Advisers must be confident they know enough about the third parties they engage with
I have used this column many times before to look at the increasing regulatory focus on how a business engages with another for the
provision of services to its clients and what that firm is responsible for.
This issue has received renewed attention following last month’s High Court judgment against Sipp provider Berkeley Burke, which is likely to impact the wider due diligence activities advisers and wealth managers undertake.
As many of you will be aware, 30 October saw Berkeley Burke lose its appeal against the Financial Ombudsman Service in a landmark ruling.
It is the latest episode in the ongoing saga that has become Berkeley Burke’s challenge of a FOS decision in respect of a customer complaint against it. Berkeley Burke has indicated it will appeal against the decision.
By way of brief background, the client was introduced to Berkeley Burke in 2011. He instructed it to invest his personal pension in Sustainable AgroEnergy plc, which offered to lease land in Cambodia through a “green oil” scheme.
The scheme later turned out to be fraudulent and the directors were imprisoned. The client complained to Berkeley Burke and then the FOS, seeking reimbursement for the sums lost in the investment.
The Ombudsman found it was “fair and reasonable”, by reference to principles 2 and 6, for Berkeley Burke to have undertaken due diligence in respect of the investment and that, had it done so, it would have refused to accept it into a Sipp.
In reaching its decision, the FOS took into consideration the regulator’s reports, guidance and a Dear CEO letter in 2014 regarding the responsibilities of Sipp operators.
It concluded Berkeley Burke’s responsibility to comply with the principles existed “from the outset of its relationship” with the client. It also emphasised that carrying out reasonable due diligence was “industry good practice”.
Berkeley Burke sought a judicial review of the FOS’s decision. The High Court held that, in its decision, the FOS was not creating new rules but merely applying existing ones in a manner which it considered to be fair and reasonable, in line with its statutory remit.
The court highlighted that principles 2 and 6 are deliberately “very wide” in their application and their interpretation is “very subjective”. The judge also explained the principles are overarching in nature and of general application.
They are not there only to amplify existing duties but can augment rules without creating new duties of their own.
So what does this mean for both the Sipp sector and wider financial services?
Well, the fact the FOS can find that Sipp providers should undertake due diligence on investments and consider whether they are generally unsuitable to be held in such a product, even when not advising customers, is an important development.
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.
But what is also interesting is that, on the same day as the High Court’s decision, the FCA issued a Dear CEO letter to Sipp operators, requesting they now consider the impact and implications of the decision, and particularly their ability to meet their financial commitments.
This development has a knock-on effect for financial advisers and wealth managers, and their own approach to due diligence and assessments of the financial stability, governance, conduct and culture on all the providers and third parties they engage with.
Simon Collins is managing director, regulatory, at Eversheds Sutherland