Out-Law News 5 min. read
17 Feb 2023, 9:49 am
A decision expected from the Court of Appeal in London could re-open the door for the courts to consider the scope of self-invested personal pension scheme (SIPP) operators' due diligence obligations under Financial Conduct Authority (FCA) rules, and on their obligations to compensate customers where there have been failings, legal experts have said.
Options UK Personal Pensions LLP (Options) has applied to the Court of Appeal seeking permission to challenge a December 2022 judgment by the High Court in which it was refused permission to bring a judicial review challenge against a decision by the Financial Ombudsman Service (FOS).
The FOS has a duty to resolve complaints by considering what, in the ombudsman’s view, is fair and reasonable in all the circumstances of the case. This includes taking into account the law, codes and good practice that applied at the time of the event and following the rules in the FCA Handbook, although the FOS is operationally independent of the regulator.
In March 2022, the FOS upheld a complaint against Options by Simon Fletcher. In 2011, Fletcher invested £30,000 in Store First, a storage unit business, through an Options SIPP. Fletcher made the investment, which later failed, following an introduction by an unregulated company, Commercial Land and Property Brokers (CLP). Fletcher then alleged that Options, formerly known as Carey Pensions UK LLP, did not carry out sufficient due diligence on CLP before accepting business from it.
The FOS considered whether Options had acted in accordance with requirements under rule 2.1.1R of the FCA Handbook’s Conduct of Business Sourcebook (COBS), which stipulates that firms must act honestly, fairly and professionally in accordance with the best interests of their clients, and Principle 6 of the FCA’s Principles for Businesses, which states that “a firm must pay due regard to the interests of its customers and treat them fairly”.
Barrister, Pinsent Masons
Given that the reasoning in the case applies to a wide range of claims against SIPP operators concerning introducer due diligence, there is some chance the Court of Appeal may take the opportunity to add to existing case law in a COBS context
The FOS decided in Fletcher’s favour. Central to its decision was its view that Options should have discovered a director of CLP, Terence Wright, was the subject of a warning notice issued by the Financial Services Authority (FSA), the predecessor to the Financial Conduct Authority (FCA), from 15 October 2010.
The notice appeared on the FSA's website in a list headed "Firms and individuals to avoid" and was described by the regulator as a "warning notice of some unauthorised firms and individuals that we believe you should not deal with". The notice stated that Wright was not authorised to carry out regulated activities in the UK, including advising on investments, and that the FSA believed that he "may be targeting UK customers".
The FOS considered that although Options had no duty to advise Fletcher, it was not fair or reasonable for it to accept his application for the SIPP or the Store First investment. The FOS also ruled that it was fair and reasonable for Options to compensate Fletcher for his financial loss, plus £500 for trouble and upset.
In bringing its judicial review challenge before the High Court, Options raised several grounds for appeal. A core argument it put forward was that as an “execution-only” SIPP operator, it was not under any legal obligation to refuse Fletcher's SIPP application or his investment instructions. Options submitted that it was not subject to any of the duties in COBS to assess the suitability of the SIPP or proposed investments. It also argued that it had no contractual or regulatory duty to SIPP members to vet the firms that referred them. Even if it had a duty to take reasonable steps, Options submitted that its usual and reasonable practice of using World Check – a background checking database – would not have identified the relevant alert at the relevant time.
The High Court rejected these arguments on the primary basis that it deemed Options to be seeking to challenge the merits of the FOS’ decision rather than having a true ground for judicial review, such as that the FOS’ decision was irrational or that it had made an error of law.
The High Court found that the FOS’s decision was based on the rules and guidance identified in the decision letter and was consistent with case law. While the FOS’s decision did not draw a distinction between the requirements of COBS 2.1.1R and those of Principle 6, the High Court found that this was explicable given the similarity or overlap between the two provisions.
Financial regulation expert Nicholas Kamlish of Pinsent Masons said: “The Court of Appeal’s decision on permission to appeal will be an important test of whether it is ‘fair and reasonable’ for the FOS to infer certain due diligence obligations from COBS and the Principles for Businesses, in light of other FCA rules and industry practice.”
“The Court of Appeal will grant permission to appeal where there is a real – i.e. non-fanciful – prospect of success or where there is some other compelling reason to do so. This might happen, for example, where the question is one of general principle decided for the first time or the case raises an important question on which further argument and a decision of the appeal court would be to the public advantage,” he said.
“The threshold for judicial review is a high one and the Court of Appeal is not likely to interfere with an exercise of the fair and reasonable jurisdiction based on FCA rules and case law. However, unlike previous FOS cases, the Options case discusses the scope of COBS 2.1.1R as well as the FCA’s Principles for Businesses. Given that the reasoning in the case applies to a wide range of claims against SIPP operators concerning introducer due diligence, there is some chance the Court of Appeal may take the opportunity to add to existing case law in a COBS context.”
Financial regulation expert Hannah Ross of Pinsent Masons said: “As yet, the courts have been unwilling to discuss the scope of SIPP operators’ due diligence duties under COBS 2.1.1R, particularly since previous FOS decisions have focused on the application of the FCA’s Principles for Businesses. If Options is granted permission to appeal the Fletcher judicial review permission decision, although the focus will be on the FOS’ decision-making, any detailed analysis on the scope of COBS 2.1.1R could help SIPP operators understand how to approach back-book issues.”
“The new consumer duty and related rules will also have an impact in this area. The FCA will gain sweeping powers from 31 July 2023 in relation to new and existing products or services that are open to sale or renewal, and from 31 July 2024 for closed products or services. Firms will be required to assess and regularly review their products and comply with Principle 2A.10 of the FCA’s Principles for Businesses, which requires firms, on identifying foreseeable harm, to investigate the circumstances which led to the foreseeable harm competently, diligently and impartially, obtaining additional information as necessary, and considering appropriate redress/remediation. In addition, Principle 6 will be replaced by an even wider Principle 12 – the consumer duty – which will require firms to act to deliver good outcomes for retail customers,” she said.
“These rules complement DISP 1.3.6 G of the FCA’s complaints handling rules which states that where a firm identifies systemic problems in its provision of a financial service, it should consider whether it ought to act with regard to the position of customers who may have suffered detriment from such problems but who have not complained. There is an existing risk that the FCA will expect SIPP operators to consider proactive redress under DISP 1.3.6 G for customers with non-standard investments. This risk will be heightened once the consumer duty comes into force,”