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