Westerby Private Pension · CAS-58612-P1X1 — Pensions Ombudsman determination

CAS-58612-P1X1

Ombudsman’s Determination Applicant Ms R

Scheme Westerby Private Pension (the Pension)

Respondent Westerby Trustee Services Limited (Westerby)

Outcome

Complaint summary Ms R complained that Westerby did not carry out sufficient due diligence when it allowed her to invest £120,000 in a loan note issued by Renewable Land Resources Limited (RLR). The loan note subsequently defaulted, and she has lost the majority of its value. Ms R also complained that Westerby’s fees were high, as it did not adequately update her on the ongoing situation with the loan note.

Background information, including submissions from the parties The Pension is a Self-Invested Personal Pension (SIPP). Westerby is the Pension’s independent trustee and its operator.

The Pension’s Master Trust Deed and Rules dated 1 October 2008 (the Rules) state the following:

“ Each Member shall be a trustee, jointly with the Scheme Trustee solely for the purpose of the Individual SIPP.”

“3.3.2 - The Scheme Trustee may retain such of the money of the Scheme as it may decide in such bank accounts and, subject to any terms and conditions agreed between the Scheme Administrator or any one or more providers of the administration or other services to the Scheme….and the Member, shall invest or apply the balance of that money as it thinks fit….”

1 CAS-58612-P1X1 “5.3 - The Scheme Trustee, or the Member Fund Trustees as the case may be, shall exercise the powers under clauses 3.3 to 4.2 only in accordance with any directions given by the relevant Member, or any professional individual or body acting with the prior written authorisation of that Member….”

When a member signs the Pension’s Supplemental Deed (the Supplemental Deed), it appoints them as a joint trustee with Westerby. The Supplemental Deed states the following:

“The member confirms that he has been given an opportunity to consider the terms of the Master Deed, the Rules and this Supplemental Deed and agrees to pay such fees to the Establisher and/or the Scheme Trustee and/or the Scheme Administrator and/or any Service Provider, on such basis as may be determined by the Establisher and/or the Scheme Trustee, as may be notified to the Member from time to time and the Member agrees to the deduction of such fees from his Member Fund, including, without limitation, the assets of his Member Fund.”

“In the professed execution of the trusts, powers and discretions under this Supplemental Deed, no death benefit trustee or Member Fund Trustee shall be liable for any loss to the trust fund or to the Member Fund arising by reason of any improper investment made in good faith or negligence or fraud of any agent employed by him….”

Definitions of the terms used in the Rules and the Supplemental Deed are as follows:

• the Member is Ms R;

• the Scheme Trustee is Westerby;

• the Individual SIPP is Ms R’s SIPP;

• the Scheme Administrator is Westerby;

• the Member Fund Trustees are Westerby and Ms R; and

• the Member Fund is Ms R’s account in the Pension.

The Pension’s Key Features document (the Key Features Document) states the following:

“We cannot provide any advice on the suitability of investments and reserve the right to refuse to accept a proposed investment.”

“We would advise you to seek financial advice before making any investment decisions.”

“We are not authorised to give you financial advice.”

“We accept no responsibility for the performance of your chosen investment(s).”

2 CAS-58612-P1X1 “We cannot provide you with investment advice other than to confirm whether the intended investment is in accordance with HMRC regulations.”

“Certain assets such as private company shares or third party loans, are classified as ‘non-standard assets’ and will incur additional costs.”

In July 2014, a “Dear Chief Executive Officer letter” (the CEO Letter) was sent by the Financial Conduct Authority (FCA) to all CEOs of SIPP operators, which specifically referred to the need for due diligence on non-standard investment business to ensure that assets allowed into a pension scheme were appropriate. The CEO Letter highlighted the need for SIPP operators to carry out the following:

• correctly establish and understand the nature of an investment;

• ensure that an investment is genuine and not a scam, or linked to fraudulent activity, money-laundering or pensions liberation;

• ensure that an investment is safe/secure (meaning that custody of assets is through a reputable arrangement, and any contractual agreements are correctly drawn-up and legally enforceable);

• ensure that an investment can be independently valued, both at point of purchase and subsequently; and

• ensure that an investment is not impaired (for example that previous investors have received income if expected, or that any investment providers are credit worthy etc.).

With effect from 13 June 2016, RLR offered the sale of secured loan notes to investors. RLR set out details of the investment in a document entitled “Renewable Land Resources (RLR) Limited” (the 2016 RLR Information Memorandum).

The 2016 RLR Information Memorandum stated the following:

“Reliance on this promotion for the purposes of engaging in any investment activity may expose an individual to significant risk of losing all of the property or other assets involved.”

“This document is exempt from the general restriction in section 21 of the Financial Services and Markets Act 2000 on the communication of invitations or inducements to engage in investment activity on the ground that it is made to ‘investment professionals’…. persons believed on reasonable grounds to be ‘certified high net worth individuals’…. persons who are ‘certified sophisticated investors’…. and persons who are ‘self-certified sophisticated investors’….”

3 CAS-58612-P1X1 “Subscription for loan notes in the Company [RLR] is only suitable for Investors capable of evaluating the risks and merits of such investment and who have sufficient resources to bear any loss which may result from the Investment. A prospective Investor should consider with care whether an investment in the Company is suitable for him in the light of his personal circumstances and the financial resources available to him.”

“Investors may not get back the full amount initially invested.”

The 2016 RLR Information Memorandum also contained the following information:-

• RLR was established to lend money to businesses in the recycling, waste management, power generation and renewable energy sectors. It was offering up to £10m of loan notes, repayable on request in a single payment but no earlier than two years from the date of the investment. It was to pay interest at 8% per annum. The loan notes would be unsecured. RLR would have no other debt immediately prior to the issue of the loan notes and was not expected to require any other debt funding.

• The loan notes were a private offer, the proceeds of which would be used to provide funding to businesses seeking to purchase land, property and other assets. RLR would structure its investments so that it took a charge over each underlying asset of its borrowers. It would require each borrower to demonstrate sufficient income cover to demonstrate that it was able to make repayments. It would lend to borrowers for projects which had planning permission and had achieved financial completion. It would lend to a range of businesses to provide diversification and spread counterparty risk.

• As it was transacting with early-stage businesses, there was no guarantee that the commercial objectives of its borrowers would be achieved allowing repayment of the loans, which would allow RLR to pay interest on the loan notes and eventually redeem the investments.

• The loan notes would not be publicly traded and there would be no market on which to transfer the investments.

• RLR had existing relationships with the following energy and recycling project developers:-

o Earthworm Energy Limited (Earthworm Energy);

o Reliance Energy Limited (Reliance Energy);

o Midlands Planning Services Limited (Midlands); and

o Astwood Infrastructure Limited (Astwood).

4 CAS-58612-P1X1 • Fees were 3% for fundraising, project management and development to be paid to Earthworm Capital LLP (Earthworm Capital), plus up to 5% for adviser’s commission, plus 1.5% per annum for annual servicing and secretarial costs payable to Earthworm Capital, plus 0.5% per annum adviser’s fee.

• A certified high net worth individual was required to sign a statement confirming annual income of £100,000 or more or net assets of £250,000 or more.

• The investments were not covered by the Financial Ombudsman Service (FOS) unless investors received advice from an authorised adviser. Investors would not be able to claim under the Financial Services Compensation Scheme (FSCS) should RLR default.

In September 2016, Westerby carried out the following due diligence on RLR’s loan note:-

• Obtained and reviewed a copy of the 2016 RLR Information Memorandum.

• In respect of RLR:-

o Obtained a copy of its certificate of incorporation, dated 28 June 2016.

o Verified its two appointed officers, Mr R and Mr L, by checking Companies House.

o Confirmed that its annual accounts and confirmation statement were up to date by checking Companies House.

• In respect of Earthworm Energy:-

o Confirmed that its annual accounts and confirmation statement were up to date by checking Companies House. Mr R was one of its directors.

o Obtained copies of its annual accounts for the years ending 30 June 2015 and 2016.

• Obtained a copy of Midlands’ annual return submitted to Companies House, dated 10 January 2016, and annual accounts for the year ending 30 June 2015. Midlands’ accountant was Prime Chartered Accountants, known as Prime Accountants & Business Advisers Limited (Prime Accountants).

• Obtained a copy of Astwood’s certificate of incorporation, dated 17 June 2016, and information from Companies House. Mr L was Astwood’s director and shareholder. R W Blears LLP (R W Blears) was Astwood’s agent when Astwood was registered with Companies House.

• Verified that R W Blears was a recognised law practice by checking with the Law Society.

5 CAS-58612-P1X1 On 22 December 2016, a business loan agreement was signed by RLR and Advica Holdings Limited (Advica). Westerby obtained a copy of the loan agreement.

On 16 February 2017, Ms R completed and signed the following two documents:-

• The Pension’s application form (the Application Form).

o In section 8 – “investment strategy”, she stated that she would be investing in “Alternative investments – loan notes”.

o In section 9 – “taking your pension benefits”, she stated that she intended to draw benefits at age 65. She was currently 46 years old.

o In section 12 – “adviser charges”, she stated that she had received advice from an authorised financial adviser, Signpost Financial Planning (the Adviser).

o In section 14 – “declaration”, it stated the following:

“I agree that I am solely responsible for all decisions relating to investment decisions in connection with my arrangement in the scheme and will hold Westerby Trustees Services Limited fully indemnified against any claim in respect of such decisions.”

• The Pension’s non-standard asset questionnaire (the Questionnaire). The Questionnaire confirmed that non-standard assets may carry a high degree of risk, could be difficult to value and sell and most were not regulated by the FCA and not covered by the FSCS. The following was included or confirmed in the Questionnaire:-

o The statement:

“Westerby will only allow investment in non-standard assets where full advice on the investment has been given by a qualified financial adviser or you would, if asked, be able to satisfy the FCA’s criteria for a high net worth, sophisticated or elective professional client overleaf.”

o A high net worth investor was someone with an annual income of £100,000 or more or net assets of £250,000 or more.

o A sophisticated investor was someone who had sufficient knowledge and experience to understand the risks involved in investing in risk investments including non-standard assets and could accept the risk of losing their entire investment. For example, they could be working or had worked in the last two years in a professional capacity in the private equity sector, or in the provision of finance for small and medium enterprises.

o Ms R stated the following:-

▪ The name of the Adviser.

6 CAS-58612-P1X1 ▪ She had previous employment experience in Enterprise Investment Schemes and loan notes.

▪ Her annual income was more than £150,000, and her total net worth was £1,125,172.

o By signing the declaration, Ms R agreed to the following statements:

“I understand the risk factors involved with non-standard assets and I am comfortable that my attitude to risk is appropriate and I am prepared to suffer a total loss of my investment.”

“I have not received any advice from Westerby with regard my investments and will not hold Westerby responsible should I suffer a financial loss as a result of my investments.”

“I understand that non-standard investments can be difficult to value at any given time and this may have an impact when calculating my pension benefits and overall scheme value.”

“I understand that non-standard investments can take time to sell and accept that I may be locked into an investment for the whole specified term. I accept that this may affect my ability to draw pension benefits from my fund.”

“I understand that non-standard investments are not regulated by the FCA or covered by the FSCS and accept that if something goes wrong I may not be able to claim any compensation or redress.”

“I confirm that I have taken financial advice specific to the investment specified in this questionnaire or that I meet the FCA requirement criteria for a high net worth/sophisticated or elective professional adviser.”

“I elect to be treated as a HIGH NET WORTH/SOPHISTICATED/ELECTIVE PROFESSIONAL INVESTOR….”

On 20 February 2017, Ms R and Westerby signed the Supplemental Deed.

On 2 March 2017, Scottish Widows transferred £135,221.49 to Westerby on behalf of Ms R.

On 7 March 2017, Ms R signed application forms to invest in two loan notes, £60,000 with Reliance Energy (LN) Limited (Reliance) and £60,000 with RLR. Both loan notes paid 8% per annum and had maturities of two years.

On 10 March 2017, Westerby signed the application forms for the two loan notes.

In March 2017, Ms R invested in the two loan notes.

7 CAS-58612-P1X1 With effect from 1 June 2017, RLR offered the sale of a further loan note and preference shares to investors. RLR set out details of the investments in a document entitled “Renewable Land Resources Limited – Information Memorandum” (the 2017 RLR Information Memorandum).

The 2017 RLR Information Memorandum stated the following:-

“Reliance on this promotion for the purposes of engaging in any investment activity may expose an individual to significant risk of losing all of the property or other assets involved.”

“Investing in early stage, unquoted companies is high risk and investors should only invest what they are prepared to lose and should always seek professional advice before doing so.”

The 2017 RLR Information Memorandum also contained the following information:-

• RLR was established to lend money to businesses in the recycling, waste management, power generation and renewable energy sectors. It was offering up to £20m of loan notes, repayable on request in a single payment but no earlier than two years from the date of the investment. It was to pay interest at 8% per annum. The loan notes would be unsecured. RLR would have no other debt immediately prior to the issue of the loan notes and was not expected to require any other debt funding.

• The loan notes were a private offer, the proceeds of which would be used to provide funding to businesses seeking to purchase land, property and other assets. RLR would structure its investments so that it took a charge over each underlying asset of its borrowers. It would require each borrower to demonstrate sufficient income cover to demonstrate that it was able to make repayments. It would lend to borrowers for projects which had planning permission and which had achieved financial completion or where this was not the case, where RLR’s directors were confident that necessary planning permissions would be obtained and financial completion would be achieved. It would lend to a range of businesses to provide diversification and spread counterparty risk.

• There was no guarantee that the commercial objectives of its borrowers would be achieved allowing repayment of the loans, which would allow RLR to pay interest on the loan notes and eventually redeem the investments. Investors may not get back the full amount initially invested.

8 CAS-58612-P1X1 • The loan notes would not be publicly traded and there would be no market on which to transfer the investments.

• RLR had existing relationships with the following energy and recycling project developers:-

o Earthworm Energy;

o Reliance Energy; and

o Astwood.

• Fees were 3% for fundraising, project management and development payable to Earthworm Capital, plus up to 3% for adviser’s commission, plus 0.5% per annum for annual servicing and secretarial costs payable to Earthworm Capital, plus 0.5% per annum adviser’s fee.

• A certified high net worth individual was required to sign a statement confirming annual income of £100,000 or more or net assets of £250,000 or more.

• The investments were not covered by the FOS unless investors received advice from an authorised adviser. Investors would not be able to claim under the FSCS should RLR default.

• It provided biographies of RLR’s two directors, Mr R and Mr L. They both had previous experience in fund raising and working with sustainable assets.

In August 2017, Westerby obtained an investment review report on Reliance Energy (LN) from an independent review company, ‘in:review’.

In April 2018, Westerby carried out the following due diligence on RLR’s loan note:-

• Obtained and reviewed a copy of the 2017 RLR Information Memorandum.

• In respect of RLR:-

o Verified its two appointed officers, Mr R and Mr L, by checking Companies House.

o Confirmed that its annual accounts and confirmation statement were up to date by checking Companies House.

o Obtained a copy of its annual accounts for the year ending 30 June 2017. The accountant was Prime Accountants.

o Conducted verification of RLR’s identity by obtaining a report from an independent company, ‘SmartSearch’.

9 CAS-58612-P1X1 • In respect of Earthworm Capital:-

o Obtained a copy of its annual accounts for the year ending 31 March 2017. The accountant was Prime Accountants.

o Confirmed that its annual accounts and confirmation statement were up to date by checking Companies House.

o Verified its appointed officers, Mr R and Mrs R, by checking Companies House.

o Confirmed that it was an appointed representative of an authorised firm by checking the FCA’s online register.

• Obtained a copy of Reliance Energy’s annual accounts for the year ending 30 April 2017. The accountant was Prime Accountants.

• Obtained a copy of R W Blears’ annual accounts for the year ending 31 March 2017, and its confirmation statement, dated 21 October 2017.

Westerby also carried out due diligence on two of RLR’s borrowers as follows:-

• In respect of Aspen Infrastructure Limited (Aspen):-

o Obtained a copy of its certificate of incorporation, dated 22 August 2017.

o Verified its appointed officer by checking Companies House.

o Confirmed that its annual accounts and confirmation statement were up to date by checking Companies House.

• In respect of EW Cap Limited (EW Cap):-

o Confirmed that its annual accounts and confirmation statement were up to date by checking Companies House.

o Verified its appointed officers, Mr R and Mr L, by checking Companies House.

o Obtained from EW Cap’s website details of a planning application for a power project on property in Wrexham, submitted by Earthworm Energy. The name of the owners of the property was established by checking Land Registry. The planning application decision was granted on 11 March 2016, and change of conditions to the decision were granted to Aspen on 13 February 2018.

On 16 April 2018, a Westerby employee signed a due diligence checklist for RLR’s loan note. The reviewer made the following comments:-

• The 2017 RLR Information Memorandum and the loan note’s application form had been reviewed. The investment opportunity and risks were clearly defined.

• It set out the nature of the investment.

10 CAS-58612-P1X1 • It had obtained independent verification of RLR from ‘SmartSearch’ and carried out a search with Companies House and the internet.

• There was no evidence to suggest a scam, money laundering or pension liberation.

• It confirmed the following:

o the custody of assets was through a reputable arrangement, and any contractual agreements were correctly drawn up and legally enforceable;

o the assets could be independently valued at point of purchase and subsequently;

o it had reviewed the credit worthiness of any investment providers or “Partners”;

o monies were being paid to a legitimate business;

o the independent verification that assets were real and secure or that the investment scheme operated as claimed;

o the investment had not been reviewed by ‘in:review’, an external investment review provider;

o the investment was restricted to high net worth/sophisticated/professional investors; and

o the investment was not covered by FSCS.

• Based on its research, there was nothing that led to concerns that the investment was impaired.

• A random check of Westerby clients investing in existing RLR loan notes showed that interest and repayments had been paid in previous loans.

The RLR Checklist stated the following:

“It is the opinion of due diligence that despite the risks in relation to the unsecured shares/loan notes there is no reason to prevent a client from investing into Renewable Land Resources Limited. A random sample of Westerby Clients shows that previous loan notes interest/capital repayments have been kept up and repaid as expected. The IM [information memorandum] clearly outlines the risks, returns and costs involved with this venture. A random check of one of the opportunities listed on EW Capitals website shows that the planning permission for the project is in place and the land is real.”

On 5 September 2018, Westerby carried out the following actions:-

• Confirmed that Prime Accountants, and R W Blears, were registered by checking the Financial Services Register.

11 CAS-58612-P1X1 • Confirmed legal charges for Prime Accountants by checking Companies House.

• Checked appointed officers of Prime Accountants and R W Blears by checking Companies House.

• Confirmed that Prime Accountants’ annual accounts and confirmation statement were up to date by checking Companies House.

On 18 September 2018, Westerby asked the Adviser due diligence questions about Reliance.

On 5 October 2018, the Adviser replied to the due diligence questions.

In October 2018, the FCA issued another “Dear CEO letter”, highlighting the judgment in the cases of R (Berkeley Burke SIPP Administration Limited) v. Financial Ombudsman Service Limited1, and drew SIPP operators’ attention to their due diligence obligations when accepting customers’ investments, with reference to the Principles and other rules in the FCA Handbook. The FCA pointed out that these were not new obligations and had been highlighted following the Financial Services Authority’s second thematic review in October 2012.

On 19 October 2018, Westerby confirmed that Mr R and Mr L were authorised by the FCA by checking the FCA’s online register.

During 2019, Westerby carried out the following checks in connection with RLR’s loan notes and some of its borrowers:-

• In respect of Earthworm Capital it:-

o Obtained a copy of its certificate of incorporation, dated 13 August 2010.

o Obtained a copy of its annual accounts for the year ending 31 March 2018.

o Confirmed that its annual accounts and confirmation statement were up to date by checking Companies House.

o Verified its appointed officers by checking Companies House. Mr R and Mrs R were appointed officers.

o Confirmed that since 31 January 2019, it was no longer an appointed representative of an authorised firm by checking the FCA website.

• Validated RLR Developments I Limited by checking Companies House. It was incorporated on 31 May 2018, and Mr R and RLR were appointed officers.

• In respect of Composting and Shredding Direct Limited:-

o Obtained a copy of its certificate of incorporation, dated 2 May 2017.

1 https://www.bailii.org/ew/cases/EWHC/Admin/2018/2878.html

12 CAS-58612-P1X1 o Obtained a copy of its annual accounts for the year ending 31 July 2018.

o Confirmed that its annual accounts and confirmation statement were up to date by checking Companies House.

o Verified its appointed officers by checking Companies House. Mr L was an appointed officer.

o Obtained a copy of a certificate for the registration of fixed and floating charges for the benefit of RLR submitted by R W Blears on 1 August 2017.

o Obtained a copy of a debenture agreement with RLR, dated 25 July 2017.

• In respect of Advica:-

o Obtained a copy of its certificate of incorporation, dated 16 May 2016.

o Obtained a copy of its annual accounts for the year ending 31 May 2018.

o Confirmed that its annual accounts and confirmation statement were up to date by checking Companies House.

o Verified its appointed officers by checking Companies House. Mr R was an appointed officer.

o Confirmed legal charges for the benefit of RLR, dated 22 December 2016 by checking Companies House.

• In respect of EW Cap:-

o Obtained a copy of its certificate of incorporation, dated 22 August 2017.

o Identified that Prime Accountants submitted notification for dormant company accounts for the year ending 31 March 2018.

o Confirmed that its annual accounts and confirmation statement were up to date by checking Companies House.

o Verified its appointed officers by checking Companies House. Mr R and Mr L were appointed officers.

o Confirmed that it was authorised to provide regulated products and services to professional customers by checking the FCA’s online register. Mr R and Mr L were approved persons.

• In respect of Astwood:-

o Obtained a copy of its certificate of incorporation, dated 17 February 2016.

o Confirmed legal charges for the benefit of RLR, dated 22 December 2016 by checking Companies House.

13 CAS-58612-P1X1 o Obtained a copy of a debenture agreement with RLR, dated 22 December 2016.

o Obtained copies of its annual accounts for the years ending 28 February 2017 and 2018. The accountant was Prime Accountants.

o Confirmed that its annual accounts and confirmation statement were up to date by checking Companies House.

o Verified its appointed officers by checking Companies House. Mr L was an appointed officer.

• In respect of Renewable Land Resources Developments II Limited:-

o Obtained a copy of its certificate of incorporation, dated 31 May 2018.

o Confirmed that its annual accounts and confirmation statement were up to date by checking Companies House.

o Verified its appointed officers by checking Companies House. Mr R and RLR were appointed officers.

• In respect of Trent Re Limited:-

o Obtained a copy of its certificate of incorporation, dated 16 May 2016.

o Obtained copies of its annual accounts for the year ending 31 May 2018. The accountant was Prime Accountants.

o Confirmed that its annual accounts and confirmation statement were up to date by checking Companies House.

o Verified its appointed officers by checking Companies House. Mr L was an officer.

• In respect of Prime Accountants:-

o Obtained a copy of its certificate of incorporation, dated 8 November 2006.

o Obtained copies of its memorandum and articles of association, dated November 2006.

o Obtained a copy of its annual accounts for the year ending 31 December 2017.

o Confirmed that its annual accounts and confirmation statement were up to date by checking Companies House.

o Verified its appointed officers by checking Companies House.

o Checked it was registered on the website of the Institute of Chartered Accountants in England and Wales. 14 CAS-58612-P1X1 o Confirmed legal charges and debentures with Companies House.

• Verified Arbuthnot Latham & Co (Arbuthnot) as legitimate bankers for RLR.

In March 2019, Ms R’s two loan notes matured, and £120,000 was repaid to Westerby.

On 3 April 2019, Ms R and Westerby signed an application form to invest £120,000 in another loan note issued by RLR, which had the same terms as her first RLR loan note. The application form confirmed that the Adviser was the authorised financial intermediary in respect of the investment. By signing the application form, Ms R agreed that she was one or more of the following: investment professional; certified high net worth individual; certified or self-certified sophisticated investor.

On 5 April 2019, Westerby paid £120,000 to RLR.

In June 2019, Westerby became aware that Companies House had issued a ‘First Gazette Notice’ for RLR. This was because RLR’s latest accounts were overdue. A ‘First Gazette Notice’ is issued when Companies House intends to strike a company off the register due to non-compliance and is a warning that a company is at risk of being dissolved. At the time, Westerby was told by RLR that the accounts had not been submitted due to a clerical error, which was being corrected. In the meantime, Westerby temporarily put on hold any further investments by clients into RLR loan notes.

On 7 June 2019, RLR notified Westerby that as its accounts had been filed, and the ‘First Gazette Notice’ had been removed. It was waiting for the accounts to be uploaded to the Companies House website. The accounts had been delayed due to changes within the Earthworm Group, such as directors and office changes. Westerby asked RLR for copies of the latest accounts, management accounts and its latest investor brochure or business plan. Westerby told RLR that when it received the documents, it would allow clients to make further investments into RLR loan notes.

In September 2019, the following actions took place:-

• RLR published a statement that said due to changes in the renewable energy market, including the loss of government subsidies, it would be suspending interest payments and capital redemptions for its loan notes, to allow restructuring. The expected timescale for the distributions of funds to investors was two to five years.

• The Adviser told Westerby that there was an issue with RLR, and that some of the underlying loans were impaired.

15 CAS-58612-P1X1 On 27 January 2020, Ms R complained to Westerby with the following points:-

• RLR had lent money to Special Purpose Vehicles (SPVs), so the only assets it held was the benefit of the SPVs’ obligations to repay. The SPVs were new companies, non-listed start-ups, that had no trading record. The funding was used to acquire sites and equipment which may or may not have residual value. There were asset charges for bank debt, which were senior to RLR’s loan notes.

• The repayment of interest and capital was solely dependent on the SPVs generating sufficient revenue streams. Given the SPVs’ lack of trading records, this was an additional risk to the loan notes. RLR could extend the maturity of the loan notes by a further two years.

• The value of the SPVs’ assets and the ability of the SPVs to generate revenue and make repayments was dependent to a large extent on the continuation of government subsidies. When she had invested in the second RLR loan note, the subsidy regime was already in retreat.

• The regulatory disclaimer by RLR confirmed that loan notes were only suitable for sophisticated investors or high net worth investors, who could accept considerable loss of investment, or have experience of similar investments.

• There was additional risk because the loan notes were not listed, so had no real form of liquidity.

• Adviser and administration fees of 11% were deducted from the initial amount invested in the loan notes. In order to recoup the fees and pay 8% per annum, the SPVs needed to pay 13.5% per annum for two years. If the SPVs failed, the advisers had already been paid their fees, which put investors at considerable risk.

• On 26 November 2019, the FCA had announced the banning of the sale of speculative mini-bonds, of which RLR’s loan notes was a clear example. The announcement included the following statement:

“The FCA ban will mean that unlisted speculative mini-bonds can only be promoted to investors that firms know are sophisticated or high net worth. Marketing material produced or approved by an authorised firm will also have to include a specific risk warning and disclose any costs or payments to third parties that are deducted from the money raised from investors.”

While this was after the date she invested in RLR’s loan note, it indicated the risks of high charges. • Any reasonable level of due diligence would have revealed the very high-risk nature of RLR’s loan notes.

On 20 April 2020, Westerby replied to Ms R’s complaint with the following points:-

16 CAS-58612-P1X1 • It did not hold the regulatory permissions required to provide financial advice. It was required to consider the acceptability of a given investment in the Pension but not assess its suitability for an investor. The considerations in the CEO Letter did not include any suggestion that a high-risk investment was unacceptable as a SIPP’s asset. It referred to another FCA publication - Policy Statement PS14/12 – A new capital framework for SIPP operators, which included the following statement:

“Non-standard investments are typically higher risk or speculative propositions, and the entire amount invested is at risk. These investments tend to be illiquid and difficult to value, and there may be little or no recourse to the FOS and FSCS, for example if the arrangement is mis-managed. Some may be outright scams. Most non-standard investments, such as UCIS, unlisted shares and speculative overseas property schemes, are unlikely to be suitable for those retail investors of ordinary sophistication and means who make up the vast majority of the retail market in the UK. However, more sophisticated investors may consider them to be appropriate investment opportunities.”

So, the FCA considered that high risk investments could be suitable as SIPP assets for certain classes of investors. It was reasonable to allow higher-risk investments within its SIPPs, but only where the member met the FCA’s definition of a high net worth or sophisticated investor, or where they have been advised to make the investment by an authorised and regulated adviser. • A regulated adviser must consider the suitability of an investment for an investor by taking into account attitude to risk and capacity for loss. The Adviser had advised her on the Pension and her investments in RLR’s loan notes. In order to provide this advice, the Adviser needed to consider the suitability of the investments for her circumstances.

• She had completed the Questionnaire, which confirmed that she met the definitions of a high net worth and sophisticated investor. It also confirmed that she had taken financial advice and understood the risks. She reaffirmed her situation as a high net worth individual or sophisticated investor when she signed the second RLR application form in April 2019. It had reviewed her LinkedIn profile on 21 February 2017. Her employment record was impressive and demonstrated that she had a wide knowledge and experience of risk in financial services through her roles in retail banking. At the time she was global head of data transformation for a retail bank and she had a previous role as Equities Global Head for an investment bank. Her experience covered transformation management, equity and loan book realignments and credit risk. She was a Chartered Accountant. This evidence and the fact that she had been introduced by a regulated adviser was sufficient for it to allow her to invest in the loan notes. It considered that her extensive experience meant that she fully understood the risks of investing in loan notes. There was no reason for it to believe that the high- risk nature of the investments made them unsuitable for her.

17 CAS-58612-P1X1 • The Pension was a member-directed arrangement, and any investments were only made on the instructions of the member. It referred to the Rules, which confirmed that investment instructions could only be given by the member or adviser. It also referred to the Application Form, where she had agreed that she was solely responsible for investment decisions. It did not consider that the general principle in law of a duty of care by trustees as stated in the Trustee Act 2000 (the Trustee Act) was relevant. This was because in paragraph 7 of Schedule 1 of the Trustee Act, it said “The duty of care does not apply if or in so far as it appears from the trust instrument that the duty is not meant to apply.” As the Pension was member directed, this duty of care did not apply. This was in line with rulings by the Pensions Ombudsman regarding the responsibility of a SIPP trustee.

• It acknowledged that the FCA expected SIPP providers to carry out a level of due diligence on proposed investments in their capacity as regulated SIPP operators. It had met its regulatory obligations in respect of the due diligence on RLR by carrying out the following:-

o It correctly established and understood the nature of the investment by reviewing RLR’s Information Memorandums. These documents stated the fees and associated risks of the investment.

o It ensured that the investment was genuine and not a scam, or linked to fraudulent activity, money laundering or pensions liberation. The parties involved with the investment included Mr R, who was the sole shareholder and a director of RLR, was authorised by the FCA and known to the Adviser for over five years. The Adviser had said that he had worked with Mr R on other projects where capital had been returned in full at the end of the term. This provided assurance that RLR was genuine and that the Adviser understood the investment. It verified that loan agreements were in place between RLR and a number of borrowers, and that debentures had been registered in favour of RLR at Companies House. This demonstrated that RLR was carrying out the activities that were stated in its Information Memorandums. There was no evidence that RLR was not genuine.

o It ensured that the investment was safe and secure, meaning that custody of assets was through a reputable arrangement, and any contractual agreements were correctly drawn-up and legally enforceable. This was confirmed by the existence of the loan agreements and debentures, which provided assurance that there were legal agreements enforceable under the laws of England and Wales. RLR’s loan notes created a legal obligation for RLR to pay interest as it fell due. As RLR was based in the UK, its obligations could be enforced in a UK court.

18 CAS-58612-P1X1 o It could not ensure that the investment could be independently valued, both at point of purchase and subsequently, as the investment was a private debt instrument not traded on a public exchange. So, its value was the outstanding capital and interest payments.

o It ensured that the investment was not impaired. When Ms R invested in the second loan note in April 2019, it checked that interest was up to date, and redemptions were being received. There was no evidence of impairment of the loan notes.

• Its investigations did not reveal any specific reasons why RLR’s loan notes would not be acceptable within a SIPP. It identified that the investment was high risk, given the nature of loan notes and the companies to which RLR was lending funds to. The risk that the underlying borrowers may not perform as expected leading to a default on their loans was stated in the Information Memorandums. The documents had clear warnings that the loan notes may not be suitable for all investors and were only being marketed to high net worth and sophisticated investors. She had completed the Questionnaire, which confirmed that she met those definitions. The Information Memorandums also warned about liquidity risk. As her intended retirement was in 20 years’ time, illiquidity should not have been an issue.

• It could not be expected to have an in-depth knowledge of the UK energy market. It was for members and their advisers to ensure that they understood the nature of the investment and the inherent risks, including those from changing legislation.

• The investment’s fees were set out in the Information Memorandums. These would have been taken into account by the Adviser when making the recommendation to her and should have been disclosed in the Adviser’s suitability report. The fees were paid outside of the terms of the loan notes.

• The FCA ban came into effect on 1 January 2020, almost three years after her investment in the first loan note and nine months after the second loan note. The ban only related to retail customers, not high net worth or sophisticated investors.

• It did not uphold her complaint.

In September 2020, the Adviser went into liquidation.

On 4 February 2021, Ms R wrote to Westerby and said that other investors advised by the Adviser had suffered losses. She shared details of a claim (the Claim) for fraud submitted to the High Court in January 2021 by two investors (the Claimants) against a number of parties, including the principal of the Adviser, Mr R, Reliance Energy and RLR. She said that this demonstrated the loan notes were a sham and there had been collusion to defraud her.

The Claim was for:

• fraudulent misrepresentations; 19 CAS-58612-P1X1 • breach of the FCA’s Conduct of Business Sourcebook (COBS); and

• unlawful means conspiracy/joint liability for deceit.

The Claim stated the following:-

• By April 2019, Reliance Energy and RLR had serious financial difficulties, and at that time, this was known to the Adviser and Mr R.

• On 29 March 2019, another defendant had made a loan of £470,000 to RLR because of cashflow problems. The Adviser was aware of this loan.

• By April 2019, the Adviser was owed substantial commission and fees by Reliance Energy and RLR.

• The investments made by the Claimants were not used to purchase loan notes but were used to reduce, repay or refinance Reliance Energy’s and RLR’s debt.

• In late 2019, the Adviser and Mr R set up a company, Resolve Resources Limited (Resolve), to develop a recovery plan for Reliance Energy and RLR.

On 7 October 2021, Westerby wrote to Ms R and said that there was insufficient cash in her SIPP to pay its fees. The fees were £1,020 but there was only £965.18 in her SIPP. It requested payment of the balance of £54.82.

On 11 October 2021, Ms R emailed Westerby and said that it had not allowed her to take out the remaining cash and close her SIPP.

On 15 October 2021, Westerby wrote to Ms R and said that if it allowed her to take out the remaining cash, it would be construed as an unauthorised payment, which carried significant tax charges. She could transfer her benefits to another provider. It enclosed a fee schedule and said that the outstanding fees remained chargeable and were still overdue.

On 23 January 2022, Ms R wrote to Westerby and requested a refund of fees from March 2019 onwards.

On 11 February 2022, Westerby wrote to Ms R and said that there was insufficient cash in her SIPP to pay its latest fees. The total amount of outstanding fees was £1,206.81.

On 22 February 2022, Westerby emailed Ms R. It said that RLR had informed it that the value of her second RLR loan note had been reduced to 25% due to a revision to the value of realisable assets. So, the value of her investment would be reduced to £30,000. It said that RLR was undergoing a restructuring process.

Later the same day, Ms R emailed Westerby and said that Resolve had told her directly that the investment’s value had been reduced to 6%, so the value of her investment was £7,200. She asked how it had validated the £30,000 valuation.

20 CAS-58612-P1X1 In January 2023, Ms R’s SIPP received £20,376 from RLR in respect of the repayment of her investment in the second loan note.

Adjudicator’s Opinion

Westerby had two distinct roles in relation to the management of Ms R’s SIPP. In order to establish whether its actions amounted to maladministration, the Adjudicator needed to consider each role separately.

Westerby’s role as a trustee

The Adjudicator also considered the following:-

• In the Key Features Document issued to members, it states, “We cannot provide any advice on the suitability of investments….” and “We accept no responsibility for the performance of your chosen investment(s).”

• In the Application Form, which Ms R signed on 16 February 2017, it states, “I agree that I am solely responsible for all decisions relating to investment decisions in connection with my arrangement in the scheme and will hold Westerby Trustees Services Limited fully indemnified against any claim in respect of such decisions.”

• In the Questionnaire, which Ms R signed on 16 February 2017, she agreed to the following statements:

o “I understand the risk factors involved with non-standard assets and I am comfortable that my attitude to risk is appropriate and I am prepared to suffer a total loss of my investment.”

o “I have not received any advice from Westerby with regard my investments and will not hold Westerby responsible should I suffer a financial loss as a result of my investments.”

21 CAS-58612-P1X1 • In the Supplemental Deed, which Ms R signed on 20 February 2017, it states, “….no….Member Fund Trustee [which includes Westerby] shall be liable for any loss to the trust fund or to the Member Fund arising by reason of any improper investment made in good faith or negligence or fraud of any agent employed by him….”.

The Rules say that Westerby, in its role as a trustee, could only act on Ms R’s specific investment instructions, and the Supplemental Deed and the Key Features Document made it clear that Westerby would not be held accountable for any subsequent investment loss. Also, Ms R confirmed that she accepted the risks of investing in non- standard assets and knew that she was solely responsible for her investment decisions by signing the Application Form and the Questionnaire. So, Westerby’s actions in respect of its role as a trustee in allowing Ms R to invest in the RLR loan note, did not amount to maladministration.

Westerby’s role as the SIPP operator

Ms R signed declarations in the Application Form, the Questionnaire and the Supplemental Deed exonerating Westerby from any responsibility for losses resulting from her investment decisions. Effectively, Ms R’s investment instructions were implemented by Westerby on an ‘execution only’ basis. However, SIPP operators are regulated by the FCA and required to comply with the Principles and the COBS within the FCA Handbook.

When considering COBS, SIPP operators have quite wide obligations, particularly under COBS 2.1.1.R where there is an obligation on firms to act in the best interests of the client. However, this rule must be balanced against the general principle that consumers should take responsibility for their own decisions. This was tested in Ehrentreu v IG Index Ltd (Rev 1) [2018] EWCA Civ 79, where the Court of Appeal held that very clear express words would be required to create a contractual obligation to protect another party from potentially inflicting economic harm on itself. This general principle of personal responsibility is particularly pertinent for SIPPS, which by their very nature are self-invested, implying a greater degree of personal responsibility.

COBS 2.1.1 was also analysed in Adams v Carey2 at first instance in the High Court. Carey is another SIPP operator. As this aspect of the case was not revisited in the subsequent Court of Appeal, the High Court decision remains good law. The main findings of the High Court decision were as follows:-

• The agreement between the parties is key in identifying the extent of the duty imposed by Rule 2.1.1. Where a customer agreement provides for a firm to carry out an ‘execution only’ role, the COBS duty must be read in that light.

2 Adams v Options SIPP UK LLP [2020] EWHC 1229 (Ch)

22 CAS-58612-P1X1 • COBS Rule 2.1.1 does not impose a duty on a SIPP operator to refuse to accept high risk investments. The fact that an investment is high risk and speculative does not of itself make it manifestly unsuitable.

• COBS Rule 2.1.1 does not impose a duty on a SIPP operator to consider the suitability of a SIPP or the underlying investments held in it if the contract with the member provides otherwise.

However, COBS 10 requires a SIPP operator to assess the appropriateness of prospective investments for a member before carrying out activities on their behalf, such as executing investment orders. Although COBS 10 is deemed not to be applicable to ‘execution only’ business, the FCA has made it clear that ‘execution only’ SIPP operators still owe members some duties regarding the suitability of underlying investments, not least because of the requirements of COBS 2.1.1, and the existence of the Principles.

While the FCA and COBS 10 do not provide specific rules or formal guidance about the required level of a SIPP operator’s investment due diligence, the CEO Letter sent by the FCA in July 2014 does refer to the need for due diligence to be carried out on non-standard investments. Ms R invested in the RLR loan notes, which should be considered as non-standard assets, in March 2017 and April 2019. This was after the FCA sent the CEO Letter, so, Westerby would have been expected to have carried out the checks referred to in the CEO Letter before Ms R invested in the RLR loan notes.

The Adjudicator reviewed Westerby’s due diligence carried out on the RLR loan notes during the period 2016 to 2019, and compared them to the checks set out in the CEO Letter as follows:-

• Correctly establish and understand the nature of an investment.

Westerby reviewed RLR’s Information Memorandums in September 2016 and April 2018. These documents describe the loan notes in some detail and set out the relevant risks. Westerby adequately established and understood the nature of the loan notes before allowing Ms R to invest in the loan notes.

• Ensure that an investment is genuine and not a scam, or linked to fraudulent activity, money-laundering or pensions liberation.

o Westerby checked evidence in September 2016, primarily from Companies House, which confirmed that RLR and three of the service providers it had relationships with, were genuine trading companies. It also carried out verification checks on the following:

▪ RLR’s appointed officers;

▪ Prime Accountants, who were accountants for RLR and a number of the service providers and RLR’s borrowers; and

23 CAS-58612-P1X1 ▪ R W Blears, who were also connected to some of the service providers.

o It obtained a copy of a business loan agreement between RLR and Advica, which was signed by both parties on 22 December 2016.

o It obtained evidence in April 2018, primarily from Companies House, which reaffirmed RLR’s existence as a genuine trading company. It also obtained independent verification of RLR from ‘SmartSearch’ and carried out verification checks on the following:-

▪ RLR’s appointed officers.

▪ Earthworm Capital and its appointed officers. It verified that Earthworm Capital was an appointed representative of an FCA authorised firm.

▪ Reliance Energy.

▪ Two of RLR’s borrowers, Aspen and EW Cap. It checked that planning permission had been granted for a project submitted by Reliance Energy and Aspen, and that the land the permission it referred to was real.

▪ R W Blears.

o It carried out verification checks in September 2018 on the following:

▪ Prime Accountants;

▪ appointed officers of Prime Accountants and R W Blears; and

▪ it verified that Prime Accountants and R W Blears were registered by checking the Financial Services Register.

o In October 2018, it verified that Mr R and Mr L were authorised by the FCA.

o During 2019, it carried out verification checks on the following:-

▪ Earthworm Capital and its appointed officers.

▪ Seven of RLR’ borrowers. For three of the borrowers, it obtained verification that RLR had legal charges or debentures over assets.

▪ Prime Accountants and its appointed officers.

▪ Arbuthnot in its role as RLR’s banker.

The due diligence Westerby carried out before and during the period that Ms R was invested in the loan notes, adequately ensured that the investment was genuine and not a scam, or linked to fraudulent activity, money-laundering or pensions liberation.

24 CAS-58612-P1X1 • Ensure that an investment is safe/secure (meaning that custody of assets is through a reputable arrangement, and any contractual agreements are correctly drawn-up and legally enforceable).

The nature of an unsecured loan note means that there is no underlying asset to be held in custody. However, Westerby checked that there were correctly drawn- up legal charges or debentures in place with a number of RLR’s borrowers. Westerby adequately ensured, as far as it could, that contractual agreements were correctly drawn-up and legally enforceable.

• Ensure that an investment can be independently valued, both at point of purchase and subsequently.

The nature of an unsecured loan note means that its value is the sum of the value of the discounted cash flows, interest and final capital repayment, an investor receives from the investment. As the loans are private, and not tradeable, the only relevant valuation was at maturity, which is the amount of the initial investment. This check could not be reasonably applied to private loan notes.

• Ensure that an investment is not impaired (for example that previous investors have received income if expected, or that any investment providers are credit worthy etc.).

In April 2018, Westerby randomly selected clients to check that previous RLR loan notes had been paid interest and repayments on time. This was after Ms R invested in the first RLR loan note in March 2017, but before she invested in the second loan note in April 2019. While the Adjudicator did not see evidence that Westerby checked the situation prior to Ms R making her investment in the first loan note, this complaint was only in respect of the second loan note.

• The risks and characteristics of the loan notes were explained to Ms R in the Information Memorandums. She confirmed that she understood the risks of the investments by signing the Questionnaire.

• Ms R was advised to invest in the loan notes by an FCA regulated adviser who should have assessed the investment in accordance with her risk appetite.

• Westerby’s role was not to stop Ms R from investing in high-risk investments, particularly as she had confirmed that she was a high net worth investor and had been advised by a regulated adviser.

• RLR was a legitimate business that lent money to verified third parties.

25 CAS-58612-P1X1 Ms R also complained that Westerby’s fees were high, as it did not adequately update her on the ongoing situation with the loan notes. The Adjudicator appreciated that Ms R was not satisfied with the level of service she was paying for during the loan note’s default period. However, when she signed the Supplemental Deed, she agreed to pay the fees determined by Westerby for running her SIPP. So, Westerby was not required to reimburse fees to Ms R.

Ms R did not accept the Adjudicator’s Opinion and the complaint was passed to me to consider. Neither Ms R nor Westerby provided any further evidence or comments on the complaint.

I agree with the Adjudicator’s Opinion.

Ombudsman’s decision Ms R complained that Westerby did not carry out sufficient due diligence when it allowed her to invest £120,000 in RLR’s loan note. The loan note subsequently defaulted, and she has lost the majority of its value. Ms R also complained that Westerby’s fees were high, as it did not adequately update her on the ongoing situation with the loan note.

26 CAS-58612-P1X1 I do not uphold Ms R’s complaint.

Dominic Harris

Pensions Ombudsman 18 July 2025

Full determination