Court of Appeal ruling in Adams v Options provides limited clarity on client’s best interests rule

In April, the Court of Appeal handed down its judgment in Adams v Options UK, with the claimant partially successful in appealing the High Court decision from May 2020. While the long-running case has been closely followed within the SIPP market, it has some interesting cross-cutting implications for financial services more generally – not least in respect of interpreting the FCA’s client’s best interest rule and FSMA rules around agreements made through unauthorised persons. 

In 2012, the claimant was contacted by an unregulated Spanish-based introducer, with a view to investing in Store First (a provider of leasehold storage pods) via a self-invested personal pension (SIPP) provided by FCA-regulated Carey (now known as Options). The claimant then transferred funds from his personal pension to the SIPP, which was established on an execution only basis. The esoteric investment performed poorly, ultimately leading the claimant to seek damages and unwind his SIPP contract.

The contract or COBS? The client’s best interests rule

The original High Court claim was brought on several grounds, including breach of COBS 2.1.1R – the FCA rule for firms to act honestly, fairly and professionally in accordance with the best interests of its client:

• the alleged breaches of the rule rejected by the High Court included (1) that establishing the SIPP was “manifestly unsuitable” in view of the small transfer value (as against the costs to set up and operate the SIPP), and (2) administering the SIPP in reference to an investment that was “manifestly unsuitable” for the claimant as a pension fund investment (e.g. in view of liquidity and market / valuation risk);
  
  
• on appeal, the claimant alleged breaches of the same rule on the basis that it gave rise, variously, to a product due diligence duty, an intermediary due diligence duty, a non-allowable investments duty, a non-standard investments duty, a proper custody duty, a valuation duty and a financial crime duty.

Somewhat frustratingly, while the FCA had suggested that COBS 2.1.1R could – in principle – include duties approximate to some of those set out above, the Court of Appeal stopped short of commenting on the implications of the COBS rule (which the FCA had requested). Instead, the Court suggested that these implications would be better addressed in a case where such issues are “live”.

What the decision does mean, however is that the High Court ruling remains a key authority on the application of COBS 2.1.1R. There, the alleged breaches (see above) were dismissed largely as the contractual agreement was clearly entered into on an execution only basis and, so far as the rule is concerned, it was not shown that the regulatory regime is intended to take precedence over the contractual terms. Put another way, COBS must be viewed in the broader context of the contract between provider and customer.

s. 27 success and a Supreme Court appeal?

The Court of Appeal did, however, overturn the High Court's dismissal of the novel claim under s. 27 of FSMA – which covers agreements made through unauthorised persons. Put simply, s. 27 applies to agreements made by an authorised person in consequence of a third party’s breach of the general prohibition (i.e. the rule in FSMA that no person may carry on a regulated activity in the UK unless they are authorised or exempt). It allows a successful claimant to recover (1) money or other property paid or transferred under the agreement; and (2) compensation for loss.

Here, the Court of Appeal found that both the regulated activities of arranging deals in investments (art. 25) and advising on investments (art. 53) of the Regulated Activities Order (RAO) had been triggered, i.e. the SIPP had been entered into as a result of the unauthorised introducer's breaches of the general prohibition. For example, in procuring a letter of authority in relation to AML requirements and completing sections of the product application form, the introducer had undertaken arrangements that brought about the transfer.

The Court of Appeal further rejected a request by Options to exercise its discretion (under s. 28 of FSMA) to enforce the SIPP contract in any event. Discretion was refused for several reasons – in particular, that “a key aim of FSMA is consumer protection [and] while consumers can to an extent be expected to bear responsibility for their own decisions, there is a need for regulation, among other things to safeguard consumers from their own folly.” 

The Court of Appeal ruling may not, however, be the end of the story. At the end of April, Options confirmed that it is seeking permission from the Supreme Court to appeal the judgement, on the basis that the Court of Appeal has “erred in law” and that – beyond its direct impact on the SIPP market – the decision has broader implications across the financial services industry.