Yesterday, the Court finally gave judgement in Russell Adams v Options SIPP UK LLP, a significant test case on the potential liability of an execution only SIPP provider to an investor whose underlying investment in the SIPP had incurred significant losses.
In a 99 page judgment, His Honour Judge Dight decided that the Defendant was not liable for such losses.
Such was the significance of the case (heard in March 2018), that a matter of weeks before trial, the Financial Conduct Authority (“FCA”) intervened.
The Court allowed the regulator to make submissions at trial as to the correct interpretation of certain aspects of the Conduct of Business Sourcebook (“COBS”) Rules in the FCA’s Handbook, the Financial Services and Markets Act 2000 (“FSMA”) and the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“RAO”).
The central question for the Court was whether the defendant (Options SIPP UK LLP – formerly Carey Pensions UK LLP –“D”), a SIPP provider and administrator, which operated on an “execution only” basis was liable to the Claimant investor, Mr Adams (“C”) for the losses which C claimed he suffered as a result of entering into what he alleged was an manifestly unsuitable investment which C instructed D to hold within a SIPP wrapper.
C alleged that D operated a business model under which it used an unregulated and unauthorised Spanish introducer and broker (CLP Brokers in Malaga – “CLP”) to procure investors to enter into SIPPs, established by D, as vehicles for potentially unsuitable investments. C alleged that D used CLP to facilitate investments in store pod renatsl which were unsuitable and became worthless. C had transferred his existing pension fund into a SIPP administered by D.
C claimed damages from D for breach of statutory duty and negligence and looked to unwind his contract. Essentially, C wanted his original pension fund returned to him with compensation for the returns he would have enjoyed.
In the main, C’s claim was based on:
(1) the COBS Rules which imposed an obligation (COBS 2.1.1R) on D to act honestly, fairly and professionally in accordance with the best interests of its client. C allleged that this required D to advise C in relation to the underlying investment in the SIPP, and that there had been a breach of this duty (the Court referred to this as “the COBS Claim”); and
(2) section 27 of FSMA which permitted C to have the contract with D declared “unenforceable” on the basis that C alleged that CLP, which was unregulated, breached section 19 of FSMA in arranging and/or advising on investments within the meaning of arts 25 and 53 of the RAO (the Court referred to this as “the s.27 claim”).
D denied that it was liable to C and submitted:
(1) D’s business was carrying on the establishment and administration of SIPPs on non-advisory, “execution only” basis;
(2) that it was not authorised, and not provide advice to C as to whether to establish the SIPP or whether to enter into the underlying investment;
(3) the contract with C made clear that the underlying investment was C’s sole responsibility; and
(4) C was fully aware, before entering into the SIPP. that the underlying investment was high risk and speculative but he nevertheless decided to proceed thereby causing his own loss.
On the COBS claim, the Court concluded that in order to identify the extent of any duty imposed on a SIPP provider by COBS, it had to consider the underlying contract between the parties which definde their respective roles and functions; it was “obvious” that this was “the correct starting point” as it was “common ground that not every COBS obligation” applied to all regulated firms.
The Court decided that the contract between C and D made clear that D did not have any duty to advise C on the underlying investment and that C was responsible for his own investment decisions.
On the s.27 claim, the Court decided that the actions of CLP fell short of arranging and/or advising on the investment (within the meaning of articles 25 and 53 of the RAO); the point at which the issue had to be considered was when C gave his instructions to invest as before that C was not bound to continue and had not suffered any loss.
The judgment has been long-awaited. It now provides some clarity for the industry on the duties owed by SIPP providers to clients, especially as similar complaints have been upheld by the Financial Ombudsman Service in the past. Such clarity may also benefit all firms that transact “execution only” business for clients.
More widely, the case highlights the importance to the Court of a firm’s contractual arrangements with a client when considering potential FCA rule breaches.
It has just been reported that C will be asking the Court for permission to appeal to the Court of Appeal.