Sipps have come under intense scrutiny, leading some to question whether they can continue in their current form
Sipps have become more mainstream since pension simplification in 2006, with the creation of lower-cost platform-based products alongside the more traditional “full” Sipps.
However, access to high-risk unregulated – or non-standard – Sipp investments, which are often introduced by unregulated advisers and scammers, has meant some retail investors have lost their pension pots.
As the complaints have rolled in, the regulator has taken a tougher stance on providers, ramping up capital adequacy requirements for holding non-standard investments and introducing more stringent due diligence.
The recent judicial review of a Financial Ombudsman Service decision against Berkeley Burke for due diligence failures clarifies that providers do have a responsibility to ensure Sipp investments are suitable, even if they are providing execution-only services.
That said, Berkeley Burke’s intention to appeal on the basis the original ruling misapplied conduct of business rules to Sipp providers, thereby creating due diligence requirements that have been applied retrospectively, suggests things are not done and dusted yet.
So, where can the Sipp market go from here? Can the products survive or are their days numbered?
Chairman, Clifton Group
I am vocal on the fact that limiting the amount of non-standard investments is a personal pension in a fancy wrapper, not a Sipp. Because of the high-profile train wrecks, providers are more aware of the issues around due diligence and I think the Berkeley Burke case is a healthy wake-up call.
True Sipps will survive if they can establish due diligence as a duty the provider has to the customer. It is the last sense check before the customer hands over the cash.
The market will become more polarised, with a lot of providers moving to standard investments only, but those with sophisticated internal due diligence structures will do well.
Goodbye to non-standard investments?
The consensus is that full Sipps will survive, although it is expected there will be fewer of them in a market dominated by the simpler platform options. Many commentators predict the space will become increasingly polarised between the two.
Dentons director of technical services Martin Tilley says the proportion of Sipps affected by problematic holdings are comparatively minor.
“There are estimated to be well over 1.8 million Sipps in existence, of which only around 225,000 are in the full Sipp category. Of these, it is estimated that perhaps 10 per cent may hold assets regarded as toxic,” he says.
“Assuming Berkeley Burke fails in its appeal and it is confirmed Sipp providers have an obligation to conduct due diligence on investments and will be liable for losses on those they should have seen as fraudulent or scams, we may see some providers pulling away from the market.”
It is also predicted those that remain will review their due diligence processes and steer clear of higher-risk unregulated investments.
Mattioli Woods chief operating officer Mark Smith notes that Sipps have become more restrictive in recent years, almost recreating the conditions they were moving away from when they were introduced.
However, if the beauty of a full Sipp is its investment flexibility, does moving away from unregulated investments undermine its purpose?
“You can see that Sipps have become more restrictive from the FCA’s thinking. It recently published a paper on default investment pathways in drawdown and concluded that this should potentially apply to Sipps. But if you put a Sipp investor in a default, that is at odds with its purpose,” he says.
Talbot and Muir director David Bonneywell is not so alarmed. He points out the Berkeley Burke ruling does not mean non-standard and esoteric investments cannot be housed within Sipps, rather it clarifies the expectations placed on providers if they accommodate such investments.
He says: “Even if the number of firms willing to take on non-standard investments diminishes, as we expect it will, the case for full Sipps remains as strong as ever.”
IFA, Beaufort Financial (Reading)
Rightly or wrongly, Sipp providers have a duty of care to police all investments, while advisers are deemed to be liable for facilitating an investment into one, even in cases where no advice is given or the client insists on investing in something considered esoteric.
It is time for the regulator and HM Revenue & Customs to draw up a list of approved and banned Sipp investments.
Survival of the fittest
Many commentators expect further consolidation in the Sipp market. Cranking up due diligence increases costs, not to mention the implications for PI cover if providers decide to take on non-standard investments, which will be challenging for some, who may decide it is better to bow out.
“As soon as anything blows up, the PI insurers are over it like a rash, asking what you did, why you used it, what you did to protect yourself,” says Altus Consulting principal consultant Rory Gravatt.
“Consolidation is the obvious end game. Providers who cannot compete will merge with others to give greater economies of scale.”
Redefining the Sipp
A recurring theme among commentators is the way that providers who were enthusiastically badging their products as Sipps not so long ago are now turning away from the name as it becomes more tarnished.
“This is disappointing, as Sipps are not the problem; it is the assets being held in a minority of Sipps that are the problem,” says Smith.
Gravatt agrees: “The assets [causing the problems] are still for sophisticated investors but the Sipp structure has become more of a retail facility, and that is the challenge.”
AJ Bell senior analyst Tom Selby points out that many Sipp operators do not have commercial relationships with unregulated introducers or permit investments into some of the more esoteric options available.
“It is important the entire Sipp market is not tarnished by a relatively small number of cases involving very specific circumstances,” he says.
However, some feel that the time is ripe to redefine the Sipp.
“One of problems is that when Sipps were first regulated in 2002, they were put into the packaged product regime, when they should not have been. A lot of issues have come from this,” says Smith.
He suggests that the term “restricted Sipp” could be introduced to help consumers differentiate it from full Sipps.
“We are suggesting the redefining of Sipps to the FCA because there needs to be more clarity,” he says.
While some aspects of the debate make sombre reading for Sipp providers, Curtis Banks group communications director Greg Kingston is optimistic about the future.
“The Sipp providers that remain will have done so on the back of being strong, well-structured firms, capable of governing their business with the right controls and to the right standards,” he says.
“There is a huge demand for them because of great service levels, competitive fees, increasing use of technology not beset by the many well-documented problems with platforms, as well as the ability to administer the right kind of complex assets from multiple and diverse sources.
“The right Sipps can thrive in this environment. History will find a name for those who chose a different path.”