FOS to review decision that SIPP operators should assess suitability of investments

Background

Mr A transferred the majority of his £29,000 SIPP fund with Berkeley Burke into Sustainable AgroEnergy, an unregulated collective investment scheme in biofuels. Sustainable AgroEnergy then went into administration and Mr A lost the whole of his investment. Mr A subsequently argued that Berkeley Burke had failed to advise him of the risks involved with the investment. Berkeley Burke contended that it was not authorised to advise Mr A and had no responsibility to advise on the suitability of an investment.

In reaching its initial decision the FOS referred to the (then) Financial Service Authority’s July 2009 SIPP Thematic Review paper which referred, amongst other things, to identifying anomalous investments. The FOS said this would enable a firm to verify if an investment was appropriate for a pension. The FOS further stated that SIPP operators were obliged to take account of ‘good practice’ as mentioned in the 2009 paper, and that Berkley Burke had not done so. The FOS held that "Sustainable AgroEnergy was an unusual and esoteric investment. This was a relatively small value SIPP invested in an unusual and new investment. Mr A also waived his cancellation rights. These factors should all have alerted Berkeley Burke to the fact that this investment and the SIPP were potentially unsuitable for him. I consider that Berkeley Burke should have made further enquiries to establish whether the investment was suitable for Mr A."

The FOS held Berkeley Burke liable for Mr A's loss. Commentators have stated that this FOS decision is out-of-kilter with decisions from the Pensions Ombudsman Service (POS) which, to date, has expected only limited duties of due diligence on operators. In particular, the POS has held in a line of cases that the 2009 paper does not require SIPP operators to advise on suitability of investments. The POS decisions suggest only limited duties of due diligence, principally related to establishing that an investment is capable of being held in a SIPP.

Review of decision

There are potentially hundreds of complaints by out-of-pocket investors to which the FOS’ decision could be applied. Investment in AgroEnergy alone is estimated at £2m. Unsurprisingly therefore, around 40 SIPP providers met to discuss a response to the decision. Following the meeting, Neil MacGillivray, the chairman of Association of Member-directed Pension Schemes, raised concerns that whilst SIPP providers check the investment, they do not advise on the risk profile. He also queried exactly how much due diligence was required of an investment. Thereafter, Berkeley Burke initiated judicial review proceedings in order to review the decision which have apparently led to the FOS removing the decision from its website and issuing the following statement “The ombudsman issued a decision in June. Following the decision, the business commenced the judicial review process. The outcome of that process was that the ombudsman will now consider the complaint afresh.”

The FOS’s decision to review its own decision is a curious and unusual step. Without a full hearing on the application, any review would require the consent of both parties, so it is unclear why the consumer would agree to a review.

Comment

The ramifications for SIPP operators if the FOS’ Berkley Burke decision remains the same are considerable. Pending the outcome of the FOS’s review, the uncertainty surrounding operators accepting what – in retrospect – may be considered non-standard investments in SIPPs lingers. Moreover, whilst many operators have now elected not to accept ‘non-standard investments’, they may have done so previously and are therefore likely to continue receiving complaints from members on the back of the Berkley Burke case. Given that SIPP Operators are not authorised to give advice, a line does need to be drawn as to what their duties really are when it comes to due diligence or ‘suitability.’ POS decisions seem to have struck the right balance by not seeking retrospectively to apply more recent FCA guidance from its thematic review. It is difficult to see how SIPP operators can assess suitability given their lack of access to their clients’ full financial history and we would hope that FOS provides some much needed clarification on this issue. Perhaps a sensible outcome is to recognise that if individuals decide to purchase investments to be held in a SIPP without advice (i.e. on an execution only basis) they should be in no better position than had they bought those investments on an execution only basis outside of a SIPP.