A SIPP from the devil’s cup: Adams v Options UK Personal Pensions appeal

This article was originally published in the September issue of Butterworths Journal of International Banking and Financial Law and is reproduced with permission from the publisher.

In this article we consider the Court of Appeal decision in Adams v Options UK Personal Pensions in which a regulated firm was found liable because its unregulated introducer “encouraged” clients to enter investments.

The Court of Appeal has given valuable clarity on when an unregulated introducer will be deemed to be carrying out regulated activity. In particular, the court found that advising on an unregulated investment (storage pods in this case) could constitute regulated activity where an investor transfers out of their occupational pension scheme and/ or uses a Self-Invested Personal Pension (SIPP). In this case, all sums invested via the SIPP had to be returned to the investor because the SIPP was entered into on the basis of regulated advice being provided by an unregulated adviser. The SIPP contract was found to be unenforceable under s 27 of the Financial Services and Markets Act 2000 (FSMA). This is a warning to regulated firms (whether they sell insurance, pensions, investments or anything else) that they may ultimately have to accept the risk and liability of the other partners in their distribution chain. Particular caution should be applied when an unregulated introducer is involved.

Background and findings

The Court of Appeal has reversed a High Court decision and found that a SIPP provider (Options, previously Carey Pensions) is liable to repay its member, Mr Adams, the full value of his initial investment in storage pods because he was advised on the investment by an unregulated introducer, CLP.

Mr Adams is a goods vehicle driver. He previously had a modest pension plan with Friends Life. He responded to an advert by CLP which was about releasing cash from pension plans. The agent at CLP suggested to Mr Adams that he could release GBP4,000 in cash by transferring the cash equivalent of his pension into a SIPP with Carey Pensions and investing the balance in storage pods. The investment performed very poorly. In finding Carey Pensions liable to repay Mr Adams’ initial investment, the Court of Appeal unanimously made a number of important findings (most of which reversed the High Court):

• CLP had “encouraged” Mr Adams to invest in storage pods which encouragement constituted advice.
• The advice in relation to storage pods was not, on its own, regulated advice but the advice overall was subject to UK regulation because it necessarily involved transferring out of a pension plan and setting up a SIPP.
• CLP had also “arranged” the investment in the storage pods because CLP’s role was “sufficiently instrumental” in the transfers.
• In these circumstances, s 27 of FSMA provides that the legitimate SIPP contract agreed between Carey Pensions and Mr Adams is unenforceable because it was agreed in consequence of CLP giving regulated advice without being authorised to do so.
• Finally, it was just and equitable that Mr Adams was able to recover the money invested via the SIPP even though Carey Pensions did not know that CLP was carrying out regulated activity without authorisation.

Comment

The market for personal investment has changed rapidly since the introduction of SIPPs turned every worker into a potential purchaser of an extremely wide range of investments, via their pensions. Hundreds of thousands in the UK now choose to act as their own fund managers. Of course, get-rich-quick-schemes have always existed. What has changed is that these schemes can now be accessed through relatively reputable, regulated SIPP providers. Even more importantly, since the introduction of pension freedoms in 2015, all workers now have access to previously unavailable funds in order to invest in such schemes. Therefore, now that any worker can be an active investor, the potential scale of harm which could be caused by bad investments is magnified. All workers now have much greater choice regarding the investments which make up their pension pot. Choice usually drives competition for the benefit of consumers. The UK regulatory regime rightly aims to both promote competition and also protect consumers. However, many innovative firms seek to avoid the compliance requirements of the regulatory regime by operating just outside the edge of the regulatory perimeter. The decision in this case demonstrates just how fine the margins are between regulated and unregulated activity – with different judges taking different views to each other and the FCA on certain points.

Next steps and actions for firms

An appeal has been marked in this case and it seems likely that the Supreme Court will provide further guidance.

In the meantime, for all regulated firms, meticulous due diligence on introducers and distribution channels is imperative. If any channel is compromised because of an unregulated player then s 27 potentially obliges a firm to repay all income through that channel. Going forward, firms have the opportunity to do enhanced due diligence on introducers and distributors with this case in mind. Additionally, firms may also wish to consider whether the conduct of their existing introducers and distributors has resulted in poor customer outcomes and back book exposure.