Mr Adams’ case against Options (formerly Carey) arising out of mis-sale of a SIPP through the unregulated introducer CLP was appealed by Mr Adams and decided on 1 April 2021 ( EWCA Civ 474).
This is significant as the Court of Appeal wholly disagreed with the first instance approach to Section 27 and the breaches of the general prohibition.
The general prohibition is the bar on unregulated people doing regulated acts relating to regulated products and so it is vital, especially in this case, to identify the acts and the products (not all acts relating to all products). These acts and products are found in the Regulated Activities Order (RAO).
In relation to advising (article 53 RAO), the Court of Appeal held that the encouragement by CLP (the unregulated introducer) to invest in Store Pods (being unregulated) also recommended transfer out of a Friends Life pension and into a Carey SIPP (both regulated) were inextricably linked. Therefore the whole scope of the advice had to be considered together.
As far as arranging was concerned the Court of Appeal was satisfied (p.98-102) that ‘“procuring the letter of authority” (i.e. the letter authorising Carey to liaise with CLP), “the undertaking of money-laundering investigations” and “the completion of the application form”’ were all steps which amounted to arrangements regarding the Friends Life Pension and the SIPP and so were in regulated acts per article 25(1) RAO.
Carey also argued that Section 28 should allow Carey relief from the sanction in Section 27 and the court disagreed balancing the various factors and specifically overturning the finding that the FCA letter of 29 September 2011 acknowledged that the FCA accepted that Carey’s processes with unregulated introducers were appropriate. That letter acknowledged unregulated introducers such as solicitros and accountants.
The Court of Appeal said:
“115. On balance, however, I none the less take the view that we should not exercise the discretion conferred by section 28(3) of FSMA. My reasons include these:
i) A key aim of FSMA is consumer protection. It proceeds on the basis that, while consumers can to an extent be expected to bear responsibility for their own decisions, there is a need for regulation, among other things to safeguard consumers from their own folly. That much reduces the force of Mr Green’s contentions that Mr Adams caused his own losses and misled Carey;
ii) While SIPP providers were not barred from accepting introductions from unregulated sources, section 27 of FSMA was designed to throw risks associated with doing so onto the providers. Authorised persons are at risk of being unable to enforce agreements and being required to return money and other property and to pay compensation regardless of whether they had had knowledge of third parties’ contraventions of the general prohibition;
iii) Over a period of only about six months, some 580 of Carey’s clients invested in storepods, despite their being high risk and non-standard investments, and most of those clients came via CLP. On average, moreover, no more than about £50,000 was being invested, possibly suggesting clients who were not rich or financially sophisticated, especially given the warning in the Key Features document that, “In general terms, investment of less than £25,000-£50,000 into a Full SIPP won’t provide the opportunity to take advantage of the investment flexibility and may mean that the fees being levied would be considered excessive in relation to the size of the fund”. These matters were, as it seems to me, such as to put Carey on notice of the danger that CLP was recommending clients to invest in storepods and to set up Carey SIPPs to that end. After all, it is hard to suppose that 580 people would spontaneously decide to invest in Blackburn storepods. There was thus reason for Carey to be concerned about the possibility of CLP advising on investments within the meaning of article 53 of the RAO, albeit that it is to be assumed that it did not in fact appreciate that the general prohibition was being contravened;
iv) Come May 2012, Carey learned that, contrary to what CLP had said in the “Non-Regulated Introducer Profile”, it was receiving commissions of about 12% from Store First, that clients were making enquiries as to when they would receive their money and that the FCA had posted a notice warning that one of those running CLP was not authorised under FSMA and that he might be “targeting UK customers via the firm Cash In Your Pension”. These matters should have rung alarm bells with Carey, and they did: it terminated its relationship with CLP. Yet it still allowed “pipeline” clients who had been introduced by CLP, such as Mr Adams, to proceed with investments in storepods;
v) It seems that it was not until 26 May 2012, the day after Carey notified CLP of its termination of their relationship, that Carey requested the transfer of the Friends Life pension, the proceeds were not received until somewhat later and the investment in storepods did not proceed until well into July 2012. It was open to Carey to decline to continue to permit Mr Adams (and other clients) to invest in storepods or at least to explore the position with him, but it did not do so notwithstanding the reasons for concern that it by then had.”
The Court of Appeal did dismiss the alternative Conduct of Business Sourcebook based claim but this did not affect the outcome.
Mr Adams was successful and the only question is how he is to be compensated.