Alan Hughes: FCA Sipp approach smacks of retrospective regulation


Earlier this year, the FCA published a lengthy article comprising feedback on a call put out to regulated firms for examples of where they considered it had “acted in a retrospective manner”.

This exercise arose from an awareness at the regulator that firms often considered it had retrospectively moved the goalposts. According to such firms, this made it impossible to comply with requirements imposed as they did not know what they were at the time.

The FCA accepts it “must operate in a way which is clear, consistent and predictable”.

This is essential to give certainty to regulated firms, which in turn fosters market confidence. However, perhaps unsurprisingly, it concluded none of the feedback it received actually met the definition of “retrospective”.

It is, of course, very difficult to prove something is retrospective in its nature, particularly where more principles-based regulation is concerned.

However, there appears to be at least circumstantial evidence of some element of retrospectivity in the Sipp market. Furthermore, the FCA’s subsequent failure to update its rules in this area is even more difficult to explain.

In April 2007, the FSA started regulating Sipp operators. In September 2009, it published the results of its first thematic review into Sipp operators, concluding they had duties under the FCA Principles (in particular, under Principle 6 – treating customers fairly) to consider the “quality” of the business introduced by advisers.

While acknowledging Sipp operators were not responsible for the advice given to Sipp members by advisers, one of the measures the regulator suggested should be implemented by the operators was requesting copies of suitability reports.

Fast forward to 2015 and there have been further thematic reviews along the same lines, with multiple claims being made against operators by members.

Most notably, in a complaint brought against Sipp operator Berkeley Burke, the Financial Ombudsman Service found it was liable to a client who had invested in an esoteric investment through his Sipp, as the operator had failed to make further enquiries to establish whether the investment was suitable.

This decision is now subject to reconsideration by the FOS following a threat of judicial review by Berkeley Burke. Indeed, the FOS decision appears to go even further than the thematic reviews in talking directly about Sipp operators determining suitability.

It is not the object of this article to consider if it is reasonable to impose such duties on Sipp operators. That is another debate for another day. However, it has always struck me as very odd that, if the FSA considered Sipp operators had always owed these duties to clients, it did not also consider it appropriate to require Sipp operators to hold PI insurance.

Indeed, it still surprises many that Sipp operators are not required to hold PI insurance when, according to the thematic reviews, they are under obligations to clients that could easily give rise to claims and significant liabilities.

It is also interesting to note the thematic reviews have been based on the FSA’s (and latterly the FCA’s) interpretation of FCA principles rather than specific rules.

Again, it would give more clarity and certainty to the position if the FSA had set out these requirements in its rules from the outset of Sipp operator regulation rather than relying on the interpretation of principles first published two years after Sipp operator regulation began.

The FCA’s failure to make such rules, together with the failure to require Sipp operators to hold PI insurance, along with its reliance on the interpretation of very broad-based principles to impose these requirements sometime after the event, starts to look like retrospective regulation.

Surely if the FSA had sat down at the start of Sipp operator regulation and considered what such regulation meant to the subjects when dealing with their clients, it would have made perfect sense for it to have clarified that from the outset.

Even more baffling is the FCA’s continuing failure to address this issue. Indeed, in the recent consultation on new capital requirements for Sipp operators, the suggestion that some of the issues the regulator was seeking to address could be met by requiring operators to hold PI Insurance was dismissed almost out of hand.

Providing the PI market would be willing to meet such a demand (which would appear to be the case), this is a step that warrants much closer consideration.

So, no evidence of retrospective regulation? Some may beg to differ.

Alan Hughes is partner at Foot Anstey LLP