Swift response to Berkeley Burke judgment puts industry on guard
Pressure on Sipp providers over high-risk investments has put the FCA’s approach to monitoring firms under a new spotlight.
The swiftness of the regulator’s response to a recent court judgment against Berkeley Burke took many commentators by surprise and raises the possibility of a tougher approach to day-to-day supervision of the Sipp market.
The watchdog sent a letter to Sipp operator chief executives on the same day as the ruling against Berkeley Burke, 30 October, to draw attention to High Court claims against providers.
Every firm holding permissions for “establishing, operating or winding up a personal pension scheme” got the letter outlining the regulator’s expectations of Sipp providers in relation to their due diligence obligations when accepting investments.
It also said firms struggling to meet financial commitments may consider selling part or all of their book to another firm, but must pay due regard to customers who may have compensation claims.
A day later, the FCA sent a more specific data request to a number of firms, as part of a wider exercise that also included phone calls and visits.
Those firms were given a week to send information about their business activity. The request asked a host of questions about professional indemnity insurance cover and capital adequacy requirements.
Money Marketing has learned that the regulator has visited at least one Sipp provider and platform to assess its non-standard investment book, and has sent out data requests to some other platforms to find out about their Sipp businesses.
Of the nine platforms Money Marketing approached about the data request, one has been visited by the FCA and another, AJ Bell, has filled in and returned its questionnaire.
All this raises important questions about whether the FCA’s approach to Sipp supervision is consistent and whether the sector is about to experience a period of heightened scrutiny.
Stepping up a gear?
Commentators are divided on whether Sipps are being singled out for special treatment from the FCA.
A spokesman for AJ Bell says data requests from the FCA are not unusual and, as one of the largest Sipp providers in the market, it was no surprise to receive one in light of the recent court cases involving Sipps.
The spokesman adds the court cases involving Sipp providers have raised a number of questions around Sipp due diligence requirements and one would expect the regulator to take a proactive approach to monitoring the market.
AJ Bell says the Dear CEO letter has reinforced the obligations Sipp providers are under, with a particular focus on any merger and acquisition activity.
The FCA’s emphasis on merger and acquisition activity is interesting in light of the fact Aim-listed pensions provider STM Group agreed to pay up to £400,000 in October to buy a majority stake in Carey Pensions – one of the Sipp providers still awaiting judgment at the time of writing.
The acquisition of Carey Administration Holdings, which owns 70 per cent of Carey Pensions and 80 per cent of Carey Corporate Pensions, has the caveat it is subject to regulatory approval.
CWC Research managing director Clive Waller hopes the FCA’s data request and merger focus is the start of a more robust approach to the supervision of Sipp providers.
He says action in this area is long overdue as the watchdog has a habit of “going from consultation to consultation” without actually doing much about behaviour that harms investors.
Furthermore, Sipp providers that have taken on unregulated investments through introducers should not be able to argue they have no responsibility for them.
Waller also says it is important the FCA does not get too preoccupied with what technology wrapper Sipps are on or how they are distributed as the key point about them is they are a product.
As products entail certain responsibilities, Waller argues the FCA’s objective must be to ensure Sipp providers do not allow bad investments on to their books through better-quality due diligence.
This should apply to third-party Sipp providers or discretionary fund managers and platforms that run their own Sipps in-house.
HC Wealth Management director John Abraham
Sipps were created to provide more freedom for investors to make their own investment decisions and to not be constrained by the investment choices offered at that time by the mainstream personal pension market.
Allowing investors to make their own investment decisions within a list of permitted investments has been exploited by unscrupulous and unregulated sales people to push esoteric and sometimes fraudulent investment schemes.
Sipp providers until recently have not seen it as their business to interrogate potential clients about why they might be investing into a scheme or investment, and that is strange to say the least.
A fragmented market
But JLT head of Sipps Richard Prior says such a view of how the market should be regulated sounds solid in theory but the real world is more complicated.
He finds it interesting the FCA is looking at platforms in relation to non-standard investments but would like to know more about where it is probing and what the data gathering will eventually be used for.
Answers to these questions would shed light on how the FCA assesses intermediation in the Sipp market and enable compliance teams to create more robust due diligence processes. The FCA told Money Marketing the regulatory requirements and expectations are the same for both a Sipp operator and a platform provider that offers a Sipp wrapper.
It also says an explanation of those requirements can be found in the regulator’s 2013 Sipp operator guidance.
Prior argues the fragmented nature of the Sipp market makes it hard for clients, regulators and Sipp providers to know where they stand in relation to each other. He says: “The operator of an investment account held by a DFM, stockbroker or platform might permit investments in non-standard assets outside of the Sipp provider’s mandate.
“For example, the stockbroking account may have allowed a client to invest in a non-standard asset that fails and the client complains. Who is the Financial Ombudsman Service going to finger where there is a regulated investment provider and wrapper? Let’s say you have a regulated stockbroker and platform: whose fault is it? We need clarity on this and there might be some cases out there which throw up some surprising outcomes.”
A possibility that clearly worries Prior is whether the FOS will find a Sipp provider liable for not doing due diligence on an investment even if the adviser recommended it. Historically it has ruled advisers must pay any compensation for the failure of unregulated investments but there are concerns the Berkeley Burke judgment might tip the balance the opposite way.
For the time being, Prior says all regulated firms running their own Sipps should regularly review the way they monitor third parties to ensure clients are not put into an asset outside their investment mandate.
He adds: “If clients are within our mandate and holding non-standard investments it is our job to monitor those assets regardless of whether it is on a DFM or platform. Generally we will go to third parties like DFMs and check what they have so we can do accurate reporting.”
Fleshing out further detail
Clearly the Sipp market would benefit from some clarification of the rules, but in what areas would it be most useful?
Consultancy MoretoSipps principal John Moret says the watchdog has been collecting data for around a decade but needs to follow through with concrete action now.
The areas he believes need work include the definition of an “appropriate” investment as the term is bandied about by many but with little agreement as to what it means.
Sipp providers also need more detail about extra due diligence requirements to vet investments, especially after the cases involving Berkeley Burke and Carey Pensions.
Finally, there needs to be clarity about responsibilities where no regulated advice is given – either direct to client or through an unregulated introducer.
Moret says: “Getting clarity around the regulatory regime is vital to building confidence back into the Sipp marketplace regardless of where the Sipp assets are held. It is crucial we draw a line in the sand under these historic problems and move forward.”
FCA heads in the right direction on Sipp supervision
Intelligent Money chief executive Julian Penniston-Hill
The information the FCA is requiring from Sipp providers is not particularly burdensome to find and send to the regulator. But anyone who is holding questionable unregulated investments might be squeamish.
It is good the FCA appears to be trying to anticipate any Sipp providers that might experience commercial difficulty as a result of these court cases as they might need to find a new buyer.
Also it seems the FCA is saying, in the Dear CEO letter, it will look to intervene and stop any potential sale that will leave investors short-changed.
That seems prudent as there are books of business we have looked to buy in the past but have avoided once we did our due diligence on them.
It will be interesting to see a test case where the FCA intervenes to stop a sale or merger where one Sipp provider looks to buy only the good assets of another provider but leave the bad ones behind.
There have been transactions where clients are left without any money and dependent on the Financial Services Compensation Scheme, which in turn charges advisers higher fees. Will the FCA step in to stop such transactions from happening?
A final point that is under appreciated in commentary on the Sipp market is platforms and discretionary fund managers with Sipps managed in-house have the same regulatory responsibilities as Sipp providers. So platforms and DFMs who run their own Sipps should not be surprised if they get data requests from the FCA or questions about their books.