FCA writes to CEOs on SIPP due diligence

FCA has written a “Dear CEO” letter on the duties of SIPP operators in respect of due diligence. The letter refers to the judgement in the Berkeley Burke case and several other pending civil claims, and asks firms to consider the potential implications of these cases for them and their customers. The Berkeley Burke case, outlines below, and backed up by several FCA communications over the years, may make firms liable for failed SIPP investments if they have not carried out sufficient due diligence on the investment, even if the customer has not sought advice on their suitability.

FCA is concerned that a number of firms may find themselves in financial difficulties as a result of claims that may now be brought and reminds them that, should this be the case, they should contact FCA immediately. It also notes that if firms in difficulties think it is in the interests of customers to sell some or all of their business, they must at all times have due regard to customers’ best interests – in particular thinking of customers who may have compensation claims.  The letter closes with a statement that FCA will take firms’ and individuals’ behaviour following the letter into account when assessing any relevant change of control or controlled function applications.

The Berkeley Burke case concerned a SIPP investment made by Mr C. Mr C had transferred his personal pension to Berkeley Burke for it to be used for investment in a scheme offered by Sustainable AgroEnergy (SA). The scheme turned out to be a scam.  Mr C complained to FOS about the conduct of BB, seeking reimbursement of the sums he had lost, and the FOS upheld the complaint. BB queried FOS’ jurisdiction. At the appeal, FCA was joined as a party to explain the application of its rules.

The judgement includes extracts from BB’s customer documentation with Mr C which, among other things, sought to disclaim any responsibility for the suitability of the investment and said that BB cannot be held responsible for any losses arising from the investment decision.

FOS, in reaching its determination, said it had a duty to go wider than FCA rules and to make a decision that was fair and reasonable in all the circumstances of the case. It focused on BB’s duties under the Principles (as well as communications from the then FSA to the firm in particular and SIPP operators in general). As a result, FOS concluded that BB did not act fairly and reasonably as it should have carried out sufficient due diligence on the investment to identify that it was not acceptable for the pension.

BB appealed for judicial review, challenging the lawfulness of the FOS decision on a number of grounds, including that, as there was no duty on the firm under COBS 9-11, FOS could not imply a duty by using the Principles as this essentially created a new rule that had not been consulted upon.  Another ground for objection was that the decision was inconsistent with previous decisions by the Pensions Ombudsman.

The Court found that the FOS analysis was sound and that nothing in the decision created any new rule or guidance but was merely an application of an existing rule. Moreover the judge agreed it was acceptable for FOS to apply the Principles to the facts in a way that was not specifically otherwise spelt out in a rule.  On the COBS 11 point, and BB’s contention that an express instruction from the client overrode the obligation in COBS, the court agreed that the purpose of the COBS rule was to address the way in which an instruction should be executed – but was only relevant where the investment in question was permitted in the first place – and the contention (which the court agreed with) was that BB should not have permitted the investment.