In recent years we have seen an increase in investments made via SIPPs that were either entirely fraudulent or catastrophically failed, causing the investor to lose their entire investment and a significant chunk of their pension pot. Many have explained that they felt safe, making the investment in the first place because their SIPP operator allowed them to do so.
They felt comforted in the belief that if the investment was truly that bad, the SIPP operator would have stepped in and stop them from investing.
In this post, we explore the duties of SIPP operators when it comes to protecting their customer’s money and how closely they are required to investigate an investment decision.
SIPP operators are regulated by the FCA, and there are a number of regulatory requirements applicable to them. The requirements include that they “must conduct their business with due skill, care and diligence” (PRIN 22.214.171.124 FCA Handbook) and “pay due regard to the interests of their customers and treat them fairly” (PRIN 126.96.36.199 FCA Handbook).
In the recent case of Berkeley Burke Sipp Administration Ltd v Financial Ombudsman Service Ltd, it was held that even where an operator is acting on a purely execution-only basis that they still have a duty, with reference to PRIN 2 and 6, to investigate and undertake extensive due diligence, and where it is concluded that the investment investigated is unsuitable, to refuse instructions. The court also held that COBS 11.2.19R did not prevent the operator from refusing the instruction as they have a wide discretion to refuse to carry out instructions.
Furthermore, following the case, in a letter to the Work and Pensions Select Committee dated 8 June 2018 the FCA’s Executive Director of Supervision – Investments, outlined that SIPP trustees are subject to specific obligations to provide clients with realistic annual valuations of the assets held in a SIPP. For a SIPP operator to accept an underlying asset into a SIPP without having taken reasonable steps to ensure that it or its trustee will be able to undertake realistic annual valuations would amount to a failure to act in the Client's best interests, in breach of COBS 2.1.1 R.
Under section 138D of the Financial Services and Markets Act 2000 a claim for damages for breach of statutory duty can be made if an operator has failed to undertake sufficient due diligence which has meant that the Client has invested in, and lost money because of a non-standard investment.
SIPP operators must undertake a sufficient amount of due diligence to not only satisfy that they can undertake realistic valuations, but also that the investment is appropriate for the customer even where they are only acting on an execution-only basis. If they fail to do so and their customer loses money, then they may be susceptible to a claim for breach of statutory duty. The case law in this area is only just fledgling, so it will be interesting to see how far that duty is stretched and if the courts will broaden or restrict the diligence burden on operators in the future.
At MBM, we specialise in financial law. Contact the MBM Commercial dispute resolution team at email@example.com or on 0131 226 8200 to speak to one of our team today. We will be more than happy to have an initial no-cost chat to discuss your situation and see if we can help.