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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 



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There are 7 comments at the moment, we would love to hear your opinion too.

  1. I think there is some confusion here over what the Ombudsman believes and what the Regulator has set out. The two are separate and currently not aligned. That is the problem.

  2. Very interesting article Alan (Hughes), very interesting commentary indeed.

  3. Douglas Baillie 8th October 2015 at 1:08 pm

    The problem is that the FCA consistently refuse to acknowledge that their rules are manifestly unclear, and any attempt by advisers to seek clarity is faced by the standard FCA response:-
    “Our rules are clear, so go and do as you see fit, and we and the FOS will then come after you later on, with the benfit of 100% retrospection”
    This is a ridiculous, unworkable regime, and it is no wonder that advisers are becoming increasingly fearful of giving advice.

  4. I think it’s fear of commitment and political pressures. The volume and complexity of guidance issued by the FCA is ample demonstration that the rules are not clear. This is de facto retrospection though the FCA would class this as ‘clarification’.

    How can it be in the public’s interest to have a regulator that fails to give clear direction but instead hammers firms with the benefit of a contemporary view after the event? This culture has long-term consequences and they have started to manifest. The PFS telling its members not to deal with insistent pension clients is s good example and a direct result of this uncertainty. The FOS simply multiply the problem with their ability to determine cases based on a wide discretion of what they consider ‘fair in the circumstances’ with awards of up to £150k with no personal representation and no appeal to a court. It’s a long time since I studied the Rule of Law but this seems to sit on the fringes and makes me very uneasy.

  5. Richard Anderson 8th October 2015 at 2:24 pm

    I think some clarification is needed in respect of the roles of the various parties here.

    In the case of an advised transaction, if an adviser has recommended a SIPP (and by extension a SIPP provider) as a suitable solution for a client, and has also recommended an investment (or portfolio of investments) to sit inside the SIPP, then it is surely the adviser who is responsible for the recommendation and the suitability not the SIPP provider. The SIPP provider is merely providing a service. If it was acceptable for the SIPP provider to enquire into the suitability of a recommendation, then on the same basis an adviser could expect Standard Life or Aviva (for example, other product providers are available) to make similar enquiries and seek a copy of the suitability letter for a Stakeholder or Personal Pension. It gets sillier by the day. You couldn’t make it up.

    I sometimes wonder if financial services, with all of its modern diversity and complexity, isn’t in fact too diverse and complex to regulate effectively and efficiently.

  6. I think we should remember the chaotic start -some would say shambolic – to the regulation of SIPP operators in 2007. There was political pressure to put in a regulatory regime as quickly as possible because of the perceived risks as a result of the removal of investment restrictions with the A day changes. The regime put in place was ill conceived and has never been fit for purpose. The FSA and FCA have been playing catch up ever since – so it’s hardly surprising that Alan Hughes sees evidence of retrospective regulation in some of the recent regulatory and ombudsman activity. The best solution would be a complete overhaul but I can’t see that happening even in the most unlikely event that the recent FCA projection of 750,000 new SIPPs (CP15/30) per annum proves to be correct. I’m afraid that the cocktail of Treasury plans to modify pensions tax relief, the existence of two at times inconsistent Ombudsmen and the irrational approach to SIPP regulation – not to mention the impact of more “Freedom & Choice” all points to more problems ahead -and more work for the lawyers!

  7. The FSA/FCA has always regulated by hindsight yet has always denied that it does so. With no external body to challenge and, where appropriate, to overrule it, that’s just the way it is and the way it’ll always be.

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