The Fallout from the Berkeley Burke Decision
In 2011, the world was still reeling from the biggest financial crash since 1929 - Bank of England interest rates were in their second year of a then record low of 0.5% and worthwhile investments were hard to come by.
Wayne Charlton, a gardener, had a modest pension pot of £24,000 that he sought to invest. An opportunity presented itself to Mr Charlton through an investment via Sustainable AgroEnergy PLC in leased land in Cambodia used for the production of biofuel from jafrota trees. He wished to hold his investment in a self-invested personal pension (SIPP) and was introduced to Berkeley Burke by a company called Big Pennle Limited.
Wayne Charlton wasn’t the only one who was enamoured with this scheme. In-fact, 616 investors invested around £12.2million in Sustainable AgroEnergy via Berkeley Burke SIPPs. These SIPPs were ‘execution only’ meaning that Berkeley Burke was under no contractual obligation to offer advice as to the underlying investment and it’s entirely up to the individual as to what investments form the assets in her or his pension pot.
With almost crushing inevitability, the AgroEnergy investment was shown to be scam and following a Serious Fraud Office investigation, three of its directors were sent to prison for fraud and the company was wound up.
Wayne Charlton lost his £24,000 investment. So, in 2014 he complained to the Financial Ombudsman Service about the conduct of Berkeley Burke, in particular that they should have done due diligence on the scheme, and sought reimbursement of his funds.
The Ombudsman duly found in favour of Wayne Charlton stating that he was acting within his statutory jurisdiction to ‘determine by reference to what is… fair and reasonable in all the circumstances of the case.’
Berkeley Burke duly challenged this decision.
In theory, the prevailing wind was with Berkeley Burke. It was widely understood in the SIPP industry and on the interpretation of the relevant regulations that the only obligation on a provider when dealing with an execution only SIPP was to comply with HMRC guidelines.
They argued that the Ombudsman was creating, or had created, a new duty to carry out due diligence and to give advice on underlying investments where none had existed before and where carrying out that due diligence would effectively mean the provider having to take decisions in respect of the veracity of investment schemes. They submitted that similar previous complaints to the Ombudsman had not found a similar duty.
They had a letter signed by Wayne Charlton that acknowledged the investment was ‘High Risk and/or Speculative, may be illiquid…’ where Mr Charlton acknowledged he had been ‘… recommended to seek professional advice from a suitably authorised adviser…’ and that Mr Charlton was ‘fully aware’ that Berkeley Burke had ‘… not provided any advice whatsoever in respect of this investment or the SIPP.’
Berkeley Burke argued that the Ombudsman had erred in law and had created a new and unexpected obligation on SIPP providers. Unfortunately for Berkeley Burke (and now potentially many other SIPP providers), they had not anticipated the winds of regulatory change. As many industries are all too aware of these days, regulatory frameworks are no longer set up to provide detailed rules to be slavishly followed but are increasingly ‘outcomes focused’ where the regulatory framework is sufficiently wide to allow the regulators broad interpretation to achieve a desired outcome.
In a country with an ageing population and insufficient pension provision, a desired outcome is to ensure that people do not invest their pension pots in fraudulent schemes. And where you have a fraudulent company, an unsophisticated investor and an unregulated advisor, the music stops with the only one the regulators are able to enforce against.
So, the court disagreed with Berkeley Burke stating that the Ombudsman was merely applying rules and principles that have been in place since 2007 in particular the regulatory principles (PRIN2.1.1R): 2.
A firm must conduct its business with due skill, care and diligence; and 6.
A firm must pay due regard to the interests of its customers and treat them fairly.
Following the decision the FCA sent a ‘Dear CEO letter’ to SIPP providers clarifying the decision for SIPP providers and advising them to consider the impact of the decision on their ability to meet their financial obligations.
- The reaction from the SIPP market to the Berkeley Burke decision has been mixed with responses ranging from those providers who are confident that their prudent management, due diligence and refusal of high risk schemes means that the decision will not impact them (and indeed many see it as an opportunity to pick up clients who are jittery about their existing provider), to those with tales of, let’s say, ‘unique’ investments and schemes that have been accepted. The many mergers and acquisitions in the industry over the years (remember the regulatory framework has been in place since 2007) may mean that some providers will have to take detailed stock of what’s exactly on their books.
- If you Google ‘Berkeley Burke’ (at the time of writing) the first three entries are for legal firms advertising for potential claimants to make claims against Berkeley Burke. The company’s website itself is now the third non-advertised hit, the first two being reporting on the case. It’s fair to surmise that other law firms will also be seeking to be instructed by claimant investors who’ve suffered loss in high-risk investment schemes.
- The FCA letter to CEOs of SIPP providers would seem to be an indication of financial trouble ahead although at this point no companies seem to be suffering issues.
- The impact on the market itself will likely mean that providers will be far more careful regarding the types of investments they’ll allow to be wrapped in a SIPP; rather than do due diligence on potentially risky investments the providers will likely just reject them out of hand. This will, no doubt, lead to a contraction of the industry and maybe an end to execution only SIPPs.
And there’s still more to come: we’re still awaiting the decision in Carey Pensions case which will be decided on similar facts and no doubt there will be more revelations to follow.
Ultimately, if the application of the regulations works as is presumably intended by the Ombudsman and the courts, we’ll see fewer people losing their pension pots in fraudulent or high risk schemes.
After all, it is those who are most vulnerable to such loss who are most often taken in by the promises of high-risk investments - and, ultimately, stopping that can only be a good thing.