Options UK Personal Pensions LLP v Financial Ombudsman Service Limited

This dispute began with a pension transfer into a self-invested personal pension, or SIPP. Carey, now Options UK Personal Pensions LLP, ran a regulated SIPP business on an execution-only basis. It said it would process applications and investment instructions, but would not advise customers on whether a SIPP or a particular investment was right for them.

Mr Simon Fletcher was introduced to Carey by CL&P, an unregulated company incorporated in Spain. Mr Fletcher said CL&P cold-called him and encouraged him to transfer his pension into a Carey SIPP and invest in Store First "Store Pods". He said he was told the returns were guaranteed and the risk was low.

Mr Fletcher signed Carey paperwork saying he understood the arrangement was execution-only and that Carey was not giving advice. He also signed a declaration saying the Store First investment was high risk or speculative and an indemnity in Carey’s favour. His pension monies were transferred and the investment was completed in late 2011.

The investment later failed and Mr Fletcher lost the whole pension fund. He complained to Carey and then to the Financial Ombudsman Service. The Ombudsman upheld the complaint and decided Carey should compensate him. Carey then brought judicial review proceedings to try to quash that Ombudsman decision.

Carey challenged the Ombudsman’s decision on three main grounds. First, it said that if the Ombudsman was going to award compensation in circumstances where a court would not or could not do so, he had to say that clearly and explain why. Secondly, it said the Ombudsman had wrongly found duties to carry out due diligence on the introducer and the investment, even though Carey was not an adviser and the arrangement was execution-only. Thirdly, it said the Ombudsman’s conclusions were unreasonable.

The court therefore had to decide how far the Ombudsman can go when deciding what is fair and reasonable in a complaint against a regulated firm. In particular, it had to consider whether the Ombudsman could rely on FCA Principles, guidance and industry practice when looking at conduct before the customer contract was formed.

The Court of Appeal dismissed Carey’s judicial review claim. It held that the Ombudsman had given adequate reasons and was entitled to decide the complaint by reference to what was fair and reasonable in all the circumstances. In doing that, the Ombudsman could take account of relevant law and regulations, regulator rules, guidance, standards, codes of practice and, where appropriate, good industry practice.

The court rejected the argument that the Ombudsman had to use a rigid formula by first setting out every possible legal and contractual duty and then expressly identifying each point of departure. It was enough that the Ombudsman made clear why the execution-only contract did not end the matter and why he was focusing on regulatory responsibilities arising before the contract was entered into.

The court also rejected the idea that the Ombudsman had invented a wholly new obligation. It noted that Carey itself was carrying out pre-contract due diligence, although haphazardly, and its own documents were geared to that process. Its non-regulated introducer profile said due diligence on unregulated introducers was required as best practice. Its contractual documents also said it could refuse applications and refuse to complete investments.

The court accepted that there can be circumstances in which a SIPP provider should refuse to accept an application for membership or an investment instruction. It also accepted that the nature of the later contractual relationship, whether execution-only or otherwise, cannot determine the firm’s regulatory obligations before the contract is formed.

The Ombudsman’s central finding was that Carey had failed to conduct sufficient due diligence on CL&P before accepting business from it. The Court of Appeal held that there was nothing irrational about that conclusion.

The Ombudsman said Carey should have carried out company checks on CL&P, reviewed its accounts and checked warning or sanctions-style lists in line with its own standards. He also said Carey ought to have known that the FCA kept alerts relating to unregulated businesses, often based overseas, and should have checked that list before proceeding.

Importantly, the Ombudsman found that Carey should have undertaken sufficient enquiries to understand who CL&P’s directors were and should have checked the FCA warning list as part of its due diligence. If it had done so before accepting business from CL&P, it would have discovered that CL&P director Terence Wright was on the warning list.

The Ombudsman treated that warning as a clear alert which should have led Carey to conclude that it should not do business with CL&P. He also considered it fair and reasonable to conclude that if Carey had requested CL&P’s accounts at the outset and CL&P had failed to provide them, that would have been a red flag and Carey would be unlikely to have accepted introductions from CL&P at all.

Carey argued that it had used the World Check database and that Mr Wright would not have appeared there at the relevant time. The court said that did not help. The Ombudsman was entitled to conclude that Carey should have checked the FCA site itself rather than rely only on World Check.

The Ombudsman also concluded that Carey should not have accepted Mr Fletcher’s application to invest in Store First. The Court of Appeal upheld the Ombudsman’s ability to take that view as part of the fair-and-reasonable assessment.

This did not mean Carey had to advise Mr Fletcher on suitability. The court was clear that Carey was not authorised to do that. The point was different. The Ombudsman was entitled to ask whether this type of investment should have been accepted at all in the light of all the circumstances, including the nature of the introducer.

The judgment records that Carey had obtained a report on Store First. That report said the investment would be unregulated and suggested a high risk or illiquid disclaimer.

The Ombudsman also referred to FCA material indicating the kinds of practical steps a SIPP operator might take in relation to investment due diligence, such as understanding the nature of the investment, checking that it is genuine and not linked to scams or fraud, ensuring arrangements are safe and enforceable, and ensuring third-party due diligence is independently produced and verified.

The court accepted that the Ombudsman could use those materials as part of the fair-and-reasonable analysis. It also rejected the argument that this approach conflicted with the execution-only model or best execution rules. The due diligence question came first. It was about whether the investment should have been accepted in the first place.

Several documents and actions mattered in the court’s reasoning. Carey’s own non-regulated introducer profile said due diligence on unregulated introducers was required as best practice. That made it harder for Carey to argue that the Ombudsman had imposed a novel requirement.

Carey’s terms and conditions also mattered. They said Carey was not giving advice, but they also said investments were made at Carey’s discretion and that no investment could be completed until its approval had been granted. The documents also allowed Carey to refuse to secure, cash in or dispose of an investment in certain circumstances. Those terms supported the idea that Carey had a gatekeeping role.

The court also noted that Carey had in fact been conducting pre-contract due diligence, although not consistently. That practical reality undermined the argument that there was no such responsibility at all. The issue was not whether Carey had zero role before contract. The issue was whether the Ombudsman was entitled to conclude that Carey had not done enough.

Carey also relied on its dealings with the FCA in 2011 and argued that the regulator knew what it was doing. The court said those points did not make the Ombudsman’s conclusion irrational. At best, the responses and records were ambiguous and did not prevent the Ombudsman reaching the view he did.

This case is most useful for FCA-regulated firms, especially those using execution-only models, introducer networks or higher-risk investments. It does not say every execution-only firm must become an adviser. It says that complaint risk may turn on gatekeeping decisions made before the contract starts.

The practical message is that disclaimers, indemnities and customer declarations are only part of the picture. If your firm has to decide whether to accept a customer, an introducer or an investment, the Ombudsman may later ask whether that decision was fair and reasonable in light of the regulatory framework and the warning signs available at the time.

That means your records matter. A strong file will usually show who was checked, what sources were checked, what was found, what follow-up was requested, what concerns were raised, who approved the relationship, and why the business decided to proceed or refuse. If the file only shows signed disclaimers and no real due diligence trail, this case shows the risk of that approach.

The Court of Appeal handed down judgment on 20 May 2024. It dismissed the judicial review claim and left the Ombudsman’s compensation decision in place. The appeal arose from a decision of Bourne J dated 21 December 2022, after permission issues were dealt with and the claim was retained in the Court of Appeal.

The judgment also discusses earlier Adams litigation for contrast. The court accepted that the Ombudsman was entitled to distinguish that litigation because this complaint focused on pre-contract due diligence and the Ombudsman’s fair-and-reasonable jurisdiction, rather than only on the contractual position after the customer relationship had already been formed.