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Double take: FOS reviews controversial Sipp ruling

The Financial Ombudsman Service has come under fire for taking the unprecedented step of reviewing a final decision after it sparked a backlash among Sipp providers.

Last week, the FOS confirmed it was revisiting a complaint previously upheld against Sipp operator Berkeley Burke Administration.

The decision, revealed by Money Marketing in July, found that Berkeley Burke had failed to carry out adequate due diligence on a £29,394 unregulated collective investment scheme.

But following concerns from Sipp operators that the decision went beyond FCA rules, and the initiation of judicial review proceedings by Berkeley Burke, the FOS has agreed to look again at the decision.

Experts say there is no legal mechanism for the FOS to reconsider a final decision before the judicial review process is complete and the ruling has significant ramifications for both advisers and Sipp operators.

‘Dangerous decision’

The complaint was made by an investor, referred to as Mr A, who in 2011 transferred a total of £29,394 from a personal pension plan into a Sipp through Berkeley Burke after being introduced by an unregulated agent.

He invested £24,195 in Sustainable AgroEnergy, an unregulated investment. The firm went into administration and Mr A lost his entire fund.

Ombudsman Roy Milne upheld the complaint, ruling that Berkeley Burke should have been alert to the fact the investment was potentially unsuitable and should have made further enquiries.

The decision cites an FSA thematic review of Sipp operators in 2009 which listed the following as examples of good practice: confirming the intermediaries that advise clients are regulated, and being able to identify anomalous investments and seek appropriate clarification of their suitability.

Berkeley Burke argued it had not advised the investor and as a Sipp operator could not have been aware of the investment’s suitability for him.

The client had also signed documents to say he understood the investment was high risk and he was not given advice.

But Milne said: “Mr A’s investment was introduced by an unregulated intermediary. This was a relatively small-value Sipp invested in an unusual and new investment. These factors should all have alerted Berkeley Burke to the fact that this investment and the Sipp were potentially unsuitable.

“Berkeley Burke should have made further enquiries to establish whether the investment was suitable.”

The FOS ordered Berkeley Burke to pay the investor the difference between the value of his investment and the return of the FTSE WMA index over the same period, plus £500 for distress and inconvenience. It says it assumes the investment has no value.

The decision has now been removed from the FOS website.

Berkeley Burke declined to comment on the decision. The firm  recently held a meeting with a number of Sipp providers to discuss the ruling.

Association of Member-directed Pension Schemes chairman Neil MacGillivray, who attended the meeting, says: “The investor was given warnings by the Sipp provider that the investment was high risk and as an industry we feel what more can we reasonably be expected to do?

“The provider checks the investment, and it may be high risk but providers do not do risk profiling – that is an adviser’s role. As an industry we fully accept we have to do due diligence but the question is how much.”

DWF Fishburns partner Harriet Quiney says: “There are limited requirements on Sipp providers to look at things like suitability because they are not providing advice, they are a wrapper.

“A Sipp provider does not have a responsibility to consider whether an investment is suitable for the investor, it only needs to consider whether the investment is eligible for a Sipp. This was a dangerous decision.”

Second thoughts

But despite concerns over the decision, many have questioned whether the FOS has the power to reconsider it.

Information on the FOS website states that “a final decision by an ombudsman draws a line under the case and brings finality to any further argument about the facts and merits involved”.

If the consumer accepts the decision, it becomes legally binding on both parties.

But as the FOS is a public body, it can be judicially reviewed by the courts. A judicial review generally focuses on the way in which an ombudsman has arrived at a decision and not on the individual facts and merits of the dispute itself.

In a statement, the FOS says: “The ombudsman issued a decision in June. Following the decision, the business commenced the judicial review process. The outcome of that process was that the ombudsman will now consider the complaint afresh.”

The FOS refused to comment on how far the judicial review process has progressed but Money Marketing understands it is in the early stages and the FOS has not been ordered by the courts to look at the complaint again.

A FOS spokesman confirmed that both parties would have to agree to the complaint being reviewed and said the case relates to “exceptional circumstances”.

Hill Dickinson partner Sarah Naylor says: “I have never heard of the FOS reviewing a decision like this. I can see why it would want to if it is concerned about the outcome of the judicial review, as it is an expensive process. 

“But I am absolutely intrigued to know what has happened in terms of the consumer agreeing to this. I do not know what legal mechanism there is for the FOS to say ‘we will cancel that decision and have another think’. It is like a judge rethinking a court judgment.”

Highclere Financial Services partner Alan Lakey says: “If you had been awarded £29,000 in a final and binding decision, why would you agree to have the decision reviewed?”

Quiney, who has previously represented a client in a FOS judicial review case, says she has been told by the FOS in the past that it cannot change an ombudsman decision without a court order.

She says: “FOS judicial reviews are rare because you either have to show the FOS acted outside its legal powers or it acted unreasonably, which is very difficult to demonstrate.”

Uncertainty

Experts say if the decision stands, it will make both advisers and providers more cautious about placing non-standard investments in Sipps.

AJ Bell marketing director Billy Mackay says: “A lot of Sipp providers will review the type of investments they hold as a result of this decision as well as the disclaimers they require from investors.”

Independent regulatory consultant Richard Hobbs says: “This creates serious uncertainty for Sipp operators. While the rules on suitability do not apply to them, the treating customers fairly rule does and that can be interpreted in many different ways.”

A partner at one advice firm, who does not wish to be named, says: “We have had internal discussions about this decision. “It is very worrying – it means the disclaimers for things like high-risk transactions which we all thought covered us mean nothing. Non-standard investments in Sipps are just too dangerous to get involved in.”

Independent compliance consultant Adam Samuel says advisers should not read the decision as meaning providers act as a “back stop” on suitability requirements.

He says: “Advisers’ responsibilities in terms of suitability remain the same. They cannot expect providers to act as a back stop for unsuitable recommendations. What we may see is Sipp providers being more active in catching unusual investments which might restrict the type of business advisers can place.”And lawyers say even if the FOS reverses the decision, there could be serious consequences.

Naylor says: “There is a risk that, if this decision is overturned, it will make lawyers think the same will happen for other decisions if they start judicial review proceedings.

“A judicial review is not something to be entered into lightly but this gives a glimmer of hope that something can be done if the FOS makes a decision you feel is wrong.” 

Past FOS judicial reviews

2007
A general insurance broker won a judicial review against the FOS for acting outside of its legal powers. A consumer made a complaint against the broker after a claim on a motor insurance policy was rejected. The complainant claimed the broker had filled out the application form incorrectly. The insurer made a without prejudice offer of £3,000, which the customer rejected. The FOS did not uphold the complaint but awarded the customer £3,000. A judicial review was instigated on the basis that the FOS only has the power to award compensation where it finds in favour of the complainant. The FOS did not defend the judicial review and the £3,000 award was set aside.

2011 
The Administrative Court refused an application from a consumer for a judicial review against the FOS after the FOS declined to deal with her complaint. The claimant was in a dispute with a finance company which alleged she owed it £10,000 on a credit card. She claimed she was the victim of identity fraud. The FOS declined to deal with her complaint on the basis that she was not an eligible complainant as she was not a “customer” of the firm. The Administrative Court agreed with the FOS’ s argument and rejected the application.

2012 
A financial adviser lost a judicial review against the FOS after a judge ruled he could not find the FOS decision to be “irrational”. The FOS had ruled that an adviser had misled his clients on the risks associated with a pension drawdown scheme. The decision concluded that the clients would not have entered the scheme had they been advised properly about its risks, which the adviser challenged. The judge found in favour of the FOS, saying the test he had to consider was whether the decision was irrational.  

Expert View

The FCA requires Sipp providers to carry out due diligence on the underlying investments within a Sipp. But the difficulty with this case is where does that stop?

Looking at previous guidance from the regulator in the context of this complaint, the FSA said in its 2009 thematic review that Sipp providers could consider:

  • Confirming that intermediaries are authorised and regulated by the FSA – there was no authorised intermediary in this case
  • Recording the type and size of investments recommended by intermediaries, so that potentially unsuitable Sipps can be identified – this was a low value Sipp and the bulk of the funds in the Sipp were invested in a single investment
  • Identifying anomalous investments to enable a firm to seek appropriate clarification of the suitability of what was recommended – the ombudsman does not comment on whether the Sipp provider identified the investment as anomalous but does find that the firm did not seek appropriate clarification of suitability
  • Identifying clients who waive cancellation rights – the client waived his cancellation rights in this case. 

The ombudsman’s decision has been criticised on the basis that the client made the investment choice, received detailed warnings from his Sipp provider regarding his investment choice, acknowledged to the provider that he understood those warnings, and still proceeded with the investment.

If a provider carries out due diligence on the investments and makes the client aware of the nature of the investments, then the client has to take responsibility for their investment decisions.

We have been pushing for some time for the return of permitted investments lists, which we believe would be the easiest way to prevent situations like this.

This decision, if not overturned, will result in many Sipp providers reviewing the investments they will hold as well as the disclaimers they require investors to sign for certain types of investments.

Billy Mackay is marketing director at AJ Bell

The FCA on Sipp operators and suitability

The FCA has issued repeated warnings to Sipp operators in recent months regarding due diligence on non-standard investments. However, these have been focused on the investments themselves, including ensuring investments are genuine and secure, rather than suitability.

However, in final guidance for Sipp operators published in October 2013, the FCA says: “Although the members’ advisers are responsible for the Sipp investment advice given, as a Sipp operator the firm has a responsibility for the quality of the Sipp business it administers.” 

Adviser views

Dennis Hall, managing director, Yellowtail Financial Planning

Hall-Dennis

Sipp providers clearly do not give advice so the FOS appears to have overstepped the line with this decision. It is absolutely right that there should be a judicial review, because otherwise it calls into question the concepts of execution-only and caveat emptor. 

Syndaxi Chartered Financial Planners, managing director, Robert Reid

Robert Reid, Syndaxi Financial Planning
Robert Reid, Syndaxi Financial Planning

The quality of due diligence has got to be a lot better from all parties involved in transactions like this: the Sipp operator, the adviser and the client. The long-term fix for Sipp operators is to not just be tighter about what investments they take on but to have independent trustees. 

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. Respectfully, how can the Ombudsman review its final decision before a judicial review is completed? A final decision by an Ombudsman is er, final, unequivocally so, end, unappealable and all that. Surely the FOS is not rewriting the rules again to suit itself is it? It doesn’t do such a thing! It can’t, can it? Is it within its modus operandi or is that covered by the Ombudsman’s ‘apparent’ autonomy to do what it wants without reference to statute, case law precedence, consistency of approach and so on?

    No one answers my regular comment – to whom is the Ombudsman accountable? It is not The Treasury, it is not the FCA. It is not the Government it is not the Courts…. just who regulates it?

  2. This matter has many facets which currently remain hidden.

    Logically the only reason for Mr A to agree to the matter being re-opened is that he has been told he can keep his ‘compensation’ whatever the outcome. If this is the case then who is paying it?

    The answer seems to be that the FOS will pay, or, more appropriately the industry will pay out of its fees.

  3. Surely the main issue with this issue is receiving “an introduction” from an unauthorised firm/person?! then acting on a transfer request knowing that “no advice” was being given! incredulous- I’m sure that one day Mr “A” woke up one day and decided to move his pension to a Sipp provider , presumably put a pin in a paper and arrived at” I know let’s invest in Sustainable AgroEnergy, an unregulated investment” !

    I’m no fan of the FOS and believe many of their decisions and actions are questionable and possibly without reference to the law of the land but on this occasion I think they are right! The Sipp provider should only be accepting business from regulated firms so that the “buck” has somewhere further up the line to stop. At least they no that they can’t be complicit in any sharp practice!

  4. @Snippy – the problem with saying they sho7ld only accept business from a regulated adviser is on that basis, the consumer would be precluded from going direct. what I think you mean is providers should only liase either directly with the consumer OR a regulated adviser and no payments out of the Sipp should be made to an unregulated individual as it would be an unauthorised payment with HMRC.
    re Alan Lakeys question about why would the consumer agree to a final decision being reviewed and who pays. This is the rea issue and could result in Criminal proceedings if Alan is right. I know Adam Samual doesnt like me saying it, but as a leyman, if it looks like a duck it may well be. What would a payment like that be described as… a duck or a?

  5. I persuaded the PIA Ombudsman that it had made a procedural error and it persuaded the investor to agree to the case being re-considered. PIAOB would have been unable to argue against the decision being set aside as it had accidentally made the decision before it had received the firm’s case.

    When PIAOB considered the firm’s case, it rejected the complaint.

  6. Surely this is a little like buying a Samsung microwave from a market trader then complaining to Samsung that you can’t get a good picture like the guy in the market said you could so you should be compensated.

  7. I still see the issue as being that of the trustee failing in its fiduciary duties. Unfortunately for FOS, Berkeley Burke Trustee Company Limited isn’t a regulated firm so there does seem to be a bit of jurisdictional issue. That said, I find it hard to fault the intent of the original FOS decision.

  8. Surely the main issue with this issue is receiving “an introduction” from an unauthorised firm/person?! then acting on a transfer request knowing that “no advice” was being given! incredulous- I’m sure that one day Mr “A” woke up one day and decided to move his pension to a Sipp provider , presumably put a pin in a paper and arrived at” I know let’s invest in Sustainable AgroEnergy, an unregulated investment” !

    I’m no fan of the FOS and believe many of their decisions and actions are questionable and possibly without reference to the law of the land but on this occasion I think they are right! The Sipp provider should only be accepting business from regulated firms so that the “buck” has somewhere further up the line to stop. At least they no that they can’t be complicit in any sharp practice!

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