In its judgment in the Secretary of State for Business, Energy and Industrial Strategy v Evans, the court has rejected an application by the government for an order disqualifying two former directors of a SIPP trustee company from acting as company directors.
The government had argued that there had been a failure to act in accordance with the FCA's regulatory framework governing SIPPs and that such failure meant that the directors were unfit to be company directors. However, the judge held that any failings on the part of the directors did not amount to incompetence to a degree that would justify a finding of unfitness.
The case raises important questions regarding the extent to which alleged failings specific to the SIPP regulatory regime might justify an order to disqualify someone from acting as a director altogether. Addleshaw Goddard LLP acted for the directors in the case.
The case concerns the conduct of the two directors of a company which acted as a SIPP trustee and administrator. The SIPP company entered into business with an introducer company called FCP which, from August 2011 to January 2013, introduced customers to the company's SIPP and suggested they invest in a fund called the LM Managed Performance Fund, an unregulated collective investment scheme investing in Australian property developments, which subsequently went into administration.
The intention had been that FCP would be an introducer of non-UK business, but in December 2011 the SIPP company's compliance team had spotted that FCP had been submitting applications for investment by individuals who appeared to be resident in the UK. The SIPP company sought to resolve this issue by putting in place (in November 2012) an arrangement with a financial adviser, but only two clients actually received advice from the adviser in question.
A number of the SIPP's members complained to the Financial Ombudsman Service (FOS) that the SIPP company had failed to undertake sufficient due diligence in accepting business from FCP, as a result of which the SIPP company had allowed their pension funds to be invested in a high risk unregulated fund which was not suitable for them. FOS issued adjudications in favour of the complainants which resulted in the SIPP company going into administration. Subsequently, the Financial Services Compensation Scheme (FSCS) declared the SIPP company to be in default for having failed to carry out sufficient due diligence on the introducers and on the products in which members were investing. The FSCS paid a substantial amount in compensation to members of the SIPP.
The company directors disqualification regime
The Company Directors Disqualification Act 1986 (CDDA) provides for a disqualification order to be made where a company has become insolvent and a director's conduct was such as to make him "unfit to be concerned in the management of a company". What amounts to being "unfit" is for the courts to decide in all the circumstances. The courts have held that directors do not need to be guilty of deliberate wrongdoing, but that "unfitness" means that the director must have been guilty of a serious failure to perform the director's duties and that the "touchstone" is lack of regard for proper standards.
The government's arguments
The government cited the FCA Principles, in particular Principle 2 which requires a firm to conduct its business with due skill, care and diligence, and Principle 6 which requires a firm to treat its customers fairly. It referred the judge to various materials setting out the FCA's expectations as to how the Principles apply to SIPP operators. These included materials which made clear the FCA's view that SIPP firms could not absolve themselves of all responsibility for the investments held in their SIPPs and were expected to have procedures and controls in place to identify possible instances of financial crime and consumer detriment. The government referred to the FCA publication "A guide for Self-Invested Personal Pensions (SIPP) operators" which, though published after the events complained of, described its contents as being "a reminder of regulatory responsibilities that became a requirement in April 2007".
Specifically, the government alleged that:
- the defendants failed to ensure that the SIPP company did sufficient due diligence in relation to pension transfer business from FCP which was not licensed to advise on and facilitate the SIPP;
- the first defendant failed to identify that the unregulated collective investment schemes recommended for 20 UK resident customers by FCP were not suitable for them;
- the defendants failed to identify that in February 2011, FCP had been fined by the regulator in Cyprus for purporting to offer investment services without holding the requisite licence (FCP having previously informed the SIPP company that it was regulated in both the UK and Cyprus);
- the defendants allowed two referrals even after it had contacted FCP to say it could not continue to accept such business and without establishing who was providing advice to FCP's UK customers.
The defendants' arguments
The defendants gave evidence that the SIPP company's administrative and compliance functions had been outsourced throughout, and that a team of 30 people was engaged on administrative and/or compliance work. The work of the company performing this outsourced function was in turn monitored by an independent consultancy which carried out reviews twice a year and reported to the board of the SIPP company. The FCA had conducted a "high level review" of the SIPP company in 2009 and was satisfied with the SIPP company's operations. A "thematic assessment" by the FCA in 2014, carried out after the events complained of but which would have considered the SIPP company's operations during the relevant time, did not identify any significant failing in the SIPP company's due diligence procedures.
The defendants also pointed out that what went wrong related to only a small proportion of the business conducted by the SIPP company.
The judge's findings
The judge accepted that the specific allegations made by the government had been proven. However, having regard to the general adequacy of the SIPP company's administrative systems, he did not consider that the directors' conduct amounted to gross incompetence of a type that would warrant a finding that they were unfit to be concerned in the management of a company. He said that the directors had made mistakes in failing to pick up the fine against FCP and failure to keep a close eye on the business that FCP had referred, particularly after compliance staff identified that FCP, which was expected to be an introducer of non-UK business, had been submitting applications for investment by individuals who appeared to be resident in the UK. However, the judge noted that the failure related to a single business relationship, ie that with FCP, and was not rooted in the way the SIPP company was run. He also noted that the business referred by FCP was a small proportion of the business the SIPP company transacted.
The judge said that "the supervisory buck in [the SIPP company] stopped with the defendants" and thus did go to an extent to the question of whether they were fit to be company directors. However, the judge said it seemed to him that it had more to do with the directors' competence as financial service providers. Their limited failings in that regard might have implications, but not implications as to their right to trade with limited liability. The judge therefore dismissed that government's claim for disqualification of the directors.
In a postscript to the judgment, the judge specifically warns against treating his judgment as a precedent, describing the case as being one decided on its particular facts. Nevertheless, it seems likely that the judgment will cause the government to think carefully before seeking disqualification orders against directors in circumstances where any failings on the part of directors relate specifically to the requirements of the financial services regime.
This will be a welcome decision for some in the SIPP industry whose SIPP businesses have been held to have breached FCA or FOS expectations in circumstances where applicable guidelines and principles did not provide clarity on the dividing line between compliance and breach. We believe the decision was the right one on the facts for the reasons given. A compliance breach should not automatically lead to director disqualification. Nevertheless the judge's warning that the case should not be seen as a precedent and is fact specific is absolutely right. It is possible that different levels or types of compliance breaches by SIPP providers could lead to successful disqualification proceedings. It will be interesting to see whether further cases emerge where the government seeks disqualification orders based on alleged compliance failings.
SIPP operators dealing with introducers outside the UK should note the judge's comments regarding the SIPP company's failure to pick up on the fine imposed on FCP by the Cyprus regulator. The judge commented that if the company's business was predominantly with individuals not in the UK, its regulatory and compliance systems ought to have included checks in line with its international reach, which should have included arrangements to search material in languages spoken in countries with which the company did business. (The information about imposition of the fine in Cyprus had been published in Greek on the relevant regulator's website.)
A final noteworthy aspect to the judge's postscript to his judgment is his comment that there has been a "trend in the world of administration and regulation to write in an increasingly obscure style, often using superfluous words or words of uncertain meaning". The postscript to the judgment ends, "If any regulators do in fact read this judgment I would ask them to note and act on my plea for them to use ordinary, plain English wherever possible."