAO, the Court held that this was apt to describe what CLP had done. In particular, the fact that CLP had procured the letter of authority (i.e. the letter authorising Carey to liaise with CLP), undertaken money-laundering investigations and completed the application form were identified as specific steps which fell into this category.

On the second, the Court held that proposing that Mr Adams transfer his pension to Carey and invest in storepods CLP was giving “advice on the merits” of selling a “particular investment which is a security” (i.e. the Friends Life policy) and buying another “particular investment which is a security” (i.e. a Carey SIPP). Therefore, although the recommendation to invest in storepods was not itself covered by article 53 of the RAO (on the basis this was not relevant transaction), CLP nonetheless gave Mr Adams advice within the scope of article 53 and so acted in contravention of the general prohibition.

The Court went on to reject Carey’s argument that it should exercise its discretion under section 28 FSMA to allow Carey to enforce its agreement with Mr Adams despite the actions of CLP as it did not consider that it was just and equitable to do so on the basis that (amongst other things):

a key aim of FSMA is consumer protection
while SIPP providers are not barred from accepting introductions from unregulated sources, section 27 FSMA was designed to place the risks associated with doing so onto the providers
over a period of only about six months, some 580 of Carey’s clients invested in storepods, despite these being high risk and non-standard investments, and most of those clients came via CLP. In addition, on average, only around £50,000 was being invested, suggesting these clients were not wealthy or financially sophisticated, and
Carey entered into the investment in storepods on behalf of Mr Adams after it had terminated its relationship with CLP having discovered that CLP was receiving commissions of about 12% from Store First, contrary to assurances previously given by CLP to Carey.

Comments

This judgment could have significant implications for SIPP providers and other financial services firms that receive referrals from unregulated introducers. The decision clearly places the risk that an unregulated introducer is carrying out regulated activities onto the provider that receives the referral, even if the provider is unaware that a regulated activity is being carried out and where the client takes out a product on an execution only basis.

This may lead some providers to review their business models and may force them to look behind any ‘assistance’ being given by unregulated third parties, and to have to form a view on whether they have engaged in any regulated activities.

Following this judgement, the Pensions Ombudsman has confirmed that it will now reopen other related complaints against Carey Pensions which had been put on hold pending the outcome of this appeal.

If you wish to discuss how this judgment may impact your organisation please contact one of our specialists or speak to your usual Herbert Smith Freehills’ contact.

Related categories

Cases / Ombudsman determinations Investment Regulatory

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