Several years ago I was asked to write an article investigating who killed the Ssas, which was driven by the rise in the popularity of the self-invested personal pension over its older occupational equivalent. Now, however, a similar question might be hanging over the Sipp itself.
If a Sipp really did what its name implies, the responsibility of the investment selection would lie with the scheme member. But that would appear not to be the case.
In what was described by one market commentator as a “game changer”, the Financial Ombudsman found in favour of an investor who had used a Sipp to invest in Sustainable Agro Energy Plc, and against the Sipp operator despite the latter obtaining disclaimers from the client who acknowledged the investment was high risk.
There are individual circumstances in this case that perhaps cloud the water and further comment at this time is inappropriate as it has been reopened for review.
Following this, though, we have also seen the Financial Services Compensation Scheme announce in February it will compensate Sipp claimants for losses in the value of investments through three unregulated investments: Harlequin Hotels and Resorts, Green Oil Plantations Limited and Sustainable AgroEnergy Plc. In the same announcement it said:
“We are now satisfied that the IFAs may be legally liable for these investment losses. This is on the basis that those IFAs cannot restrict their advice to the suitability of the Sipp without considering the suitability of the investments to be held within the Sipp.”
One might argue that some unregulated investments are more complex and thus potentially more risky than others but where and who should draw the line and where does this leave IFAs?
An IFA might be approached by one of his top clients who has been offered the opportunity to invest in his employer and wishes to exercise this option through a Sipp. On the face of it a not uncommon opportunity, but does risk lie lurking? Will the IFA be comfortable recommending that this opportunity be taken through a Sipp investment and, if they do, will they recommend a suitable Sipp operator? In doing so, is it their responsibility to financially analyse the unquoted employer’s private equity in the same way they would analyse the features and habits of a regulated fund? In doing so, might they leave themselves open to the criticism and liability outlined in the FSCS statement? It might well be that an IFA feels they have to walk away from the situation when their client has approached him for appropriate advice.
Similarly, a stalwart of Sipp investment since their inception, a directly owned commercial property investment might also have unexpected ramifications. Commercial property is, after all, also a non-regulated investment. A client approaching their IFA might be looking to acquire a property with incumbent tenant offering an attractive yield and with many years remaining on the lease. Would the IFA be required to financially assess the tenant’s ability to remain in business and continue to pay the rent for the full term of the lease? If the company were to fail, the income would cease, liabilities such as business rates and insurance would still be payable and, if the property was leveraged, mortgage payments would still need to be maintained.
So might we find IFAs removing themselves from the situation, leaving the client forced to approach the Sipp operator directly? What is clear is that few, if any, Sipp operators can provide regulated financial advice, so the client would be on their own. Many Sipp operators will not accept clients other than through an FCA regulated adviser. Those that do might be asking themselves the same question as the IFA, bearing in mind the decision currently under review with FOS.
The client looking to invest in any unregulated investment might, therefore, find no one able to advise them and no one able to accept their investment proposal. Is regulation and the fear of recrimination killing off the idea of the self invested personal pension?
Perhaps not: A glimmer of hope has been raised by the publication of HMRC’s February newsletter outlining its actions to prevent pension liberation and scams. While its actions are aimed at reducing the risk of scams they state clearly “the responsibility for getting the right advice lies with the pension scheme member”. Now if only everyone saw it that way…
Martin Tilley is director of technical services at Dentons Pensions Management