The judgment handed down in Adams v Options SIPP UK LLP by the Chancery Division of the High Court may give SIPP providers some comfort on their exposure to liability when acting on an execution-only basis and a SIPP member suffers loss on an investment made through their SIPP.
What was the case about?
Mr Adams transferred funds from his personal pension plan to a SIPP administered by the defendant SIPP provider (the Provider) in order to invest in a company which sold leasehold interests in storage pods (the Investment) which were intended to generate a rental income and potential capital growth. CL&P Brokers (CLP), an unregulated promoter which Mr Adams alleged was linked to the Provider, had recommended the Investment and had introduced him to the Provider. The transfer from the personal pension plan to the SIPP was necessary as its broader investment powers permitted Mr Adams to invest in the Investment which would not have been possible through his personal pension plan. The Investment did not perform well and Mr Adams brought a claim against the Provider, rather than CLP (which as an unregulated firm was unlikely to have insurance cover).
Mr Adams argued that:
- the SIPP provider should not have accepted the Investment as an asset of the SIPP and failed to advise him that it was unsuitable contrary to its obligation to act "honestly fairly and professionally in accordance with the best interests of its client" under the FCA's Conduct of Business Sourcebook (COBS)
- his contract with the Provider was unenforceable under the Financial Services and Markets Act 2000 (FSMA) because CLP had breached the regulatory regime created by FSMA by arranging the Investment and advising him on it, which were regulated activities for which CLP had not been authorised by the FSA
- there was an organised joint venture between the Provider and CLP and the Provider should be jointly liable for the alleged negligent advice provided by CLP.
The key issue of significance which Mr Adams' claim raised was the nature and scope of the duties owed by the Provider in relation to investments made through the SIPP.
What did the court say?
The High Court rejected Mr Adams' claim on all counts.
In terms of the first argument, it held that the starting point was to look at the contract between the parties which defined the roles and responsibilities of the parties in relation to the material transactions, and therefore determined the extent of the obligations imposed by the COBS. This was the appropriate starting point because not all COBS rules apply to all authorised firms or all regulated activities. The COBS provisions did not override the contract. The contract made clear that the Provider was acting on an execution only basis, and was not advising the claimant as to the suitability of the Investment. The COBS provisions therefore did not impose a duty on the Provider to advise on the suitability of the SIPP or the Investment.
The second argument was a novel one for which there was no authority. However, the court found that the actions of CLP fell short of "arranging" the investment, nor could CLP be said to have "advised" Mr Adams to enter the SIPP. Therefore the contract between Mr Adams and the Provider was not unenforceable.
Finally, the court did not consider that there was any joint venture between the Provider and CLP, and rejected Mr Adams' negligence claim.
A change in approach?
The Financial Ombudsman has upheld many complaints brought against SIPP providers in cases with similar facts. This latest judgment may therefore offer providers some comfort that, where an investor has been introduced to them by an independent promoter and it is acting on an execution only basis, it will not usually be liable for any losses suffered by the investor on investments made through the SIPP.
However, the earlier High Court case of Berkeley Burke SIPP Administration v Financial Ombudsman Service will continue to give SIPP providers cause for concern where an investor suffers loss and the judge in Adams was careful to distinguish Berkeley Burke on its facts, on the basis that it was a judicial review application and it related to different regulatory provisions and because he did not have to determine the question of due diligence prior to the provider agreeing to accept investments in store pods into their SIPP. Berkeley Burke has been given permission to appeal and it will be interesting to see whether the Court of Appeal reaches a different conclusion to the High Court in a way which is more closely aligned to the Adams decision. It is also likely that Mr Adams will seek permission to appeal.
Contribution from Alex Kirtley, Trainee Solicitor.