Tort of Deceit & Pension Scams
This discussion is going to show that Tort of Deceit could be used as an effective weapon in all pension scams. I will give tips that others may also decide they too might have a case.
In order that I avoid yet more defamation claims, I will use my own experience of my ill-advised pension transfer but will keep it general. I will also use known cases to support my contention tort of deceit is an effective tool against all scams.
[Aside: The Limitation Act 1980 specifies a time limit on actions for defamation as it happens, of one year! The actors in the pension scam I was caught in made a threat of defamation in 2016 – 2 years ago – because I named them as scammers. I have never changed that position and they never brought an action. I may be wrong, but I feel their time has expired and I could probably resume my allegation with impunity]
Characteristics of Pension Scams
Two types of scam
The most familiar and often described is the pension liberation scam. In the UK you cannot access your pension before the age of 55, If money was taken from the pension before the age of 55 it will be treated as an unauthorised payment and subject to high tax charges – minimum 55%!
However confidence tricksters persuade you to transfer your pension and then access it using a loan before the age of 55. This however turned out not to be legitimate, leaving those caught in the scams not only facing heavy tax bills on the loans but also finding their pension pots have been frittered away on private venture schemes that have failed.
The other type of scam is similar in that money is transferred offshore into unregulated investments that often fail, those funds syphon extortionate charges for their management but do not offer pension liberation loans.
Key to both types is the transferring of the pension into an offshore wrapper recognised by the HMRC and so not attracting the unauthorised payment penalty (but not guaranteed by HMRC either).
An offshore pension trustee that has agreed to comply with HMRC rules regarding pensions – i.e. no access under the age of 55, lifetime allowances etc. and also agreed to notify HMRC of any benefits paid. Note, they are not approved by HMRC as often said by scammers – just one of many fraudulent misrepresentations made by scammers!
There may be legitimate, honest, ethical QROPS serving people who choose to reside elsewhere but they appear to be few in number. The dishonest, unethical ones, who are well aware of the scammers, in it only for themselves with complete disregard for their members, get all the attention and overshadow the existence of ethical QROPS. The good ones know the bad name they get from the preponderance of unethical ones but don't have the courage to stand up and be counted; the good ones simply moan and complain of the damage the unethical QROPS are doing. Well, my advice? Get over it and grow a pair and sort out your industry; stand up and be counted instead of whingeing about it!!
Introducers are generally unregulated entities that often operate by cold calling people and offering a free pension review. They also often own offshore unregulated funds that they need subscriptions for. They cannot carry on a regulated activity in the UK without FCA authorisation.
Unregulated investments firstly are not protected by the FCA compensation scheme and secondly, are generally considered complex and high risk and the ordinary person would struggle to understand fully the risks, so UK legislation, the Financial Services and Marketing Act 2000 (“FSMA”) bans their promotion to ordinary consumers – retail clients.
So these investments can only be recommended to certain classes of investor. The issue for the fund owners is those types of investors would not entertain the idea of investing in them because historically they are badly managed and usually fail, leaving investors with nothing.
To get round this, the introducing firm makes an arrangement with a firm offering financial advisers that will firstly recommend the transfer of the pension to an offshore pension scheme – the QROP – and secondly recommend a proportion of the pension is invested in the introducer’s offshore unregulated fund. This is believed, by the scammers, to be legit because once the fund is offshore and outside UK regulation they believe they can do as they please with it.
I hold this is flawed because they are only considering how to circumvent the legislation surrounding the treatment of the pension fund. They are not considering their fiduciary duty to you when giving the advice. That is where I feel Tort of Deceit becomes the weapon.
In order to convince you their advice is sound they have to use deception. They have to a) lie – what the law terms false misrepresentation and/or b) non-disclosure – i.e. omit material facts from their advice which would immediately alert a person to the scam. This is their mistake.
The Financial adviser
This person is key to the scam but moreover, their regulatory status determines whether YOU can get access to the Financial Services Compensation Scheme (“FSCS”).
If you take advice from a person not authorised by the FCA to give that advice you do not get access to the FSCS nor Ombudsman Services.
In my case the advisory firm was regulated in another EU member state and under EU rules was permitted to offer services in other member states and so had a corresponding FCA register entry. However the services they were permitted to give was restricted to Insurance Mediation. [Not disclosed]
The FCA later confirmed to me they were not authorised to give investment advice or transfer my pension.
Advisers also make claims to there being tax advantages from being transferred to a QROP. This turned out to be false if you weren't actually leaving the UK – which I wasn't and they knew it! [false misrepresentation]
In my case the adviser also made the claim all the firm’s advisers are qualified to full UK standards and he himself had ifs level 4 diploma for Financial Advisers and a Professional Certificate in Banking.
The Life Assurance Bond
In an attempt to circumvent the regulations, advisory firms have an agreement with an offshore Life Assurance company – in my case, it turned out this was in the Cayman Islands. [so they can do as they please once your money is out of FCA regulation]
This was the vehicle they believed ensured they acted within their regulation as an Insurance Mediator. The FCA later however advised me that the products being advised were investment products and it’s the Investment Rules that apply. So, they are in fact carrying on a regulated activity – giving investment advice – while not being authorised by the FCA and it seems the FCA do nothing about it when you make a complaint – go figure!
The Life Assurance bond comes with extortionate charges (mine was 0.49% of Account Value or initial premium whichever is greater plus £450 annual charge plus a c.4% surrender charge on the Account Value or initial premium whichever is greater, albeit on a sliding scale over 8 years!) [not disclosed]
The unregulated funds recommended are often illiquid with a lock in period that comes with an early exit penalty – one of the funds I was invested in had a 7% early exit penalty and the other had a 5% early exit penalty. They also come with high annual charges. These funds are often opaque and do not tell you what the the underlying investments are which generally amount to high risk loan notes for risky private venture projects that usually fail. [false representations because these are often promoted as suitable for retail pensions; regulated; safe for balanced investors etc. ]
So that's the general scenario. Now to demonstrate the flaw.
Tort of Deceit
To succeed in a tort of deceit action the following legal test must be met:-
There must have been a representation made by the fraudster which can be clearly identified, which must be a representation of fact.
The representation must be false.
It must have been made dishonestly.
It must be proved that the representation must have been intended to be relied upon and was in fact relied upon.
The distinction between 2 & 3 means a statement made, that you assert was false, must have been both false and made dishonestly. By dishonestly the law means the fraudster either knew it wasn't true or they didn't really care that it might not be true (the law uses the term reckless as to its truth).
In Derry v Peek Lord Herschell established “… fraud is proved when it is shown that a false misrepresentation has been made (1) knowingly, (2) without belief in its truth, or (3) recklessly, careless whether it be true or false”.
The House of Lords later held that a duty of care could exist in respect of a statement leading to pure economic loss, if the parties were in a ‘special relationship’.
This became known as the Hedley Byrne rule, and basically has three ingredients which I shall relate in respect of financial advisers:-
You rely on the judgement and skill of the adviser
The adviser knows you rely on his/her judgement and skill
In the circumstance it was reasonable for you to rely on the adviser’s judgement and skill
Given these three ingredients a “special relationship” exists and gives rise to a duty of care, owed to you by the adviser, i.e. a legal obligation imposed on the adviser requiring adherence to a standard of reasonable care while performing any acts that could foreseeably harm you. Harm in this instance is economic loss. This duty of care is to our advantage.
I contend that with all pension scams, the “adviser”, in order to succeed in persuading you to transfer your pension must:-
Establish that he/she possesses specialist knowledge and skills that you come to rely on and also it is foreseeable you will act on the advice
make false statements and know them to be false
deliberately omit material facts such that, were they not omitted, a reasonable person would, on balance of probabilities not proceed with the pension transfer
Intend for you to act on his/her advice
Specialist Knowledge and Skills
The adviser in my case established a specialist knowledge and skill, not only in writing to me, but also the firm’s website made the same claim.
In other words, the adviser made a claim to possessing a skill or competence and the law then requires him to make good on that claim. A practitioner who falls short, with resulting damages or losses, then he/she is likely to be held negligent.
TIP: Find evidence the person who advised you to transfer your pension established they had a specialist knowledge and skill to give financial advice. It is irrelevant whether it is true or not. If it isn't true, all the better – because then it's fraudulent misrepresentation.
I hold the adviser must make false statements if they are to succeed in conning you.
In the case of the scam involving pension liberation, the false statements were that there was a loophole in the law that allowed you to take money from your pension before the age of 55. This turned out to be untrue.
In my situation, there was no “liberation”.
The false statements to me amounted to, but not limited to:
Regulatory status; They were regulated but were restricted to Insurance Mediation and not authorised for Investment advice anywhere in the EU. This distinction was not disclosed but their status worded to make the reasonable person believe they were regulated to give investment advice.
Failed to disclose I would lose my rights to FCA protection because the adviser was not authorised to give me investment advice.
Described tax advantages associated with transferring a pension to an offshore QROP – but failed to disclose the material fact that you could only enjoy tax advantages after being resident outside of the UK for 5 years.
Falsely told me both funds were regulated and audited in their respective jurisdictions. One fund is unregulated and neither had published audited accounts. [false misrepresentation].
Told me the funds were suitable for retail pensions – one fund was licensed as a professional fund only and even quoted, in its offer supplement – which I was never shown – the UK legislation prohibiting its promotion to me. [false misrepresentation].
Gave me a false valuation and told me my fund was doing well when in fact one fund had dropped 30% in value. [false misrepresentation]
Claiming I am suitable for these investments when no suitability assessment – as per EU guidelines and UK legislation – had been carried out which would have shown I was unsuitable for these investments and it was actually unlawful to invite me to participate in these investments. [false misrepresentation]
Claiming the levels of risk associated with the investments are suitable for a balanced investor when in actual fact they turned out to be very high risk and completely unsuitable. [false misrepresentation]
These are the kinds of false representations the advisers of all pension scams have to make if they are to persuade you to transfer your pensions. The list is not exhaustive. If they actually told you the truth you wouldn't proceed. If they told you: “the funds are high risk, illiquid offshore funds and you will probably lose all your pension and by the way I am not regulated to give you investment advice and you lose access to the FCA Compensation Scheme” etc. Would you go ahead?
TIP: You need to list all the statements made to you – preferably written ones but verbal will also suffice. Many, if not all of them will probably be shown to be false.
The reason these statements are important is that having established a specialist knowledge and skill, the law expects the adviser to demonstrate the degree of competence expected of an ordinary skilled member of that profession when doing their duty properly.
You could no doubt show that any old regulated IFA ( what the law terms an ordinary skilled member) would not give the same advice when doing their duty properly and so demonstrate the adviser hasn't measured up to what the law expects of them.
It is reasonable to expect a person with specialist knowledge and skill in financial planning would be well aware of: the restrictions on their regulatory status; the law of inviting retail clients to participate in unregulated funds; the risks associated with opaque funds that invest in high risk private venture schemes, suitability assessments etc. etc.
Therefore, these statements the advisers make fit what Lord Herschell referred to in Derry v Peek as “representations made: a) knowingly or b) recklessly, careless whether it be true or false”.
Your Best Interest
Once the adviser has established a specialist skill and knowledge, a situation of “trust” arises where it becomes reasonable for you to rely on that skill. Then the Hedley Byrne rule says that a special relationship exists.
Once that special relationship is established, the adviser has a legal fiduciary duty to act in your best interest and this requires trust, good faith and honesty.
In my case I have documentary evidence in the form of an email from a Director of the advisory firm, describing a business arrangement with the introducers which proves, conclusively, the advice given me was pre-determined for all clients regardless of best interest and suitability; they would, by default, recommend a proportion of the client’s pension is invested in the introducer’s own fund. This is in direct conflict with fiduciary duties required of the adviser that we have just established by the Hedley Byrne rule.
I contend that in all pension scams there are similar business arrangements between the various actors that conflicts with client’s best interests. However, evidence of this might be difficult to obtain. I was lucky.
However, even without such evidence, if it is foreseeable by the adviser that you will act on their [fraudulent/negligent] advice and the adviser intends you to act on that advice, then if losses occur because of that advice, the adviser is liable for those losses.
It may often be true that the advice is not just negligently given but fraudulent.
Furthermore, the adviser cannot use contributory negligence as a defence in cases of fraud. In other words the tortfeaser cannot say YOU are partly to blame for the losses because YOU agreed to it – which in my case the adviser has attempted!