The FCA’s Dear CEO prepares SIPP providers for more claims ahead

Posted: 21st December 2018

Andrew Bailey, FCA Chief Executive, has just written to the CEOs of all Self-Invested Pension Plan (SIPP) providers. The ‘Dear CEO’ letter followed a third round of FCA thematic work and an unsuccessful judicial review in which SIPP provider Berkeley Burke challenged a 2014 Financial Ombudsman Service (FOS) decision.

The original complaint against Berkeley Burke was upheld by FOS, where it determined the SIPP provider undertook inadequate due diligence on a client’s end investment. In this case it was an Unregulated Collective Investment Schemes (UCIS) investment in Sustainable ArgoEnergy (Cambodian green oil) and the client lost the original £29,000 investment when the scheme collapsed. The Serious Fraud Office (SFO) have since investigated and secured convictions against three individuals for fraud and bribery offences.

Berkeley Burke disagreed with the FOS findings on the due diligence and went to judicial review. The judge eventually dismissed Berkeley Burke’s claim.

What does the ‘Dear CEO’ letter say?

The letter draws attention to the recent legal decision and other pending civil claims in the high court.

Mr Bailey states that “we expect you to consider the potential implications of them for your firm and its customers” and “if the outcome of any of these cases calls into question your firm’s ability both now and in the future to meet its financial commitments as they fall due, you must notify the FCA immediately”

The letter also recognises that if firms are unable to meet their financial commitments, part or all of the business may be sold. However, it also reminds CEOs that “Principles for Businesses require your firm to pay due regard to its customers’ interests and treat them fairly”, and that if the firm is considering a sale the firm must discuss with the FCA at an early stage.

What are the implications?

The sending of this letter suggests that the regulator believes that the impact of the recent judicial review (and pending claims) could be far reaching for some SIPP providers. For example, Berkeley Burke had 616 clients in SIPPs with around £12.25m invested, which could have significant impact to this SIPP provider and others.

However, this is just one UCIS scheme, there are many more than different UCIS schemes held within SIPPs that have been arranged in recent years. The SIPP providers’ due diligence at the point of investment could now be the subject of a claim.

Previously investors have primarily pursued claims against the advisory firm responsible for the recommendation for the SIPP and underlying UCIS scheme. Where the investor was unable to recover all losses, the recent high court outcome could give investors the new opportunity to make a claim against the SIPP provider. Or course, any of these claims are subject to the claim being within the provider’s own and/or FOS time limits.

What is sufficient due diligence?

The right amount of due diligence can be a difficult judgement, but firms should take a relative approach, i.e. for complex and higher risk investments a greater level of detail is needed compared to lower risk vanilla investments. It is very difficult for a SIPP provider to be able to spot fraud and bribery. It is understood that Berkeley Burke's lawyers suggested the SIPP administrator would have needed a "crystal ball" to understand the obligations the FOS supposedly placed on it retrospectively when administering the case some three years after the investment was made. This highlights how challenging it can be to determine how much is enough especially when needing to respond to the FOS.

We regularly assist firms in due diligence activity and use a deep dive and relative approach to test whether an entity/investment scheme would stand robust scrutiny. This approach has been developed over time by our experience with various clients incorporating the best and worse approaches.

Even if the most robust approach was not able to detect fraud/bribery like the case of Sustainable ArgoEnergy, the risk of losing a case to the FOS is likely to reduce if the firm adopts the right approach.

What a SIPP provider should do now?

The first step is to undertake a risk assessment in light of the recent developments to assess how exposed a SIPP provider is to unregulated investments such as UCIS (or Non-Mainstream Pooled Investments). Then the provider should assess the approach taken to due diligence and determine whether it was sufficient. Whilst doing this the provider should revisit the FCA’s finalised guidance FG13/08.

If the provider finds issues with these then speaking to the FCA and Professional Indemnity insurers is the next step. The provider should also think about whether any issues are limited to unregulated investments.

Engage with the FCA early

The letter makes a point to encourage the CEO to contact the FCA at an early stage in the following scenarios:

• If considering the sale of part or all of business to be sold to another firm or considering winding up the firm.
• If the firm is unable to meet its financial obligations.

In relation to these scenarios the FCA cites the rulebook: Principle 11 – disclosing to the FCA anything they would reasonably expect notice of, and, SUP 15 ‐ discussing with the FCA before making internal/external commitments.

It is particularly worth noting the comment at the end of the letter “In assessing any Change of Control applications, or applications for individuals to hold (or resume holding) Controlled Functions roles, we will take into account how those individuals have acted in the context of the considerations outlined in this letter.”

This appears to be a reminder that CEO’s must act in a way that the FCA would expect.