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Latest and long-awaited judicial review of FOS: the Berkeley Burke saga

  • United Kingdom
  • Financial services disputes and investigations

02-11-2018

On 30 October 2018 the Court handed down its judgment in the Berkeley Burke SIPP Administration Ltd v Financial Ombudsman Service Limited case. This is the latest episode in the ongoing saga that has become Berkeley Burke’s challenge and judicial review of the FOS’s decision in respect of Mr Charlton’s complaint against Berkeley Burke. Berkeley Burke sought to challenge the FOS’s findings via a number of methods and over a number years, all of which culminated in this most recent judgment.

The FCA has recently used its powers to intervene in various cases and again intervened in this case due its potential significance to execution only services (particularly in the SIPP sector). The Court ruled in favour of the FOS, and found that it had not erred at law in any part of its decision to uphold the customer complaint against Berkeley Burke.

Background to Mr Charlton’s complaint

Mr Charlton was introduced to Berkeley Burke, a self-invested personal pension ("SIPP") provider and administrator, in 2011. Mr Charlton instructed Berkeley Burke to invest his personal pension in Sustainable AgroEnergy Plc ("SA"). SA offered to lease land in Cambodia through a "green oil" scheme. The scheme later turned out to be fraudulent and SA’s directors were imprisoned.

Mr Charlton complained to Berkeley Burke and then the FOS, seeking reimbursement for the sums lost in the investment. The Ombudsman found that it was fair and reasonable by particular reference to PRIN 2 and 6 for Berkeley Burke to have undertaken due diligence in respect of the investment in SA, and that had it done so, it would have refused to accept the investment into a SIPP.

In reaching its decision, the FOS took into consideration the regulator’s reports, guidance and the FCA’s "Dear CEO" letter in 2014 regarding the responsibilities of SIPP operators. It concluded that Berkeley Burke’s responsibility to comply with the Principles existed "from the outset of its relationship" with Mr Charlton. FOS also emphasised that carrying out reasonable due diligence was "industry good practice".

Berkeley Burke sought judicial review of the FOS’s decision, arguing that:

  • it acted always in accordance with the Conduct of Business Sourcebook (“COBS”) rules in the FCA’s Handbook;
  • the FOS had applied PRIN 2 and 6 to create a new and unexpected duty (to undertake due diligence in respect of investments, despite it acting on an execution only basis), and that there was a requirement for the FCA to undertake a consultation process before new rules could be established and this has not occurred;
  • the PRIN could only augment existing duties, not create new ones;
  • the duties under COBS 11.2.19, which required execution on instruction for execution only business, conflicted with the FOS decision which required extensive investigation of the investment; and
  • the FOS decision conflicted with previous decisions of the Pensions Ombudsman (the “PO”) on similar facts.

The Judicial Review

Permission to bring the judicial review was granted on two primary grounds, that:

  • the FOS had incorrectly found that Berkeley Burke was not required to execute Mr Charlton’s instructions under COBS 11.2.19; and
  • the FOS had failed to follow previous decisions from the PO, or to give cogent reasons for doing so.

The above grounds centred on two questions of law arising from the FOS decision, which the High Court had to consider:

  • was Berkeley Burke under a duty to investigate and undertake extensive due diligence, and where it is concluded that the investment investigated is unsuitable, under a duty to refuse instructions (notwithstanding that it was acting on an execution only basis); and
  • was the FOS bound by the previous PO decisions.

Berkeley Burke failed on all points with Mr Justice Jacobs agreeing almost entirely with the arguments made by the FOS and the FCA.

On the first ground, the High Court held that in its decision the FOS was not creating new rules, but was merely applying existing ones, namely the PRIN, in a manner in which it considered to be fair and reasonable, in line with its statutory remit. The Court highlighted that the PRIN are deliberately "very wide" in their application and their interpretation is "very subjective". Further, HHJ Jacobs explained that the PRIN are overarching in nature and of general application; the PRIN are not there only to amplify existing duties, but can augment rules without creating new duties of their own.

The High Court also held that Berkeley Burke could not rely on COBS 11.2.19R to explain their insufficient due diligence on the investment. It was held that COBS 11.2.19R concerns the manner in which instructions should be executed, rather than whether they should be executed at all (by reference to, and analogy with Article 21 of MiFiD). SIPP operators have available to them the discretion to refuse to carry out instructions, should they consider an investment is generally not suitable to be held in a SIPP.

On the second ground, the High Court held that the FOS was right in its decision to consider the case independently of previous similar cases determined by the PO. This was not an unexpected decision, and the Court reached this conclusion because the PO and FOS act within two very different jurisdictions, and with different statutory remits. The FOS’s remit being to determine complaints in a manner in which it considers to be fair and reasonable, as against the PO’s need to follow the correct position in law.

What does this mean for the SIPP sector and execution only business?

SIPP providers will not welcome the outcome of the case – that the FOS can find that SIPP providers should, even when not advising customers, undertake due diligence on investments and consider whether the investment is generally unsuitable to be held in a SIPP. However, in reality, this decision does very little to change the current landscape of the SIPP sector. The FOS has been reaching similar decisions for a number of years and the FCA’s expectations of the sector have clearly increased over time.

Following the High Court’s decision, the FCA issued on the same day a "Dear CEO" letter to SIPP operators, requesting that they now consider the impact and implications of the Berkeley Burke v FOS decision, and particularly their ability to meet their financial commitments. In the event of possible failure, SIPP providers are urged to notify the FCA.

Whilst the FOS and the FCA’s minds seem made up, it must be remembered that this decision was a judicial review of a FOS decision. Berkeley Burke sought to challenge the incredibly wide remit of the FOS to make a decision which it considers to be fair and reasonable. In that context, whilst SIPP providers will no doubt disagree with the decision, and consider that the FOS’s decision does in fact create a new duty, it is not surprising that the FOS was successful in these circumstances. This case serves as a reminder of the difficulties firms will face in challenging the FOS by judicial review given its wide remit, and, there will no doubt be re-ignited calls to revisit the FOS’s jurisdiction to determine complaints relating to pensions in light of the outcome.

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