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Editor’s note: The beginning of the end for suspect Sipps?

There is nothing wrong with a Sipp in itself. It is just a tax wrapper, with the obvious advantages of tax efficiency and flexibility. It is what is held in it that counts. That has been found wanting in recent years.

In its plan and budget for the year ahead, released last week, the Financial Services Compensation Scheme once again pointed to esoteric, high-risk investments being transferred into Sipps as a key driver of the heightened levies advisers are paying. The verdict makes for unpleasant reading: property developments in the Caribbean, oil plantations and storage pods are being pushed on unsuspecting pensioners, and good advisers are footing the bill for the misselling.

There is hope on the horizon, however. The FSCS is once again capping what life and pensions advisers will have to pay, before any additional claims get paid by other parts of the industry. More importantly, it has revealed a renewed focus on making recoveries from operators themselves, and is letting Sipp operator failures fall on the investment providers themselves.

Fortunately, it appears that its recoveries won’t be limited to Sipp operators, but that the FSCS is also willing to wield its legal powers against the marketing companies and lead generators packaging up the dangerous Sipp investments for IFA consumption and paying them handsomely for the privilege.

Our cover story this week on the FSCS’ Sipp struggles

It is a step in the right direction while we still have so little certainty over how many Sipp claims are yet to rear their ugly heads.

Advisers will never get the white-list of products they want. It is simply too much work for a resource-stretched FCA and opens the door for regulatory arbitrage, with armies of consultants designing products to meet the letter of the rules, not the spirit of them.

As Informed Choice managing director Martin Bamford notes in his column later this week, while we have no firmer regulation on the kickbacks that advisers can accept from unauthorised introducers, cutting out unsuitable Sipp sales is down to culture.

How many ‘advisers’ will continue to flog dodgy Sipp investments when no one is watching, when the moral imperative is on them alone to do what is best for the client but the financial incentive says take the bet?

In a post-freedoms, low-yield era when clients are demanding flexibility and returns, it is not hard to see why the companies running the unregulated investments are so keen to put them in front of as many advisers as possible. The sad truth is that it is the most vulnerable, least sophisticated investors who are most at risk from predatory advice.

It remains up to both the FCA and the advice profession to do what is within their powers to educate the public on the dangers and to make sure as few IFAs as possible succumb to the temptation of snake oil salesmen.

Justin Cash is the editor of Money Marketing. He can be found on Twitter @Justin_Cash_1

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. There is nothing suspect about SIPPs – they are just tax wrappers. It is suspect investmens and their even more suspect promoters that we need to worry about.

    Why should SIPPS have to perform any sort of due diligence on the investments chosen by the member? If I want to invest in somethign, I will go to someone expert in the field; I do not expect a provider of a tax wrapper (more accurately an admin service) to sign it off.

    Much better to require SIPP providers to check directly with the member’s IFA that they have been given advice. If advice has been given, then it should be accepted automatically (so long as it is permitted by the pension legislation and does not expose the SIPP trustee to risk -trading on margin etc); if the member has not been given advice, then the SIPP provider should give them a standard risk warning in big red letters agreed by the FCA with a mandatory cooling off period. The member can then go ahead but with no cover by the FSCS.

    The call on the FSCS goes down as do the levies (which, btw, should be set according to how much business the IFA does involving various risk-banded non-standard assets).

  2. This can be traced back to pension simplification in 2006.

    Rather than draft robust legislation that would allow large occupational pensions to invest in more esoteric investments, but restrict investments that could be held in self-administered schemes, a free for all was introduced which we are still dealing with today.

    • @Sean Kelly I disagree. Pre 2006 there were far fewer effective restrictions on what small schemes such as SSASs and SIPPs could invest in. The restrictions that were in place back then were ones aimed at stopping tax abuse and not ones aimed at member protection.

      Now we are in a world where everyone must be ‘protected’ whether they want it or not. Which in many cases means that you cannot do what you want with your money because nanny knows best.

      Large pension schemes are irrelevant since, for various reasons, they will never invest any signficant amount in ‘esoteric investments’

      • nanny may not know best, but the emerging volume of complaints and compensation claims tends to suggest she’s likely to know better…

        • @Adam Smith: I am not saying that there is no need for protection for individuals. What I am saying is that it should not be forced on everyone as it is at the moment. Adults should be able to effectively opt out – give up some protection in return for additional freedom.

          The problem we have is that the FCA has statutory objectives which result in a complete lack of balance. They have an objective to protection individuals, but no balancing one to promote market efficiencies or encourage innovation.

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