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Print articleCourt of Appeal Judgement Provides Important Guidance on Interpretation of RAO
April, 2021 - Jonathon Crook
In this highly anticipated judgement the CoA determined that the Defendant SIPP operator (previously known as Carey Pensions UK LLP) was liable for the consequences of dealing with an unregulated third party who had introduced clients to it in order to invest in unregulated investments via a SIPP. The FCA intervened in the proceedings and made submissions, in particular, on the correct interpretation the FSMA Regulated Activities Order 2001 (“RAO”) and the FCA’s own Perimeter Guidance.
SIPP introducer not regulated by the FCA
Mr Adams, a goods vehicle driver, was one of 580 individuals who in 2012 invested in “storepods” (long leases of units in a storage facility) in Blackburn, Lancashire granted by a company called Store First Limited via SIPPs established with Carey. The average investment was £50,000 and the individuals were introduced to this “opportunity” and to Carey by CLP Brokers Socieded Limitada (“CLP”), a company operating from Spain. CLP was not regulated by the FCA and indeed its operators included an individual who (unknown to Carey) had been the subject of a warning notice from the FCA in 2010 as to the targeting of UK pension investors.
Carey had entered into Terms of Business with CLP which sought to govern the basis on which CLP would introduce investors “for the purposes of applying on an execution only basis and commencing a Carey SIPP”. As part of that arrangement CLP undertook that it would not provide advice as defined in FSMA.
CLP persuaded Mr Adams to invest in the storepods. Mr Adams was introduced to Carey and transferred an existing personal pension into a Carey SIPP from which the investments were made. As part of the transaction Mr Adams also released £4000 to pay off a judgment that had been obtained against him by HSBC.
The application form for the SIPP specifically stated that it was being established on an execution only basis and all investment decisions would be the responsibility of Mr Adams (who was recommended to take independent advice) and the member declaration for the purposes of effecting the investment recorded that the investment was high risk and/or speculative. The investment proved to be disastrous. It subsequently became clear that CLP had been receiving a commission of circa 12% from Store First (and not 2-5% as CLP had previously stated) and had been offering cash inducements to investors. Carey then terminated its relationship with CLP but continued to process investments where the SIPP had been established and investment instructions received, including that of Mr Adams.
Initial judgment places investment risk with the claimant
Proceedings were commenced in 2015 with the primary claim being that under section 27 FSMA, the agreement between Mr Adams and Carey was unenforceable as it had been entered in consequence of things “said and done” by a third party, CLP, in the course of a regulated activity carried on in contravention of the general prohibition in section 19 of FSMA. Specifically it was alleged that CLP were either “arranging deals in investments” or “advising on investments” within the meaning of Articles 25 and 53 of the RAO. On the basis that the agreement was unenforceable and further to section 27(2) Mr Adams was entitled to be repaid the sums paid into the SIPP, plus compensation for any loss sustained as a result of him having parted with that money in the first place.
That argument failed at the trial in 2018 with judgment finally handed down in 2020 ( a delay for which the Judge was rightly criticised by the CoA). In the Judge’s assessment CLP had acted as a bare introducer and not given advice and the steps taken by CLP following the introduction were nothing more than mere administrative acts. The Judge agreed with Carey that for arrangements to bring about the transaction being challenged there must be “a direct and substantial causal connection” between the arrangements relied on and the ultimate transaction and he rejected a “but for” approach. He therefore concluded that Mr Adams should take responsibility for his own decision to undertake what was clearly a high-risk investment.
CoA determines that that CLP did breach section 19 FSMA
In reversing the Judge’s decision (and in a judgment issued within a month of the appeal hearing - no doubt to compensate for the previous delays but also in recognition of its importance) CoA noted that although the storepods themselves were not a “security” or “relevant investment”, - Mr Adams’ rights under his existing pension and his SIPP with Carey were each a security for the purposes of the RAO. Advice on an unregulated investment was capable of involving advice on a specified investment within the scope of Article 53. CLP had encouraged Mr Adams to invest in storepods and the recommendation to invest carried with it advice that Mr Adams should transfer out of his existing pension and invest in a Carey SIPP. CLP therefore gave “advice on the merits” of selling “a particular investment which is a security” (i.e. the existing pension policy) and buying another (a Carey SIPP). CLP therefore gave Mr Adams advice which fell within the scope of Article 53 of the RAO and in doing so acted in breach of the general prohibition.
In addition, the CoA decided that CLP also contravened the general prohibition by “making arrangements” within the meaning of Article 25 for Mr Adams to sell his existing pension policy and place the money in a Carey SIPP. In order to reach this decision the CoA considered the provisions of Article 26 which excludes “arrangements which do or would not bring about the transaction to which the arrangement relates”, the provisions of the FCA’s Perimeter Guidance (set out in PERG) and various previous authorities (which were not consistent) and determined that the relevant test for arrangements to “bring about a transaction” was that they must play a role of significance. This “is not to be judged simply on a “but for” basis, but neither is a direct causal connection inevitably required”.
CLP had procured a letter of authority from Mr Adams to enable CLP to liaise with Carey, had undertaken money-laundering checks and had facilitated the completion of an application form for the SIPP. All of these steps constituted CLP “making arrangements” for Mr Adams to transfer his existing pension into a Carey SIPP. “Arrangements” is “a broad and untechnical word” and was apt to describe what CLP did.
In an important supporting Judgment Lady Justice Andrews (who was particularly scathing of how the liberalisation of the pensions regime in 2006 had brought with it “fresh opportunities for unscrupulous entities to target the gullible, the greedy or the desperate”) emphasised the importance of a holistic assessment of the behaviour of an unregulated entity when considering whether there had been the “making of arrangements” under Article 25. In her view the trial Judge had “failed to stand back and look at what Mr Adams was told in a realistic and common-sense manner”.
CoA declines to exercise discretion in favour of enforcement
The CoA also roundly rejected the attempt by Carey to persuade the Court that it was nonetheless just and equitable for the Court to exercise its discretion under section 28(3) FSMA to allow the agreement to be enforced and for Carey to retain the funds it had received. The Court emphasised that a key aim of FSMA is the protection of consumers, including safeguarding them from their own folly. Whilst SIPP providers are not barred from accepting introductions from unregulated entities such as CLP, “section 27 was designed to throw the risks associated with doing so onto the providers”.
The fact that Carey were to be taken as having no actual knowledge of a breach of the general prohibition was by no means conclusive in Carey’s favour. The Court was heavily influenced by the fact that over a period of six months some 580 clients of Carey had invested in storepods which put Carey on notice of the danger that CLP were recommending clients to invest. The exclusions and limitations in respect of Carey’s liability in the agreement with Mr Adams and its “execution only” role therefore did not protect Carey from liability.
The CoA did not determine an alternative case advanced on appeal as to a breach of COBS 2.1.1R by Carey as this had not been raised at trial. As a result, whether Carey had wider and direct duties to Mr Adams which would have given rise to a statutory claim under section 138D FSMA was left open.
Conclusions
On the facts of the case it is difficult to challenge the decision of the Court as being unfair to Carey. Indeed, the use of SIPPs as a mechanism for allowing unregulated introducers to persuade individuals to invest what are often modest pension funds in unregulated and high-risk (or indeed fraudulent) investments has been a major problem in the financial services sector for some time.
What is of wider importance is the finding that for the purposes of the RAO whether the activity of an unregulated entity amounts to the “making of arrangements” involves a “holistic” assessment by reference to the facts of the case and the extent of the involvement of that entity in the transaction that is concluded. And if the role of that entity is of significance then the test may be met, even absent a direct causal connection. However, what the decision makes clear is that for any FCA regulated firm, dealings with an unregulated entity (past, present or future) carry a clear risk of claims by clients which moreover cannot be excluded by contractual wording.
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