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Alan Hughes: The most important lesson from Berkeley Burke case

FCA must give greater consideration to where detailed rules would result in more effective regulation and better protection

Last month saw Sipp provider Berkeley Burke lose its High Court appeal against the Financial Ombudsman Service.

The appeal followed the Ombudsman’s decision against Berkeley Burke for failing to carry out adequate due diligence on an unregulated collective investment scheme for a client. Berkeley Burke said the decision was legally incorrect, as it misapplied conduct of business rules and could create retrospective due diligence obligations for Sipp providers.

So, what are the key points to take from the decision?

The first point to note is that the ability of the FOS to decide cases based upon what is “fair and reasonable” affords it considerable discretion when making decisions.

Berkeley Burke loses High Court appeal against FOS

It is also widely known the potential grounds for judicial review of a FOS decision are very limited. In this case, Berkeley Burke argued the FOS erred in law in making its decision. In the context of an Ombudsman that is empowered by statute to make decisions based on what is “fair and reasonable”, this sets an incredibly high bar for a successful judicial review. Worth remembering given the current consultation on extending the FOS’s remit and increasing the maximum award to £350,000.

The High Court found in this case the FOS (and essentially the FCA) was perfectly entitled to interpret the two very broad principles in question in such a way as to impose specific and detailed duties on Berkeley Burke as a Sipp provider. The two principles were:

  • A firm must conduct its business with due skill, care and diligence;
  • A firm must pay due regard to the interests of its customers and treat them fairly.

From those principles, the FOS’s final decision derived a detailed list of due diligence tasks Berkeley Burke should have carried out to comply, then went on to find it had failed to do so. Note that even the regulator had not previously spelled out a list of requirements as detailed as that set out in the FOS decision.

A look at the timeline of Sipp regulation in the context of this case tells a compelling story:

  • April 2007: FSA starts regulating Sipps;
  • September 2009: FSA publishes results of a thematic review of Sipp operators;
  • October 2012: FSA publishes results of a further thematic review of Sipp operators;
  • October 2013: FCA publishes finalised guidance for Sipp operators.

The September 2009 document did not explicitly talk about due diligence on investments, although it did talk about responsibility for the quality of Sipp investments.

October 2013 was the first formal guidance the FCA issued and even that did not go into the level of detail on due diligence required by Sipp operators now set out in the FOS decision.

Inside the legal battle for Sipp supremacy

The decision acknowledges that the approach taken by Berkeley Burke to due diligence may have been common industry practice (but not good industry practice).

It appears, then, that a large part of the (regulated) Sipp sector had the same understanding of its duties as Berkeley Burke and, for at least five years following the FSA taking over regulation of Sipps, there was no detailed statement (by way of rules or guidance) of the practical steps firms should have been taking to discharge those duties. This goes back to what good – or perhaps effective – regulation looks like.

While regulation is not designed to eliminate market failure, effective regulation will certainly seek to mitigate obvious risks. If the regulator always held the view that, in order to discharge its duties under the relevant principles, it expected Sipp operators to carry out very specific and detailed due diligence, surely this would have been better set out in detailed rules from April 2007, rather than being drip-fed to the Sipp operators over the course of five or more years.

Alan Hughes: FCA’s new duty of care rules are a waste of time

That way, all Sipp operators would have been clear from day one about what they needed to do and could have priced their services accordingly. With Sipps available for as little as £100 per year, it was surely obvious that, for that fee, the steps required to discharge their duties were not being taken.

The court decision is explicit that even where detailed rules exist, the principles can be interpreted to add to those rules, so there would have been no disadvantage to the regulator to having those detailed rules – they would not have been exhaustive.

In future, you would hope the FCA gives greater consideration at the outset to where detailed rules would result in more effective regulation for firms and better protection for consumers. We can only speculate as to why, in this case, those detailed rules were not made in 2007 and indeed have still not been made as rules to date.

Alan Hughes is partner at Foot Anstey

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. “We can only speculate as to why, in this case, those detailed rules were not made in 2007 and indeed have still not been made as rules to date.”

    It’s quite simple… they make it up/interpret the rules as they go along.

    As Alan rightly says, if it was that obvious what was expected by the regulator and the FOS then surely they are under a duty to spell it out – not doing so has put every potential client at risk since. Basing regulation on mopping up afterwards cannot be a sensible policy for the general public or firms.

    It’s also worth considering what the effect of this will be going forward. Presumably, SIPP providers will be much more cautious, choice will reduce and costs will rise.

    To be clear, I think that BB failed in their duty, but not for the reasons stated. This case should not set future principles/precedent in the way it appears to based on failure of all the other parties involved too, the regulator, the FOS and the lawyers representing them all.

    Is the regulator going to step up and clarify what this all means in practice?

    And if there’s anything else so obvious that the FCA or FOS are aware of that firms should be doing but aren’t, can you please spell it out rather than leave it to us to guess and hope?

  2. Seems like the regulators making up the rules as they go along.

    Nothing changes.

  3. You see I disagree in this case. BB knew that shed loads of dodgy business was coming their way via unregulated introducers I think you’ll find in this case. Whilst they may have pointed this out in writing to the consumer, they didn’t notify or express any concerns at the time to teh FSA as was at the time which might have resuletd in the FSA investigating whetehr the unregulated introducers (ex mortgage brokers) were crossing the line in to advice (a criminal offence). If BB had suspicions that this was occurring and failed to notify, then they are complicit.
    As to whether the FSA needed to give more detailed rules, i thought we were all grown up enough not to have to ask them to put in writing what is often after all COMMON SENSE.
    Misuse of SIPP was a train wreck waiting to happen from pre FSA regulation of SIPPs and anyone who didn’t see that coming deserves what they are getting now.

    • BB had £7.5 million in Ethical Forestry, Liberty Sipp had £45 million

    • I essentially agree with what you are saying here Philip but I think it misses a couple of key issues.

      Firstly, the key point is that in the case outcome the FOS laid out very specific list of requirements that no firm could have guessed but had they been presented with it earlier (or it was widely published) they would not have transacted the business. This might have saved a large number of clients a lot of trouble and anxiety.

      Secondly, the FOS and FCA were either very slow to react or were asleep to the risk of these investments going into SIPPs. Both are damning.

      Strong regulation does not mean creating rules and reacting to everything that’s going wrong. It means having proportionate rules, knowing where the risks are, and dealing with them robustly. The former is better for clients and firms but unfortunately it’s easier and personally safer to do the former, and human nature as it is…

  4. If you’re going to make hay whilst the sun shines, don’t forget, you need to remove your hand from the threshing machine before the hay is bailed or you’ll loose your fingers with it.

  5. The RPPD was developed from a TCF paper issued in 2007 and that clearly put responsibilities on product providers and distributors to ensure the fair treatment of customers.

    Some of these assets were absolute howlers and any reasonable person should have prevented them from being put into a pension.

    Taking business from unregulated introducers then facilitating the provision of dodgy assets that hard earned pensions could be transferred to was appalling.

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