SIPP professionals hit from all sides: regulator, tribunal and ailing IFAs

The Financial Conduct Authority (FCA) has written to CEOs of SIPP operators in a ‘call to action’. The regulator says the issues about which it raised concerns in its October 2013 Thematic Review remain and SIPP operators are not playing their part in preventing scams and pension fraud.

In an October 2013 Law-Now, we reported that the FCA was scrutinising SIPP operators, i.e. companies acting as trustees and administrators for investors’ self-invested private pensions. Whilst its October 2013 guidance was unchanged from that issued in 2012, its paper suggested an increased interest in SIPP operators, especially when considered alongside its new capital framework.

In last year’s paper, the FCA commented that SIPP operators were to have some responsibility for the ‘quality’ of the SIPP business they administer. It suggested operators should undertake due diligence on investments investors sought to introduce to their SIPPs - and for Unregulated Collective Investment Schemes (UCIS) – that responsibility was ‘enhanced’. The ‘Dear CEO’ letter refers not to UCIS but ‘non-standard assets’: those which would incur additional time and cost should they need to be transferred to another operator which asset classes it listed definitively in its 4 August 2014 Policy Statement. The FCA’s Dear CEO letter also appears more forceful. Rather than suggesting operators consider certain due diligence, such as collecting management information on investments introduced to SIPPs and measuring against benchmarks, it now wants operators to ensure investments are:

• not a scam or linked to fraudulent activity, money laundering, or pensions liberation;
• capable of independent valuation;
• ‘safe and secure’ (which the FCA appears to consider as being subject to a binding contract); and
• not ‘impaired’ (the FCA gives an example that previous investors in the same asset have previously received the income expected from it).

Unlike in its 2013 paper, the FCA does not list procedures which it considers good practice, rather it notes operators had difficulty completing due diligence for non-standard, overseas, assets. It says operators should be able to ascertain the structure of an investment, where pension funds are being transferred, and should not rely solely on a provider’s marketing literature to do so.

The FCA’s views are oft-quoted by investors whose SIPP investments have not performed well and who seek to claim against the operator. Last week, in a case the Financial Ombudsman Service (FOS) deemed it had jurisdiction to consider, a complaint against a SIPP operator which had accepted a pension investment in potential UCIS, Agro Energy, to a client’s SIPP was upheld. The Ombudsman noted that the investment was unusual and esoteric and the operator should have been aware that the investment and the SIPP were potentially unsuitable for the client. The Ombudsman went on to refer to the July 2009 SIPP Thematic Review paper which referred, amongst other things, to identifying anomalous investments to enable the firm to seek appropriate clarification of the suitability of what was recommended to the client. This FOS decision is believed to be the first of its kind and out-of-kilter with decisions from the Pensions Ombudsman Service which, to date, has expected only limited duties of due diligence on operators.

The pressure on SIPP operators was increased further this month as the Financial Services Compensation Scheme (FSCS) declared four Independent Financial Advisors in default, all of whose business was based on giving advice relating to SIPP investment. The FSCS has predicted further IFAs will default given the volume of enquiries it has received from SIPP investors who have lost money.

Comment

It clearly remains the FCA’s view that SIPP operators should undertake some due diligence on the investments clients seek to introduce to their pensions. This is particularly so where those investments are UCIS and, if different, ‘non-standard’. The FCA’s views will continue to be quoted in claims brought against operators. Those claims are set to increase if more IFAs are declared in default and investors have no other target for a claim but the operator. However - and notwithstanding the surprising decision from the FOS recently - the FCA’s current concern appears to be that operators assist with detecting pension fraud rather than ensuring a SIPP investment is suitable per se. In theory, an operator can still accept non-standard assets ‘with adequate procedures in place to assess those investments.

Further information:

Dear CEO letter

FOS decision

FSCS notice

October 2013 FCA Guidance

CMS October 2013 Law-Now

Law-Now – new capital framework