SIPPs and FOS - does the Rowanmoor decision change anything?

Last week FOS published a decision it reached last year in a complaint against a SIPP provider involving advised sales of investments held within SIPPs. The FOS upheld the complaint, finding that the SIPP provider should have rejected business from the regulated financial adviser, CIB Life and Pensions Limited (CIB), given, broadly, red flags available to the SIPP provider with respect to the operation of CIB's business model including that CIB was not advising on the ultimate investment within the SIPP and as a result such introductions involved a significant risk of consumer detriment. The decision has received quite a bit of press attention - but has it moved the dial for SIPP complaints before FOS or not?

The Facts

Referrals were made to Rowanmoor by CIB or RealSIPP (an appointed representative of CIB).  Referrals from CIB largely resulted in investments in The Resort Group (TRG).  TRG was broadly an investment in property in Cape Verde where TRG owned a series of luxury resorts.  

Rowanmoor conducted due diligence on CIB by checking its regulatory status and met with CIB to discuss its business model.   Rowanmoor maintained management information about the business it was accepting; including from CIB.  Rowanmoor's business model was to accept predominantly advised business.  All Rowanmoor SIPP applications included a declaration that clients would send Rowanmoor a copy of their suitability letters however in practice not all copies of suitability letters were provided.

In 2009 Rowanmoor reported in its board minutes concerns that CIB was providing execution only business – it was not advising on the ultimate investment within the SIPP and instead just on the transfer to the SIPP itself.  Rowanmoor sought assurance from CIB who confirmed that it would provide advice on the underlying investment.

In 2011 Mr T on the introduction of a friend attended a presentation about investing in TRG.  Mr T believed that people from TRG ran the event.  Mr T could not recall any dealings with CIB or receiving a suitability report from CIB.

On 6 July 2011 Mr T signed a Rowanmoor application form stating that he had been advised by CIB.  On 6 August 2011 he signed Rowanmoor's "property information schedule".  His SIPP opened on 5 September 2011 and Rowanmoor wrote to Mr T about his intention to invest in TRG and recommended he seek appropriate legal/professional advice before acquiring the property.  Mr T signed and returned a declaration stating: "… I understand there are risks inherent in the proposed transaction and that Rowanmoor Pensions will not be liable on the basis stated above.  However I do not wish to appoint legal advisers in this matter…". On 10 October 2011 his SIPP received a transfer of £96,000 from Mr T's final salary scheme; £90,000 was invested in TRG.

In 2013, Rowanmoor again contacted CIB for written confirmation that it was providing advice to clients on both the SIPP and the underlying investments.  The request followed an alert from the then FSA about the issue of IFAs limiting their advice to transfers to SIPPs and not the underlying investments.  CIB again provided the confirmation sought.

The TRG investment ran in to problems; it made no return and this was in part understood to be due to fees deducted from revenue generated from the investment and problems with title for TRG properties.  

Rowanmoor received 1,387 introductions from CIB over a period from June 2009 to October 2013 (of which 455 had been provided over a 2 year period).  Mr T was customer 456.  Rowanmoor was unable to identify precisely why instructions from CIB ceased albeit that the then FSA asked CIB to review certain pension transfers and CIB asked Rowanmoor to cease transfers then in progress.  The FSA thereafter restricted CIB's activity pending its investigation.

The business from CIB accounted for 26.9% of all business received by Rowanmoor.  Of the business received from CIB 341 schemes introduced involved one or more occupational transfers, being 24.59% of the total population.  CIB introduced Harlequin as well as TRG, albeit the vast majority of investments were made in TRG.  

CIB entered liquidation in May 2015.  

Rowanmoor's Arguments

The complaint against Rowanmoor was upheld at both investigator and provisional ombudsman level.  Rowanmoor argued in response that:

1. The investment in TRG was not particularly high risk as it was a bricks and mortar investment asset.  The investment had not itself failed and it was a tradeable investment with a potential future income.
2. The Court of Appeal in Adams v Options UK Personal Pensions (Adams v Options) agreed with the High Court that the contractual relationship between the SIPP provider and member is materially determinative of the respective obligations of each party.  Further, COBS 2.1.1R (the duty to act honestly, fairly and professionally) overlaps with Principles 2, 3 and 6 of the FCA Handbook and the Principles should be applied consistently with COBS.  The Principles should not be interpreted in isolation; the contractual documents create the relevant context in which the Principles inform the due diligence obligations.  Relying on the Principles to distinguish Adams v Options imposes a wider and more onerous due diligence duty on Rowanmoor than exists in the contractual arrangements, but also wider than would have existed had Mr T not had a financial adviser.
3. Rowanmoor had sought confirmation from Mr T that he had received advice. 
4. Rowanmoor also sought assurance from CIB and CIB provided a verbal assurance to Rowanmoor that CIB was providing clients with advice on the suitability of investments held within their SIPPs.  It was unreasonable to have expected Rowanmoor to have reviewed the suitability reports of CIB.  It was not accepted that the introductions received from CIB should have been seen as anomalous given that, for example, it was common for only a narrow selection of advisers and administrators to be associated with capacity limited investment opportunities such as TRG. There was also nothing in the management information to cause concern to Rowanmoor.  CIB was a regulated adviser and TRG a demonstrably legitimate investment, there was nothing about the nature nor volume of the SIPP business that should have alerted Rowanmoor to the potential for consumer detriment having regard to Rowanmoor's obligations as SIPP provider. 
5. The FSCS had found failures with CIB's advice process and that is why it had paid out compensation to Mr T for CIB's involvement.

The Decision

As is usual with FOS decisions involving complaints against SIPP providers, a large part of the decision is dedicated to quotes from the various FSA/FCA publications (2009 and 2012 thematic review reports, October 2013 SIPP operator guidance, July 2014 Dear CEO letter and the FCA's alert in 2013 "advising on pension transfers with a view to investing pension monies into unregulated products through a SIPP") relating to SIPP provider obligations.  FOS concludes from these various publications that: "... [the publications] provide a reminder that the Principles for Businesses apply and are an indication of the kinds of things a SIPP operator might do to ensure it is treating its customers fairly and produce the outcomes envisaged by the Principles.  In that respect, the publications which set out the regulator's expectations of what SIPP operators should be doing also goes some way to indicate what I consider amounts to good industry practice at the time, and I am therefore satisfied it is appropriate, to take them in to account... whilst the regulators' comments suggest some industry participants' understanding of how the standards shaped what was expected of SIPP operators changed over time, it is clear the standards themselves had not changed".

Having cited Principles 2 (a firm must conduct itself with skill, care and diligence), 3 (a firm must take reasonable care to organise and control its affairs responsibly and effectively with adequate risk management systems) and 6 (a firm must pay due regard to the interest of its clients and treat them fairly), FOS' decision sets out the test applied when considering the complaint, namely: whether Rowanmoor complied with its regulatory obligations as set out in the Principles and in doing so considering (1) whether Rowanmoor ought to have, in compliance with its regulatory obligations, identified that customers introduced by CIB were not receiving regulated advice about TRG and that there was a significant risk of consumer detriment and if so (2) whether Rowanmoor should therefore not have accepted the customer's application from CIB.

The decision then considers Rowanmoor's various arguments with respect to the application of the Court of Appeal decision in Adams v Options, including Rowanmoor's submission that, broadly, the contract between Mr T and Rowanmoor must be considered first to assess the due diligence obligations' of Rowanmoor and further that the Principles should not be used to extend the due diligence obligations further than what the Court decided were those duties, based on the contract.  FOS disagreed with Rowanmoor's arguments on the application of Adams v Options finding that the facts were "very different" including that the breaches in Adams v Options were with respect to breaches that occurred after the contract was entered into; whereas Mr T's complaint considered what Rowanmoor ought to have identified from CIB's introductions and if Rowanmoor should have ceased to accept business from CIB (so although not saying expressly, this considered Rowanmoor's obligations before the contract between Mr T and Rowanmoor was entered into).  Further, Adams v Options did not consider the application of the Principles and FOS is required to consider the Principles when reaching its decisions.

In upholding the complaint against Rowanmoor, FOS concluded that:

1. There was a lack of due diligence into CIB and its business model
2. Rowanmoor should have identified the large volumes of high risk investments introduced by CIB as anomalous
3. There was a failure to check Mr T had been fully advised and to request a suitability report
4. It was unreasonable to rely on the assurances provided by CIB that it was providing advice on the underlying SIPP investment when the issue was first raised in 2009

Broadly, FOS considered that there were enough red flags available to Rowanmoor based on both what it had been told and what would have been available to Rowanmoor had it conducted adequate due diligence.  In particular:

• CIB departed from its advice model as explained to Rowanmoor and it was not reasonable for Rowanmoor to rely on verbal assurances from CIB.  Instead Rowanmoor ought to have called in to question the motivations of CIB and the assurance provided should have been documented in writing.  Further, the fact that CIB also asked if Rowanmoor would accept execution-only business in the same call "undermines the credibility of the assurance given by CIB and ought to have flagged to Rowanmoor the likelihood that some of the customers introduced by CIB were not receiving regulated advice about TRG – and that there was therefore a significant risk of consumer detriment".
• CIB was a small IFA firm; Rowanmoor should have questioned how CIB could conclude a high volume of introductions for high risk investments.  CIB had 10 advisers and Mr T was based in Northern Ireland with CIB based in Kent.  Further, despite CIB's small size Rowanmoor knew from the outset of the relationship that CIB intended to refer a high volume of business.
• Rowanmoor was also aware of the involvement of unregulated parties in promoting TRG.
• Rowanmoor was on notice that CIB was not a firm "doing things in a conventional way.  It had been introducing execution only business for high risk investments in significant volumes and appeared to be keen to still do this."
• CIB had altered some application forms despite being warned not to do this.
• There had been misleading statements in the promotional material for TRG referring to Rowanmoor.

FOS also says in its decision that it was not enough for Rowanmoor to have checked CIB's regulatory permissions when it came to due dilligence on CIB: "People and organisations should feel reassured that, when dealing with regulated advice firms, those firms are operating in line with the regulatory rules. But it doesn’t follow that that faith can be blind and nothing further needs to be checked – especially if there are warning signs that things are not as they should be with the advice firm."  Although FOS agreed that in principle Rowanmoor was entitled to place some reliance on what it was being told by CIB and a discussion with CIB was "a reasonable starting point"; what Rowanmoor were told was "not particularly reassuring".

When it came to setting out what further due diligence, in FOS' eyes, Rowanmoor should have conducted, the FOS said that given the assurance provided by CIB in 2009 could not be trusted at face value it should have contacted customers to check the position and reviewed suitability letters.  Rowanmoor should also have conducted wider enquiries with respect to CIB's business model, including checking with CIB how it came into contact with potential customers, what its arrangements with TRG were, whether anyone else was providing information to customers and what marketing information was being provided to customers.  The decision concludes that had Rowanmoor checked the position "with at least some customers" introduced by CIB it would have revealed "significant failings in the advice process".  FOS also concludes that it would have been good practice to have had a written agreement with CIB in place governing the relationship and clarifying the respective responsibilities. 

FOS' decision expressly says that rejecting the application to open the SIPP is not the same thing as advising on the merits of investing and/or transferring to the SIPP.  COBS and the Principles provide an independent framework and so "… [FOS] remain of the view that it's not possible to say conduct that does not amount to a breach of COBS automatically means the Principles have been satisfied or that the conduct amounts to good industry practice at the relevant time…".  FOS also rejected any suggestion that the FSCS payment for CIB's conduct should be taken in to account or that Mr T should carry any responsibility for his own investment decisions.

The decision does not comment on the due diligence conducted on TRG at any length on the basis that FOS had already decided to uphold the complaint based on the red flags with CIB.

FOS and SIPPs

So where does the Rowanmoor decision leave SIPP providers when it comes to FOS complaints?

It was arguably already widely accepted before the decision in Rowanmoor that FOS expects due diligence to have been conducted by SIPP providers on the introducer/adviser and the SIPP investment.  Further, due diligence should also be conducted on an ongoing basis on the investment and introducer/adviser.  The Berkeley Burke judicial review had already set out FOS' views on due diligence when it came to the SIPP investment – namely to identify an investment as high risk, speculative and non-standard, to consider the appropriateness of the investment for the pension scheme, to ensure that the investment is genuine and not a scam or linked to fraudulent activity, to independently verify the investment as genuine, not a scam or linked to fraudulent activity, ensure that the investment could be independently valued both at point of purchase and subsequently and ensure that the SIPP does not become a vehicle for a high-risk and speculative investment that wasn't a secure asset and could be scam.  

FOS had also consistently found that the various FSA/FCA publications set out the regulatory obligations and that these publications merely reiterated what was understood to be the obligations of SIPP providers – it did not set out new obligations it merely repeated the obligations that were already there.

So a lot of the Rowanmoor decision covers old ground; what is arguably new is FOS' view on the extent of SIPP provider ongoing due diligence, what that means for advised business and what checks should have been undertaken based on the available red flags.  Further, the decision also sets out FOS' position on the interaction of its jurisdiction with the findings in Adams v Options and specifically addresses the findings in Adams v Options on COBS 2.1.1R.  Broadly, FOS found that Rowanmoor in 2009 knew enough to have warranted further investigation in to what CIB was doing and it was not enough to rely on a verbal assurance from CIB that it was advising on the underlying investments given what Rowanmoor knew.  Further, Rowanmoor could not rely on Adams v Options as its obligation to Mr T to have rejected his SIPP application existed before he opened a SIPP with Rowanmoor.  Further, despite the findings in Adams v Options on COBS 2.1.1R, FOS' jurisdiction extends to the Principles which FOS is duty bound to consider.

On the one hand, it could be said that FOS' finding that Rowanmoor should have done more in 2009 is fact specific.  It turns on what Rowanmoor knew in 2009 – that CIB was operating an execution only model – and FOS' view that despite the assurance provided by CIB, Rowanmoor should have done more to have investigated the position further.  If limited to this finding, the decision's impact might be quite limited.  

However, if the decision is reviewed as creating obligations on SIPP providers before the SIPP provider even has a contractual relationship with a customer, that does appear to stretch the position and how far does that duty go?  Further, saying that Rowanmoor could not rely on what it was told by another regulated firm again arguably takes things further and raises the question when can a regulated firm rely on what it is told by another regulated firm?  Also, why is rejecting an investment not advice on that investment – saying "no" to an investment appears to look like advice as it specifically rejects that form of investment.

Further, the decision does not answer a number of questions – first, what about business transacted before mid-2009 i.e. before CIB's execution only model was reported internally at Rowanmoor? Second, what if Rowanmoor had not identified the concerns over the execution only model, it would appear to be in a better position than having identified the problem and subsequently engaging with CIB to seek assurances on the position? 

What now for complaints against SIPP providers at FOS?

Looking at FOS' approach to SIPP complaints, you would be forgiven for thinking that FOS wants SIPP providers to act as a backstop for financial advice (or "consumer detriment" in FOS' words) – checking that IFAs are doing the right thing.  In the Rowanmoor decision what FOS appears to want SIPP providers to do is check that the IFA advises on the underlying investment, but given it is also FOS' view that IFAs cannot advise on a pension transfer without advising on the underlying investments, why should SIPP providers police a position that FOS says should not happen anyway? Further, why should SIPP providers have to meet the redress for the decision to transfer out of the final salary pension scheme, when it is clear that the SIPP provider had nothing to do with the decision to transfer and that could only be the fault of CIB for which the FSCS has already found CIB's advice wanting – why does FOS ignore the law in the form of the Civil Liability (Contribution) Act 1978 in circumstances where another party has already been found at fault? 

As already noted, the FOS decision could perhaps be limited to its facts and here the "red flags" it is said Rowanmoor knew about or should have found out about.  However, on the other hand the decision arguably increases the obligations on SIPP providers (at least before FOS), extending ongoing due diligence obligations and putting SIPP providers at the regulatory forefront for policing regulated financial advice; advice the SIPP provider has no permissions to give in the first place.  Where FOS' pursuit of SIPP providers stops is perhaps the biggest question of all – but surely it cannot go much further.