The Financial Services Compensation Scheme (FSCS) is facing a number of claims in relation to a self-invested personal pension (SIPP) provider that was found to have failed in its due-diligence of an unregulated introducer.
Brooklands Trustees was held liable by the Financial Ombudsman Service (FOS) for losses totalling £1.6m from clients who had invested their pensions in an unregulated product, which later collapsed, through the company’s SIPP.
The clients had been referred to Brooklands by FCP Insurance Consultants, which was not authorised to advise on pension or investment business at home or abroad. They invested in the LM Managed Performance fund (LMMP), an Australian property fund that collapsed in 2013.
Brooklands Trustees went into administration in July having arranged a ‘pre-pack’ sale of its SIPP book to Heritage Pensions for £425,000. At the time, Brooklands SIPP had 5,500 members and funds under management of £650m and only took business from advisers who had signed an introducer agreement.
Administrators’ documents sent to investors in July revealed Brooklands had received 20 claims through the FOS totalling £1.6m.
FCP had no authorisation to provide pension-related advice in the UK. It had been authorised in Cyprus for insurance business and had a passport allowing it to service UK clients of four big insurers. From November 2013 it was not authorised in the UK at all.
In the rulings, which are still at the ‘provisional’ stage, the FOS said Brooklands had failed to detect FCP was unauthorised to carry out pension business in the UK and as such was liable for the losses. The firm could have prevented the bad investments had it not failed in its due-diligence, it added.
Brooklands still disputes its liability for the losses, saying it had acted promptly when it detected FCP was referring UK clients.
The cases are currently on their way to the FSCS due to Brooklands’ insolvency earlier this year, meaning the complaints process has been suspended. As soon as the FSCS has received the claims it will determine whether they are eligible, it said.
This includes checking whether the company has in fact defaulted and is unable to pay compensation itself. According to the administrator documents, Brooklands’ professional indemnity insurer did not agree to cover the claims because it had not been notified of them in time.
The FSCS pays out a maximum of £50,000 per investment claim, meaning at most it would pay out £1m to the 20 investors, leaving many of them short of funds.
Warning sign
Brooklands and FCP signed an introducer agreement in December 2009. FCP started to approach UK consumers for pension transfers to the SIPP shortly after.
One of the claimants told Professional Adviser she had been introduced to the investment by her adviser, FCP’s Glenn Houghton in late 2011.
Rachel Papworth opened her SIPP in January 2012 and Brooklands transferred £50,000 into the LMMP fund in March for which FCP received 9% up-front commission from the fund.
Shortly after, the introducer agreement between Brooklands and FCP came to a halt when the SIPP firm detected FCP was not authorised to carry out pension transfers in the UK.
In response, FCP agreed a ‘piggyback’ deal with UK-regulated firm Universal Wealth Management (UWM) in late 2012, through which it introduced further deals.
The FOS adjudicator said Brooklands had failed in its duty to treat customers fairly and “should have put in place risk management systems that would have flagged potential instances of unsuitable or poor advice”.
FCP had already been fined by the Cypriot regulator for carrying out business without authorisation prior to Papworth’s investment, which should have given it a warning sign, it said.
Further alarm bells included excessive initial commission, the domicile and permissions of FCP and the high volumes of very similar business introduced by one firm over a short period of time, the FOS said.
Brooklands said it had nothing to do with providing the advice and should not be held accountable for dealing with unregulated introducers, which it said was accepted industry practice.
But the FOS said: “If adequate controls had been in place, Brooklands would have been aware that FCP was acting outside the scope of its permissions and would have identified the anomalous features of Ms P’s proposed investment. Brooklands would then have been able to alert Ms P to this. Had Ms P been alerted, she would not have proceeded with the investment.
“FCP was responsible for initiating the course of action that led to Ms P’s eventual loss, but Brooklands had the opportunity and obligation to put a stop to it. Ms P’s loss only occurred when the SIPP and the LMMP fund investment were arranged. Brooklands should therefore pay redress to Ms P.”
‘Good chance’ of success
Papworth said she had been “given the run-around” by both the regulator and the SIPP firm, with neither accepting her claim as valid.
The regulator said it could not help because she had dealt with an unregulated adviser and bought an unregulated product.
It later told Brooklands to send letters to the claimants referring them to UWM, which was authorised and could be held liable. UWM and FCP had not partnered up until after Papworth’s investment was made, however.
Dentons Pensions director of technical services Martin Tilley said the case had a good chance of being cleared because it did not focus solely on the investment and its failure, which under regulation at the time would have not been the SIPP provider’s responsibility.
As such it was different to the Berkeley Burke case of June 2014, in which the FOS decided the SIPP provider had failed to ensure the investment was suitable, when client Mr A invested his entire pension fund in a high-risk, unregulated scheme selling bio-fuel investment products in South East Asia.
The case ‘disappeared’ after Berkeley Burke launched a judicial review of the decision although another similar case against Berkeley Burke is currently with the FOS awaiting a decision.
Tilley said: “[In this case] the failure of the investment on its own is not the issue. Had it been a client coming to the SIPP provider directly and individually, then the claim would have been unlikely to have been successful as it is well established that SIPPs, at the time of the investment, did not have the obligations they do now.
“The chain of events is the acceptance by the SIPP provider of the introducer strategy which led to the investment being possible, which has led back to whether the SIPP provider was complying with its obligations under its regulation at the time.
“The FOS has determined it was not and was therefore complicit in the process of the investment being made.”
Tilley said it was unlikely the case would trigger an avalanche of similar cases if successful. “The circumstances of this particular case are specific and, while not unique, are not common and unlikely to be widespread,” he explained.
“It may have implications for a few SIPP providers who permitted similar processes for substantial business and, again, depending on individual circumstances of client acceptance. Whether this could be broadened out to other investments that have failed would depend not on the investment itself but the processes and source from which the client was accepted.”
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