Its Dear CEO letter to providers shows the regulator expects future fallout within the industry
In comparison to the timescale of the pending judgment in Adams vs Carey Pensions, the Court of Appeal judgment in Berkeley Burke vs Financial Ombudsman Service went through at breakneck speed.
Although on face value the two cases cover similar principles, the underlying circumstances are different. This offers some hope to the Sipp industry as, if a further Berkeley Burke appeal fails, there are potentially dark days ahead.
Almost as if it had prior knowledge of the outcome, the FCA issued a Dear CEO letter to all Sipp operators the same day as the publication of the Court of Appeal judgment.
The letter requires Sipp operators to “consider the potential implications” of this judgment and other “pending civil claims in the High Court” on their business and subsequently on their customers.
It goes on to remind Sipp operators of their requirement to be able to meet financial commitments and collaborate with the regulator if it is felt they might not. Clearly, the FCA is expecting some future fallout within the industry. Nevertheless, what consideration does the FCA require? Its letter does make the point the case in question is pending an appeal and that other judgments need to be taken into account.
I suspect what it is looking for is evaluation of a worst-case scenario. Fortunately, Sipp providers should already have management information detailing the type of assets held. It would appear from the current court judgment that the client introduction is irrelevant – whether it is through a regulated intermediary, an unregulated introducer or a direct-to-Sipp operator case, since the focus is on the acceptance of the asset, not the source of the business.
For all current assets, the Sipp operator must consider whether the potential for any liability exists.
For those assets, they must then assess what due diligence was undertaken and, in particular, the evidence that exists to prove the process that was followed. Only then can the Sipp operator take a view as to whether any liability might exist and, secondly, the likely scale of that liability. It is quite possible that, irrespective of fault, Sipp operators could be deluged with claims, and the documenting of and dealing with such claims will have a resource cost on a business.
For some, it seems likely the compound costs of these claims and liabilities could make the ongoing continuation of the business unsustainable. For these firms, a controlled exit from the market will be necessary, whether this is by sale, merger or enforced wind-up. The FCA’s letter also addresses this point and asks that due consideration should be given to consumer outcomes of any proposed exit.
It also requires the Sipp provider to communicate with the regulator at the earliest opportunity in an open and co-operative way.
Of those firms with limited or no liabilities, consideration will need to be given to whether their business model is sustainable in view of the heightened levels of due diligence necessary to avoid potential liabilities.
Undoubtedly, revisions to due diligence processes will be necessary to ensure they are fit for purpose. The depth and type of process will vary, but additional costs will apply, which will have to be passed on to investors looking at any non-standard asset.
Quite possibly, the costs could see some providers step away from certain asset classes or indeed from the non-standard market altogether.
There has already been some evidence of this, possibly driven by the enhanced capital adequacy requirements introduced in 2016.
All of that said, there will remain some financially strong providers with robust due diligence processes that will endure, although they will be fewer in number than now.
The phrase “hindsight is a wonderful thing” makes me wonder if scrutiny after an asset failure may suggest that missed due diligence at the time might have been at fault. I wonder, then, where a due diligence process would ever end.
Martin Tilley is director of technical services at Dentons Pension Management