Section 27 claims

FSCS’S APPROACH TO SECTION 27 CLAIMS AGAINST SIPP OPERATORS

This note is intended to provide information to customers on how FSCS will deal with claims made against SIPP Operators under section 27 of the Financial Services and Markets Act 2000 (“FSMA”).  It is correct at the time of publication. FSCS’ approach is under continuing review and we will provide updates in due course in light of further developments.

 

1 FSCS SIPP Operator claims

1.1 In January 2018 FSCS first declared three Self-invested Personal Pension (“SIPP”) Operators in default. Since then FSCS has been receiving and assessing claims and, where eligible under the rules which FSCS must follow, paying compensation to customers in connection with due diligence failures by a number of failed SIPP Operators.

1.2 However, the law in relation to when SIPP Operators may be liable to their clients is still developing, and recently in particular the courts have been considering the circumstances when a SIPP Operator may be liable to its clients for claims made under section 27 of FSMA in a case called Adams v Carey, which later became Adams v Options. Further detail on this case and its impact on FSCS’s approach to claims is set out in part 3 below.

 

2 What is a Section 27 Claim and why is it relevant to FSCS?

2.1 FSCS was established under Part 15 FSMA to provide compensation to clients of authorised financial services firms who are unable, or are likely to be unable, to meet the claims against them themselves. We describe these firms as being “in default”. The Financial Conduct Authority (the “FCA”), the regulator of financial services in the UK, set rules for FSCS.  They are known as the COMP Rules and are contained within the FCA Handbook. The COMP Rules are accessible here: FCA Handbook - FCA Handbook

2.2 Under these rules, FSCS may only pay compensation where the firm in default is a person that was authorised by the FCA to carry on certain regulated activities (such as advising on investments, or making arrangements to bring about an investment). FSCS can only pay compensation to customers where it is satisfied that they have an eligible claim against an authorised person. More about FSCS eligibility is available at www.fscs.org.uk/making-a-claim/claims-process/eligibility-rules/

2.3 People and firms who are not authorised by the FCA are not permitted to carry on regulated activities. This rule is set out in section 19, FSMA and is referred to as the “General Prohibition”. Where a person carries on a regulated activity in breach of the General Prohibition, that person may be committing a criminal offence.

2.4 Authorised firms, such as SIPP Operators, occasionally work with third-parties that are not authorised. Where the unauthorised third-party is not carrying on a regulated activity there will not be a breach of the General Prohibition. Activities the unauthorised third party may carry out could include simply providing information or making an introduction between authorised firms and potential clients. These arrangements have been seen, for example, where a person wishes to transfer their pension into a SIPP and the unauthorised third-party provides them with information and/or introduces them to a SIPP Operator, and this would not breach the General Prohibition.

2.5 However, sometimes the actions of an unauthorised third-party might go further than that if they advise clients and provide a personal recommendation in relation to which SIPP Operator they should transfer their pension to, and/or which investments they should purchase within their SIPP. Alternatively, the unauthorised third-party might arrange the transfer of the client’s pension, or make arrangements to bring about the pension transfer. These are regulated activities and so when performed by an unauthorised third party it would be a breach of the General Prohibition.

2.6 Under section 27, FSMA an agreement which a consumer enters into with an authorised firm ‘in consequence of something said or done’ by an unauthorised third-party ‘in the course of a regulated activity carried on by the [unauthorised] third-party in contravention of the General Prohibition’ is not enforceable against the consumer unless, in the particular circumstances, the court considers that it would be just and equitable to allow the agreement to be enforced.

2.7 This means that where section 27, FSMA applies, the consumer may also be able to bring a claim against the authorised SIPP Operator firm they have entered into an agreement with to: i) recover any money paid or transferred by them under the agreement; and ii) seek compensation for losses they have suffered. This is referred to as a “Section 27 Claim”.

 

3 Section 27 Claims in the Courts – the Adams Case

3.1 In May 2020 the High Court dismissed a Section 27 Claim made against a SIPP Operator on the basis that it was not satisfied that the actions of the unauthorised third-party involved amounted to a breach of the General Prohibition (Adams v Options SIPP UK LLP [2020] EWHC 1229 (Ch)). The High Court also held that even if the unauthorised third-party had acted in breach of the General Prohibition, it would have exercised a discretion available to it under section 28, FSMA to not grant relief in any event.

3.2 However, in April 2021 the Court of Appeal reached a different decision in the same case (Adams v Options UK Personal Pensions LLP [2021] EWCA Civ 474) and upheld the Section 27 Claim. The Court of Appeal decided not to exercise its discretion under section 28, FSMA to not grant relief, despite accepting the fact that the SIPP Operator did not know that the unauthorised third-party had acted in breach of the General Prohibition. This was because, amongst other reasons, the Court of Appeal decided that FSMA imposed the risk of accepting client introductions from an unauthorised third-party imposed on authorised firms.

3.3 An application to the Supreme Court for permission to appeal the Court of Appeal’s decision has been made in the Adams The Supreme Court is the final court of appeal for civil cases in the UK. If the Supreme Court grants permission and decides to hear the case, they will provide the final judgment in this matter.  However, until the Supreme Court has decided whether it will hear the appeal, the law is not sufficiently certain for FSCS to be satisfied that a civil liability is owed by SIPP Operators under the COMP Rules.

 

4 What is FSCS doing about Section 27 Claims?

41. What is clear is that determining that a Section 27 Claim can be established is a complex exercise and depends on the particular facts of each case. For example, a court – or FSCS – would need to consider in each case: i) whether an identifiable unauthorised third-party was involved; ii) whether there is evidence that the third-party acted in breach of the General Prohibition in relation to the particular transaction and, if so; iii) whether the customer entered into an agreement with an authorised firm in consequence of the unauthorised third-party’s actions; and finally iv) whether it is just and equitable for the agreement between the customer and the authorised firm to be enforced in any event.

4.2 FSCS does not consider that it would be fair to delay paying compensation to customers in relation to their investment due diligence claims until it is also able to determine whether a Section 27 Claim is also established.

4.3 Therefore, where FSCS is satisfied that a customer is eligible for compensation for due diligence failures by their SIPP Operator, in connection with the investments purchased via their SIPP, but they might also be eligible for a Section 27 Claim, FSCS will pay compensation to customers on an interim basis. This compensation will be calculated with reference to the loss that customers have suffered (if any) from their failed investments, due to the identified due diligence failures by their SIPP Operator.

4.4 In these cases, FSCS will make it clear in the decision letter whether any compensation offered is on a full and final settlement or interim payment basis because there may be a Section 27 claim for FSCS to consider in future. In addition, where FSCS is unable to value a particular investment which is the subject of a due diligence failure, we may also apply an interim valuation to assess the compensation FSCS will pay in relation to that investment at this time. This will also be explained in the decision letter, where applicable.

4.5 In cases where FSCS cannot be satisfied that a customer is eligible for compensation for due diligence failures, but is aware that there might also be a Section 27 Claim to consider in future, FSCS will place the claim on hold. FSCS will reopen these cases and write to customers once it is able to determine whether or not these customers may be eligible for compensation as a result of a Section 27 Claim.

4.6 For the avoidance of doubt, where a customer’s claim does not involve an unauthorised third-party the question of a Section 27 Claim does not arise. FSCS will therefore continue to assess those claims and make offers of compensation, where it is satisfied eligible claims exist, in full and final settlement and discharge of customers’ entitlement to compensation.

4.7 Once FSCS is able to determine whether or not customers may be eligible for further compensation as a result of a Section 27 Claim, FSCS will write to affected customers to inform them of its final decision on this matter, and ultimately its final decision as to their Section 27 claim.

 

5 Why is FSCS doing this?

5.1 Given that the High Court and the Court of Appeal took opposing approaches to the application of a Section 27 Claim to the same set out facts, and an appeal remains outstanding to the Supreme Court in the same case FSCS does not consider that it would be acting efficiently, effectively, or economically if it were to invest significant resource now in circumstances where the law as it applies to Section 27 Claims is currently unsettled. FSCS also notes that taking this approach mitigates against the risk of compensation being wrongly paid, and therefore FSCS having to consider taking action to recover compensation.

5.2 This approach is consistent with our responsibilities under FSMA to have regard to the need to ensure efficiency and effectiveness in the discharge of its functions.

 

6 What power does FSCS have to make interim payments?

6.1 FSCS’ power to make interim payments on account in these circumstances derives from COMP 11.2.4R. This provides that if FSCS is satisfied that, in principle, compensation is payable in connection with a protected claim, but considers that immediate payment in full would not be prudent because of uncertainty as to the amount of the customer’s overall claim, it may decide to make an interim payment on account.

 

7 When will I know if I am entitled to payment of further compensation?

7.1 FSCS is closely monitoring developments in relation to Section 27 Claims against SIPP Operators, including the progress of the Supreme Court appeal in the Adams As and when FSCS is in a position to update customers about developments it will do so on its website below.

7.2 Once a final decision is issued by the Supreme Court, either by refusing permission to appeal or, if permission is granted, by handing down a final judgment, FSCS will consider that decision and its implications in the context of FSCS’ statutory powers, discretions, and responsibilities.

7.3 FSCS will then write to customers who have received interim payments on account to notify them of FSCS’s final decision as to whether it will make a further payment of compensation to customers who can prove an eligible Section 27 claim, or whether FSCS will treat the interim payment already made as the full and final settlement of their claim(s) against the SIPP Operator. For those customers who were not eligible for an interim payment in respect of due diligence failures, and may only have a Section 27 claim, FSCS will reopen the claim and provide a final decision.

 

8 Who can I contact if I have further queries?

8.1 Should you have any questions upon receiving a decision letter from FSCS making an offer of compensation as an interim payment on account, you should discuss the letter in the first instance with your adviser or representative (if you have one).

8.2 Otherwise, you can contact FSCS’ Customer Contact Centre on the details set out at the top of the decision letter that has been sent to you.