Understanding the big cases. Part 2: Adams v Carey

Glyn Taylor summarises the last three big cases and reflects on what they will mean for our industry.

The Russell Adams v Carey Pensions UK LLP Judgement was handed down earlier this year, (May 2020). Following an introduction by an unregulated introducer, Mr Adams set up a SIPP with Carey Pensions, and Carey carried out the investment in the Store First rental pods on an execution-only basis, as instructed by Mr Adams. The investment in Store First performed badly, with the investment ultimately being worth very little.

A matter of weeks before the trial, the FCA intervened. The FCA was granted permission to make written and oral submissions at trial as to its interpretation of the Conduct of Business Rules (COBS) of the FCA Handbook and related legislation including the Financial Services and Markets Act 2000 (FSMA) and Order 2001 (RAO).

Mr Adams alleged Carey breached the statutory duty, breach of FSMA rendering the SIPP unenforceable under Section 27 of FSMA and breach of duty under COBS 2.1.1R to act honestly, fairly and professionally in the best interests of the claimant.

Mr Adams alleged that the unregulated introducer had “advised” him about, and “arranged” for him (both within the meanings of those activities in the RAO): the SIPP and the investment in Store First, in breach of FSMA.

He brought a claim under Section 27 of FSMA, which gives the Court discretion to unwind an agreement if an authorised person (in this case, Carey) enters into an agreement with a client (Mr Adams) as a consequence of something said or done by an unauthorised third party wrongly performing an authorised activity (i.e. the introducer advising” on and/or “arranging” the investment). The FCA supported Mr Adams’ position that the activities carried by the introducer fell within the regulated activities of advising on and arranging investments.

However, The Court disagreed with both the FCA and Mr Adams and dismissed the Section 27 claim. It found that the actions of the introducer fell short of “arranging the investment” and that, crucially, the point at which this issue must be considered was when Mr Adams gave his instruction to invest. Before that point, Mr Adams was not bound to continue with the proposed SIPP investment, nor had he suffered any loss.

Good news for providers?

This appeared to be good news for SIPP providers. The Section 27 claim failed because the activities of the introducer were held not to constitute advising or arranging.

Mr Adams also alleged that Carey breached COBS 2.1.1R of the FCA Handbook, which requires a regulated entity to act “honestly, fairly and professionally in accordance with the best interests of its client”, by allowing Mr Adams to establish the SIPP for the purposes of the investment in Store First rental pods.

The FCA submitted that COBS 2.1.1R imposes duties on a SIPP provider to assess the proposed introducer and proposed investment and not to accept into a SIPP an investment which is inappropriate for any SIPP, or for any SIPP investment by a retail customer who is not known to have received independent legal advice. It also submitted that the requirements in COBS could not be overridden by reference to the SIPP contract (which made it clear that Carey’s provision of services was on an execution-only basis).

The Court rejected Mr Adam’s arguments and the FCA’s submissions. It found that, while COBS could not be excluded by contract, it was “obvious that the correct starting point” in ascertaining the scope of obligations imposed by COBS, and in construing those obligations, was the contract between the parties. As a result, the Court held that there was no duty on Carey to consider the suitability or appropriateness of a SIPP or the investment in Store First rental pods.

Failure was inevitable.

The judgement dismissing the claim was even more surprising as the FCA’s submissions supported Mr Adams’ position. However, to us it was clear that the Adams case was going to fail due to how the case was present to the court.

Firstly, the Court didn’t have to consider whether the duty under COBS 2.1R extended to refusing to do business and not accept Mr Adams as a client. The FCA submitted that, if a SIPP operator is aware of problems with an investment and/or an introducer as a result of performing due diligence in accordance with its obligations under COBS 2.1.1R, that rule would require the SIPP operator to take appropriate action which may include declining to proceed with the investment. In particular, “refusing to do business with someone is not consistent with an advisory relationship with them.”  This wasn’t determined by the Court in the Adams case as it wasn’t pleaded as part of the claim.  The Court also didn’t fully consider the meaning of “making arrangements” under RAO article 25 as it was pleaded very narrowly to only the court only to consider only part of Article 25.

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