FCA draws red lines against Sipp providers in judicial review

Michael Klimes looks at the FCA’s increasingly tough stance on Sipp providers and unregulated investments

The FCA is set to claim a Sipp provider breached its conduct rules by accepting esoteric investments without due diligence, according to court documents seen exclusively by Money Marketing.

This year could mark a turning point for Sipp providers that have been involved with unregulated investments as the FCA has them in its sights.

The regulator’s involvement as an interested party in two court cases should make some Sipp providers and advisers feel nervous.

In March, the High Court heard a case involving Carey Pensions which set up a Sipp for a client who invested £50,000 into the Store First rental scheme. Its lawyers claimed the company did not break conduct of business rules.

While the decision in this case is expected in the summer, the FCA has also submitted evidence to a judicial review into a Financial Ombudsman Service determination against Berkeley Burke Sipp Administration.

Money Marketing has seen court documents from the judicial review that contain the FCA’s arguments and evidence it has submitted to the case that aims to settle a longstanding dispute between the FOS and Berkeley Burke over who was responsible for investment failures.

In 2014, the FOS ruled against Berkeley Burke for failing to carry out adequate due diligence on a £29,000 unregulated collective investment scheme.

Berkeley Burke took legal action and the FOS agreed to look again at the decision, which was both controversial and unprecedented at the time.

In February 2017, the FOS issued a second determination upholding the original ruling but Berkeley Burke challenged the decision again.

Then in October 2017, the High Court struck down Berkeley Burke’s challenge and the question remained whether Berkeley Burke would pursue a judicial review to challenge the decision for a third time. Earlier in May, Money Marketing revealed Berkeley Burke had applied for the judicial review, and that is now scheduled for an October hearing in London.

The court documents provide an insight into the various arguments being deployed for the upcoming trial. Berkeley Burke’s documents note that if the FOS decision is upheld, then a number of Sipp providers will not only be under the obligation to screen all non-standard investments, but clients may find they are unable to invest in their desired investment. Subsequently, the fee for arranging a Sipp would have to go up considerably and some providers might not be able to cover these costs.

Money Marketing’s in-depth coverage of the Sipp market

Furthermore the Berkeley Burke documents say: “Both the FCA and FOS have treated [the complaint] as a test case, thus recognising its importance…the FCA regards it as important that Sipp providers should be under an obligation to carry out due diligence on potential investments.”

Adviser view

Jarrod Ellis, director, Delta Financial Management

This case does open up a can of worms and it raises many questions. Ultimately, the adviser should be responsible for the advice they have given to the client. However, the adviser cannot process that without a Sipp provider who is the facilitator of the investment. If the Sipp providers carry a liability, then they will want to scrutinise the advice that has been given. So you could have a situation where a Sipp provider that is not regulated to give advice will be reviewing the advice given by a regulated adviser.

How does the Sipp provider set themselves up to review every
case that comes in? If Sipp providers are now responsible, they will have higher insurance fees and capital adequacy costs and these will push
up charges.

Also, how do you apportion liability among different stakeholders if the liability falls jointly on the Sipp provider and adviser? If the Sipp provider goes bust, is the adviser fully liable or vice versa?

Aside from these general points, what does Berkeley Burke argue specifically?

Berkeley Burke argues a number of questions of law arise from the FOS’s decision against it. Firstly, in circumstances where, on an execution-only basis, a client instructs a Sipp provider to include a named unregulated investment in his Sipp, is that Sipp provider under any duty to investigate whether the investment is viable and should be included in the Sipp?

Secondly, should a Sipp provider refuse to take on an investment if it thinks the investment is questionable, even if this goes against the client’s instructions?

Finally, is the FOS’s second determination upholding the original ruling against Berkeley Burke consistent with previous rulings in similar cases?

Berkeley Burke then makes what it calls its “specific instruction argument” and says in the second ruling that the FOS “made a material error of law…by finding Berkeley Burke was not required to execute [the client’s] specific instructions” in accordance with conduct of business rules and Mifid regulations.

It also makes a “consistency argument” and says the FOS’s second ruling “made a material error of law in failing to follow previous decisions…or give cogent reasons for declining to do so”.

FCA fights back

The FCA was allowed to join the case as an interested party on 27 February and has submitted evidence on Sipp operators’ duties when vetting third parties; assets inappropriate for any Sipp; and how the regulatory regime applies to providers in the context of this case.

Most importantly, it tries to knock down Berkeley Burke’s main argument that it was unable to act contrary to the client’s instructions. Berkeley Burke bases this on the best execution principle in the conduct of business rules.

However, the FCA points out the conduct of business rules are clear where it says there is an “obligation to execute orders on terms most favourable to the client”.

Furthermore “a firm must take all reasonable steps to obtain, when executing orders, the best possible result for its clients taking into account the execution factors”.

Red lines

It is apparent that the FCA has set definitive red lines on how Sipp providers should handle unregulated investments based on the conduct of business rules and Mifid regulations.

Sipp providers that are exposed to unregulated investments which have failed should follow what happens in the trial closely, as a ruling against Berkeley Burke could be a watershed  moment for the industry.

Claims management companies will undoubtedly be waiting in the background to seize any opportunity they can to prey on potentially vulnerable providers.

Advisers should also watch what happens, as any history of association with a tarnished Sipp provider could affect their reputation negatively.

With the regulator an interested party in two prominent cases and becoming more assertive, it is unwise for any adviser or provider to rest on their laurels and hope for
the best.

The FCA declined to comment while Berkeley Burke refused to respond to Money Marketing’s multiple requests for comment.

Expert View

Richard Prior, head of Sipps, JLT

The Sipp industry and many providers are waiting for the outcome of the judicial review case with a bit of nervousness.

The FOS and FCA appear to be using it as a test case for their future stance. If the courts find against Berkeley Burke or Carey Pensions then there are suggestions the number of complainants could be in the many thousands.

The likely compensation could be in the hundreds of millions. The worry for the providers that have been engaged with unregulated introducers and have non-standard assets on their books is the claims management companies are waiting in the wings.

There is also potential nervousness about whether professional indemnity insurers will continue to support some Sipp providers. Furthermore, some Sipp providers are potentially struggling with capital adequacy requirements already and any exposure to high levels of claims could force some into administration. Lifetime Sipp Company became insolvent recently.

From our engagement with the adviser community, this leaves them in a difficult position when trying to source a Sipp provider for their existing or future clients. We have been helping our adviser clients understand the level of due diligence required, as there is an increased emphasis on doing more robust checks on the providers they select. Sipp providers need comprehensive information ready for advisers to help them do due diligence easily.

While this is a worry for the industry, it provides an opportunity for Sipp providers with cleaner books, financial strength and lower exposure to failed unregulated investments to secure higher levels of new business from other providers at risk. It will be interesting to see any action the FCA takes in advance or in reaction to the court case.

Advisers are in limbo as there is a lack of transparency regarding some Sipp providers’ exposure to failed unregulated investments.

Advisers should be concerned about how the failure of a Sipp provider could disrupt services for their clients and potential reputational damage in terms of the advice they gave to use those providers.

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Comments

There are 19 comments at the moment, we would love to hear your opinion too.

  1. It seems sensible to me there’s at least some accountability. If providers are obliged to provide anti-scam checks, it seems prudent to extent this to unregulated investment checks. Even if it just ends with them sending a new “scorpion” style leaflet which explains the dangers of investing in unregulated investments.

  2. Julian Stevens 25th May 2018 at 10:36 am

    It’s all very well to say that (some) clients may find they are unable to invest in their desired investment but, if they really understood the nature of and risks posed by all too many off-piste investments which, anecdotally, all to many haven’t, that desire might very well swiftly wither away and die a well deserved death. For just how many people are such investments actually suitable? Precious few, I’d bet.

    Is there really a convincing argument for going outside https://www.jameshay.co.uk/media/4159/partnership-sipp-permitted-investments-list.pdf? If so, I’d be interested to see it.

    • This list permits NMPI’s, incuding UCIS. James Hay only require a statement from an adviser confirming they have given advice.

      • Julian Stevens 25th May 2018 at 8:29 pm

        That being the case, the adviser who signs the declaration is responsible. Were I asked to sign such a declaration in the wake of advice not to touch a particular investment with a bargepole, I wouldn’t. All I’d be prepared to sign is a statement to the effect that I’d advised against it and, if that wasn’t satisfactory to the client, tough.

  3. Perhaps a sophisticated investor test for new SIPP’s would be a route forward.

    However, at the end of the day, they are supposed to be ‘Self Invested’.

    Should the state step in and decide what I can invest in.

  4. It doesn’t make SIPP providers responsible for the advice. It is simply a matter of avoiding obvious junk assets that will not perform in terms of paying out pension and death benefits, which is what the scheme is designed for.

  5. This is about definitions.

    Did the SIPP provide promise or was it contracted to provide advice?

    If not, and it was merely offering a facility within a SIPP wrapper, then it seems to me that the FOS and the FCA are completely wrong to expect any element of due diligence.

    As soon as you involve yourself in any conversation where the merits of investment are considered you have moved from facilitation to advice.

    • Alan

      That is, with respect, as fundamentally flawed an analysis as Berkeley Burke’s “specific instructions” argument.

      What you both seem to have overlooked are overriding obligations not to facilitate financial crime.

      Is there an unauthorised party “arranging/bringing about deals in investments” in respect of the transaction? They’re not doing it for free, so there’s your unauthorised business offence under FSMA 2000.

      Does the investment look questionable? If you don’t do due diligence on it, are you being wilfully or recklessly blind to fraud? Or even, potentially, conspiring?

      What about the money laundering aspects? Have these firms been putting SARs in, or DAMLs (consents)? Does a SIPP operator’s MLRO have to do jail time for these firms to wake up?

      • These are separate issues.

        The main issue is where does a facilitator’s obligations start and end?

        If everybody in a SIPP transaction chain is expected to hold an opinion on the investment then it is no longer ‘self-invested’

    • Julian Stevens 25th May 2018 at 1:00 pm

      I don’t understand what you mean by “provide promise”.

      That aside, if an investor decides to make investments of any sort other than on the basis of regulated advice, that should mean that s/he has chosen to forego all and any regulatory protections. It’s up to him/her to do due diligence on the probity of the party from whom s/he has chosen to take advice. If such persons can’t be bothered even to check the FCA register, then on their heads be it.

      Whether or not SIPP operators can wash their hands of all and any responsibility for allowing junk investments, on the grounds that they’re merely facilitators is a very moot point.

      It’s reasonable (I think) to argue that SIPP operators shouldn’t facilitate ultra-risky investments that are highly unlikely to be suitable for the vast majority of SIPP users or, at least, accept any applications to use such investments other than via a regulated adviser.

  6. It sounds like the FCA are very clear in their own mind what should and shouldn’t be allowed in these circumstances. If that’s the case, why wait for the legalities to play out when they could issue clear guidance or even new rules around this now?

  7. Julian, the problem is that the rules allow it. FCA will have to adjust the rules and insist that facilitators have some obligation other than implementation.

    I recall Harry Katz telling me that we aren’t and shouldn’t be social workers. Similarly, if a consumer is either an idiot, a gambler, looking for a fast buck or whatever then shouldn’t he be allowed to do this?

    If the regulatory view is that the consumer is never wrong and that every loss or perceived negative is deserving of compensation then we might as well give up the job now.

    • Julian Stevens 25th May 2018 at 3:54 pm

      If by “it”, you mean ultra-high risk investments via a SIPP, the measure I’m suggesting wouldn’t override that, other than by mandating that SIPP holders should, by way of proper regulated advice, be protected from plunging headlong into a potentially dangerous and wholly unsuitable type of investment. That, surely, is consumer protection, which is supposed to be one of the FCA’s primary raisons d’etre. If, however, some higher authority were to rule that such a requirement constitutes infringement of freedom of choice, the FCA could legitimately say: We did our honest best but were overruled.

      Most RFA’s would, in most cases, advise the client not to do it and would refuse carte blanche to facilitate the transaction on any terms.

      As for whether the FCA can legally shift responsibility for DD onto the SIPP providers, who aren’t advisers, that’s what this JR is all about.

      • Certainly have no objection to that. What I am saying is that a facilitator, such as a SIPP administrator, does not have any requirement to oversee, comment on, advise on or in any way bar strange or seemingly crazy investments as long as they fall within that SIPP providers now mandated list of acceptable investments.

        Each SIPP provider decides on what is allowed and there isn’t any consensus.

  8. Julian Stevens 25th May 2018 at 8:22 pm

    In view of the FCA’s reminder as to what its COB rules require of (regulated) advisers and that these requirements appear all too often to have been ignored, one wonders why it didn’t put a stop to them arranging unsuitable investments for clients instead of, after the event, trying to hold to account certain SIPP operators such as Berkeley Burke. YET AGAIN, this highlights the utter uselessness of its GABRIEL system and that it appears to be trying to deflect attention from that fact.

  9. The culpability is ultimately with the adviser and it infuriates me that the innocent have to foot the bill through FSCS fees.
    There are far too many IFA’s wishing to appear sophisticated by introducing funds to clients of which neither have any experience.
    I was a first hand witness to this at a Practice in the nineties when Sipp’s were the flabvour of the month along with traded endowments etc.
    Keep it simple and if it’s unregulated don’t use it!!!

  10. Is it not time to stop unregulated investments within SIPP’s. Commercial property could be allowed (within the UK) with certain additional requirements.

    It seems to me that the claims lawyers and companies are set to have a feeding frenzy at the cost of the industry and advisers. At what point do the investors become accountable for their greed and stupidity? I find it odd that not understanding or ignorance of the law does not give you amenity, yet this is the actual defence they then put forward for their clients.

    • Julian Stevens 29th May 2018 at 10:50 am

      Trouble is, the law allows UCIS to be held via SIPPs and not even the FCA can override the law by banning them. Then again, were the FCA to do its job properly and stop regulated advisers selling them, not to mention mandating special permissions and suitable PII cover for those who wish to, it wouldn’t need to. Such activities would wither and all but die almost overnight.

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