Money Covered: The Week that Was - 19 April

Welcome to The Week That Was, a round-up of key events in the financial services sector over the last seven days.

The second episode of Season 3 of our podcast, Money Covered - The Month That Was, where the team discusses key developments and topical issues in the financial services area, is now available. This episode features Rachael Healey, George Smith and Rob Morris discussing what impact ESG and AI may have on the financial services sector, in particular Pensions and Accountants.

To listen to this and all previous episodes, please click here.

Headline Development

Court of Appeal hears Judicial review against FOS 

The Court of Appeal has heard the claim for judicial review brought by Options Pensions against the Financial Ombudsman Service (FOS). Options challenged the lawfulness of an Ombudsman Decision upholding a complaint alleging inadequate due diligence on an unregulated introducer and unregulated investment (store pods) – broadly, Options argued that (1) FOS failed to explain its departure from the law, (2) made an error of law and/or (3) reached an irrational decision:

• Ground 1 – Options argued that FOS found it liable despite there being no identification of a breach of a specific rule and so to hold Options responsible FOS had to explain why they were departing from the relevant law. FOS upheld the complaint based on the FCA's Principles of Business (which are non-actionable); Options therefore argued that the Ombudsman was departing from the law as they were upholding a complaint where the Court would be unable to do so. The FOS disputed this on the basis that there was no departure from the law, as it also found that Options had not complied with COBS 2.1.1R (the FOS maintained this was implicit in the decision due to the similarity between Principle 6 and COBS 2.1.1R as both require regulated firms to act in the best interests of their customers). FOS also argued that they are entitled to make a decision based on what they consider to be fair and reasonable having considered the relevant law and guidance / best practice from the time. In other words, the FOS argued that the Ombudsman does not have to determine complaints as a Court would. Ground 1 is likely to turn on whether the Court agrees with Options that the Ombudsman was departing from the law by upholding a complaint based on the Principles, which may turn on whether the Principles are considered to be "relevant law".
• Ground 2 – Options argued that the FOS erred in law if it upheld the complaint based on a breach of COBS 2.1.1R, as FOS had to consider the contract, specifically the limited function Options agreed to provide. There was a great deal of disagreement between the parties as to what the FCA expected from SIPP operators at the time – Options argued the acceptance of business from unregulated introducers was prevalent at the time and the FCA did not prohibit it. The FOS disputed Ground 2 by maintaining that Options had due diligence obligations and that the due diligence completed was inadequate.
• Ground 3 – Options argued that the due diligence it carried out on the introducer and investment was reasonable. Options noted the FOS' key argument on alleged due diligence failings was based on the failure to find Mr Terrence Wright (a director at the introducer firm who was the subject of an FCA alert) on the FCA website, but that it was wrong to find that it was unreasonable of Options to rely on the market-leading World-Check service (which Options used to search the directors and which should have identified the alert but did not). On the investment, Options argued that the due diligence findings on Store First did not reveal that it was so risky and/or that no one could be suitable for the investment. 

The FCA was involved as an interested party and endorsed the FOS' submissions. 

The judgment could have significant impact on SIPP operators (and potentially regulated firms more generally) given it could impact the FOS' approach to determining complaints alleging inadequate due diligence and the Ombudsman's reliance on the Principles of Business. The impact of the judicial review will depend on whether Options is successful and if so, on what grounds. Success on Grounds 2 or 3 could have a far-reaching impact.  

As this is a claim for judicial review, we anticipate that the Court of Appeal will deliver its judgment within the next month or two. We will provide a further update as soon as we are able to. 

Developments for FCA Regulated Professionals

FCA reminds motor finance firms they must maintain adequate financial resources 

The FCA has provided an update on its review of firms' historical motor finance discretionary commission arrangements (DCA) and taken the opportunity to remind firms they must maintain adequate financial resources at all times. 

The FCA has issued a Dear CEO letter in which the regulator confirms that it expects firms to:

• Assess the adequacy of their financial resources;
• Ensure the accuracy of financial statements and regulatory reporting;
• Make adequate disclosures to the FCA;
• Make adequate disclosures to group stakeholders; and
• Continue to investigate DCA complaints and subject access requests appropriately.

The FCA also provided an update on its review and noted that firms have been engaging constructively, but many firms are struggling to promptly provide information due to record retention and storage issues. The FCA also notes that firms are taking differing approaches to account for the impact previous DCAs have had on their financial resources.

The FCA intend to outline the next steps of the review by 24 September 2024.

To read more, please click here. To read RPC's blog, click here.

FCA pensions data reveals declining use of advice and guidance 

An increasing number of pensions are being accessed without professional advice or guidance, raising concerns about the support being given to retirees when making financial decisions.

Recently published data from the FCA shows that 58% of the pensions accessed in 2022/23 did not receive advice or guidance, compared to 48% in 2018/19. The use of guidance has declined most in drawdown and among UFPLS withdrawals.

Given the financial complexity of retirement decisions, this is a concern. The majority are shunning not only paid for advice but also the government's free guidance offered via Pension Wise. Commentators note that this reinforces the need for the industry to develop and promote advice models that can help people plan for the retirement.

To read more please click here.

Update for Accountants

Further guidance on R&D tax relief published

HMRC has published updated guidance on the new regime for Research & Development (R&D) tax relief for accounting periods beginning on or after 1 April 2024.

The new regime allows loss-making R&D intensive SMEs to benefit from additional support and the updated guidance provides further information on the conditions for additional support and the process by which claims can be made.

Further information can be found here.

Updates for Pensions Professionals

Pension freedoms: DWP may raise the £30,000 DB advice threshold

The Department of Work and Pensions (DWP) is considering raising the advice requirement for defined benefit (DB) pensions.  Currently, the limit means that anyone wishing to transfer a DB pension must take advice from a regulated financial professional if the transfer value is over £30,000.  The limit has been in place since 6 April 2015 when the 2015 Pensions Schemes Act came into force.  It exists to ensure that individuals giving up the safeguarded benefits of DB pensions are fully aware of what they are giving up.  

However, Citywire reports that the DWP is reviewing this limit, and considering raising the threshold to £100,000.  This would allow more individuals to transfer benefits without seeking advice from a regulated financial professional.  Increasing scrutiny over advice has made advisors reluctant to provide this service, meaning individuals may be finding it difficult to transfer smaller pots under current regulations.  

No decision has been made yet, and the DWP will provide an update in due course.

Legislative and Case Law Updates

Court of Appeal considers statutory interpretation of section 91(2) of the Pensions Act 1995

Manolete Partners Plc v White [2024] EWCA Civ 356 concerns the meaning and effect of section 91(2) of the Pensions Act 1995. This case was an appeal against the decision of HHJ Hodge KC who allowed a debtor to be ordered to draw from an occupational pension scheme to pay a judgement under section 37(1) of the Senior Courts Act 1981. 

The issue the Court of Appeal considered was whether section 91(2) prohibits the court from making such an order. Section 91(1) confirms that an occupation pension cannot be subject to a charge (and an agreement to that effect is unenforceable). Section 91(2) also provides that "no order can be made by any court the effect of which would be that he would be restrained from receiving that pension."

The Appellant had previously been represented by solicitors and counsel but shortly before the appeal was due to be heard, he informed the Court that he could no longer afford representation and would therefore be acting in person.  The Court of Appeal considered that, as the appeal raised points which were 'seriously arguable and of potential importance to occupational pensions generally', the appeal should be adjourned to give the Appellant a chance to obtain representation (on a pro bono basis).

The Appellant has been directed to obtain representation as soon as possible to allow the appeal to be relisted for a full day hearing without undue delay. We will report further once the appeal has been heard. 

Solicitors owed a duty to beneficiaries of an "inter vivos" trust

It is an established principle that a disappointed beneficiary under a will that has been negligently prepared (or not prepared) has a remedy against the solicitor instructed by the testator. But who, if anyone, can sue if a solicitor’s negligence thwarts the vesting of an intended inter vivos gift? The High Court has considered this and Alice Nash of Hailsham Chambers has explored the issues. 

A firm of solicitors was instructed to act in relation to a trust of property, but negligently failed to give effect to the settlor’s intentions with the result that the trust failed to confer the intended benefit on the settlor’s children. Faced with a claim brought by the settlor, the trustees and the intended beneficiaries, the defendants sought to argue that all the claims should be struck out, on the basis that nobody other than the settlor had standing to sue, and his claim was statute barred. The judge permitted all the claims to proceed. 

Most strikingly, the judge held that, in his judgment, the solicitors owed the intended beneficiaries a direct duty of care. Accordingly, the judgment amounts to an open invitation to the court, at any subsequent trial of this or a similar claim, to dispense with the complexity that bedevils this area of the law and adopt a relatively straightforward route to a remedy for disappointed beneficiaries of irrevocable inter vivos trusts (that being a trust created during the lifetime of the settlor).

To read the note from Alice Nash at Hailsham Chambers on the decision in Lonsdale and ors v Wedlake Bell and ors [2024] EWHC 712 (KB), please click here. 

Conflicts of Interest: Irwin Mitchell Trust Corporation v PW 

On 19 March 2024, Court of Protection handed down its judgement in Irwin Mitchell Trust Corporation -v- PW. The issue before the court was whether Irwin Mitchell Trust Corporation (IMTC), in its capacity as professional deputy to PW, were in breach of conflict of interest rules by appointing Irwin Mitchell Asset Management (IMAM) to manage PW's investments. 

Irwin Mitchell LLP had previously acted for PW in a compensation claim after she had contracted viral encephalitis in 2005, leaving her with life-long cognitive impairment. In March 2017, Irwin Mitchel LLP appointed IMTC to act for PW under a property and financial affairs deputyship. IMTC then appointed IMAM to manage the investment of the funds PW had won as part of her compensation claim. Unsurprisingly, these companies are all part of the same group; Irwin Mitchell Holdings Ltd wholly owns IMAM and is a controlling member of Irwin Mitchell LLP, who in turn, wholly own IMTC. 

Under s.19(6) of the Mental Capacity Act 2005, a Deputy is treated as Agent of the person they represent, which means that there is a fiduciary relationship between them. Consequently, a Deputy is under a duty to not enter arrangements which do, or have the potential to, result in an own-interest conflict. IMTC accepted that the appointment of IMAM had that 'theoretical potential' to give rise to a conflict of interest, but argued that there was no 'real sensible possibility' of a conflict arising as a result of the procedures and practices it had put in place. However, HHJ Hilder rejected this argument, noting that the procedures IMTC had referred to relied too heavily on receiving authority from family members who would not be alive to the issues. HHJ Hilder concluded that the arrangement "clearly conflicts with the rule against self-dealing. There is actual conflict of interest in that the Irwin Mitchell group gains financially…... The processes adopted by IMTC do not and could not extinguish that conflict. In my view, that these proceedings have been necessary at all is a paradigm example of Lord Herschell's [Bray v Ford [1896] AC 44] wise recognition of the tendency of human nature to be swayed by interest rather than duty."

To read the full judgement, click here.

With thanks to this week's contributors: Patrick Barclay, Rebekah Bayliss, Anthony Cutler, Shauna Giddens, Damien O'Malley, Faheem Pervez, James Parsons, Tom Spratley.