The High Court has dismissed an application by Berkeley Burke SIPP Administration Ltd (Berkeley Burke) for judicial review of an earlier decision by the Financial Ombudsman Services' (the FOS).
The FOS previously decided that Berkeley Burke, a Self-Invested Personal Pension (SIPP) provider, had failed to act with due skill, care and diligence when accepting the complainant, Wayne Charlton's requested investments in an unregulated scheme in his SIPP. Berkeley Burke had been required to compensate Mr Charlton for the losses he suffered as a result of making the investment.
Although Berkeley Burke has indicated that it will appeal the decision, it could have major implications for the industry. The FCA issued a 'Dear CEO' letter, on the same day as the judgment (30 October 2018), to SIPP providers reminding them of their notification obligations if they anticipate they will be unable to meet their financial commitments as a result of the decision. The letter notes this may result in some firms selling part or all of their business to another firm and that if they do, firms should have due regard to its customers' interests and treat them fairly, in particular any customers who may have claims for compensation.
In 2011, Mr Wayne Charlton invested in a 'green oil' scheme in Cambodia that had been offered to him by a company called Sustainable Agro Energy plc (the SA Scheme). He was introduced to Berkeley Burke as he wanted to hold the investment in a SIPP. Mr Charlton also applied to transfer his personal pension to Berkeley Burke so he could use those funds to invest in the SA Scheme. During the process, Mr Charlton met with the introducer, Big Pebble Ltd, and signed a standard form which stated that he was fully aware that the investment was "high risk and/or speculative, may be illiquid" and "confirm[ed] I wish to proceed". The form went onto say that he was "fully aware that Berkeley Burke SIPP Administration Limited act on an Execution Only Basis…..and that Berkeley Burke SIPP Administration Limited has not provided any advice whatsoever in respect of this investment or the SIPP".
The SA Scheme was later discovered to be a fraud and Mr Charlton lost his investment. He complained to the FOS about the conduct of Berkeley Burke and sought reimbursement of the £29,000 he had invested.
The decision by the FOS
The FOS's review of Mr Charlton's complaint was protracted with a number of ombudsmen involved before a Final Decision was issued on 2 February 2017. In that decision the FOS held that Berkeley Burke had not acted fairly and reasonably in accepting Mr Charlton's the SA Scheme into his SIPP.
The key elements of the decision were:
- That Berkeley Burke was responsible for taking appropriate and ongoing measures to ensure it was complying with the FCA's Principles for Business and that its customers were treated fairly;
- Principle 2 required Berkeley Burke to conduct its business with due skill, care and diligence and Principle 6 that Berkeley Burke pay due regard to the interests of its customers and treat them fairly.In respect of Mr Charlton, this would have entailed carrying out due diligence into the SA Scheme prior to the investment and not merely just considering whether it was permitted to be held within a SIPP under HMRC rules;
- Berkeley Burke did not meet its regulatory obligations and allowed the investment which put Mr Charlton's pension fund at considerable risk;
- DISP 3.6.4(2) requires the FOS to consider what industry good practice was at the time (as opposed to merely common practice). The FOS held that good practice would have been "to check before accepting an investment into a pension scheme that it [the scheme] was what it purported to be".
The FOS concluded that Berkeley Burke did not act fair and reasonably or in accordance with the Principles of Business and failed to carry out sufficient due diligence. Further, had Berkeley Burke complied with the Principles and Rules it would have identified that the investment was not suitable.
The Berkeley Burke position
Berkeley Burke argued that even though it was acting on an execution only basis and therefore under no duty to advise on the investment, the FOS had irrespective of that still found that SIPP administrators owed a duty to investigate whether high-risk investments were suitable and acceptable for inclusion in the SIPP. In support of its application, Berkeley Burke made a number of submissions:
- The Consultation Argument – Berkeley Burke argued that the Principles were secondary legislation and as such, cannot be used to undermine a primary statutory requirement for there to be a consultation on rules or guidance under FSMA;
- The Augmentation Argument – the Principles should be used to augment or clarify existing duties but not to create new duties that have not been subjected to the afore mentioned consultation;
- The Conflict Argument – Berkeley Burke held that a conflict existed in between COBS 11.2.19R that a firm "must execute the order following specific instructions" and any duty of inquiry. Berkeley Burke also relied on Article 21.1 of MiFID which states that "whenever there is a specific instruction from the client the investment firm shall execute the order following the specific instructions";
- The Error of Law Argument – that whilst an Ombudsman has a discretion to depart from common law, it did not mean that he did not have to consider the law and get it right.
- That the FOS had created inconsistency between its approach and that of the Pension Ombudsman which had rejected similar complaints by customers.
The Court was not considering a challenge to the conclusions of fact by the FOS, rather it was a challenge to the lawfulness of the FOS's decision. S.228(2) of FSMA requires the Ombudsman to determine a complaint by considering what is fair and reasonable in all circumstances in the case. The judge acknowledged this was a subjective test but it was not argued by Berkeley Burke that the Ombudsman's conclusions were irrational. According to Berkeley Burke, the FOS' errors were errors of law based on the rules in the FCA Handbook.
In ultimately agreeing with the submissions on behalf of the FOS, the judge concluded as follows:
- The Consultation Argument – the judge did not consider that the FOS's decision created a new rule or duty which should have been "consulted upon" but was, as the FOS submitted, just the application of existing the rules, namely Principle 2 and 6;
- The Augmentation Argument – the judge held that this argument depended on the proposition that the FOS had created a "new unexpected duty". In addition, the judge found that the argument was inconsistent with the conclusions of what the Ombudsman considered to be good industry practice at the time (namely to check before accepting an investment whether it was what it was purported to be) which was one of the factors he was entitled to consider in reaching his decision;
- The Conflict Argument – even though Mr Charlton had waived the 7 day cooling off period before the investment was made and had asked Berkeley Burke to proceed immediately, COBS 11.2.19R was still subject to the Principles which were an ever present "sub-strata or overarching framework".Further, he noted that any suggestion that a SIPP provider must, as a result of COBS 11.2.19R, execute a transaction regardless of the duties contained in the Principles would produce surprising results.By way of example he referenced a situation where a customer wanted to place an investment which was not "SIPPable" into the SIPP meaning it was not eligible for the tax benefits. It would not be right that a SIPP provider would still be bound to proceed with the investment in those circumstances given the prejudice to the customer.
- Finally, the judge considered whether the FOS was "bound to follow the Pensions Ombudsman's conclusions" and held it was not. The FOS Ombudsman operates under a different statutory scheme and in applying that statutory scheme, made up his/her own mind as to what was a fair and reasonable outcome.
As mentioned, Berkeley Burke has indicated that it intends to appeal this decision and it remains to be seen if permission to appeal will be granted. In meantime, this judgment supports the FCA's position that SIPP providers must comply with the Principles and therefore cannot simply proceed with investments, even if instructed to do so by their customer, without considering them first.
Issuing the Dear CEO letter on the same day as the decision re-enforces that the FCA is monitoring this industry closely and firms should therefore, if they have not done so already, be considering the impact of this decision on their own schemes in terms of both potential complainants and the financial impact on the firm of those complaints.
The next development in this story is likely to be the closely related decision in Russell Adams v Carey Pensions UK Limited which will either further cement this decision or alternatively re-open the uncertainty that has existed prior to this decision.