A swift judgment in the appeal in Adams -v- Options UK Personal Pensions LLP

• United Kingdom

• Financial services disputes and investigations
• Litigation and dispute management
• Pensions disputes

01-04-2021

On 1 April 2021, the Court of Appeal (“CoA”) handed down its judgment in Adams -v- Options UK Personal Pensions LLP. Mr Adams raised two primary arguments in his appeal against Options UK Personal Pensions LLP (formerly, at the time of the hearing at first instance, Carey Pensions (UK) LLP) (“Options”)). Mr Adams’ appeal on the COBS claim was denied, but his appeal on the claim under s.27 of the Financial Services and Markets Act 2000 (“FSMA”) was upheld. The judgment will provide welcome clarity on the application and scope of COBS 2.1.1 for self-invested personal pension (“SIPP”) providers – preserving the findings at first instance.  It also contains important findings for all financial institutions as to the operation of s.27.  In particular, there is now a question over what role an unregulated introducers can undertake which will not carry a risk of being held to be advising or arranging, and therefore in breach of the general prohibition in FSMA. Eversheds Sutherland acted for Options in this case.

The background

In 2011, Mr Adams was contacted by an unregulated introducer, CL&P Brokers (“CL&P”), with regard to an investment in Store First – a company which sold leaseholds in storage pods which would provide a rental income and potential capital growth. The investment was to be held in a SIPP provided by Options. CL&P introduced Mr Adams to Options. Options had Terms of Business with CL&P which expressly prohibited CL&P from advising prospective members. Following his introduction to Options, Mr Adams proceeded to set up a SIPP with Options in February 2012, and to transfer his existing pension. In June 2012 Mr Adams instructed Options to make the investment in Store First.

Mr Adams’ investment in Store First did not perform as he had hoped. Mr Adams brought a claim against Options, seeking damages, and to unwind his contract with Options.

A matter of weeks before trial, the FCA intervened in the claim. The FCA was granted permission to make written and oral submissions at trial as to its interpretation of the COBS rules, Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the “RAO”), and FSMA.

Mr Adams brought his claim on three grounds: (1) for a breach of COBS 2.1.1R; (2) under s.27 of FSMA; and (3) an alleged joint tortfeasor relationship between Options and CL&P.

At first instance Mr Adams’ claim was dismissed on all grounds. Mr Adams was granted permission to appeal on the COBS and s.27 claims. The FCA continued its role as intervenor during the appeal.

Appeal – The COBS claim

Mr Adams alleged at first instance that Options failed to act honestly, fairly and professionally, in accordance with COBS 2.1.1R, in: accepting the investment in Store First; providing the SIPP; failing to implement FCA guidance; and failing to warn Mr Adams as to the risks and that the SIPP and/or investment in Store First were “manifestly unsuitable”.

As Newey LJ noted, the COBS claim advanced by Mr Adams on appeal bore “little relation to his particulars of claim”, and the claim presented at first instance. On the basis that Mr Adams sought to “advance a case radically different to that found in his pleadings and which [Options] could be expected to have met at trial”, the COBS appeal was dismissed. However, notably, Newey LJ commented that “Mr Adams might anyway have struggled to overcome the judge’s finding that any breach of duty was not causative of loss”.

As such, HHJ Dight’s decision at first instance remains the leading authority as to the application of COBS 2.1.1 to SIPP providers, and those acting on an execution only basis. In brief, HHJ Dight found that it was “obvious that the correct starting point” in ascertaining the scope of the obligations imposed by COBS, and in construing those obligations, was the contract between the parties, “because it is common ground that not every COBS obligation” applies to all firms.

HHJ Dight found that all of the contractual documentation between Options and Mr Adams was clear  that Options was acting on an execution only basis; that it was not advising Mr Adams; that the investment in Store First was high risk and/or speculative; and that Mr Adams was responsible for his own investment decisions. In that context COBS 2.1.1R could not be read as imposing on Options a duty to advise or comment on the suitability of the SIPP or investment, as that would be unlawful (noting that Options does not hold the relevant permissions to advise); or to reject a ‘high risk’ investment. There was no breach of COBS 2.1.1R.

Appeal - The s.27 FSMA claim

Mr Adams brought a novel claim under s.27 FSMA, in respect of which there was no existing case law, and which failed at first instance. The premise of s.27 is such that where an authorised person (here Carey), in the course of a regulated activity, makes an agreement with another person (here Mr Adams), as a consequence of something said or done by a third party (here, CL&P) also in the course of a regulated activity, but in breach of the general prohibition (because that person did not have the requisite permissions), then that agreement may be unwound. S.27 provides the Court with a broad discretion as to the remedies to be granted. S.28 operates in effect as a ‘Defence’ and sets out the factors to which the Court should have regard when determining liability/redress under s.27.

A ”relevant investment”

It was common ground that the establishment of the SIPP by Options in February 2012 was a regulated activity; that the subsequent investment in Store First was not; and that the investment in Store First was not a “security” or “relevant investment” under the RAO. Mr Adams argued that CL&P had ‘advised’ (Art 53, RAO) him, and ‘arranged’ (Art 25, RAO) the SIPP and/or the investment in Store First, in breach of the general prohibition.

Relevant to the consideration of Art 53 and 25 was whether acts done in respect of the Store First investment, were capable of being captured by the provisions of the RAO. Mr Adams and the FCA sought to argue, and in reliance on PERG 12.3, that notwithstanding that the Store First investment was not a “security” or “relevant investment”, the investment in it was a “relevant transaction”. Mr Adams argued that the definitions of “buying” and “selling” included “disposing…for valuable consideration”, which included “converting” rights, which had occurred when purchasing the investment. Mr Moeran Q.C., on behalf of Options, explained that that approach and PERG 12.3 were flawed, as there had been no conversion of the rights under contract or the SIPP, only of the asset by reference to which the value of the SIPP was determined, and that the member’s rights under the Options’ SIPP were not fundamentally contractual, but rights under a trust. The Court of Appeal agreed with Mr Moeran Q.C.’s analysis and found that the FCA’s guidance under PERG 12.3 is wrong.

Article 53 - Advice

Notwithstanding that, Newey LJ found that did not mean that advice on the merits of an unregulated investment would necessarily be irrelevant to the issue of whether activities of the nature covered by Art 53 and 25 had been undertaken, and that advice could be (and in this case was) capable of involving advice on a specified investment.

Contrary to HHJ Dight’s findings that there was no evidence that CL&P had ‘advised’ Mr Adams to enter into the SIPP, as a specific product, the Court of Appeal adopted a more holistic approach, finding that a recommendation of Options generally, as a SIPP provider, “was sufficiently specific for it to relate to a “particular investment” within the meaning of [Art 53”]”. The CoA held that “CLP’s recommendation that Mr Adams invest in storepods carried with it advice that he transfer out of his Friends Life policy and put the money into a[n Options] SIPP. Investment in storepods may have been the ultimate objective, but it was so gained by transferring out of the Friends Life policy and into a[n Options] SIPP. CLP thus proposed that Mr Adams undertake those transactions too and, in so doing, gave “advice on the merits” of selling a “particular investment which is a security” (viz. the Friends life policy) and buying another “particular investment which is a security” (viz. a[n Options] SIPP)”.  

Article 25 - Arranging

At first instance, HHJ Dight found that the actions of CL&P fell far short of ‘arranging’ the investment, and that the words to ‘bring about’ in Art 26 meant that the correct ‘causal test’ was such that the ‘arrangements’ must have “a positive or effective cause, not merely a set of circumstances which may be no more than the context of the transaction which eventuates”. The Court of Appeal did not accept that position, and found that the focus should be placed on the need for actions to “bring about” the transaction. However, the Court of Appeal accepted there was some difficulty in discerning that test, noting there is a need for some “causal potency” behind the act, and that “for arrangements to “bring about” a transaction for the purposes of article 26, they must play a role of significance. Whether or not arrangements “bring about” a transaction is not to be judged simply on a “but for” basis, but neither is a “direct” connection inevitably required”.

On the facts, Newey LJ concluded that, taking ‘arrangements’ at its ordinary meaning, CL&P in completing the SIPP application form, and collecting documentation for the AML purposes were undertaking  ‘arrangements’ and which ‘brought about’ the transfer from the ceding scheme, as there was sufficient causal potency in those acts.

The CoA therefore concluded that Art 25 and 53 of the RAO had been triggered, that the agreement between Options and Mr Adams was in consequence of CL&P’s actions in breach of the general prohibition, and that s.27 of FSMA was therefore triggered.

The CoA was invited by Options to exercise its discretion under s.28 of FSMA to nonetheless enforce the agreement. Although not required to consider the issue, HHJ Dight noted obiter in respect of s.28 of FSMA, that Options had “erected a system or process to define and constrain the role of [CL&P]. It was entitled to assume that the system was working” such that it would have been just and equitable to enforce the agreement, had he needed to consider the issue. However, despite finding that Options had no actual knowledge of any breach by CL&P of the general prohibition (being the factor specifically required to be considered by the Court when exercising its discretion) the CoA refused to exercise its discretion under s.28. The CoA held that the aim of FSMA was consumer protection, and that s.27 placed the risk of dealing with unregulated third parties on to regulated firms. Further, the CoA considered that the volume of business referred to Options by CL&P, and the concerns Options later had about CL&P, combined with the fact that it did not share those concerns with Mr Adams before proceeding with his investment, meant it would not be just and equitable to grant relief under s.28(3) of FSMA.

Consequences for the SIPP industry, and other financial institutions

The SIPP industry has faced significant volumes of complaints and claims for several years, arising from facts similar to those in the Adams case. The CoA’s judgment will provide some guidance, as to the application of s.27 of FSMA, and the factors taken into account by the court in its exercise of discretion under s.28 of FSMA. There will no doubt be concerns as to the extent to which consumer protection has been prioritised by the Court.  Firms may now look to consider their policies and procedures for dealing with unregulated third parties, and what role there remains for such entities given the findings of the CoA. 

More broadly, HHJ Dight’s approach to determining the scope of COBS rules remains good law. In particular, that the scope of COBS must be considered through the lens of the individual contractual arrangements with customers.