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FCA warns on ‘widespread’ failings in third Sipp thematic review

The FCA has written to the chief executives of all Sipp operators after its third thematic review of the sector found failings remain “widespread”.

The review found that, despite recent warnings, a “significant number” of Sipp operators are still failing to carry out appropriate due diligence on non-standard investments and comply with prudential rules.

In a ‘Dear CEO’ letter to firms published today, FCA director of supervision Clive Adamson asks chief executives to review their business and take action in light of the findings.

The review found that most Sipp operators failed to undertake adequate due diligence on high-risk, speculative and non-standard investments.

It assessed due diligence in five key areas, including ensuring an investment is genuine and not a scam or linked to fraudulent activity; ensuring an investment is secure, and ensuring that an investment can be independently valued.

The FCA says: “We found that most firms do not have the expertise or resources to assess this type of business, but were still allowing transactions to go ahead.

“This increases the risk that a pension scheme may become a vehicle for high risk and speculative investments that are not secure assets, many of which could be scams. It is not acceptable for firms to put consumers at risk this way.”

The review found firms are failing to understand the nature of an investment, especially contracts for rights to future income and sale and repurchase agreements; to check that money is being paid to legitimate businesses; and to independently verify that assets are real and secure, or that investment schemes operate as claimed.

The FCA says firms typically had difficulty completing due diligence for non-standard overseas investment schemes where they did not have access to local qualified legal professionals or accountants.

In addition, since the last review of Sipp operators, the FCA says there has been an increase in the number of opaque investment structures, such as special purpose vehicles and limited companies, created to pool investment monies and finance other businesses.

Firms had difficulty establishing where money was being sent, and whether underlying investment propositions were genuine.

The FCA also found firms are continuing to rely on marketing and promotional material produced by investment providers as part of their due diligence, despite previous guidance highlighting the need for independent assessments.

Many Sipp operators were also found to be in breach of prudential rules, including a number operating in breach of minimum capital requirements.

The FCA says: “Many of the firms we assessed were unable to identify the correct prudential rules that applied to their business, and we found a general lack of understanding of prudential requirements amongst senior management.”

The FCA says it has already required several firms to limit their business as part of the thematic review and in some cases has initiated enforcement investigation. It says it will visit more firms over the coming months and expects to see significant improvements.

Last week, the FCA revealed it is in the process of referring two individuals at two different Sipp operators to enforcement action as a result of the review.


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There is one comment at the moment, we would love to hear your opinion too.

  1. Surely the Professional Trustee needs to act in a prudent manner. They must always consider the “what if” scenario. That “what if” scenario should be a simple consideration that the member dies and the spouse comes forward to claim the balance of the pension fund. Any investments made that has lost significant capital value the spouse should be looking for compensation from the Trustee who should be able to fully justify the decision to invest in a particular asset and the risks were fully understood by all parties. The SIPP Trustee should be under greater duty of care as they are effectively a Professional Trustee firm and need to act accordingly. It is not enough to rely upon an insistent member who may have indemnified the Trustee or they both relied upon the member IFA – that is a potential conflict of interest. A Trustee needs to demonstrate a duty of care and to have acted in the way of a prudent person of business.

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