Clarity for SIPP providers as the judgment in Adams -v- Carey Pensions finally arrives

• United Kingdom

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

18-05-2020

The long awaited judgment in the Adams -v- Carey Pensions case has now been handed down. Mr Adams’ claim against Carey Pensions has been dismissed on all grounds, bringing with it clarity on the duties and obligations of a Self-Invested Personal Pension (“SIPP”) provider, and important findings for all financial institutions as to the parameters of ‘execution-only’ instructions, the scope of COBS 2.1.1, and the application of s.27 of the Financial Services and Markets Act 2000 (“FSMA”). Eversheds Sutherland acted for Carey Pensions 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 Carey Pensions (“Carey”). CL&P introduced Mr Adams to Carey. Carey had Terms of Business “ToBs”) with CL&P which expressly prohibited CL&P from advising prospective members. Following his introduction to Carey, Mr Adams proceeded to set up a SIPP with Carey, and to transfer his existing pension. In June 2012 Mr Adams instructed Carey to make the investment in Store First.

Mr Adams’ investment in Store First did not perform as he had hoped and over time became worth less than the purchase price. Mr Adams brought a claim against Carey, seeking damages, and to unwind his contract with Carey.

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.

The three limbs of Mr Adams’ claim

The COBS claim

Mr Adams alleged that Carey 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”.

HHJ Dight rejected Mr Adams’ arguments, and the submissions of the FCA, agreeing with Carey and finding 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. Further, HHJ Dight added that no “provision [has] been identified to demonstrate that, so far as the COBS duties which I am considering are concerned, the regulatory regime is intended to take precedence over the contractual terms”. He noted that the argument before him turned not on whether the duties could be excluded but what those duties were having regard to the relevant factual context, which includes the terms of the contract.

HHJ Dight found that all of the contractual documentation between Carey and Mr Adams was clear  that Carey 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 Carey a duty to advise or comment on the suitability of the SIPP or investment, as that would be unlawful (noting that Carey does not hold the relevant permissions to advise); or to reject a ‘high risk’ investment. The court found that Mr Adams had to take responsibility for his investment decision.

It was also found that there was no express provision in FSMA which would provide an investor with a right to bring a claim based on an alleged breach of, or non-compliance with, FCA guidance, concluding that “the Thematic Review cannot properly be described as a set of rules or even guidance and in my judgment cannot give rise to a claim for failing to follow the suggestions which it makes”. Similarly, guidance issued by the FCA after the facts relevant to this claim, would not have any direct bearing on the judgment.

Finally, HHJ Dight concluded that notwithstanding the above findings, any alleged breach of COBS 2.1.1.R could not be said to have caused Mr Adams’ loss.

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. The premise of s.27 is such that where an authorised person, in the course of a regulated activity, makes an agreement with another person, as a consequence of something said or done by a third party also in the course of a regulated activity, but in breach of the general prohibition, 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.

It was common ground that the establishment of the SIPP by Carey in February 2012 was a regulated activity, and that the subsequent investment in Store First was not. Mr Adams then 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.

HHJ Dight found that the actions of CL&P fell far short of ‘arranging’ the investment, and that, crucially, the point at which the issue must be considered is when Mr Adams gave his instruction to invest. Prior to that point, Mr Adams was not bound to continue, nor had he suffered any loss. The Court found that the correct ‘causal test’ was not the ‘but-for’ test, as proposed by Mr Adams and the FCA, rather the words to ‘bring about’ in Art 26 means 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”. They did not.

HHJ Dight held also that on the evidence submitted there was no case that CL&P had ‘advised’ Mr Adams to enter the SIPP (noting the investment in Store First was not a specified investment), and that a recommendation to consider a product was not sufficient.

In the light of the above, HHJ Dight dismissed this cause of action entirely. He also noted as part of his consideration of s.28 of FSMA, that Carey 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”.

The joint venture/tortfeasor claim

Mr Adams alleged that Carey was, by virtue of its relationship with CL&P  in a joint venture with it and/or should be held to be a joint tortfeasor in respect of negligent advice allegedly provided by CL&P to Mr Adams.

HHJ Dight confirmed that the correct test for establishing joint tortfeasorship is that set out in Sea Shepherd, finding that the “facts are entirely inconsistent with any conclusion that [Carey] assisted in the commission of a tort by CLP” and that there was no common design. HHJ Dight was similarly not satisfied on the evidence that any tortious negligent misstatement had been made by CL&P, and noted the distinction between such a misstatement and a simple recommendation.

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 similar facts to those in the Adams case. Many of those complaints have been upheld by the Financial Ombudsman Service.

More broadly, the Court’s approach to determining the scope of COBS rules will have far reaching consequences for all financial institutions. In particular, that the scope of COBS must be considered through the lens of the individual contractual arrangements with customers.