There has been a lot of talk among legal professionals about the implications of the Adams v Carey Pensions case and what this could mean for the wider industry.
The fact that the court sided with the Sipp provider has undoubtedly created a precedent for the benefit of the sector.
According to the ruling, an execution-only provider cannot be deemed responsible if any of the investments fail or don’t go as planned.
By definition, ‘execution-only’ means that no financial advice is given or involved in the investment process whatsoever, leaving the responsibility in hands of the investor or whoever is acting on their behalf.
But Glyn Taylor, professional support lawyer at APJ Solicitors, doesn’t believe Adams will win the appeal.
“I am still of the view that, whilst it is likely permission will be granted given the wider importance of the case within the Sipp industry, there are real difficulties with the appeal being successful,” he said.
“Whilst the point about the contract trumping FSMA [Code of Business (Cobs)] and principles is, in my opinion, wrongly decided; the difficulty with the appeal is the contract only becomes important once Adams becomes a client of Carey.
“It is common ground that a firm acting in an execution–only capacity cannot advise or recommend on the transaction and Cobs 9 is not engaged.
“The real issue here is understanding the difference between refusing to accept business and advising or recommending the suitability of the investment.”
Satisfy the tests
But such a distinction could not be made in Adams’ case, Taylor added.
“It is with section 27, that my real concerns become evident. Whilst an unregulated introducer giving advice or recommending an investment is a paradigm of section 27 FSMA, the claimant still has to show the arranging or recommending of the investment by the unregulated introducer brought about the transaction.
“We call this the ‘causal test’. The claimant tried to argue the correct test is the ‘but for’ test – that is: but for the actions of the unregulated introducer, then the claimant wouldn’t have brought about the investment.
“The judge, however, decided on the evidence that the bare referral of a customer to a Sipp is insufficient to bring about the transaction, as it does not necessarily result in any further causal steps being taken in the establishment of the Sipp.
“Again, on the evidence, there was a significant delay between setting up the Sipp, any further involvement of the introducer, and the client signing a declaration to proceed with the investment.
“Even if the ‘but for’ test is correct, then the claimant’s evidence was clear that he would have proceeded with the investment regardless and that he was very aware that the investment was high risk.
“This entitles the court to find that the agreement can be enforced under section 28, if the court of appeal determines it was just and equitable to do so,” Taylor added.
But what does this mean for the Sipp sector?
According to Benedict Walton, head of commercial dispute resolution at law firm Forsters, providers could now have some peace of mind.
“This long running case may have positive implications both for Sipp trustees and investors,” he said.
“While the court’s finding that Carey was not liable in respect of the poor performance of Mr Adams’ Sipp will mean that execution–only Sipp trustees are breathing a sigh of relief; this is not a ‘free pass’ because the finding was, to an extent, fact–specific.”
In particular, he added, the court found that:
- Adams was well aware that the investment was inherently risky;
- The unregulated introducer did not actually ‘advise’ Adams on the Sipp, and the Sipp was not entered as a consequence of the introducer’s actions, the extent of which Carey was in any event not aware; and,
- Adams’ contract with Carey was expressly ‘execution–only’ and, as such, Carey’s obligations under Cobs had to be considered in that light.
Higher recovery of failed investments
Walton believes the decision will lift providers from some of the perceived responsibilities they have towards investors.
“Put simply, if investors use execution–only Sipp wrappers to access more exotic investment opportunities, they won’t be able to rely on Cobs 2.1.1 to bring a claim; and if the investment fails, they should be prepared to take responsibility for that.
“However, slightly counterintuitively, this could actually lead to higher recovery in respect of failed Sipp investments by emboldening Sipp trustees to pursue claims against third parties in respect of failed investments, without having to worry as much about beneficiaries then pursuing them if the claim fails.
“Viewed that way, it could actually be a positive development for investors,” he added.
But this might not be the end because, with Adam’s appeal pending, “this tale will have a few more twists”.