The Court of Appeal has dismissed a claim for judicial review in the case of Options UK Personal Pensions LLP v Financial Ombudsman Service Ltd (the "Carey Pensions" case).  The judgment had been keenly awaited by the SIPP industry, as it clarifies the extent to which SIPP providers may be held liable for a failure to carry out due diligence on SIPP investments that are entered into on an "execution only" basis.

The Ombudsman decision that gave rise to the judicial review application

The appeal stemmed from a decision by the Financial Ombudsman Service (FOS) in which the Ombudsman upheld a complaint by Mr F, a member of a SIPP operated by Carey Pensions UK LLP (subsequently renamed Options UK Personal Pensions LLP).  In 2011 Mr S was approached by Commercial Land and Property Brokers Sociedad Ltda ("CL&P"), a non-FCA-regulated Spanish company, and persuaded that that he should transfer his pension fund to a SIPP operated by Carey and invest in store pods. The SIPP membership application form signed by Mr F confirmed that he understood that investment decisions were solely his responsibility and that the Carey scheme was established on an "execution only" basis.   The investment subsequently failed and Mr F lost his entire pension fund.

FOS upheld a complaint by Mr F and ordered Carey to compensate him.  The Ombudsman held that Carey should have carried out due diligence on CL&P and the store pods investment to a standard that was consistent with good industry practice and its regulatory obligations.  He held that, had it done so, Carey would have rejected Mr F's SIPP application which was made as a result of a referral from CL&P.  In particular the Ombudsman said that Carey should have checked who CL&P's directors were and the list of alerts kept by the FSA (the FCA's predecessor).  Had it done so, it would have discovered that one of CL&P's directors was the subject of an FSA alert, which should in turn have led Carey to conclude that it should not do business with CL&P.  Carey had carried out a check using a service called World Check which was not yet showing the relevant FSA alert at the date of Carey's check.  However, the Ombudsman said that Carey should have checked the FSA list directly.  The Ombudsman also said that Carey should have checked CL&P's accounts.  The Ombudsman concluded that Carey had breached Principle 6 of the FCA's Principles for Businesses which requires a firm to pay due regard to the interests of its customers and treat them fairly.

The grounds of appeal

Carey sought to appeal on three grounds:

• Ground 1: Need to identify and explain departure from legal standards.  Carey alleged that the Ombudsman had failed to address whether Carey would be liable under a duty which could have given rise to a court claim or, if holding Carey liable despite there being no grounds for a court claim, to give reasons for this as required by case law.
• Ground 2: Misdirection on legal obligations of a SIPP administrator.  Carey argued that the Ombudsman had erred in law in finding that Carey owed duties to a prospective SIPP member to carry out due diligence on introducers and investments despite the "execution only" basis of the agreement between Mr F and Carey and the fact that Carey was not authorised to give investment advice.
• Ground 3: Rationality:  Carey argued that the Ombudsman's decision contained significant logical flaws and/or that the conclusions reached were outside the range of reasonable responses open to the Ombudsman.

Ground 1: Need to identify and explain departure from legal standards

The crux of Carey's argument on Ground 1 was that a breach of the FCA's Principles of Business does not itself give rise to a legal claim and that case law therefore required the Ombudsman to address whether he was holding Carey liable in circumstances that would not give rise to a court claim and, if so, give reasons for taking that course.

The Court noted that the law requires the Ombudsman to determine a complaint according to what is, in his opinion, "fair and reasonable in all the circumstances" and that the Ombudsman may uphold a complaint in circumstances where there would not necessarily be grounds to bring a claim in the courts.  Previous case law had held that if the Ombudsman was upholding a complaint on the basis of the Principles notwithstanding that a firm had complied with the relevant specific rules, the Ombudsman was required to explain that that was so and give adequate reasons for his decision.

The Court held that it was clear that the relevant legislation allowed the Ombudsman to make a money award in circumstances where a claimant would not have been able to claim damages in the courts.  The Court said that Carey was seeking to interpret existing case law "in a very restrictive and unwarranted way".  It held that the Ombudsman had explained the relevant law and explained why he was relying on the Principles.  The challenge on Ground 1 therefore failed.  The Court also held that on the facts of the case, if there was a breach of Principle 6 (the requirement for a firm to pay due regard to the interests of its customers and treat them fairly), that must also have been a failure to act fairly and professionally in accordance with Mr F's best interests as required by COBS 2.1.1R.

Ground 2: Misdirection on Legal Obligations of a Scheme Administrator

Carey argued that the Ombudsman had erred in law in finding that Carey owed duties to a prospective SIPP member to carry out due diligence on introducers and investments despite the "execution only" basis of the agreement between Mr F and Carey and the fact that Carey was not authorised to give investment advice.  Carey argued that the Ombudsman had created a new legal duty which created a tension with the legal duty under COBS 11.2.19(1)R to execute investment instructions of SIPP members.

The Court rejected Carey's arguments in relation to Ground 2.  It said that existing case law made clear that the Principles could form the basis of an Ombudsman decision that it would be fair and reasonable to uphold a complaint and award compensation.  The Court also noted that it was clear that Carey had been carrying out due diligence on unregulated introducers "albeit haphazardly".  Carey's contractual documentation also made clear that it could refuse an application for membership for any reason and could refuse to execute investment instructions.  This undermined the argument that the Ombudsman had created a novel duty to carry out due diligence.

Another point to which the Court gave considerable weight was that the Ombudsman was considering the position of a pension provider before any contractual relationship was entered into.  The nature of that relationship (eg that it would be "execution only") could not bear on the obligations of a pension provider before it entered into any contract with the member.  The fact that the Ombudsman was looking at the pre-contractual position made the case different from the High Court's decision in Adams v Options SIPP UK LLP, another case involving Carey and investment in store pods.  In the Adams case the claimant's argument that Carey failed to carry out adequate investment due diligence effectively failed on a legal technicality, namely that this argument had not been included in the pleadings.

The Court acknowledged that Carey was not authorised to give advice on the suitability of store pods investments for Mr F.  However, it said that the due diligence and best practice with which the Ombudsman was concerned was whether Mr F should have been accepted as a member of the SIPP at all.  The due diligence related to whether the type of investment should have been accepted at all in the light of all the circumstances including the nature of the introducer.

Ground 3: Rationality

Carey's final ground of challenge was that even if the due diligence duty relied on by the Ombudsman did exist, it was irrational to decide that the duty had been breached.  Carey place reliance on the fact that the FCA had visited Carey's premises in 2011, had been aware of the level of due diligence undertaken by Carey and had approved it. Carey also pointed out discrepancies in the Ombudsman's determination regarding the number of county court judgments against a company related to CL&P.

The Court rejected these arguments.  It noted that that the FCA and Carey were not in agreement about the meaning of Carey's responses given to the FCA in 2011.  In particular, the FCA had understood Carey to say that it did check the FCA website directly.  It also held that discrepancies over the number of county court judgments were not sufficient to render the Ombudsman's decision irrational.

Our thoughts

Legislation requires FOS to determine complaints by reference to what is fair and reasonable in all the circumstances of the case.  The Court of Appeal's judgment confirms previous case law to the effect that this gives FOS a very broad discretion regarding how to determine cases, and that the courts will not be inclined to overturn FOS decisions on the basis of legal technicalities. 

The judgment illustrates that it is not possible for regulated firms to use their T&Cs to absolve themselves of all responsibility for unsuitable investments.  Crucially the Court agreed with FOS that Carey had obligations that arose before it had even entered into a contract with a member.  The Court agreed that Carey was under a duty to carry out due diligence to establish whether it should accept the store pods investment into its SIPP at all.  This was directly relevant to whether Mr F should be accepted as a member of the SIPP given that Mr F's wish to join the SIPP stemmed from his wish to invest in store pods.