Recent figures released by the Financial Ombudsman Service resulted in numerous headlines about the number of Sipp complaints. However, closer scrutiny reveals the complaints largely relate to the asset(s) held within Sipps and not the Sipp itself.
My feeling is that these figures have yet to plateau but we are probably not far short of that point. The action taken by the FCA following its thematic reviews should have stemmed further investment through Sipps in what have been termed “toxic assets”.
The regulator’s letter to Sipp chief executives of July 2014 made it very clear what was required of providers under its treating customers fairly requirements.
Publicity of previously held and failing investments has been high and, coupled with the ever-present ambulance chasing claims management firms speeding up potential complaints, we should have shaken out most of the problem cases.
That said, speculation exists that the regulator may not be entirely finished with its cleansing of the Sipp marketplace and it continues to collect data from providers in connection with non-standard assets held, sources of business and introducers. The information collected will be used to help it decide whether to undertake supervision work in the area.
Advisers will have been justifiably uneasy about making any recommendations of non-standard assets. Even facilitating a vehicle such as a Sipp that subsequently invests into a non-standard asset could put the adviser on the hook if they failed to assess for what purpose the Sipp was to be used for and if that was suitable for their client.
What we must avoid, however, is an overreaction to the term non-standard asset – which should not be confused with assets that are toxic or even high risk.
A standard asset, for the purposes of Sipps, is simply one that appears on the FCA agreed list, can be accurately and fairly valued and can be sold or transferred at a non-detrimental value within 30 days. All other assets are non-standard. Many people’s interpretation of non-standard assets include overseas off-plan hotel rooms, burial plots, storage pods and other esoteric assets which have caused the sometimes sensationalised headlines of the past.
But there are many other examples of asset classes in far more regular use that can understandably be accommodated into a client’s balanced investment strategy.
One of the most basic might be the strategic holding of cash in a Sipp for a known future liability. An individual might wish to vest and draw their pension commencement lump sum in just over 12 months’ time and might disinvest from volatile assets into cash and select a one-year bond to provide a return in the interim. The bond being a fixed term investment, and without the possibility of early surrender, would be regarded as a non-standard asset.
Discretionary fund managers might also include non-standard collectives such as hedge funds or some structured products. These assets usually represent only a small proportion of the portfolio but might provide diversification or coverage to asset classes as a risk management tool.
Looking more widely, Sipps might be a useful tool where individuals are offered an equity stake in their employer. Finding the cash personally might not be easy but a Sipp might be able to acquire a UK unquoted equity interest as part of the individual’s overall retirement planning strategy.
Another non-standard asset that might provide exposure to an asset class and diversification within it is a directly owned share in a property syndicate. These plans usually involve a number of properties pooled into a single investment and offered in shares. Syndicates allow smaller investors the chance to participate in an asset class they might otherwise be excluded from.
Although peer to peer lending is difficult to accommodate in Sipps where the end borrower might not be identifiable, lending to unconnected third parties where the borrower is known and on whom due diligence can be carried out might also be an alternative to a medium or long-term cash holding.
It is important the regulator and industry in general can differentiate between toxic assets and non-standard assets that have undergone proper due diligence. Similarly, when advisers are looking for a suitable Sipp vehicle for their client, they must bear in mind that a provider with a large number or high percentage of non-standard assets does not necessarily denote it has been ignoring FCA guidelines.
Martin Tilley is director of technical services at Dentons Pension Management