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.
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.
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.
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