Some suggestions on bringing a private legal action against carbon credit schemes (part 2)

Earlier this week, REDD-Monitor posted some advice from a law firm about the sale of carbon credits as investments under UK law. Part of the advice was on “what, if any action, may be taken in the UK against companies selling voluntary carbon credits to the retail market.”

This is the second part of the advice, about voluntary carbon credits and Self-Invested Personal Pensions (SIPPs). The first part of the advice is available here.

The firm has agreed to REDD-Monitor posting the advice, but wishes to remain anonymous. They also recommended that anyone interested in taking action against carbon credit schemes should seek legal advice in relation to the particular circumstances and do not rely on the information contained below.

Voluntary carbon credits and SIPPs

SIPPs are Self-Invested Personal Pensions, a government approved personal pension scheme. Most SIPPs allow investment in a range of assets and are designed for people who want to manage their own funds by dealing with, and switching, their investments when they choose.

Due to the nature of SIPPs as a pension wrapper, meaning it simply holds pension capital which is then invested according to the SIPP holder’s wishes, investment in both regulated and unregulated products is permitted. Therefore, there is no restriction on investments in VERs being included in SIPPs. It is important to note that SIPPs have been designed to allow investment flexibility and the range of permitted investments will vary according to the SIPP provider and the type of SIPP. There is no exhaustive list produced by the FCA or HMRC however permitted investments commonly include the following:

• Stocks & shares
• Unquoted sharesCommercial property (shops, factories or office premises)
• Overseas property (hotel rooms and land)
• Investment trusts
• Mutual investment funds
• Deposit accounts with bank and building societies
• Insurance company funds
• Government securities
• Structured products
• Loan notes

There are some SIPP providers offering investment in carbon credits, and many carbon credit schemes trading in VERs are now marketing them as “SIPP compatible”.

For tax purposes, SIPPs are regulated by the HMRC. A wide range of assets are permitted to be included by the HMRC and VERs or carbon credits are not excluded. The inclusion of investment in assets in practice is usually dependent on whether the assets are subject to a tax charge.

The FCA regulates SIPP providers and investors should seek independent financial advice from an FCA authorised adviser before entering into a SIPP. The FCA has recently published SIPP Operator Guidance following a second thematic review and has already begun preparations for a third review by writing to SIPP operators and requesting information to assess the level of unregulated assets held in SIPPs.

FCA Regulation of SIPP Providers

The activity of administering SIPPs is regulated by the FCA which means that SIPP operators should be complying with the FCA’s Principles and Rules including paying due regard to the interests of customers and treating them fairly (Rule 6). Although SIPP operators are not responsible for any advice given by third party financial advisers, the FCA SIPP Operator Guidance highlighted the FCA’s expectation that SIPP operators would have controls and procedures in place enabling the identification of possible instances of financial crime and consumer detriment. Arguably such procedures should highlight situations where a proposed investment is with a scheme offering VERs. This is particularly apparent when considered alongside Principle 2 of the FCA’s Principles for Business which requires firms to ensure that they conduct and retain appropriate due diligence. The example used in the thematic review is checking and monitoring introducers and assessing whether investments are appropriate for personal pension schemes.

All personal pension providers, including SIPP Providers, have to be FCA authorised and comply with the rules set out in the FCA Handbook including the Conduct of Business Sourcebook (“COBS”). COBS rules include the following:

• Acting honestly, fairly and professionally in accordance with the best interests of its client (COBS 2.1.1).
• Taking reasonable steps to ensure that a personal recommendation, or a decision to trade, is suitable for its client (COBS 9.2.1)

Where SIPP providers are offering investments in VERs to retail investors, depending on the circumstances, it may be considered that they are in breach of the above COBS rules and not acting in the best interests of their client.

The FCA website sets out steps to complain about financial products and services including contacting firms directly and contacting the Financial Ombudsman. As mentioned above, as VERs are not regulated products the Financial Ombudsman cannot investigate the product itself but could investigate the service provided by an FCA authorised SIPP provider.

Alongside the applicable parts of the FCA Handbook, the FCA has published a number of papers on the treatment of SIPPs, including ‘A guide for Self-Invested Personal Pensions (SIPP) operators’, published 08 October 2013. The FCA outlines relevant FCA principles, guidelines and treatment of SIPPs.